Thailand: A lackluster recovery Asia Pacific Economic Outlook, Q4 2015

Thailand’s economic growth continues to be reined in by weak investment, perilously high household debt, an uneven global recovery, and an uncertain political future.

Thailand_interior-imageThailand’s economic recovery has been uninspiring. Economic growth continues to be reined in by weak private consumption and investment and the absence of growth in exports. Household debt remains perilously high and the country’s future political path is still uncertain. Consequently, consumer confidence has tumbled, declining for 8 consecutive months to a 15-month low in August 2015. On the external front, weak demand has stymied growth in exports. Further cause for concern stems from a slowing Chinese economy, the devaluation of the yuan, and the impending interest rate hike by the US Federal Reserve.

Thailand’s weak economic performance over the first half of the year resulted in the Bank of Thailand (BOT) lowering its annual growth forecast for 2015. Factors promoting growth through the near term such as a recovery in tourism, low oil prices, and an accommodative monetary policy are likely to be overshadowed by the downside risks to overall economic performance. It is therefore likely that the BOT will further lower its forecast for GDP growth in 2015.

Though a weaker baht would benefit exporters and add some much-needed inflationary pressure, a combination of downside risks makes robust economic growth a highly unlikely prospect in the near term.

A weak first half results in lower annual growth forecast

Thailand’s economy grew 2.9 percent year over year in the first half of 2015. However, the weak base for calculating year-over-year growth in 2015 (weak growth in 2014) misrepresents the actual state of the economy. Quarter-over-quarter figures reveal a more realistic picture. On a quarter-over-quarter seasonally adjusted basis, growth in Q1 slowed to just 0.3 percent from 1.1 in the previous quarter. Growth in Q2 was marginally better than in Q1 but still weak at just 0.4 percent.1 Weak economic data resulted in the BOT revising its annual growth forecast for 2015 to 3.0 percent from an earlier estimate (April 2015) of 3.7 percent.2 The likelihood of further downward revision remains high.

Production figures remain weak

On a quarter-over-quarter seasonally adjusted basis, the agriculture sector declined 1.5 percent in Q1, followed by a further decline of 1.0 percent in Q2. This sector is significant, as the livelihood of Thailand’s large rural population (more than 50 percent of the total population) is either directly or indirectly linked to agriculture. The sharp decline in agriculture is a result of the El-Nino-fueled drought that affected several provinces in Thailand. A further blow to the sector came from low global prices for the country’s major crops, namely, rice, rubber, and sugar. In the non-agriculture sector, manufacturing declined 0.5 percent in Q1 and 1.8 percent in Q2 as both internal and external demand remain weak. The surge in construction in Q1 failed to spill over into Q2.

Expenditure growth remains sluggish

On a quarter-over-quarter seasonally adjusted basis, private consumption expenditure has improved since a weak fourth quarter last year. Growth has edged up from -1.3 percent in Q4 to 0.7 percent in Q1 and then to 1.0 percent in Q2. Though the improvement is encouraging, growth in private consumption remains too weak to make a significant contribution to GDP growth. Weak private consumption stems from a decline in consumer confidence. The consumer confidence index compiled by the University of the Thai Chamber of Commerce fell to 72.3 in August 2015, the lowest level since May 2014 when military rule began.3

Thailand_Figure1_Private-consumption

In Q2, both private and public investment declined, reversing growth in Q1. Private investment declined by 3.1 percent, while public investment declined by 8.8 percent. As a result, total fixed capital formation declined 3.7 percent quarter over quarter in Q2 after growing 6.9 percent in Q1. Trade was also weak in the first half of the year. Exports contracted 3.9 percent in Q1 and 1.0 percent in Q2. Imports fell by 0.6 percent and 2.2 percent respectively.

