Thailand Monthly Economic Monitor 23 September 2022 The economy picked up in Q3 2022, as mobility, tourist inflows, and employment improved, in line with a projected strengthening domestic recovery in H2. However, goods exports softened due to weakened global demand. Inflation remained the highest among the major ASEAN economies, driven by supply-side factors, while demand-pull pressure remained muted. The authorities responded with social assistance as well as food and fuel subsidies. While the fiscal consolidation path has been largely maintained thus far, additional borrowing to support energy subsidies may be needed. The recently announced average minimum wage increase of 5% is intended to help alleviate the pressure of elevated costs on lower income groups. While the magnitude is not large compared to past wage and inflation developments, it may contribute to inflation and underemployment. The Thai baht depreciated due to expectations of the Fed tightening and the widening current account deficit. Consumption remained strong in July from improved Figure 1: Domestic Activity Supported the Recovery, mobility and employment. The private consumption index While Exports Slowed ((Percent year-on-year) expanded in July as domestic mobility and tourism sector Private Investment Index 45 continued to improve (Fig. 1). The Google mobility index has Goods Exports, 3MMA Manufacturing Production Index returned to the pre-pandemic level. A strong labor market also 30 Private Consumption Index supported private consumption. The unemployment rate fell 15 to 1.4% in Q2, down from the COVID crisis peak of 2.0%, but above the 1.0% seen pre-pandemic. 0 -15 Inflationary pressure remained high, driven mainly by supply side factors and increases in regulated prices. -30 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Inflation rose to 7.9% (yoy) in August, due to rising prices of Source: Haver analytics; World Bank staff calculations food-related categories (Fig. 2). Food prices rose following domestic flooding and food shortages. Rising meat prices Figure 2: Inflation Picked up in August due to Food reflected the high prices of animal feed. Although energy and Fuel Prices (Percent, year-on-year) prices moderated following the fall in the global crude oil price, 30 26.323.9 YTD, 2022 Jul, 2022 natural gas prices continued to climb, and rising subsidy costs 25 23.1 Aug, 2022 have pressured the government to raise regulated prices. 20 Over January-September, the caps on diesel, electricity, and 15 7.9 8.0 9.9 10 6.1 7.6 5.6 cooking gas prices increased by 17%, 30%, and 28%, 1.3 1.8 2.1 5 respectively. In contrast, demand-pull pressure generally 0 associated with price increases across broad categories Headline Energy & Food related Non-food, inflation tranportation components energy & remained muted; non-food, energy, and transportation- related (17%) (27%) transportation related inflation remained contained at 2.1% (yoy). (56%) Note: Numbers in parenthesis indicate shares of the CPI basket The economic recovery has benefited from a regional Source: MOC; CEIC; World Bank staff calculations surge in tourism. Tourist arrivals in July increased by 46% Figure 3: Tourist Arrivals Surged in line with ASEAN (mom) to 1.12 million, reaching 34% of the same period of (Percent of the same period in 2019) 2019. This pattern reflects a trend observed in major ASEAN 50 Jan-22 Feb-22 Mar-22 countries (Fig. 3). Asian tourists, especially from ASEAN Apr-22 May-22 Jun-22 40 nations, continued to rise substantially as border restrictions Jul-22 were relaxed, accounting for 67% of total tourists in July. 30 Arrivals are projected to continue to surge in the second half 20 of 2022. However, lingering concerns about future COVID 10 outbreaks, ongoing travel restrictions imposed by China, the slowing global economy and