Thailand Monthly Economic Monitor 30 July 2024 Philippines Monthly Economic Developments July 2023 DRAFT_LCM.docx Ear Recent indicators of economic activity point to a gradual recovery, supported by improvement in manufacturing production, goods exports, and tourism. The number of tourist arrivals expanded, nearing pre-pandemic levels. However, private consumption moderated. Growth is projected to accelerate from 1.9 percent in 2023 to 2.4 percent in 2024. The Bank of Thailand has maintained a neutral policy rate and anticipates inflation to return to its target by Q4 2024. The banking sector remained stable with adequate buffers, though vulnerabilities in household debt and SME NPLs persist. The government has approved a flagship Digital Wallet program, expected to boost GDP in the short term and rolled out a soft loan program to support SMEs. The Thai baht depreciated due to delays in the Fed’s easing cycle and ongoing concerns about the Thai economy. After bottoming out in Q1 2024, recent manufacturing Figure 1: High Frequency Data Indicate a Gradual production and export numbers point to a gradual recovery. Recovery In May, manufacturing production slightly contracted by 1.5 (Percent, year-on-year) 50.0 percent year-on-year improving from its average contraction of Manufacturing Production Index 40.0 Service Production Index nearly 4 percent over the past six quarters (Fig. 1). Service Private Consumption Index 30.0 Goods Exports activity continued to expand, supported by ongoing tourism 20.0 recovery. Tourist arrivals in May reached 2.63 million, 10.0 approaching pre-pandemic levels and marking a 30.8 percent 0.0 year-on-year increase (Fig. 2). Chinese tourists accounted for 70 -10.0 percent of pre-pandemic levels. As a result, economic activity in -20.0 Q2, based on an average of April and May, showed signs of Jan-21 Jan-22 Jan-23 Jan-24 stronger recovery compared to the weak expansion of the Source: Haver Analytics, CEIC; World Bank staff calculations. previous quarter, with accelerated export growth. Meanwhile Figure 2: Tourism Recovery Remained Slow private consumption moderated, and the consumer confidence (Tourist arrivals, percent of the 2019 level) index declined for the fourth consecutive month in June. 120 Total China ROW 107.4 100 96.6 Goods export growth accelerated, driven by a rebound in 80 agricultural exports, while manufacturing exports 70.4 moderated. In May, goods exports increased by 7.2 percent 60 year-on-year, marking the second consecutive month of 40 expansion. Agricultural goods exports rose by 36.5 percent, 20 driven by fruits, rubber, and animal feed. Conversely, 0 manufacturing exports moderated to 2.4 percent, due to contractions in vehicles and parts, electrical appliances, and steel exports, despite of a pickup in electronic exports. Overall, Source: CEIC; World Bank staff calculations. in the first five months of 2024, export growth of 3.4 percent year- Figure 3: Goods Export Growth Accelerated but on-year lagged behind most major Asian exporters (Fig. 3). Remained Weak Many major Asian exporters benefited from the global (Percent year-on-year) electronics cycle recovery in higher value-added components -10.0 0.0 10.0 20.0 30.0 40.0 50.0 (e.g., semiconductors), while Thailand’s exports have yet to fully Vietnam benefit due to its downstream position in global value chains. Korea Philippines 2023 Inflation remained positive but declined due to falling fresh Taiwan 2024 (Jan-May) food and energy prices. In June, headline inflation decreased Singapore from 1.5 percent year-on-year to 0.6 percent, the second lowest Thailand China among emerging markets, after China (Fig. 4 and 5). Fresh food Malaysia inflation declined due to an increased supply of agricultural Indonesia products from favorable weather. Energy price inflation also Source: Haver Analytics; World Bank staff calculations declined, reflecting moderating global oil prices despite the THAILAND MONTHLY ECONOMIC MONITOR | 1 partial withdrawal of energy subsidies. In April, the government Figure 4: Inflation Declined in June Due to Falling lifted the ceiling on retail diesel prices, consistent with the Fresh Food and Energy Prices (Percent Year-on-Year) reversal of the excise tax on diesel to THB 5.99 per liter, and the 8.0 Core inflation 7.0 Raw Food substantial State Oil Fund deficit stabilized over the past three 6.0 Energy months (Fig. 6). However, subsidized electricity prices, including 5.0 Headline inflation 4.0 BOT's reduced rates for low-income households, remained unchanged. 