Stimulus impact key to 2020 outlook

Central bank can’t do much more, so fiscal stimulus will have to work if Thai economy is to revive. By Fitch Solutions

We believe Thailand’s economy in 2020 will continue to face the same headwinds as 2019, curbing the potential for a strong rebound in activity. External challenges will persist, with net exports exerting a greater drag on headline growth, while household demand will moderate further, given high indebtedness and weaker job growth prospects.

As such, growth will be highly dependent on the effect of fiscal and monetary stimulus, with risks of delays to the former and insufficient impact from the latter.

Consequently, we downgraded our 2020 growth forecast to 3.0%, from 3.5% previously, which would be a modest improvement on this year.

Thailand’s economy this year has suffered from a sharp decline in exports and a cooling of domestic investment. In the first half, the economy expanded by 2.6% year-on-year, and we forecast growth to average 2.8% for the full year compared with 4.1% in 2018.

Weaker external demand, as a result of China-US trade tensions and slower regional growth, has been exacerbated by the strong appreciation of the baht, which has eroded export competitiveness.

In addition, a buildup of inventory through 2018 has lowered the need for further investment and output. High debt levels among households and small and medium-sized enterprises (SMEs) are a constraint on significant monetary easing, meaning credit stimulus will be constrained.

We have also revised our baht forecast to reflect modest gains in 2020, which aligns with our expectation that Thai export competitiveness will be eroded even further.

WEAK CHINESE DEMAND

This is against a backdrop of a continued slowing of external demand and tensions between China and the US over trade. Chinese import demand will likely remain subdued as domestic economic activity cools, with Chinese policymakers reluctant to introduce significant stimulus to boost domestic demand.

We believe this will contribute to weaker tourist arrivals growth, as China contributes the largest number of tourists to Thailand.

Tourism will also suffer more broadly from the baht’s strength, potentially resulting in a contraction in activity in the sector. In August, the three-month advance booking rate fell to 25.5%, its lowest reading since August 2017, and represents a potential warning sign.

Weak external demand risks having a negative spillover effect on household consumption, resulting in softer growth in business investment. Persistent weakness in external orders has led to a decline in domestic business sentiment. The Business Confidence Index has declined from a reading of 50.0 in January to 47.9 in September.

Similarly, capacity utilisation has eased from its all-time high of 70.7% in November 2018, coming in at 66.5% in August this year.

We also note in the second quarter, inventories increased across several product types. Given the large buildup of inventories in recent years, we expect businesses to focus on reducing stocks and delaying investment in the near term.

The decline in business sentiment has also filtered through to weaker hiring sentiment, which bodes poorly for employment gains. Indeed, if export weakness persists — export growth averaged -2.7% year-on-year in the first eight months of 2019 — and tourism numbers decline, the outlook for the labour market is likely to moderate further.

Given that household debt levels remain elevated, at 68.9% of GDP in the first quarter of 2019, a weakening of labour market conditions could prompt a sharp pulling back of consumption in favour of savings.

The key to staving off a further slowdown from 2019 will be the effectiveness of government or central bank stimulus measures. The

Bank of Thailand eased its policy rate this year by 25 basis points. However, we only see scope for one further cut in 2020, given policymakers’ cautious approach to easing because of the high indebtedness of households and SMEs. As such, we believe the central bank will have little impact on economic growth in 2020.

Consequently, the pressure will fall on the government to boost growth, and we believe further stimulus may be needed to support a rebound in 2020. The government in the third quarter announced two stimulus packages aiming to bolster household spending, corporate borrowing and foreign direct investment. We see these packages as having a modest impact, with a more immediate effect on growth in early 2020 from social welfare handouts and business loans.

In contrast, we expect efforts to encourage relocation of industry from China to Thailand, highlighted by the “Thailand Plus” incentive package announced in September, will have a slower impact. The rebound in foreign direct investment in 2019 could be sustained as a result, supporting the country’s near-term investment and longer-term growth outlooks.

BUDGET INSUFFICIENT

The proposed 2020 fiscal budget is unlikely to be sufficient to drive a strong rebound. It would lift government expenditure by an estimated 7.0%, leading to a deficit of 2.6% of GDP. However, increases in spending on infrastructure have lagged.

Delays in releasing infrastructure funds and beginning projects have also been a constraint on the effectiveness of fiscal stimulus, as highlighted by the delays surrounding the planned three-airport high-speed rail link, for which a contract was only signed in late October.

Given the baht’s strength and external headwinds, Thailand’s net export contribution could deteriorate more than we are anticipating. In such an instance we also flag the fragility of the governing coalition as a risk to the policymaking response.

If policymaking is impeded by weaknesses within the coalition, this could limit the ability for fiscal stimulus or pro-business reforms to be introduced in the event of a sharper downturn.

We also highlight the difficulty the central bank has had in weakening the baht, with a sharper appreciation in the baht potentially hampering growth in the export sector.

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If policymaking is impeded by weaknesses within the coalition, this could limit the ability for fiscal stimulus or pro-business reforms.