Crouching Tiger: Economic Outlook 2022 Thailand is no longer a sick man of Asia
Dr. Amonthep Chawla, Chief Economist and Wealth Research & Advisory of CIMB Thai Bank stated that Research Office of CIMB Thai Bank raised GDP projection from 0.4% to 1.1% for 2021 and from 3.2% to 3.8% for 2022 in line with better-than-expected Q3 economic reports. Meanwhile, problems of supply chain disruption appeared improving amid more effective means to control the spread of covid-19 among workers. Opening economy is seen to provide more optimistic view regarding tourism outlook going forward.
Since the outbreak of covid-19 in 2020, Thailand’s economy experienced a recession, slow recovery and prolonged stagnation. Economic outlook by the International Monetary Fund (IMF) reported GDP growth of Thailand in 2021 would be among the lowest in ASEAN, higher than Myanmar due to political uncertainty. Foreign investors viewed Thailand as a “Sick man of Asia”. Most shunned investment in Thailand. Foreign direction investment (FDI) in terms of issuance of promotional certificates totaled 936 projects and valued 227.72 billion baht in the first nine months of 2021, declining by 10% and 31%, respectively, from the same period last year. Moreover, foreign investors registered as net sell of Thai stocks amount nearly 64 billion baht during the first 10 months of 2021. As a matter of fact, Thailand’s economy is full of potential to grow, given natural resources, quality workforce and strategic location in the heart of ASEAN. Higher economic growth is possible, pending on favorable factors and government policies on long-term investment. Thus, we coined economic outlook of Thailand in 2022 as a crouching tiger, implying a tiger lying down, staying still, and waiting to attack. It is not a sleeping or a sick tiger that other people saw. However, we should watch out for an evil tiger, aiming to derail economic recovery of Thailand in 2022.
Crouching tiger – exports, tourism and purchasing power among middle-upper income group
Thailand’s economy relies on 3 supporting factors:
The first supporting factor is exports. Thailand’s exports could grow by 4.7%, following a continual recovery in electronics, automobiles and parts, rubber products, petrochemical and processed food, in line with a gradual expansion of major trading partners. Thanks to rapid vaccination, residents in the US, Europe, China, Japan and other trading partners of Thailand have sufficient immunity enough to open their economies. Some may see the rising number of daily infections; however, the death rate appeared low. Thus, these countries may be reluctant to use stringent lockdown measures but would likely limit movement of those who are not vaccinated, which would unlikely impact demand for products from Thailand.
The second supporting factor is tourism. We expected roughly 5.1 million foreign tourists coming to Thailand in 2022. Tourism outlook appeared promising after the government eased regulations on traveling and quarantine. Foreign tourists next year could come from countries that would allow returned tourists coming in without being quarantined as well, such as the US, UK Germany and other European countries, Middle East and ASEAN. Regarding China, we do not expect Chinese tourists to come to Thailand as much as 28% of total tourists seen in 2019 due to a delay on opening boarder for tourism in China. There could be merely 9% of the expected 5.1 million tourists in 2022 that are from China. We projected a sharp rebound in the number of tourists by the second half of 2022, following a mass vaccination and the declining number of daily infections in Thailand and other countries. During the second half of 2022, Thailand’s income distribution is likely to improve more clearly, especially among self-employed workers, workers in the service sector and entrepreneurs in SMEs while business sectors that could show clearer signs of recovery are hotels, restaurants, retails and real estate.
The third supporting factor is purchasing power among middle to upper income groups. Thailand does not experience a problem of high employment rate but workers seemed to be concerned about job security, deterring them from spending on durable goods. Following an easing restriction on economic activities and opening boarder for international tourism, consumers’ spending would likely grow amid higher confidence. Recovering sectors are, for example, food and non-alcoholic beverages, restaurants, hotels and other domestic tourism-related sectors. Meanwhile, supports from government subsidies that is expected to continue, such as khon-la-khreung (co-payment scheme) or other rebates on traveling and consumption programs, could accelerate consumption among locals. In addition, once Thai people receive the third dose of vaccine, confidence would increase, supporting consumption on semi-durables and durables, such as clothes, shoes, furniture, motorcycles and cars. We viewed that consumers’ spending could rebound among middle and upper income groups during the first half of the year while purchasing power among lower middle income groups could rebound afterwards, pending on rising farm income and higher number of international tourists by the second half of next year.
Evil tiger – new waves, trade war and high inflation
Despite 3 supporting factors above, Thailand’s economy has 3 downside risks
The first risk factor is new waves of covid-19 outbreak. Another round of spike in the number of daily infections in Thailand and major trading partners could deter consumers and investors’ confidence and lower economic activities, affecting local consumption and exports. Given mass vaccination, Thailand and many other countries would not opt to lockdown economies; however, we would need to watch out if lower production could disrupt supply chain locally and aboard.
The second risk factor is trade war between the US and China. We expected a continuation of high tariff and limited trade between US and China in 2022. However, an escalation of trade war to include other economic dimensions, such as currency and capital flows, could deter global trade momentum, affecting exports from Thailand to China and other countries in ASEAN. Thailand could expand its exports to the US, but they may not be able to offset the fall of exports to other markets, causing exports to decline.
The third risk factor is high inflation. Cost of living increased rapidly, especially among energy, raw food and raw materials for production. We projected an inflation rate at 1.9% and average Brent oil price at 67 US dollar/barrel; however, inflation rate could accelerate if there is a supply chain disruption in China. High inflation rate in Thailand affects the poor more than higher income groups. The poor would need to spend almost all the money from whatever they earn. The problem arises when income grows slower than consumption, inducing the poor to deplete their savings or incur more debt. Rising cost of living would discourage people from spending, causing a decline in economic activities. Fiscal policy could be used to provide cash transfer to the poor or subsidize cost of living.
Outlook for FX and rate
We projected the Thai baht to weaken against the US dollar next year due to capital movement. Rising US inflation could last till mid-2022, which could induce the Fed to end its QE program by June and start to hike the rate 3 times next year. The rate hikes in the US would unlikely panic the capital market due to a clear and effective communication guideline; however, capital outflows from emerging markets could persist in early 2022 due to rising borrowing cost in the US. Capital inflows to Thailand’s stock and bond markets during the second half of the year are possible due to market expectation on economic growth outlook, especially in line with a rebounding tourism revenue. Current account balance would likely turn surplus by the third quarter of next year. In sum, we projected the Thai baht level at 32.50 baht per US dollar by year-end 2021 and at 33.50 baht per US dollar by year-end 2022.
For the monetary policy, we projected the Bank of Thailand (BOT) to keep the policy rate unchanged at 0.50% per year toward the end of next year for supporting economic recovery. The BOT could inject soft loan or more liquidity to targeted SMEs or households that lack income during low tourist revenue. Meanwhile, the BOT would start to communicate about the timing for the rate hike, which we viewed that the BOT could wait for 3 factors. First, the size of Thailand’s economy would surpass the pre-covid level. Second, inflation rate could sustain above 1% and remain in the target of 1-3%. Third, income distribution could be improved due to rebounding tourism and recovering SMEs. We projected these 3 factors would arise in 2023, which could be a good timing for the BOT to hike the rate by that time.
