Thailand Monthly Economic Monitor 19 July 2023 Philippines Monthly Economic Developments July 2023 DRAFT_LCM.docx The economy maintained moderate expansion, driven by private consumption and tourism. Declining inflation alleviated pressure on living costs and supported private consumption. However, goods exports as well as manufacturing production and investment contracted due to weak external demand. Public debt remained stable; a decrease in budget deficit financing was offset by increased borrowing to support the State Oil Fund. In June, the Thai baht depreciated compared to major ASEAN currencies, primarily due to an all-year high current account deficit. Domestic demand continued to support the ongoing Figure 1: Services Production Continued to Expand While Manufacturing Production Contracted recovery, while goods exports contracted. In May, services (Percent year-on-year) expanded 11.6 percent (year-on-year), reflecting strong private 40.0 Manufacturing Production Index Service Production Index consumption growth and tourism recovery (Fig 1). Activities Private Consumption Index during the election period provided a boost to consumption in 20.0 May. Consumer confidence in June indicated a continued recovery in private consumption, supported by improvements in the tourism and agricultural sectors, as well as a decrease in the 0.0 cost of living due to the decline in domestic gasoline prices. In contrast, manufacturing production contracted by 2.9 percent (year-on-year) due to the fall in external demand. Private -20.0 Jan-21 Jan-22 Jan-23 investment contracted at a smaller magnitude in the first five Source: Haver Analytics, CEIC; World Bank staff calculations. months of 2023, backed by FDI, especially in construction in the Eastern Economic Corridor. Figure 2: Tourism Supported Services Activity (Tourist arrivals, percent of the 2019 level, seasonally adjusted) 120 112 Tourism continued to recover. The number of international 106 tourist visitors declined to 2.0 million from 2.2 million in the 100 81 previous month, due to the low tourist season. However, on 80 seasonally-adjusted terms, tourist inflows continued to improve, 60 reaching 81 percent of the 2019 level. The increase was driven 39 40 by visitors from ASEAN, Europe, Japan, Korea, and India. Tourists from China remained relatively stable, hovering around 20 40 percent of the 2019 level. The recovery of Chinese tourists 0 Total China (28%) ASEAN (27%) Europe (17%) has been slow due to high airfares, limited flights and cautious Jan-23 Feb-23 Mar-23 Apr-23 May-23 spending amid their economic slowdowns. Other major source Source: CEIC; World Bank staff calculations. markets such as ASEAN and Europe, already surpassed pre- pandemic levels (Fig. 2). Figure 3: Exports Continued to Contract in May (left: diffusion index; right: Percent year-on-year) 65 60 Goods exports contracted modestly compared to other 50 60 40 Asian countries. In May, goods export growth contracted by 5.9 30 percent (year-on-year), marking the eighth consecutive month of 55 20 contraction. This slowdown in exports was consistent with the 10 50 0 overall weakness observed in the global manufacturing -10 Purchasing Manager Index (PMI) (Fig. 3). Nevertheless, the 45 Manufacturing PMI: Global -20 -30 contraction in the first five months of 2023 proved to be the 40 Services PMI: Global -40 Thai Exports. YoY (RHS) smallest among major Asian exporters with the exception of -50 China (Fig. 4). The growth in agricultural products, automobile 35 -60 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 and parts, and electrical appliances exports mitigated the Source: CEIC; MOC; World Bank staff calculations contraction. Conversely, exports of electronics, metal and steel, and chemical and petrochemical products declined sharply. THAILAND MONTHLY ECONOMIC MONITOR | 1 Inflation fell to its lowest rate in almost two years. In June, Figure 4: Exports Contracted Less than other Major headline inflation in Thailand declined faster than ASEAN peers, Asian Exporters (Percent year-on-year) reaching just 0.2 percent (year-on-year). This decline was driven 30 26.1 2022 2023, YTD by a contraction in energy prices and a lack of significant 20 17.7 pressure on core inflation (Fig 5). The energy prices inflation 12.7 10.4 7.0 6.1 8.0 10 5.5 5.7 contracted for the second consecutive month at 9 percent 0.3 following the global crude oil prices were down further. Raw food 0 prices remained elevated at 3.9 percent. Despite elevated -10 -5.1 -6.0 -6.1 electricity price inflation resulting from the expiration of the -8.9 -11.5 -12.2 electricity subsidy for lower-income households, core inflation -20 -13.6 -17.1 slightly declined from 1.5 percent in the previous month to 1.3 percent. In May, the Bank of Thailand raised its policy rate to 2.0 percent in response to upside inflationary risks, signaling its Source: CEIC; MOC; World Bank staff calculations commitment to normalize interest rates amid the ongoing recovery. The policy rate saw a total increase of 150 basis points Figure 5: Inflation Declined Faster Than Peers (Percent, year-on-year) since August 2022. However, the estimated real policy rate Indonesia Malaysia remains negative and below those of ASEAN peers (Fig 6). Philippines Thailand 6.0 The fiscal deficit narrowed, while public debt stayed flat. The central government fiscal deficit narrowed to 5.0 percent of GDP in the first eight months of fiscal year 2023 (Oct 2022 - May 1.0 2023), down from 7.0 percent of GDP in the same period last year. This reflected mainly a decrease in total expenditure. However, total revenue remained below the pre-pandemic period at 16.7 percent of GDP due mainly to the excise tax cut -4.0 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 on diesel. Public debt to GDP remained stable at 61.6 percent of Source: CEIC; World Bank staff calculations. GDP. A decrease in borrowing to finance the budget deficit was offset by additional government guaranteed agency debt of THB Figure 6: Real Policy Rate was Lower Than Peers (Percent) 20 billion (0.1 percent of GDP) to support the State Oil Fund (Fig 8.00 7). Although total borrowing to support the State Oil Fund Latest policy rate Real policy rate 6.75 reached THB 50 billion (0.3 percent of GDP), the Fund remained 6.00 in a deficit of THB 52 billion as of July 10, albeit significantly down 3.75 4.00 3.50 from more than THB 120 billion end-2022. The path back to an 3.00 2.00 oil fund surplus is expected to be gradual due to the remaining 2.00 2.08 subsidy on cooking gas and potential additional subsidies to 1.04 replace the expiring diesel excise tax cut late July 2023. 0.00 -0.09 0.15 0.21 -2.00 Portfolio flows declined, the current account deficit Thailand Malaysia South Indonesia Philippines widened and the Thai baht weakened amid political Korea Note: The real policy rate is based on consensus inflation for 2023 uncertainty and weakening global prospects. In June, the Source: CEIC; World Bank staff calculations. Nominal Effective Exchange Rate (NEER) depreciated, while other ASEAN currencies appreciated. The depreciation was in Figure 7: Public Debt was Stable in May (Percent of GDP) line with the current account deficit and portfolio outflows. The 70 Deficit financing current account deficit widened to 6.6 percent of GDP in May, an Off budget borrowing 60 all-year high, due to a net income and transfers deficit during the SOEs and agencies corporate dividends payment season, while the goods trade 50 balance showed a small surplus. Net foreign outflows from the 40 equity and bond markets reached THB 41 billion in June, up from 30 THB 21 billion in the previous month. 20 10 0 FY19 FY20 FY21 FY22 May 2023 Source: PDMO; World Bank staff calculations. THAILAND MONTHLY ECONOMIC MONITOR | 2 Although the banking system remains resilient with a Figure 8: The Banking System Remains Resilient Figure 1: NPL with Sufficient and CAR Capital andin the Thai Financial Liquidity Sector Buffers robust level of capital and strong asset quality, high (Percent) (In percent) household indebtedness remains a source of vulnerability. NPL (LHS) CAR (RHS) Tier-1 Capital (RHS) As of Q4 2022, the tier-1 capital adequacy ratio for Thai banks 3.5% 3.20% 3.30% 25% 3.10% 3.10% 3.00% was 15.9 percent (Fig 8), above both the minimum regulatory 3.0% 2.90% 2.80% 20% requirement and the Basel III minimum requirement of 10.5 2.5% percent. This capital adequacy ratio is comparable to its regional 2.0% 15% peers such as Malaysia and the Philippines. The gross non- 1.5% 10% performing loan (NPL) ratio declined to 2.8 percent, which is 1.0% comparable to regional peers and reflects the continued support 5% 0.5% of banks for their borrowers through debt restructuring and loan 0.0% 0% profile management. Banks also maintained an adequate level 2022Q3 2022Q4 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2 2021Q3 2021Q4 2022Q1 2022Q2 of provisions with an NPL coverage ratio of 171.9 percent. However, household debt remains elevated even compared with Source: Bank of Thailand. advanced economies at 85.7 percent of GDP as of Note: NPL: Note: Non-Performing NPL: Loans, CAR: Capital Non-performing loans,Adequacy