Thailand Monthly Economic Monitor 19 July 2022 The economy showed better-than-expected signs of improvement in Q2 2022 due to stronger domestic demand, a rebound in the tourism sector, and continuing expansion of goods exports. However, rising inflationary pressure and slowing global demand are creating significant headwinds to the outlook. The economy is expected to grow at 2.9% in 2022 and 4.3% in 2023. Inflation surged to a 14-year high in June, prompting the Bank of Thailand (BOT) to signal interest rate normalization. The fiscal deficit remained large as the government continued to ramp up measures to counter the impact of the rising cost of living and the pandemic, including through support for the tourism sector and lower-income groups as well as subsidies on energy prices. The Thai banking system remains resilient, despite deteriorated asset quality. The Thai baht continued to depreciate in July as investor confidence waned and the current account deficit persisted. The economy showed signs of a better-than-expected Figure 1: Indicators of Activity Point to a Recovery rebound in Q2 2022, supported by private consumption, but Confidence has Waned (Index 2019 = 100, sa) tourism recovery, and goods exports. The private 140 Private Consumption Index Manufacturing Production Index consumption index increased 0.6% (month-on-month, 130 Private Investment Index, sa Goods Exports Index seasonally adjusted) in May, and has stayed above the pre- 120 Consumer Confidence Index* 110 pandemic level since November 2021 (Fig. 1). However, 100 consumer confidence declined in Q2, mainly due to the rising 90 cost of living. The mobility index reached its highest level 80 since February as new COVID-19 cases declined, but lagged 70 behind regional peers (Fig. 2). Goods exports continued to 60 increase in May at 10.5% (yoy), up from 9.9% in the previous 50 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2* month, supported by agricultural and agro-manufacturing 2020 2021 2022 goods exports. In contrast, manufacturing exports growth Source: CEIC; World Bank staff calculations slowed due to supply chain disruptions, especially in the Figure 2: Mobility Increased but Lagged Behind automotive industry. A weakening global environment could Peers weigh on the exports outlook. Manufacturing production (Google Index, average of transit, retail and recreation, and workplace) declined for the third month in May at 1.9% (mom, sa) and 30 Indonesia Malaysia global manufacturing PMI dropped to its lowest level in 22 Philippines Thailand months, at 52.2 pts in June (Fig. 3). -20 Tourist arrivals continued to surge as border restrictions in Thailand and other countries were relaxed. Tourist arrivals reached 521,410 in May, up from 293,350 in the previous month, reaching 19% of the same period in 2019. -70 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Tourists from Asian countries, especially ASEAN and India, Source: CEIC; World Bank staff calculations continued to rise substantially as border restrictions were relaxed; European visitors (excluding Russia) remained the Figure 3: Manufacturing Exports Weakened in May (left: PMI Index, right: YoY, percent) main source of inbound tourists (Fig. 4). Tourist arrivals are Manufacturing PMI: Global (LHS) projected to increase to around 6 million in 2022 or 16% of 60 Exports: Agriculture and Agro Industrial Products, YoY 50 Exports: Manufacturing, YoY arrivals in 2019. However, the recovery is expected to be gradual due to remaining COVID concerns, continued travel 55 25 restrictions by China, the slowing global economy, and the 50 0 impact of the war in Ukraine on travel costs. 