Thailand Monthly Economic Monitor 13 May 2024 Philippines Monthly Economic Developments July 2023 DRAFT_LCM.docx Ear The economy slowed more than expected due to sluggish external demand and delayed budget approval. Expanding private consumption and tourism continued to drive services growth, albeit at a slower pace. Inflation increased due to the removal of energy subsidies and elevated food prices but remained the lowest among emerging markets. The delayed budget approval led to minimal public spending in Q1. However, the recent enactment of the FY24 budget and the upcoming rollout of the Digital Wallet cash transfer in Q4 buoyed the near- term growth outlook. Despite a current account surplus, the Thai baht depreciated in April due to a delay to the Fed’s easing cycle and concerns over the Thai economy and the fiscal implications of the Digital Wallet. Economic activity weakened as manufacturing continued to Figure 1: High Frequency Data Indicate a Slowdown (Percent, year-on-year) contract and services slowed. In March, manufacturing 50.0 Manufacturing Production Index production saw its sharpest contraction in six months, declining Service Production Index Private Consumption Index by 5.1 percent year-on-year (Fig. 1). The contraction was Goods Exports 25.0 consistent with falling goods exports, persistently high inventory level, and weakening domestic demand. While services continued to grow, its pace slowed as private consumption 0.0 contracted and tourist numbers declined. Consumption of durable goods, notably vehicles, decreased, partly due to tighter lending conditions. The consumer confidence index remained -25.0 stable over the past three months, albeit below pre-pandemic Jan-21 Jan-22 Jan-23 Jan-24 Source: Haver Analytics, CEIC; World Bank staff calculations. levels. Figure 2: Exports Contracted Sharply in March Goods exports declined sharply, driven by contracting (Percent year-on-year) 50.0 manufacturing exports. In March, goods exports contracted by 2023 Q1 Mar 40.0 10.2 percent year-on-year, marking its first decline in seven 30.0 months and the worst performance among peers (Fig 2). Exports 20.0 to major destinations such as the US, EU, China, Japan, and 10.0 ASEAN weakened. The uncertain global outlook and transport 0.0 disruption in the Red Sea contributed to this decline. Manufacturing exports, including electronics, automobiles, -10.0 Petro-chemical and petroleum products led the contraction. After -20.0 benefitting from the electronics upcycle in 2023, Thailand experienced a sharp contraction in electronics exports in March, similar to China and Malaysia. Note: Data as of Jan-Feb 2024 for the Philippines Source: Haver Analytics; World Bank staff calculations Tourism declined, following a strong rebound in the Figure 3: Tourism Recovery Remained Slow previous month. In March, tourist arrivals reached 2.98 million, (Tourist arrivals, percent of the 2019 level) marking a 31.4 percent year-on-year increase and reaching 86 120 Total China ROW percent of pre-pandemic levels (Fig. 3). Chinese arrivals 100 96.9 accounted for 58.2 percent of the pre-pandemic level, declining 80 slightly after a strong pickup in the previous month, following the 85.9 Chinese New Year holiday. Arrivals from Malaysia and the 60 58.2 Middle East, which account for 16 percent of total arrivals, also 40 decreased during the holy month of Ramadan. 