CAR: Ratio. Capital Adequacy ratio Data reported is for domestically incorporated commercial banks. data reported are for domestically incorporated commercial banks Q4 2022. The composition of household debt in Thailand Source: Bank of Thailand warrants attention due to a large share of uncollateralized lending (44 percent of GDP), notably higher than, say, China (28 percent of GDP). The difference is due to the prevalence of uncollateralized lending, including personal loans (19 percent), credit card loans (4 percent), and agricultural loans (7 percent) among others. News Highlights: Issues to Watch: • Bank of Thailand aims to cut persistent debt in order to • Tourism: Will Chinese tourists recover as fast as reduce the burden of households. (Bangkok Post, Link). projected in 2023? • Fitch Affirms Thai Rating at BBB+ With Stable Outlook. • Inflation: Will inflation continue to decline, despite (NNT, Link). elevated demand? • SET index fluctuates amid uncertain political outlook. • Politics: Will the government formation process delay the (Bangkok Post, Link). budget disbursement in FY 24 (Oct 23 to Sep 24)? Prepared by Warunthorn Puthong, Uzma Khalil, under the guidance of Kiatipong Ariyapruchya and Ekaterine T. Vashakmadze. For further questions, please email wputhong@worldbank.org THAILAND MONTHLY ECONOMIC MONITOR | 3 Selected Economic and Financial Indicators 2022 2023 2023 2022 Q2 Q3 Q4 Q1 Feb Mar Apr May Jun GDP and Inflation (%YoY) GDP growth (real) 2.6 2.5 4.6 1.4 2.7 Contribution to GDP growth: Private consumption 3.4 4.0 5.2 2.9 2.8 General Government consumption 0.0 0.4 -0.3 -1.2 -0.9 Gross fixed capital formulation: Private 0.9 0.4 1.9 0.8 0.5 Gross fixed capital formulation: Public -0.3 -0.6 -0.5 0.1 0.3 Net Exports of goods and services 1.8 0.3 -0.8 2.7 2.7 Change in Inventory -0.6 0.4 1.7 -1.3 -0.5 Residual and errors -2.6 -2.4 -2.6 -2.7 -2.2 GDP, nominal (USD Billion) 496 123 119 125 134 GDP, nominal (THB Billion) 17,370 4,214 4,337 4,533 4,531 Consumer Prices Index: Headline 6.1 6.5 7.3 5.8 5.5 3.8 2.8 2.7 0.5 0.2 Consumer Prices Index: Core 2.5 2.2 3.1 3.2 3.2 1.9 1.7 1.6 1.5 1.3 Output Indicators Manufacturing Production Index (%YoY) 0.6 -1.1 7.9 -6.0 -3.7 -2.4 -3.9 -8.7 -3.1 Capacity Utilisation (%) 62.8 61.2 62.8 60.3 63.8 62.8 66.5 53.6 60.2 Farm Production Index (%YoY) 2.0 6.6 -2.2 0.4 9.0 10.8 11.6 11.7 -6.6 Service Index (%YoY) 12.9 13.4 16.3 12.8 13.7 14.7 13.2 9.8 10.9 Labor Market Unemployed workers (Thousand Persons) 527.0 546.6 491.4 462.5 421.1 Unemployment rate (%) 1.3 1.4 1.2 1.2 1.1 Underemployment/1 (Thousand Persons) 273 264 235 275.9 227.9 Underemployment (%) 0.7 0.7 0.6 0.7 0.6 Balance of Payments (USD million) Current account -17,368 -7,790 -7,924 432 3,469 1,034 4,413 -581 -2,766 Current account (% of GDP) -3.6 -6.4 -6.7 0.3 2.6 2.5 10.6 -1.4 -6.6 Trade Balance 10,814 2,509 -1,851 2,970 2,945 1,311 4,305 80 55 Exports of goods (%YoY) 5.8 9.6 6.7 -7.5 -4.6 -4.1 -5.8 -4.9 -5.9 Imports of goods (%YoY) 15.5 22.7 23.2 -0.3 1.3 1.8 -5.7 -3.7 -2.3 Service, primary and secondary Income -28,044 -10,536 -5,833 -2,043 524 -277 109 -662 -2,821 Tourist Arrivals (Thousand Persons) 9,957 1,582 2,413 5,465 6,478 2,114 2,219 2,182 2,014 Financial account 3,168 -183 -3,496 3108.6 -2454.1 Financial account (% of GDP) 2.3 -0.1 -2.9 2.5 -1.8 Foreign direct Investment, net 2,607 -363 87 918.0 -843.1 Portfolio flows 5,768 1,911 -756 1963.4 -5860.5 Others Investments -5,410 -1,647 -3,225 196.4 4129.8 Central Government Budget (Fiscal Year, THB billion)/2 Revenue 2,992 883 833 694 675 192 235 259 299 Expenditure 3,845 892 925 1,076 907 293 321 264 256 Central Government balance -852 -9 -91 -382 -232 -102 -86 -4 43 Central Government balance (% of GDP) -3.9 -0.2 -2.1 -8.4 -5.1 Public debt (% of GDP) 60.5 61.0 60.5 61.0 61.3 61.2 61.3 61.6 61.6 Financial Markets Indicators Policy rate (%) 1.25 0.50 1.25 1.25 1.75 1.50 1.75 1.75 2.00 2.00 M2 (%YoY) 5.20 6.1 4.7 4.10 3.23 4.0 2.5 1.9 1.4 - Household Debt (% of GDP) 91.4 92.8 91.5 91.4 90.6 SET Index 1,669 1,568 1,590 1,669 1609 1,622 1,609 1,529 1,534 1,503 Thai government bond yield, 10 year (%) 2.45 2.81 3.08 2.45 2.23 2.50 2.23 2.47 2.48 2.48 Foreign exchange reserve and FX forward position (USD billion) 246 251 228 246 252 245 252 252 249 USD/THB, end of period 34.56 35.30 37.91 34.56 34.10 35.15 34.10 34.14 34.73 35.59 THB NEER, average 115.5 116.0 113.5 115.8 120.3 119.9 119.2 119.5 120.6 119.3 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 2023 begins in October 2022 and ends in September 2023, 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 | 4