45 -25 Economic growth is projected to expand by 2.9% in 2022, up from 1.5% in the previous year. The economy is 40 -50 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 expected to reach pre-pandemic levels in Q4 2022 and Source: MOC, CEIC; World Bank staff calculations THAILAND MONTHLY ECONOMIC MONITOR | 1 expand further by 4.3% in 2023, given the decline in COVID- Figure 4: Tourist arrivals from ASEAN and India 19 cases and the expectation of tourism sector recovery. more Than Tripled as Borders Reopened in May (Thousand people) However, spillovers from the war in Ukraine on domestic 600 Others Middle East 521 energy prices, the downward revisions to growth in major Oceania USA Russia Europe (exclude Russia) trading partners, and China’s zero-COVID policy are 500 ASEAN India expected to weigh on the outlook. Also, the uncertain 400 Korea China Japan Total 91 293 trajectory of the pandemic remains an important risk to 300 231 211 domestic activity and the projected recovery in tourism 200 153 187 134 arrivals. Though confirmed COVID-19 cases in the first 10 91 110 100 128 90 days of July declined to a 15-month low at 30 cases per million 15 12 20 47 70 78 26 54 27 78 17 7 12 population, reported ATK cases were as high as 20,955 per 0 Aug-21 Oct-21 Dec-21 Feb-22 Apr-22 day on average in the first two weeks of July (293 cases per Source: MOTS, CEIC; World Bank staff calculations million population). There is a risk that the confirmed case count may significantly underestimate the actual extent of Figure 5: Headline and Core Inflation Surged due to infections as (i) not all ATK cases may be reported and (ii) not Energy and Food Prices. (Percent year-on-year) all ATK results are reflected in confirmed COVID-19 cases, 8.0 Energy 8.0 which are based on those requiring hospitalization. Raw Food 6.0 Core inflation 6.0 Headline inflation BOT's target range (1-3%) Headline inflation rose to a 14-year high, prompting the 4.0 4.0 BOT to signal rate normalization. Inflation rose to 7.66% in 2.0 2.0 June, up from 7.1% the previous month, driven by increases in energy and raw food prices (Fig. 5). Both producer price 0.0 0.0 and consumer price inflation rates surpassed those of -2.0 -2.0 regional peers (Fig. 6), stemming from higher imported -4.0 -4.0 energy dependency and relaxation of price controls. The 2011 2013 2015 2017 2019 2021 government further increased the diesel price cap to THB 35 Source: CEIC; World Bank staff calculations per liter in June, up from THB 32 per liter in May. The cap on Figure 6: PPI and CPI Surged Ahead of Peers LPG was also raised by THB 15 to THB 363 per 15kg. Core (Percent year-on-year, average H1 202) inflation (ex. energy and raw food) also picked up to 2.2%, 12.0 Producer Price Index (PPI) 11.6 10.5 well above the 0.5%, on average, of the past five years. Consumer Price Index (CPI) 10.0 Headline inflation has remained above the upper limit of the 8.0 target range (1-3%) for the sixth consecutive month; inflation 5.3 5.6 expectations increased to 2.5% over the short-term (1-year 6.0 4.1 3.8 ahead), but they remain below 2.0% over the medium-term 4.0 3.0 2.4 (5-year ahead), according to the consensus forecast. The 2.0 Monetary Policy Committee (MPC) signaled a shift toward 0.0 policy normalization in its June meeting for the first time since Indonesia Philippines* Malaysia* Thailand the pandemic, citing that a very accommodative monetary *Average of January and May for the Philippines and Malaysia policy will be less vital going forward as the economic Source: CEIC; World Bank staff calculations recovery has gained more traction, while inflationary risks continue to increase. Figure 7: Oil Fund Balance Turned Negative as of Late 2021 (THB billion) The government continued to ramp up fiscal measures to 60 mitigate the impact of the rising costs of living and the 27.5 30 pandemic. The government