Credit has been growing much faster than GDP during the past few years, particularly since the global financial crisis. It has surged from about 100% of GDP in 2006 to around 150% today.
Historically, periods of such rapid credit growth in emerging markets (EMs) have nearly always ended in crisis. And now the credit growth that has been fuelling Thailands growth is cooling.
With the highly leveraged balance sheets of Thai households looking stretched, private consumption, which accounts for more than half of all spending, is likely to slow as households rein-in spending to pay down debt.
Exports, the other driver of the economy, have also slowed. Accounting for 60% of the economy, export-growth stalled in the first eight months of the year, before staging a recovery in August. Again the lacklustre performance to August will drag on full-year exports, which the World Bank says need to grow at 4% to 5% a month from September to December just to reach its projection of 2.5%.
Southeast Asias second largest economy recorded two quarters of negative growth this year, placing it in recession with growth expected to come in at around 3.5% for the full year almost half the rate of expansion in 2012.
And thats before taking into account the fallout from the budget deadlock in Washington, which the World Bank has estimated will knock 0.5% off the growth of Asian economies for every 1% of growth the US economy loses.
The problem for Thailand is that much of this credit has fuelled spending on cars and other consumer goods rather than investment, which could bolster longer-term growth prospects.
While neighbouring Malaysia and Indonesia are cutting subsidies, Thailand has caved in to violent protests by farmers and expanded its support programmes for rice and rubber producers. At a cost of Bt300 billion ($9.6 billion), the capitulation wont help prime minister Yingluck Shinawatras plans to contain rising government debt and balance the budget by 2017.
Buying rice directly from farmers during the past two years has not only been consuming around 4% of GDP annually but the hand-outs are creating a vicious cycle that is pricing Thai rice out of the international market.
Thailand is the worlds largest rubber producer and until last year was also the number one rice producer, but prices of both commodities are falling, hurting export earnings.
Government incompetence is a big risk, given concerns that a lot of these gimmicks and giveaways arent really adding much to the economy and are just ending up costing the country a lot of money, says Gareth Leather, Asia economist at Capital Economics.
But the greatest risk to the economy in the medium term is credit growth. If you look at the past decade, credit has continued to grow a lot quicker than GDP for most of this period.
If you look historically at other emerging markets, I dont think there are any instances of countries that have seen such a rapid explosion of credit that havent subsequently suffered a crisis or some kind or another. For Thailand to escape this fate would be quite unusual, so there are big concerns about the outlook for the countrys financial sector.
He adds: The dilemma for the central bank is that current low interest rates risk fuelling faster credit growth. But at the same time rates need to stay low to enable consumers to finance debt repayments.
The big picture is that the economy is actually quite weak at the moment and all or most of the components of domestic demand have been quite subdued and probably wont pick up much, if at all, over the next few years.
Leather says the big hope for Thailand is a pick-up in export demand, which would drive the economy for the next couple of years if the global economy recovers as expected.
For now, with capital outflows that have seen the baht lose around 9% of its value against the dollar in the past six months, and business and consumer confidence waning, the impetus for economic expansion is falling back on to fiscal spending.
However, a massive Bt2 trillion, seven-year government infrastructure programme for a high-speed rail network, electrification and motorways, viewed as critical for medium-term growth, is mired in court battles with the opposition.
The projects are aimed at recovering a lost decade in which infrastructure development has been derailed by revolving-door government, political instability including a coup and flooding that together are responsible for Bt1.7 trillion in lost economic activity.
An equally vital Bt350 billion programme to bolster flood defences in northern and central Thailand, with reservoirs and flood channels aimed at preventing a repeat of 2011s devastating floods, is also on hold due to legal challenges.
The wrangling means all-important disbursement of the 2014 budget will be held up with a knock-on effect on growth.
These infrastructure investments are tipped to provide a substantial boost to the economy, but Thailands poor record of implementing projects is fuelling doubt over when or if theyll go ahead.
Lat Krabang Port and Bangkoks Suvarnabhumi Airport took decades to materialize and work on a high-speed rail link between Bangkok and Rayong has still not begun 19 years after it was announced.
However, Thailands fundamentals continue to paint a picture of apparently robust economic health, especially compared with other EMs.
The countrys balance of payments is stable with a negligible or zero current-account deficit; inflation, interest rates and unemployment are all low, and tourism is performing strongly with revenue up 23% this year.
We expect the economy to have come out of recession in Q3 but the data weve seen so far for the period suggest it will remain pretty fragile and recovery will be quite moderate in the immediate future, says Oxford Economics economist Sarah Fowler.
Exports are picking up a bit more so thats looking a bit more positive, although what weve seen on exports from all different countries is that they have tended to be quite volatile. So export demand is improving but it will remain quite patchy.
Fowler concludes: Longer term, the outlook is still pretty good for Thailand because the fundamentals arent bad compared to other emerging markets. We expect economic growth to speed up gradually towards the end of this year and next year as the global economy accelerates.