20 0 Seven months of delay in implementing the FY24 Budget resulted in subdued spending. In the first half of FY24 (October 2023 – March 2024), the central government fiscal Source: CEIC; World Bank staff calculations. deficit (GFS basis) declined to 3.5 percent of GDP, down from THAILAND MONTHLY ECONOMIC MONITOR | 1 7.1 percent in the same period last year. This decline was Figure 4: The Digital Wallet (THB 500 Billion) will be attributed to the ongoing delay in budget approval for FY24, Funded Through the Budget and a State-Owned Bank (THB million) resulting in minimal capital spending (0.04 percent of GDP) and moderated recurrent spending. However, the FY24 Budget (October 2023 – September 2024) of THB 3.48 trillion (18.9 percent of GDP, cash basis) came into effect on April 26, after a BAAC (state- Budget FY2024, seven-month delay. Speeding up budget execution has potential owned bank), 175,000 172,300 to boost economic activity in the rest of 2024. The Digital Wallet is expected to boost GDP by 0.5-1.0 Budget FY2025, percentage points over the short-term, at a fiscal cost of 2.7 152,700 percent of GDP. On April 10, the government announced its much-anticipated flagship policy, the Digital Wallet program, which entails a one-time digital transfer of THB 10,000 or USD Source: Royal Thai Government; World Bank 286 to 50 million Thais. The program is scheduled to be Figure 5: Inflation Remained the Lowest in ASEAN implemented in Q4 2024 and Q1 2025. Once rolled out in Q4, (Percent Year-on-Year) private consumption is expected to benefit from the stimulus 10.0 Indonesia Malaysia measure, with an estimated impact on GDP growth at 0.5 – 1.0 Philippines Thailand 8.0 percentage points over the two-year period. The fiscal cost of Vietnam THB 500 billion (2.7 percent of GDP) will be financed through the 6.0 fiscal budget for FY24 and FY25, as well as quasi-fiscal means 4.0 –borrowing by the Bank for Agriculture and Agricultural 2.0 Cooperatives' (BAAC), a state-owned bank (Fig. 4). The latter 0.0 will not be reflected in the public debt. Nonetheless, public debt is expected to increase by 0.8 percentage points of GDP -2.0 compared to previous projections due to increased spending -4.0 pressures. Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 Source: CEIC; World Bank staff calculations. Cabinet has approved a larger FY25 budget deficit to finance the Digital Wallet program. The cabinet planned to increase the budget deficit by 153 billion baht, bringing the total budget to 3.75 trillion baht (about 19.6 percent of GDP), up from the previously planned 3.6 trillion baht and higher than the budget for FY24. This revision of the budget plan reflects the additional funding required for the digital wallet scheme. The budget deficit is projected to increase to THB 866 billion (about 4.5 percent of GDP) from 3.8 percent of GDP previously. The government expects the public debt to reach 66.9 percent of GDP by the end of FY25 while remaining below the debt ceiling of 70 percent. Inflation turned positive due to the removal of energy subsidies and elevated food prices, yet remained the lowest among emerging markets. In April, headline inflation turned positive for the first time in seven months, reaching 0.2 percent year-on-year, yet it remained the lowest among ASEAN peers and emerging markets (Fig. 5). This increase was primarily driven by higher energy prices, following the still elevated global oil prices and reduced energy subsidies, along with elevated domestic fresh food prices. The government began reducing costly and regressive fuel subsidies in April, lifting the ceiling on retail diesel prices by THB 1.40 per liter to reach THB 31.44 per liter, the highest since October last year. The Bank of Thailand estimated that energy subsidies lowered headline inflation by THAILAND MONTHLY ECONOMIC MONITOR | 2 0.77 percentage points in 2023. Core inflation, which excludes Figure 6: The Thai Baht Against US Dollar energy and raw