rising inflation remain the key 0 Indonesia Malaysia Philippines Thailand risks surrounding the tourism outlook. Source: Consensus forecast; CEIC; World Bank staff calculations THAILAND MONTHLY ECONOMIC MONITOR | 1 Goods exports softened in July following weaker global Figure 4: Manufacturing Exports Continued to Slow (left: PMI Index, right: YoY, percent) demand. The export growth moderated to 3.4% (yoy) in July, 60 50 down from 11.6% in the previous month. Exports expanded 10.8% in the first 7 months of 2022, though manufacturing 55 25 goods dragged overall growth, due to contractions in electronics and automotive exports, as the demand from 50 0 major trading partners weakened. Export growth to the US moderated; exports to China and Japan contracted sharply by 45 -25 20.6% (yoy) and 4.7%, respectively. However, exports to the EU, ASEAN, Australia, and the Middle East sustained their 40 -50 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 strong recovery. The outlook has dimmed as the global Manufacturing PMI: Global manufacturing PMI in August indicated a further slowdown of Thai Exports: Agriculture, Agro Industrial Products, YoY (RHS) global demand (Fig. 4). Thai Exports: Manufacturing, YoY (RHS) Source: MOC, CEIC; World Bank staff calculations The fiscal consolidation path, although set back by measures to mitigate food and fuel prices, has been Figure 5: The Fiscal Deficit is Narrowing and largely maintained. The central government’s deficit Approaching Pre-Pandemic Levels (Central Government balance, percent of GDP) narrowed to 5.9% of GDP in the first ten months of FY22 (Oct 10 2022-July 2022), down from 7.9% in the same period last year. This was driven mainly by spending on social assistance 0 as well as healthcare and energy subsidies. However, the fiscal deficit remained larger than the pre-pandemic period, -10 which averaged 2.7% in FY 2017-19 (Fig 5). The fiscal deficit -20 in FY22 is expected to remain substantial as the government rolled out another set of relief measures, amounting to THB 2017-19 2020 2021 2022 -30 27.4 billion (0.2% of GDP) from September to October. The Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep measures include the subsidy program (Kon La Krueng) in Source: MOF; Haver Analytics; World Bank staff calculations which the government subsidizes 50% of the purchase of goods and services up to THB 800 per person (USD 23) and Figure 6: The State Oil Fund Deficit Widened due to cash transfers to 13.3 million low-income earners at THB 400 Oil and Gas Subsidies (THB billion) (USD 11). In addition, the government is expected to continue 60 to subsidize energy prices, including diesel oil, electricity, and 27.5 30 cooking gas. 0 -30 Pressure on public debt has risen as the government may -4.5 -60 need to borrow to support energy subsidies. The State Oil Oil LPG Total -90 Fund, which has been used to subsidize diesel and cooking -120 gas prices, recorded a deficit of THB 120 billion (0.7 % of -119.8 -150 GDP) in August (Fig 6). In addition, the Electricity Generating Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Authority of Thailand (EGAT) reported that in the first 9 Source: Oil Fuel Fund Office; World Bank staff calculations months of FY2022, the government cost of the electricity subsidy approached THB 100 billion (0.6% of GDP). The risk Figure 7: Average Minimum Wage Growth was the Lowest in ASEAN Countries of higher public debt has risen further following cabinet (Percent, year-on-year) approval of loan guarantees for EGAT up to THB 85 billion 1.4 Thailand (0.5% of GDP), as well as for the State Oil Fund up to THB 0.6 2017-22, avg 2.0 Minimum wage growth Philippines 150 billion (0.9% of GDP), should the need arise. 