Taking stock of the Thai economy
■ Recent indicators show the severe impact of the coronavirus pandemic to the Thai economy. External weakness from fragile global demand and business disruption from worldwide lockdowns are weighing on domestic activity. The most recent data in May showed that merchandise exports contracted by 23.6% year-on-year across almost all products and markets, while imports dropped by 34.2% year-on-year in all categories, in line with deteriorated economic activities. Meanwhile, tourist arrivals in the same month remained non-existent, as the ban on international flights was in effect until the end of June. The ban was lifted on July 1 for specific groups of travellers, such as foreigners with Thai spouses, residents, work permit holders, and visitors for business, educational or medical purposes (other than Covid-19 treatment). Nevertheless, inbound visitors will still need to fulfil quarantine requirements.
■ Private consumption continued to decline, albeit at a slower pace, amid partial lockdown easing. The private consumption index (PCI) in May contracted by 12.5% year-on-year, a slight improvement from -14.4% in April. With reopening in phases, the service index fell by 29.7% year-on-year compared with -31.9% in the previous month. The durables index plunged 32% year-on-year due to the ongoing slump in car sales.
■ Manufacturing production and private investment worsened in tandem with the ongoing slump in external and domestic demand. May MPI tumbled 23.2% year-on-year after an 18.2% decline in April. The fall was driven by lower production in automotive (-69%), rubber and plastics (-21%) and electric appliances (-27.4%). Meanwhile, the private investment index (PII) for the month declined by 12.5% year-on-year, a sharper decrease from -10% in March after a one-time jump in construction activity in April due to the postponement of Songkran. Although the business sentiment index improved slightly to 34.4, it still hovered below the 50 level, indicating a decline in business sentiment.
■ We revised down our GDP forecast to -9.7% for 2020. We expect private consumption turnout to be worse than others’ projections, due to rising unemployment. With lockdown easing in May, some sectors of the economy will slowly recover in the coming months, but broad-based weakness remains. But China’s experience suggests that a pre-lockdown normality may not return quite as quickly as many had hoped for. Therefore we expect Q2 GDP to be the trough for this cyclical recovery.
■ On the external front, we think global exports may have bottomed out, but several downside risks remain for the speed of recovery. South Korea’s trade data, a popular barometer for world trade, showed exports dipping by 10.9% year-on-year in June compared with a 23.6% plunge in May. In addition, the purchasing managers’ index (PMI) suggested that activity should continue to pick up as the PMIs for several countries improve in May from April. That said, only China’s PMI was above 50 — signifying an expansion in activity while the rest still remained well below 50. Nonetheless, the demand for Korean exports remained depressed in major markets such as the US (-10% year-on-year), Japan (-16%) and the EU (-14%). Also, a surge in the number of infected patients in various places, such as the US and China, likely impeded the return to normality in many places. Therefore, even if trades have bottomed out, any recovery should be a gradual one.
■ The tourism industry will also remain muted for the rest of the year amid weak global demand. Although inbound travel has been permitted for several groups of people, the international travel ban for tourists is expected to remain in place until vaccines are successfully developed. Even in the event of the ban being lifted, the number of tourists would not reach 9 million for 2020, given the social-distancing measures for air travel and quarantines for inbound tourists.
Q On the domestic front, several indicators are pointing to weakness ahead for both consumption and investment. For consumption, a huge drop in household spending should be witnessed in the second quarter, as the lockdown of Bangkok and various business closures started at the end of March. Despite the easing of restrictions, household spending is still threatened by falling tourism and export income. It’s estimated that 10 million people are highly affected by the pandemic. We project that there will be at least 3 million people losing their jobs over the course of the year. Similarly, private investment should wane further as demand, both domestic and external, continues to be weak and the virus situation remains uncertain. For instance, Thailand’s automotive sector is likely to shrink by 40-50% year-on-year in light of diminishing demand. Lower production, along with relatively weak business sentiment, will likely delay companies’ decision to expand production in the periods ahead.
■ That said, the only upside for the Thai economy seems to be the government’s policies. The government approved a fiscal stimulus in three phases totalling 2.36 trillion baht (14% of GDP). On the financial stability front, the Bank of Thailand announced relief measures for borrowers whose loans are not classified as non-performing loans, and the central bank set up the Corporate Bond Stabilisation Fund with 400 billion baht for bond purchases.
■ The unprecedented scale of fiscal and monetary stimulus will likely help mitigate the adverse impact, but the effectiveness depends on the speed of implementation and necessary funds reaching the right target groups. Regarding the policy rate, we reckon there is a possibility for another rate cut. Although the Monetary Policy Committee voted unanimously to maintain its policy rate at 0.50% on June 24, the central bank downgraded its GDP forecast to a contraction of 8.1% from a previous projection of -5.3%. Therefore, with the strong baht an ongoing concern, the Bank of Thailand will have to deliver another rate cut in due course, coupled with the possibility of deploying unconventional policy tools.