ทำความเข้าใจสภาพคล่องในระบบเศรษฐกิจไทย

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Given its vague definition, ‘liquidity’ in the economic context has oftentimes been precariously used by most analysts and commentators. In the last article, we clarified this vagueness by proposing the Gross Domestic Liquidity (GDL) as a measure of liquidity in an economy. Now, we will further discuss what we have learnt from our GDL and its implications.

To briefly recap, the GDL as a measure of liquidity is comprised of 3 ‘liquid’ tanks – market, banking, and real economy. Nevertheless, liquidity isn’t a closed system. Hence, there must be leakage/injection channels. We have identified two – external (in-outflow from abroad through both trade and investment flows) and government intervention.

Is Thai Economy Flooded with Liquidity?

Let’s start with the simplest question. How much liquidity is in the Thai economy currently? According to latest data available, GDL in April was 11.1 trillion baht, increased by 200 billion baht or 1.8% from March.

But does 11.1 trillion baht is too much liquidity?  As there exists no apparent and official level, the approach here is to compare the GDL with its historical standard. In addition, since liquidity is a veil for real economic activities, GDL has to grow accordingly with the economy. Consequently, current GDL is more likely to be more than, say, a year ago. Therefore, we couldn’t directly compare level of GDLs between 2 periods. Some normalization is needed.

By using a statistical technique, we could decompose GDL into 2 components – trend and cycle. As the trend keeps growing overtime, we will focus on the cycle only. If the cycle is at its peak, then we could argue that the liquidity is ‘relatively’ high, and vice versa.

Let’s look at the period of the great flood in 2011 which we saw a significant exodus of liquidity abroad. The cycle suggested that the liquidity cycle dropped to almost -700 billion baht (see the illustration). The lowest point in the history! This provides a reality check that our GDL measure is salient. 

In fact, decomposing GDL into trend and cycle is not only limited to overall GDL. We could do exactly the same process to all sub-components. Consequently, we would also have market, banking, and real economy cycles.

Now that everything is in place, we could answer if Thai economy is actually flooded with liquidity as many have claimed. And the result is……...yes. 

As of April 2016, the cycle of GDL was 270 billion baht above the ‘normal’ level represented by the trend, which is among the highest level in the past 7 years! Hence, we could confirm that Thai economy is experiencing a surge in liquidity.

Looking into more detail, we found that the surge in liquidity is stored in the banking tank! As a matter of fact, the cycle of liquidity in banking tank reaches the highest level since the data is available.

What could explain this phenomenon? Before tackling this question, let’s see a bit more information. First, the GDL cycle has started to increase since early this year. Second, not only banking cycle, market cycle has been increasing sharply as well. Additional hint: Fed funds rate. Any guess?

It’s the delay of Fed funds rate hike! In December 2015, Fed raised its policy rate for the first time in almost a decade. This event caused a huge amount of money to flow back to the U.S., draining our liquidity along the way. At that time, the market expected Fed funds rate to be additionally raised for 4 times in 2016. However, as U.S. and global economies are softer than expected and yes with recent overshadowing Brexit, now people only expected at most 1 rate hike this year. Inevitably, money flew back into emerging markets – including Thailand.   

GDL and Loan-and-Deposit Management

Now that we know the state of liquidity. It is interesting to turn the attention to the implication of liquidity on the Thai banking system.

Let’s look at banks’ loan-and-deposit management. Every bank wants to issue new loans which are largely financed by deposits. So, if a bank wants to significantly boost loans, it must boost deposit as well. But too much deposit comes with higher cost. Therefore, loan and deposit must be managed together in a timely and efficient manner.

Given its significance, there is one crucial ratio – L/D ratio. Essentially, it’s loan over deposit. On average, L/D ratio of Thai banking system is around 95%. If L/D ratio is higher (lower), it means liquidity in loan-and-deposit management is tighter (looser) than usual.

Since there is a range of acceptable L/D ratio, accurately predicting it will be tremendously helpful in planning loan-and-deposit strategy. For example, if L/D ratio is expected to be too high, then the bank may want to preemptively acquire new deposits before other banks in order to maintain the L/D ratio at a comfortable level with lower competition.

So, could the GDL predict the L/D ratio? Yes, it could! In fact, it’s market and banking components which could be the predictor of the L/D ratio. In other words, if we expect these 2 components to continue to increase, L/D ratio will be expected to fall. Consequently, the bank may not need to actively acquire new deposits.

The implication of GDL on bank management is only one of many possible implications. It could help answering how much volatility in Thai liquidity system is affected from external factors? How much liquidity will be squeezed if Fed starts to increase its rate again? What is the direction of bond yields? Among them, we are at least confident to say, or know what we are saying, that Thai economy is flooded with liquidity.

(Published in Bangkok Post on July 1, 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 tmbanalytics@tmbbank.com

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