Thailand’s Q2/2022 economy overwhelmed with multiple risks

Dr.Amonthep Chawla, Head of Research Office, Wealth Research and Advisory of CIMB Thai Bank stated that,  since the beginning of 2022, Thai economy has consistently been surrounded by uncertainty and volatility from the highly contagious Omicron variant and African swine fever (ASF) spread which has pushed up pork and egg prices, to the eruption of the Russia-Ukraine war which has sparked energy price skyrocketing and widespread concerns over accelerated inflation around the world, including Thailand.

These were coupled with the tightened monetary policy implemented by the US Federal Reserve (Fed) and Asian countries for fear of the risk of stringent control measures on Chinese companies and lockdown resumption to combat the COVID resurgence in China. Under the circumstances, global economy could slow down further than expected. Particularly with the Fed fund rate spike and balance sheet shrinkage to curb inflation, private sector spending and investment could continue its slowing pace this year. Thus, CIMB Thai Research Office has cut our economic growth forecast for Thailand this year from 3.8% to 3.1% following the country’s economic growth of 1.6% in 2021.       

Even amid the highly volatile situation, Thai economy in Q1/2022 is likely to recover continuingly from 2021 which was hit by the intensifying pandemic in Q3. Thai export has continued its growth momentum despite higher freight rates and shortage of containers and semi-conductor chips, which have more or less hindered electronics and automobile manufacturing, as there is still high demand for goods in major destination countries. Although demand for goods in those countries has yet to be accelerated to the extent as in the past due to inflation pressures on their consumption and investments, they still record higher economic growth than their actual potentials, hence a benefit to Thai export this year. Besides, private sector consumption should be sustained with support from purchasing power of middle to upper income consumers who have firm financial standing and confidence, along with the government measures to stimulate spending and consumption through personal tax income deduction and 50-50 co-payment schemes.

Tourism in Q1 has yet to fully turnaround due to the lingering spread of Omicron variant which has prompted the government to step up controls on foreign tourist inflows and the declining travel confidence amid the Russia-Ukraine tensions, which saw the Russian ruble weaken and subsequently erode spending capability of Russians, hence decrease in number of tourist arrivals.

Looking forward into Q2, Thai economy should expand at an accelerating rate compared to Q1. We predict Thai GDP growth in Q2 of 2.3% YoY or 0.8% QoQ after seasonal adjustment. Here are our notes on Thai economic recovery in Q2:    

• Tourism rebound: With restored confidence, and with the belief that humans can eventually live with COVID, tourism should recover. Although the infection cases have gone beyond 10,000 per day, but given the increasingly efficient vaccination and mild symptoms of infection cases, the government is not expected to implement the lockdown measure again and should move forward with the opening of the country in conjunction with greater easing of restrictions. This should be conducive to the rebounding of the country’s domestic and international tourism. However, we do not expect incoming tourists in Q2 to exceed 500,000 as it is not the high season for Western tourists and China has yet to give international travel permission for their people along with the depreciating Russian ruble which could discourage Russian tourists’ travel demand.    

• Improving farm income: The increase in agricultural output in line with the higher levels of dam water compared to the foregoing year, coupled with prices of farm produce which normally move in the same direction as oil prices have contributed to improving income from rice farming, and rubber, palm, sugarcane and tapioca plantations. This should in turn benefit sales of motorcycles, farm materials and consumer goods in general. However, due to the prolonged slump in farm income and high household debts, money circulating in the system may still remain low. Meanwhile, private sector spending in overall should slacken owing to the slowing growth of non-farm income, the surge in living cost and the end of the government’s cash transfer for farmers measure. The goods with some promising prospects should be foods and alcohol-free beverages while garments, shoes and furniture could slow down. Restaurants may be affected by rising food prices. Hotel and tourism-related businesses, though having better prospects than in the previous year, still have to deal with the impacts of low foreign tourist inflows. Hospital and healthcare businesses should enjoy a relatively robust growth in line with higher health awareness and healthcare demand during the pandemic.       