3.4 Inflation Indonesia 7.1 2.7 A minimum wage hike, intended to help lower income Malaysia 1.6 7.3 groups facing elevated living costs, will start in October. Thailand 5.0 5.9 The minimum wage is set to rise by 5% on average to THB Philippines 6.1 4.7 2022 328-354 per day. This will be the highest hike since 2011- Indonesia 1.4 3.3 2013, when the wage rose an unprecedented 60% in real 25.0 Malaysia 2.5 terms. In the recent past (2017-2022), Thailand’s minimum Note: Philippine minimum wage non-agriculture sector wage hikes proved to be the lowest among major ASEAN Source: CEIC; ILO; World Bank staff calculations THAILAND MONTHLY ECONOMIC MONITOR | 2 countries, averaging 2.0% (Fig 7). Minimum wage growth has Figure 8: Minimum Wage Hikes Have Been in Line not been significant, being largely in line with average private with Average Wage Growth and Inflation (2017-22) (THB, Percent) sector wage (2.4%) and low inflation (1.4%) over the same Daily Avg Monthly period (Fig 8). While a minimum wage may help segments of Daily minimum Private minimum wage, Wage, Inflation the formally employed, it may have negative effects on Year wage* Change, % Change, % ,% employment, small firms, and inflation if hikes surpass labor 2010 2011 165 176 2.0 6.4 6.1 6.7 3.3 3.8 productivity growth. 2012 245 39.4 16.6 3.0 2013 300 22.4 10.2 2.2 2014 300 0.0 11.9 1.9 The current account deficit deepened, putting pressure 2015 300 0.0 2.1 -0.9 2016 300 0.0 1.1 0.2 on the Thai baht. The current account deficit increased in 2017 305 1.8 -0.3 0.7 July to 9.7% of GDP due to increased fuel imports and 2018 316 3.5 2.2 1.1 2019 316 0.0 3.3 0.7 weakened goods exports (Fig. 10). The deficit was the largest 2020 321 1.6 1.6 -0.8 among ASEAN countries. The Nominal Effective Exchange 2021 2022 321 337 0.0 5.0 0.9 6.4 1.2 5.6 Rate (NEER) continued to depreciate at 0.9% in Q3 (to Source: CEIC; World Bank staff calculations September 15) following expectations of Fed tightening and a Figure 10: The Current Account Deficit Increased as widening current account deficit. International reserves were the Trade Balance Deteriorated at 10 months of imports in August, down from an average of (USD Billion) 14 months over the past 3 years, the largest decline among 10000 BOP: USD: Trade Balance BOP: USD: Services, Primary Income & Secondary Income the ASEAN countries. The reserves declined due to valuation BOP: USD: Current Account Balance 5000 change from the strengthening USD as well as foreign exchange intervention amid a widened current account deficit. 0 The banking system remained resilient with sufficient -5000 capital and liquidity buffers, and improved asset quality. The system-wide regulatory capital to risk-weighted assets -10000 01/2020 07/2020 01/2021 07/2021 01/2022 07/2022 (CAR) remained adequate as of Q2, at 19.6%, above the Source: CEIC; World Bank staff calculations minimum regulatory requirements (Figure 9). Thai commercial banks also maintained adequate liquidity, with a Figure 9: Capital Adequacy Remained Sufficient liquidity coverage ratio of 185.5%, well above the minimum (Percent) regulatory requirement of 100 percent. Growth of gross loans from commercial banks has slowed in 2022 and registered a 3.9% growth (yoy) in Q2, compared to 6.2% at the end of Q1. However, SME loan growth stood at 6.1% in Q1 and 3.6% in Q2, a notable improvement compared to -0.4% at the end of 2021. Nonperforming loans to total loans decreased to 2.9% in Q2 from 3.1% at the end of 2021 (Figure 8), primarily through debt restructuring and management of banks’ loan portfolio Source: BOT; IMF FSI; World Bank staff calculations Issues to Watch: News Highlights: • Inflation: Will rising prices derail the recovery of private • Thailand Approves First Wage Hike Since 2020 as consumption? Inflation Spikes (Bloomberg, Link). • Tourism: Will the inflows of foreign tourists continue to • The stronger dollar has weakened the international accelerate in the second half of 