Have you recently come across the statement that Thai economy is flooded with liquidity? Probably several times. As a matter of facts, several analysts do feel that there is an excess liquidity in Thai economy currently.
But plenty of liquidity is good, isn’t it? Not necessary. Too much of it, then, an economy may face bubble in asset prices or money is wastefully invested in low productivity projects. Too less, on the other hand, the economy may face higher borrowing cost or fruitful projects do not receive sufficient fund. Monitoring and managing liquidity is therefore a very important task.
Despite opaque definition, ‘liquidity’ has been extensively discussed. So what does it mean by liquidity? Well, readers who are familiar with financial markets may think of liquid assets – ones that could easily convert to cash such as stocks or treasury bills. But is that all? Should we limit to only financial market? What about money from trade flow or government injection? Should these components represent liquidity in an economy as well? Unfortunately, the definition of liquidity in this sense is poorly defined. Despite its significance, no one is really sure what the liquidity is or, even worse, how to measure it.
Hence, in this piece, we would like to discuss our novel attempt to systemically measure Gross Domestic Liquidity (GDL) for Thai economic system.
Framework for Measuring Gross Domestic Liquidity
Let’s visualize GDL as a liquid which could be stored in several combined tanks where each tank has its own particular feature. Imagine a gas station as an example. In a station, there would be tanks storing Gasohol 91, Gasohol 95, and Diesel. All the tanks combined represent how much oil the gas station has.
Now, return to our liquidity. Similar to oil tanks, we identified 3 tanks for GDL – market, banking, and real economy. Let’s discuss each tank one by one.
The first tank – market – is comprised of total money invested in all mutual funds and life insurance. As of March 2016, the latest data available, the sizes of both components were 4.2 trillion and 2.0 trillion baht, respectively.
What about stock and bond markets? Isn’t it obvious that they should be included in this tank as well? The answer is no. When buyers buy a mutual fund, where would money go? Mostly to either stocks or bonds. Similar to life insurance, insurers will invest in these markets too. In other words, if we additionally include the sizes of stock and bond markets into this tank, we will face double-counting problem – counting the same money twice.
In fact, the double-counting problem is the most crucial challenge in measuring GDL. This problem arises occasionally as you shall see later.
The second tank is banking liquidity which includes cash, investment (bonds held by commercial banks), and net interbank (net borrowing/lending between banks.) See the double-counting problem again? Noted that cash here is the actual cash which is not equivalent to deposits. Deposits are constantly used to finance banking activities such as issuing loans. Therefore, they are not truly considered as fully liquid. To this end, as of March 2016, the size of banking tank was 4.0 trillion baht.
The last one is real-economy tank. In other words, it is the liquidity in real economic system, not financial ones (as in market and banking.) There is only one item in this tank which is currency outside banks and government, or, roughly speaking, the monetary base with the size of 1.2 trillion baht. We can’t use the larger definition of money supply, such as broad money, because it would double-count several items such as deposits.
Up to this point, it seems like our liquidity is a close system. That is liquidity from one tank could move to others leaving no effect on overall liquidity. Unfortunately, it is not. There are also leakage and injection which could affect the level of liquidity.
The leakage/injection channels are external sector and government intervention.
The external sector is relevant to both market and real-economy tanks in forms of capital flow and current account, respectively. Capital flow is represented by foreign net buy for both equity and bond. If net capital flow is positive, there is more money flowing in the system, i.e. the injection. In contrast, if net capital flow is negative, then it could be perceived as a leakage. In March 2016, we received the injection of 122 billion baht. Henceforth, with mutual fund and life insurance, the ultimate size of market tank in March was 6.3 trillion baht.
Furthermore, current account (CA) is net revenue from selling goods and services abroad. If the net revenue is positive (negative), that means we have more (less) money in our real-economy tank. With 175-billion-baht CA surplus, in addition to monetary base, the real-economy tank amounted 1.4 trillion baht.
Last but not least is the role of government and the Bank of Thailand (BOT). The government constantly issues new bonds to finance its expenditure, thereby absorbing some liquidity out of the system. On a contrary, the BOT could both inject and drain the liquidity by doing Open Market Operations (OMO). For example, if the BOT buys bonds from the market, it would have to pay money to sellers, mostly commercial banks, and increase the liquidity, vice versa. In facts, this is the primary channel how the authority is controlling liquidity in Thailand. In March, the government and BOT absorbed 927 billion baht from the system.
In summary, after combining the liquidity from all tanks, i.e. market, banking, and real-economy, adjusted by injection and leakage, total liquidity in Thai economic system in March 2016 was 10.8 trillion baht.
Now that we have the framework to measure liquidity. In the next article, we will further analyze the development of liquidity in Thailand and answer some interesting questions that are not answered yet.
(Published in Bangkok Post on June 3, 2016)
TMB Analytics is the economic analysis unit of TMB Bank. Behind the Numbers is co-authored by Peerawat Samranchit and Naris Sathapholdeja. They can be reached at firstname.lastname@example.org