extended the cash handout and subsidy measures to support lower-income groups from July 0 to September after the previous set of measures expired in -30 -4.5 June. These measures include cashback for purchases of fuel -60 oil for motorcycle taxi drivers, a cap on NGV prices for taxi Oil LPG Total drivers, and a cooking gas price subsidy for state welfare -90 cardholders and street vendors. To support domestic tourism, -120 -102.6 the government also extended the measure to subsidize hotel Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 accommodation at 40% of normal room rates for Thai tourists. Source: Oil Fuel Fund Office (OFFO); World Bank staff calculations For broader measures, the cap on the diesel price will further THAILAND MONTHLY ECONOMIC MONITOR | 2 deepen the State Oil Fund deficit. In the first six months of Figure 8: NPL Declined to 3.1% in Q4 2021 (Percent) 2022, the oil price subsidy had already withdrawn THB 83 billion (0.5% of GDP) from the Oil Fund (Fig. 7); the cap on 3.4% NPL (LHS) CAR (RHS) 25% Tier-1 Capital (RHS) diesel prices from July to September is estimated to incur an 3.3% 20% additional cost of THB 44 billion (0.3% of GDP). Apart from 3.3% the subsidy, the excise tax cut on diesel by THB 4.65 per liter 3.2% 15% is running at a loss to government revenue of THB 9 billion 3.2% 10% (0.05% of GDP) per month. 3.1% 5% 3.1% The fiscal deficit remained large. The central government deficit narrowed to 7.0% of GDP in the first eight months of 3.0% 0% 2019Q4 2020Q2 2020Q4 2021Q2 2021Q4 FY22 (Oct 2021-May 2021), down from 8.5% of GDP in the same period last year. Public debt rose to 60.9% of GDP at Source: Bank of Thailand, IMF FSI, and World Bank staff analysis the end of May 2022, up from 58.3% at the end of FY21, Figure 9: Thai Baht REER Depreciated although it remained well below the debt ceiling of 70% of (Percentage change from the previous month, average) GDP. -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 The Thai banking system remains resilient, although IDR June 1-14 July asset quality has deteriorated since the pandemic. The system-wide regulatory capital to risk-weighted assets (CAR) MYR remained stable as of Q4 2021, at 19.6%, above the minimum regulatory requirements. Thai commercial banks also THB maintained adequate liquidity with a liquidity coverage ratio of 189.2% during the same period, well above the minimum PHP regulatory requirement of 100 percent. In terms of credit, gross loans from commercial banks grew by 6.2% in Q4 2021, Source: J.P. Morgan; Haver Analytics; World Bank staff calculations as loans from corporates expanded, while SME loans have been declining since Q2 2020, and continued to decline by Figure 10: The Current Account Deficit Continued to 0.4% in Q4 2021. Overall asset quality improved, with Widen in May (USD Billion) nonperforming loans (NPLs) to total gross loans declining to 3.1% in Q4 2021, down from 3.3% in the previous quarter 8000 (Fig. 8). However, forward-looking indicators such as special 6000 mention loans (SMLs) remained high at 6.4% of the total 4000 loans in the same period, compared with 2.8% at the end of 2000 2019. 0 The Thai baht depreciated in July due to a flight to safety -2000 and a continued current account deficit. The Real Effective -4000 BOP: USD: Trade Balance Exchange Rate (REER) weakened further by 1.4% during the -6000 BOP: USD: Services, Primary Income & Secondary Income first two weeks of July, after depreciating by 0.6% in June, BOP: USD: Current Account Balance -8000 second only to the Philippine peso (Fig. 9). The Thai baht fell 10/2019 04/2020 10/2020 04/2021 10/2021 04/2022 due to global investor concerns over the global economic Source: CEIC; World Bank staff calculations slowdown as the Fed continued