3.0 Core inflation (excluding energy and raw food) stayed weak at 2.0 0.4 percent, below its pre-pandemic average of 0.7 percent from 1.0 0.0 2016-2019, due to the delayed closing of the output gap. -1.0 -2.0 -3.0 The Bank of Thailand (BOT) maintained its neutral policy -4.0 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 rate, anticipating inflation to return to its target in Q4. In the Source: CEIC; World Bank staff calculations. monetary policy meeting on June 12, the BOT assessed that the current policy rate of 2.5 percent remains appropriate for Figure 5: Inflation Was the Lowest Among Peers as supporting economic and price stability. This aligns with their Growth Has Been Weak (Percent Year-on-Year) view that the economy has accelerated in Q2, and that inflation Indonesia Malaysia will return to the target range of 1 to 3 percent in Q4. However, Philippines Thailand Vietnam underlying price pressures which has been obscured by price 6.0 controls and the potential impact of the universal cash transfer on growth and inflation may complicate monetary policy. 1.0 The banking system remained stable, though household and SME debt continued to be a major source of vulnerability. As of Q1 2024, non-performing loans (NPL) -4.0 remained low at 2.7 percent, below pandemic levels. However, Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 Source: CEIC; World Bank staff calculations. SME loans, accounting for 18 percent of total commercial bank lending, continued to exhibit a high NPL. The banking sector Figure 6: State Oil Fund Balance Deficit Stabilized but maintained adequate buffers against potential adverse shocks, Remained Substantial with capital and liquidity levels at commercial banks well above 60 27.5 LPG Oil regulatory requirements. Although profitability has improved— 30 Total evidenced by a Return on Assets of 1.2 percent and Return on 0 Equity of 8.9 percent—commercial bank lending has been -30 subdued. This trend aligned with a slowdown in credit demand -60 and tighter credit standards, particularly in lending to SMEs. -90 Meanwhile, household debt decreased to 90.8 percent of GDP -120 -111.9 in Q1, down from its peak of 95.8 percent two years earlier. -150 -125.2 Despite this decline, it remained a significant vulnerability for the Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 financial sector, not only due to its magnitude but also because Note: Data as of July 15 Source: OFFO; World Bank staff calculations of the proportion of uncollateralized consumer loans in bank lending portfolios. Figure 7: The Digital Wallet Could Provide a Short- term Boost to Growth (Percent) The recently approved flagship Digital Wallet could boost GDP by 0.5-1.0 percentage points in the short term (Fig. 7). With DW (Upper/Lower bound) The one-time digital transfer of THB 10,000 (USD 286) is 3.5 With DW (Moderate) 3.4 scheduled for implementation between Q4 2024 and Q1 2025. The transfers can only be spent within the recipient's registered Baseline 2.8 2.8 district to boost local economies. Merchants can convert 2.5 payments into cash only after the second transaction, when 2.4 funds circulate between merchants. The government has altered 1.9 the financing source to ensure the program's legality. Originally, it was planned to be financed through the FY24 and FY25 fiscal 1.5 budgets, along with quasi-fiscal measures via borrowing by the 2023 2024 2025 Source: Thailand Economic Monitor (July 2024) Bank for Agriculture and Agricultural Cooperatives (BAAC). The THAILAND MONTHLY ECONOMIC MONITOR | 2 latter was dropped and replaced by additional FY 25 budget Figure 8: The Thai Baht Depreciated Against US allocation. Furthermore, the estimated fiscal cost of the program Dollar Similar to Most Peers in April (Percent) was revised downward from THB 500 billion (2.7% of GDP) to -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 THB 450 billion (2.4% of GDP) and is expected to cover 40 MYR million participants. According to the Thailand Economic Monitor CNY Q1 Q2 July 2024, public debt is projected to rise by 1.3 percentage SGD points of GDP by the end of FY 2025 due to increased spending THB pressures. IDR Fiscal spending on both current and capital expenditures PHP accelerated after a seven-month delay. In May, the central KRW government's fiscal deficit (GFS basis) surged to 9.0 percent of Source: Haver Analytics; World Bank staff calculations GDP, significantly up from the six-month average of 3.2 percent. Figure 9: The Current Account Surplus Rose in Q1 Both current and capital expenditures accelerated after seven 2024 months of delay. Meanwhile revenue remained relatively stable (USD million) at 16.4 percent of GDP. Accelerating budget execution is BOP: USD: Trade Balance BOP: USD: Services, Primary Income & Secondary Income expected to stimulate economic activity throughout the rest of BOP: USD: Current Account Balance 2024. Additionally, to support SMEs, the government launched 6000 a THB 100 billion (USD 2.8 billion, 0.5 percent of GDP) soft loan 4000 scheme via the Government Savings Bank (GSB). The