food, continued to expand at 0.4 percent. Depreciated Similar to Most Peers in April (Percent) The BOT kept the policy rate unchanged, while commercial MYR SGD April banks and state-owned banks lowered lending rates for retail customers, in response to the Prime Minister’s call. On PHP YTD VND April 10, the BOT voted 5-2 to maintain the policy rate at 2.50 IDR percent, deeming it appropriate for safeguarding macro-financial TWD stability. Two MPC members advocated for a 0.25 percentage KRW point cut. However, major commercial banks and state-owned THB banks lowered the marginal retail rate (MRR) by 25 basis points -10% -8% -6% -4% -2% 0% for six months by the end of April, following the Prime Minister's Source: Haver Analytics; World Bank staff calculations call. These cuts are aimed at alleviating the interest burden on vulnerable individuals and SMEs in the short term. However, they are unlikely to address the structural issue of high Figure 7: The Current Account Surplus Increased in household debt, which remained the highest among ASEAN Q1 2024 (Percent of GDP) peers at 91 percent of GDP in Q4 2023. Current Acct: Services, Primary and Secondary Income The Thai baht depreciated due to a delay to the Fed’s easing 15 Current Acct: Goods Current Account cycle and concerns regarding the Thai economy and the Digital Wallet, despite a current account surplus. In the first 10 four months of 2024, the Thai baht against the US dollar 5 depreciated the most among major Asian currencies at 8.0 percent (Fig 6). The US Fed’s latest decision to delay the Fed 0 Funds Rate cutting cycle led to a rise in US T-bills yields, -5 prompting capital outflows, similar to other emerging markets (EM) and a weakening of EM currencies. Net foreign stock and -10 bond portfolio outflows amounted to THB 25.6 billion due to Q1-17 Q1-18 Q1-19 Q1-20 Q1-21 Q1-22 Q1-23 Q1-24 Source: Haver Analytics; World Bank staff calculations accelerated outflows from the bond market, while the equity market recorded net inflows. The depreciation of the Thai baht also reflected domestic factors: the softening economic outlook and uncertainty surrounding the funding sources for the Digital Wallet scheme. This depreciation persisted despite the current account balance turning positive in Q1, reaching about 2.1 percent of GDP, driven by a surplus in goods trade, services, primary, and secondary income (Fig. 7). Table 1: Budget Structure (THB million) Actual Budget FY2021 FY2022 FY2023 FY 2024 FY 2025 (Proposed) 2,446,630 2,551,457 2,665,671 2,787,000 2,887,000 Total Revenues [15.3] [14.9] [15] [15.1] [15] 3,208,653 3,146,241 3,262,393 3,480,000 3,752,700 Total Expenditures [20] [18.4] [18.3] [18.9] [19.6] 2,583,799 2,516,574 2,610,244 2,532,827 Current expenditures [16.1] [14.7] [14.6] [13.7] 428,357 415,990 478,191 717,722 Capital expenditures [2.7] [2.4] [2.7] [3.9] -762,023 -594,784 -596,722 -693,000 -865,700 Fiscal Surplus/Deficit [-4.8] [-3.5] [-3.3] [-3.8] [-4.5] Note: *share of GDP in parenthesis [ ] THAILAND MONTHLY ECONOMIC MONITOR | 3 News Highlights: Issues to Watch: • The ratio of interest burden to estimated government • Consumption: Will the Digital Wallet scheme lead to revenue is projected to increase due to its flagship strong consumption activity and GDP growth in Q4? digital wallet (Bangkok Post, Link). • Inflation: Will removal of energy subsidy put pressure on • The dispute between the government and the BOT inflation? intensified (Bangkok Post, Link). • Fiscal: Will budget execution rate accelerate as budget • Thai bankers cut MRR for six months to help retail for FY24 became effective in late-April? customers (The Nation, Link). Prepared by Warunthorn Puthong (Economist). For further questions, please email wputhong@worldbank.org THAILAND MONTHLY ECONOMIC MONITOR | 4 Selected Economic and Financial Indicators 2023 2024 2023 2024 2023 Q2 Q3 Q4 Q1 Dec Jan Feb Mar Apr GDP and Inflation (%YoY) GDP growth (real) 1.9 1.8 1.4 1.7 - Contribution to GDP growth: Private consumption 4.0 4.3 4.7 4.0 General Government consumption -0.7 -0.7 -0.9 -0.4 Gross fixed capital formulation: Private 0.6 0.2 0.7 0.9 Gross fixed capital formulation: Public -0.3 -0.1 -0.3 -1.0 Net Exports of goods and services 3.0 2.5 7.9 0.6 Change in Inventory 0.0 -1.8 -7.1 -0.7 Residual and errors -4.7 -2.6 -3.7 -1.7 GDP, nominal (USD Billion) 515 126 126 130 - GDP, nominal (THB Billion) 17,921 4,333 4,441 4,630 - Consumer Prices Index: Headline 1.3 1.1 0.5 -0.5 -0.8 -0.8 -1.1 -0.8 -0.5 0.2 Consumer Prices Index: Core 1.3 1.5 0.8 0.6 0.4 0.6 0.5 0.4 0.4 0.4 Output Indicators Manufacturing Production Index (%YoY) -3.8 -5.0 -5.2 -2.9 -3.6 -4.7 -2.9 -2.8 -5.1 Capacity Utilisation (%) 59.6 58.6 58.4 57.4 60.5 55.9 59.2 59.8 62.4 Farm Production Index (%YoY) 1.0 1.5 1.0 -0.6 -4.9 -1.1 -4.3 -5.9 -4.6 Service Index (%YoY) 8.7 9.0 6.8 5.5 3.1 4.4 3.0 4.3 2.1 Labor Market Unemployed workers (Thousand Persons) 395.2 429.1 401.2 329.3 - Unemployment rate (%) 1.0 1.1 1.0 0.8 - Underemployment/1 (Thousand Persons) 202.1 202.6 166.9 210.9 - Underemployment (%) 0.5 0.5 0.4 0.5 - Balance of Payments (USD million) Current account 7,002 -1,053 2,549 2,010 2,857 2,266 -191 1,965 1,082 Current account (% of GDP) 1.4 -0.8 2.0 1.5 2.1 5.3 -0.4 4.6 2.5 Trade Balance 16,972 3,650 5,393 3,452 1,610 2,346 -1,100 1,736 975 Exports of goods (%YoY) -1.6 -5.0 -2.0 4.6 -1.0 3.0 7.2 2.5 -10.2 Imports of goods (%YoY) -2.7 -6.6 -10.7 6.1 3.2 -1.7 1.5 3.1 5.2 Service, primary and secondary Income -9,970 -4,703 -2,843 -1,442 1,247 -80 909 230 107 Tourist Arrivals (Thousand Persons) 28,150 6,437 7,089 8,095 8,934 3,261 3,035 3,352 2,983 Financial account -14,380 -4318.0 -4720.0 -4507.0 - Financial account (% of GDP) -2.8 -3.4 -3.7 -3.5 - Foreign direct Investment, net -5,821 -2,189 -1,140 -2,418 - Portfolio flows -13,190 -1,390 -3,978 -2,019 - Others Investments 4,701 -764 585 -33 - Central Government Budget (Fiscal Year, THB billion)/2 Revenue 3,224 927 912 733 697 252 247 197 253 Expenditure 3,745 875 850 1,037 713 348 241 225 247 Central Government balance -522 52 62 -304 -17 -96 6 -28 6 Central Government balance (% of GDP) -2.9 1.2 1.4 -6.6 -0.4 Public debt (% of GDP) 62.4 61.7 62.4 61.9 188 61.9 62.2 62.5 63.4 Financial Markets Indicators Policy rate (%) 2.50 2.00 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 M2 (%YoY) 1.79 1.50 1.1 1.4 1.7 1.4 2.1 1.4 1.7 - Household Debt (% of GDP) 91.3 90.8 91.0 91.3 SET Index 1,416 1,503 1,471 1,416 1,365 1,416 1,365 1,371 1,378 1,368 Thai government bond yield, 10 year (%) 2.67 2.48 3.16 2.67 2.64 2.67 2.64 2.56 2.50 2.79 Foreign exchange reserve and FX forward position (USD billion) 255 249 242 255 252 255 252 252 253 250 USD/THB, end of period 34.22 35.59 36.56 34.22 35.43 34.22 35.43 35.94 36.47 37.06 THB NEER, average 119.8 119.8 119.9 119.2 118.8 120.1 119.7 118.5 118.1 116.8 1/ Underemployment accounts for workers who are occupied less than 35 hours per week and are available for additional work (defined by BOT). 2/ Fiscal Year 2024 begins in October 2023 and ends in September 2024, Fiscal Balance according to GFS. Source: Office of the National Economic and Social Development Council, Bank of Thailand, Office of Industrial Economics, Ministry of Industry National Statistical Office of Thailand, Fiscal Policy Office, Public Debt Management Office, Haver Analytics. THAILAND MONTHLY ECONOMIC MONITOR | 5