to aggressively tighten its monetary policy. The Thai bond and equity markets registered large net outflows of THB70.9 billion in June, the largest outflows since March 2020. The continued current account deficit (8.8% of GDP in May), also weighed on the Thai baht (Fig. 10). THAILAND MONTHLY ECONOMIC MONITOR | 3 Issues to Watch: News Highlights: • Inflation: Will rising prices derail the private • The tourism council targets 10 million foreign arrivals in the consumption recovery? second half of the year. (Bangkok Post, Link) • Tourism: Will the inflows of foreign tourists surpass the • Lack of flights and rising fuel are challenging the recovery projected 6 million in 2022 as border restrictions are of the tourism industry. (Bangkok Post, Link) removed? • The Bank of Thailand Governor signals to gradually • Exports: Will goods exports be significantly affected by increase interest rates to tackle rising inflation and ensure the global economic slowdown? an uninterrupted economic recovery. (Reuters, 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 | 4 Selected Economic and Financial Indicators 2021 2022 2022 2021 Q3 Q4 Q1 Q2 Feb Mar Apr May Jun GDP and Inflation (%YoY) GDP growth (real) 1.5 -0.2 1.8 2.2 Contribution to GDP growth: Private consumption 0.2 -1.9 0.2 2.0 General Government consumption 0.5 0.3 1.2 0.6 Gross fixed capital formulation: Private 0.6 0.4 -0.2 0.5 Gross fixed capital formulation: Public 0.3 -0.5 0.1 -0.3 Net Exports of goods and services -4.1 -9.2 0.5 3.1 Change in Inventory 0.0 7.2 -1.1 -1.6 Residual and errors 4.1 3.5 1.0 -2.1 GDP, nominal (USD Billion) 506 119 129 130 GDP, nominal (THB Billion) 16,179 3,918 4,294 4,302 Consumer Prices Index: Headline 1.2 0.7 2.4 4.7 6.5 5.3 5.7 4.7 7.1 7.7 Consumer Prices Index: Core 0.2 0.1 0.3 1.4 2.3 1.8 2.0 2.0 2.3 2.5 Output Indicators Manufacturing Production Index (%YoY) 6.5 -0.3 4.7 1.6 2.4 0.4 0.0 -2.1 Capacity Utilisation (%) 63.0 58.5 64.5 66.5 64.6 69.3 58.5 62.4 Farm Production Index (%YoY) 0.9 4.0 -2.3 4.6 6.1 6.4 5.1 11.4 Service Index (%YoY) 0.4 1.6 5.8 8.2 9.2 5.3 15.0 13.9 Labor Market Unemployed workers (Thousand Persons) 748 871.3 631.9 607.6 Unemployment rate (%) 2.0 2.3 1.6 1.5 Underemployment/1 (Thousand Persons) 584 778 438 319 Underemployment (%) 1.5 2.1 1.2 0.8 Balance of Payments (USD million) Current account -11,018 -4,686 -1,436 -2,189 -568 920 -3,057 -3,716 Current account (% of GDP) -2.2 -3.9 -1.1 -1.7 -1.3 2.2 -7.2 -8.8 Trade Balance 39,885 9,391 10,225 9,282 3,446 5,200 1,126 1,985 Exports of goods (%YoY) 20.0 16.1 22.3 14.4 15.9 18.9 6.6 11.3 Imports of goods (%YoY) 25.0 32.0 23.1 16.3 14.0 16.7 19.4 23.3 Service, primary and secondary Income -50,903 -14,077 -11,661 -11,471 -4,015 -4,280 -4,183 -5,702 Tourist Arrivals (Thousand Persons) 428 45 342 498 153 211 293 521 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 2,857 805 643 219 185 219 162 282 Expenditure 4,124 1124 1201 358 246 358 196 234 Central Government balance -1,266 -319 -558 -139 -61 -139 -34 47 Central Government balance (% of GDP) -7.9 -8.1 -13.0 -5.9 Public debt (% of GDP) 58.75 58.31 59.61 60.6 60.17 60.6 60.8 60.9 Financial Markets Indicators Policy rate (%) 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 M2 (%YoY) 6.0 4.9 5.4 5.9 5.6 6.6 6.3 5.9 - 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 1,685 1,695 1,667 1,663 1,568 Thai government bond yield, 10 year (%) 1.90 1.89 1.90 2.26 2.81 2.15 2.26 2.72 2.86 2.81 Foreign exchange reserve and FX forward position (USD billion) 258 257 258 251 230 255 251 239 239 230 USD/THB, end of period 33.42 33.92 33.42 33.30 35.30 32.73 33.30 34.35 34.19 35.30 THB NEER, average 117.4 114.8 114.5 116.7 116.0 117.6 117.1 116.4 116.3 115.3 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 | 5