2022? reserves, but the external position and financial stability • Exports: Will goods exports be significantly affected by remain strong (Bangkok Post, Link). the global economic slowdown? • The cabinet approved a proposal for the ministry to guarantee the THB 85 billion loan for EGAT (Bangkok Post, Link). Prepared by Warunthorn Puthong, MTI, Uzma Khalil, FCI, under the guidance of Kiatipong Ariyapruchya and Kim Alan Edwards. For further questions, please email wputhong@worldbank.org THAILAND MONTHLY ECONOMIC MONITOR | 3 Selected Economic and Financial Indicators 2021 2022 2022 2021 Q3 Q4 Q1 Q2 Apr May Jun Jul Aug GDP and Inflation (%YoY) GDP growth (real) 1.5 -0.2 1.8 2.3 2.5 Contribution to GDP growth: Private consumption 0.2 -1.9 0.2 1.8 3.9 General Government consumption 0.5 0.3 1.2 1.0 0.4 Gross fixed capital formulation: Private 0.6 0.4 -0.2 0.5 0.4 Gross fixed capital formulation: Public 0.3 -0.5 0.1 -0.3 -0.7 Net Exports of goods and services -4.1 -9.2 0.5 3.5 -0.4 Change in Inventory 0.0 7.2 -1.1 -2.0 1.0 Residual and errors 4.1 3.5 1.0 -2.1 -2.1 GDP, nominal (USD Billion) 506 119 129 130 123 GDP, nominal (THB Billion) 16,179 3,918 4,294 4,308 4,228 Consumer Prices Index: Headline 1.2 0.7 2.4 4.7 6.5 4.7 7.1 7.7 7.6 7.9 Consumer Prices Index: Core 0.2 0.1 0.3 1.4 2.3 2.0 2.3 2.5 3.0 3.1 Output Indicators Manufacturing Production Index (%YoY) 6.5 -0.3 4.7 1.6 -0.7 0.0 -2.0 -0.2 6.4 Capacity Utilisation (%) 63.0 58.5 64.5 66.5 61.1 58.5 62.3 62.5 61.0 Farm Production Index (%YoY) 1.3 6.9 -3.6 6.5 5.7 1.5 9.1 6.5 1.1 Service Index (%YoY) 0.3 1.5 5.6 8.8 13.2 12.4 12.6 14.7 16.6 Labor Market Unemployed workers (Thousand Persons) 748 871.3 631.9 607.6 546.6 Unemployment rate (%) 2.0 2.3 1.6 1.5 1.4 Underemployment/1 (Thousand Persons) 584 778 438 319 264 Underemployment (%) 1.5 2.1 1.2 0.8 0.7 Balance of Payments (USD million) Current account -11,018 -4,686 -1,436 -2,189 -8,647 -3,057 -3,716 -1,873 -4,068 Current account (% of GDP) -2.2 -3.9 -1.1 -1.7 -7.0 -7.3 -8.9 -4.5 -9.7 Trade Balance 39,885 9,391 10,225 9,282 5,170 1,126 1,985 2,059 -401 Exports of goods (%YoY) 20.0 16.1 22.3 14.4 9.7 6.6 11.3 11.1 3.4 Imports of goods (%YoY) 25.0 32.0 23.1 16.3 22.4 19.4 23.3 24.3 25.3 Service, primary and secondary Income -50,903 -14,077 -11,661 -11,471 -13,816 -4,183 -5,702 -3,932 -3,667 Tourist Arrivals (Thousand Persons) 428 45 342 498 1,582 293 521 767 1,124 Financial account -2,126 2,636 2,306 3,996 - Financial account (% of GDP) -0.3 2.2 1.8 3.1 - Foreign direct Investment, net -5,651 -763 -4,266 1,607 - Portfolio flows -11,468 158 1,829 2,592 - Others Investments 16,149 3,410 5,029 -43 - Central Government Budget (Fiscal Year, THB billion)/2 Revenue 2,857 805 643 632 883 235 307 341 228 Expenditure 4,124 1124 1188 840 892 266 238 388 294 Central Government balance -1,266 -319 -545 -208 -9 -31 69 -47 -66 Central Government balance (% of GDP) -7.9 -8.1 -12.7 -4.8 -0.2 Public debt (% of GDP) 58.8 58.4 59.6 60.6 60.9 60.8 60.8 60.9 60.8 Financial Markets Indicators Policy rate (%) 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.75 M2 (%YoY) 6.0 4.9 5.4 5.9 6.1 6.3 5.8 6.3 5.1 - Household Debt (sa, % of GDP) 89.6 89.9 89.6 89.2 SET Index 1,658 1,606 1,658 1,695 1,568 1,667 1,663 1,568 1,576 1,639 Thai government bond yield, 10 year (%) 1.90 1.89 1.90 2.26 2.81 2.72 2.86 2.81 2.50 2.43 Foreign exchange reserve and FX forward position (USD billion) 279 277 279 273 251 261 260 251 248 242 USD/THB, end of period 33.42 33.92 33.42 33.30 35.30 34.35 34.19 35.30 36.81 36.48 THB NEER, average 117.4 114.8 114.5 116.7 116.0 116.4 116.3 115.3 112.7 114.3 1/ Underemployment account for workers who work less than 35 hours per week and available for additional work (defined by BOT) 2/ Fiscal Year 2022 starts in October 2021 to September 2022, 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