• Continued growth of export: Export in Q2 should continue to expand, though at a decelerating rate compared to Q1, attributable to the rising prices of farm products, petrochemicals and commodities in tandem with oil price hikes, which should sustain Thai export to some extent. Also, there should be growth prospects for export of such products as automobiles and parts, electronics and parts and processed foods for which Thailand has competitive edge and major markets of which, e.g. the US, Europe and ASEAN, still record economic growth, while the weakening Thai baht would benefit income generated from export. However, certain concerns remain as regards importers in the face of rising import costs from the baht depreciation, and possible trade deficit for Thailand this year from the oil price hikes. Moreover, export businesses with high import content for their manufacturing but mainly for distribution in domestic market may be hit harder than those mainly using local content for their manufacturing.          

• Slackening public sector spending albeit living cost relief measure: There may be budget constraint which has disabled full coverage of people suffering from higher cost of living and may result in weaker purchasing power of low-income earners. The relief measure may partly help people use cheaper diesel oil, hence lower transportation cost, but it may allow for distortion of market mechanism and inefficient energy consumption of the country in the long run. In sum, public sector spending this year which has declined compared to that in the previous year should not be the economic hero of Q2. 

• Private sector’s wait-and-see stance for new investment projects: There are political uncertainties in relation to government stability and change in the administration as Thailand is approaching the general election in the next 12 months. A change in the administration through an election is a universal mechanism in any democratic country. If the current government can make it clear to the business circles that the government’s investment policies would remain the same even with the change in the administration, Thailand would be able to attract foreign investors who want to relocate their production bases from China to avoid Chinese lockdown to fight the pandemic and implications of the US-China trade war.   

As regards currency movement, Thai baht is likely to weaken to 34.50 baht against the stronger US dollar amid global concerns over investment in risk-weight assets in the backdrop of the Russia-Ukraine crisis which has driven oil price hikes and resulted in trade deficit. With tourism revenue remaining at the low level, transportation costs have jumped up and outward remittance of dividends in Q2 has been in huge amounts, hence current account deficit (service and revenue). 

The Fed fund rate hikes could be seen in Q2 to curb inflation. This could further drive capital outflows from Thai bond market and broaden the differences between Thai and US interest rates. However, we believe the baht will turn stronger against the dollar in H2 to the level of 33.00 toward the end of the year given higher confidence in global capital market after gradual pace of Fed fund rate increases duly realized by the capital market in Q2. Meanwhile, Thailand could start to earn more income from tourism, oil prices could be on a declining trend on the back of OPEC’s expansion of production capacities to the extent adequately fulfilling the earlier rising demand, and the Bank of Thailand (BOT) is predicted to raise the policy rate in response to the economic recovery. This should attract investors to resume investment in Thailand.

In view of interest rate trends, the BOT is expected to keep the policy rate unchanged at 0.50% per annum all through the year to support economic recovery, especially in Q2 when economic expansion is still fragile with thin tourism revenue. The elevated inflation in Q2 would mainly stem from the supply side, i.e. sharp rise in oil prices, while that on the demand side would remain weak as seen from the prevailing low reference interest rates. However, the BOT could be pressured to raise the policy rate in H2 if the high inflation lasts longer.

The BOT has to decide whether to maintain the existing low policy rate to fuel the economic recovery or bring it up to combat inflation and ease pressure on the weakening baht.  With few government relief measures released today, the BOT could opt for keeping the existing policy rate unchanged to stimulate economic revival, especially if economic activity cannot return to normalcy until early next year. The BOT should also work out other measures to stabilize the exchange rates and the monetary market. Meanwhile, the government should come up with measures in H2 to keep the cost of living under control. We predict the inflation rate to surge to almost 5% in Q2 and stay at 4.5% for 2022 under the assumption that Brent crude oil price would rise to its peak at USD 120 per barrel in Q2 before moving down in H2 to year-round average at USD 100 per barrel.