Thailand’s export woes are linked to an uneven global recovery

Export growth is critical to the success of Thailand’s economy. Exports account for more than 60 percent of Thailand’s GDP.4 However, Thailand’s exports have shrunk over the last two calendar years and are likely to shrink this year as well. The BOT forecasts a drop in exports of more than 1.5 percent in 2015.5 Exports in terms of US dollars have fallen every month for the first seven months of 2015, declining 7.7 percent in June from a year ago, the largest drop since late 2011.6

Thailand’s weak export performance is likely linked to the uneven recovery of the global economy. Exports to China, Thailand’s largest trading partner, accounted for 11 percent of total exports in 2014. Exports to the United States, the European Union, and Japan accounted for 10.5 percent, 10.3 percent, and 9.6 percent of total exports in 2014 respectively. Furthermore, the Association of Southeast Asian Nations (ASEAN) accounted for 26 percent of Thailand’s total exports in 2014. Strikingly, in the first half of 2015, Thailand’s exports to almost all its major trading partners declined relative to the same period a year ago. Exports to China fell 7 percent, while exports to the European Union and Japan fell 7 percent and 6.6 percent respectively. A slowdown in China has far-reaching effects, indirectly resulting in Thailand’s exports to ASEAN shrinking by 4.2 percent in the first half of 2015. China’s recent devaluation of the yuan is yet another concern for Thai exporters, as a weaker yuan is likely to weaken the purchasing power of China’s importers. The only bright spot for Thailand’s exports is the United States, which climbed 4.1 percent from a year ago in the first half of 2015.

Another factor behind Thailand’s weak export performance is that some of its electronic exports are outdated in terms of technology. For example, Thailand is the world’s second-largest producer of hard disk drives. However, hard disk drives, used primarily in personal computers, are being replaced by solid state drives that are used in tablets. Electronics are the largest component of Thailand’s export portfolio (14.6 percent of total exports in 2014). Year-over-year growth in electronics exports averaged more than 8 percent between 2005 and 2010 but slowed to -0.2 percent from 2011 to 2014. Weak growth has continued into 2015 as well (-1.4 percent in the first half of 2015). Thailand will need to get a foothold in the high-tech supply chain if it is to register growth in this segment. This will be a challenge as manufacturers move to countries such as Vietnam and the Philippines where labor is cheaper. Thailand’s automotive sector has not fared much better. Automotive exports grew 0.7 percent in the first half of 2015 after registering just 0.1 percent growth in 2014. Furthermore, agriculture and related sector exports contracted by 6.3 percent in the first half of 2015, continuing from a 1.9 percent contraction in 2014.

Thailand_Figure2_Major-exports

Downside risks are likely to overshadow the positives

Factors such as political uncertainty, high household debt, the possibility of a further slowdown in China and an impending hike in interest rates in the United States are likely to overshadow the drivers of near-term growth in Thailand. A rebound in tourism, though positive, is largely due to Chinese tourists, who accounted for a fifth of all international visitors in 2014. Further weakening of the yuan and a sharper slowdown in China could reverse the trend. The recent bomb blast in the capital city is also likely to have a negative impact on tourism. Similarly, the positive effect of low energy prices and accommodative monetary policy (the BOT cut the policy interest rate to 1.5 percent in April) are benign due to the indebtedness of Thai households (86 percent of GDP at the end of 2014),7 political uncertainty, and weak external demand. Lastly, a hike in short-term interest rates in the United States in the near term could exacerbate capital flight, further weaken the baht, and reduce foreign investment. Though a weaker baht would benefit exporters and add some much-needed inflationary pressure, a combination of downside risks makes robust economic growth a highly unlikely prospect in the near term.

Thailand_Figure3_Average-annual

Thailand needs to bolster growth through investment

Near-term prospects of GDP growth remain modest at best, and growth over the coming years remains a long-term concern.  Thailand is currently Southeast Asia’s second largest economy. However, Thailand’s potential growth over the next decade lags behind regional competitors. The administration at the helm of affairs will need to boost potential GDP growth through investment. Public investment assumes importance in the absence of historical drivers of growth such as private consumption and exports.

Thailand_Figure4 Average annual potential

Thailand_Figure5_Total-fixed-investment

Investment should be focused on improving infrastructure and boosting productivity through higher value addition. A clear roadmap to improve infrastructure will help keep foreign investment from flowing out of Thailand to its neighboring competitors. Similarly, improved productivity will help keep Thailand’s export-oriented model competitive. Any progress, however, will depend heavily upon how Thailand addresses its internal problems, not least among which is the need for a stable polity.