GSB will 2000 offer liquidity to commercial banks at a 0.01 percent interest rate, enabling them to extend loans to small businesses at rates up to 0 3.5 percent for three years—a significant reduction from the -2000 current 7 percent rate. -4000 -6000 Despite a current account surplus, the Thai baht Jan-20 Jan-21 Jan-22 Jan-23 Jan-24 depreciated amid delays in the Fed’s easing cycle and Source: Haver Analytics; World Bank staff calculations concerns over the Thai economy. In Q2, the Thai baht NEER depreciated by 1.2 percent, mirroring trends in other major Asian currencies such as the Indonesian rupiah, Philippine peso, and Korean won (Fig 8). Despite improvements in the current account balance in the past three quarters, supported by increased tourism receipts and a goods trade surplus, the baht depreciated (Fig 9). The depreciation primarily resulted from a more resilient US economy, which delayed the Fed’s easing cycle, and recent weaknesses in the Thai economy. Thailand also recorded its sixth consecutive quarter of portfolio investment outflows, driven by withdrawals in both stock and sovereign bond markets. News Highlights: Issues to Watch: • Budget for digital wallet scheme reduced by B50bn • Consumption: Will the Digital Wallet scheme lead to (Bangkok Post, Link). strong consumption activity and GDP growth in Q4? • The Excise Department is scheduled to impose a • Inflation: Will removal of energy subsidy put pressure on carbon tax by 2025 (Bangkok Post, Link). inflation? • Minimum wage increases to THB400 will be • Fiscal: Will accelerated budget execution lead to accompanied by tax measures to ease the burden on stronger economy in H2? businesses ( Bangkok Post, Link). Prepared by Warunthorn Puthong (Economist). For further questions, please email wputhong@worldbank.org THAILAND MONTHLY ECONOMIC MONITOR | 3 Selected Economic and Financial Indicators 2023 2024 2024 2023 Q3 Q4 Q1 Q2 Feb Mar Apr May Jun GDP and Inflation (%YoY) GDP growth (real) 1.9 1.4 1.7 1.5 Contribution to GDP growth: Private consumption 4.0 4.7 4.0 3.7 General Government consumption -0.7 -0.9 -0.4 -0.3 Gross fixed capital formulation: Private 0.6 0.7 0.9 0.8 Gross fixed capital formulation: Public -0.3 -0.3 -1.0 -1.8 Net Exports of goods and services 3.0 7.9 0.7 -1.7 Change in Inventory 0.0 -7.1 -0.8 0.1 Residual and errors -4.7 -3.7 -1.7 0.7 GDP, nominal (USD Billion) 515 126 130 129 GDP, nominal (THB Billion) 17,922 4,441 4,631 4,615 Consumer Prices Index: Headline 1.3 0.5 -0.5 -0.8 0.8 -0.8 -0.5 0.2 1.5 0.6 Consumer Prices Index: Core 1.3 0.8 0.6 0.4 0.4 0.4 0.4 0.4 0.4 0.4 Output Indicators Manufacturing Production Index (%YoY) -3.8 -5.2 -2.9 -3.5 -2.8 -4.9 2.7 -1.5 Capacity Utilisation (%) 59.6 58.4 57.4 60.4 59.8 62.3 55.5 59.8 Farm Production Index (%YoY) 1.4 0.5 1.4 -4.7 -5.5 -5.1 -10.3 7.4 Service Index (%YoY) 8.8 6.9 5.9 6.2 7.2 5.1 8.7 7.7 Labor Market Unemployed workers (Thousand Persons) 395.2 401.2 329.3 407.7 Unemployment rate (%) 1.0 1.0 0.8 1.0 Underemployment/1 (Thousand Persons) 202.1 166.9 210.9 191.5 Underemployment (%) 0.5 0.4 0.5 0.5 Balance of Payments (USD million) Current account 7,392 2,549 2,400 2,613 2,096 337 -45 647 Current account (% of GDP) 1.4 2.0 1.8 1.9 4.9 0.8 -0.1 1.5 Trade Balance 16,972 5,393 3,452 1,610 1,736 975 265 2,825 Exports of goods (%YoY) -1.6 -2.0 4.6 -1.0 2.5 -10.2 5.8 7.8 Imports of goods (%YoY) -2.7 -10.7 6.1 3.2 3.1 5.2 6.4 -2.3 Service, primary and secondary Income -9,580 -2,843 -1,052 1,003 360 -638 -309 -2,178 Tourist Arrivals (Thousand Persons) 28,150 7,089 8,095 8,934 3,352 2,983 2,757 2,633 Financial account -13,929 -4720.0 -4056.0 -3980.9 Financial account (% of GDP) -2.7 -3.7 -3.1 -3.0 Foreign direct Investment, net -7,205 -1,140 -3,802 408 Portfolio flows -13,080 -3,978 -1,909 -4,269 Others Investments 6,427 585 1,692 3 Central Government Budget (Fiscal Year, THB billion)/2 Revenue 3,224 912 733 707 203 255 256 318 Expenditure 3,745 850 1,037 747 229 262 256 454 Central Government balance -522 62 -304 -40 -26 -7 0 -136 Central Government balance (% of GDP) -2.9 1.4 -6.6 -0.9 Public debt (% of GDP) 62.4 62.4 61.9 188.4 62.7 63.4 63.8 64.3 Financial Markets Indicators Policy rate (%) 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 M2 (%YoY) 1.79 1.1 1.4 1.7 1.4 1.7 2.1 2.6 - Household Debt (% of GDP) 91.4 91.0 91.4 90.8 SET Index 1,416 1,471 1,416 1,378 1,301 1,371 1,378 1,368 1,346 1,301 Thai government bond yield, 10 year (%) 2.67 3.16 2.67 2.50 2.66 2.56 2.50 2.79 2.79 2.66 Foreign exchange reserve and FX forward position (USD billion) 255 242 255 253 253 252 253 249 253 253 USD/THB, end of period 34.22 36.56 34.22 36.47 36.85 35.94 36.47 37.06 36.73 36.85 THB NEER, average 119.8 119.9 119.2 118.8 117.2 118.5 118.1 116.8 117.2 117.6 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 | 4