The Tourism Authority of Thailand’s data show the country welcomed 1.97mn foreign tourists in May, down from 2.18 mn in April. In the first five months of this year, tourist arrivals reached 10.63mn or 63.6% of pre-Covid level (2019) and generated THB452 bn receipts (58% of pre-Covid level). Arrivals from Malaysia, Russia, South Korea and India reached 76-105% of pre-pandemic levels. Chinese tourists are returning slowly (23.5% of pre-Covid level). In the second half of this year, we expect more Chinese tourists following more slots for Chinese airlines, from 150 flights per week to more than 400 starting in September.
Private Consumption Index rose 7.6% YoY in April. There was improvement in many categories driven by recovering tourism activity, a growing services sector (which reduced unemployment rate to pre-pandemic level), improving confidence, and economic activity during the May general election. For the rest of the year, recovering tourism activity and easing inflationary pressure following lower fuel prices would boost consumption. However, household spending remains vulnerable, especially households which have debts and earn less than THB50,000 per month. Hence, recovery would be uneven between household segments amid fading pent-up demand.
In the first four months of 2023, agricultural product prices fell 2.9% YoY but output increased by 8.9%, causing farm income to rise 6.9%. But looking ahead, farm income is likely to increase at a slower rate in line with the drop in agricultural product prices as well as risk of El Nino-induced drought reducing agricultural output. In addition, consumption has been pressured by high level of household debt which has reached almost 87% of GDP and increasing financial burden as interest rates are at an 8-year high. Vulnerable households might need additional support from the government.
Private Investment Index turned to contract 0.8% MoM and 0% YoY in April, led by a decline in new vehicle registrations and imports of capital goods. Likewise, the Manufacturing Production Index continued to drop for the seventh straight month, by 8.1% YoY. Capacity utilization rate fell to 59.0%, still below pre-pandemic level of 65.5%. The Business Sentiment Index (BSI) dipped below-50 again in May, as a result of a drop in non-manufacturing BSI, particularly hotel and restaurant sectors. This drop can be attributed to the start of the low season and the end of government tourism stimulus measures. Meanwhile, the Manufacturing BSI inched-up but remained in contraction territory (below-50). For the rest of this year, we expect private investment to remain stable as investors might delay investment decisions pending clarity on the formation of the next government and their economic policies.
In 1Q23, the BOI received applications for investment incentives for 397 projects (+9% YoY) with a total investment value of THB185.73 bn (+77% YoY). Foreign direct investment applications rose by 10% to 211 projects valued at THB155.26 bn. (+115%), led by South Korea, Singapore, China, and Japan, as (i) the COVID-19 situation eased; and (ii) countries which are major sources of FDI have reopened their countries and might relocate production to mitigate risks from geopolitical conflicts. Applications were mostly for the electronics sector. 2Q and 3Q will be the transition period as investors wait for clarity on the the formation of the next government and well as their economic policies. Greater uncertainty could delay investments.
In the first four months of this year, Thai exports contracted 5.2% YoY led by a 7.1% decline in industrial products such as computers & parts and oil-related products, while agricultural and agro-industrial products experienced 3.7% growth driven by fresh, frozen & dried fruits, rice, and fresh & frozen chickens. China reopening and easing chip shortage helped to boost some sectors. Most industrial products registered weaker export volumes and prices. Exports from oil-related sectors remain weak.
Our economic growth forecast is supported by recovering tourism activities and improving consumption. Growth is expected to stabilize in 2Q and 3Q to 2.7-2.8.% YoY and pick up in Q4 driven by rising foreign tourist arrivals and the low base effect last year. However, there is downside risk from domestic political uncertainty, China slowdown, and US Fed’s aggressive rate hikes.
The Thai economy expanded by 2.7% YoY in 1Q23, accelerating from 1.4% in 4Q22, driven by the recovering tourism sector and improving private consumption amid higher employment and rising farm income. Private investment rose at a slower pace in both construction sector and machinery equipment. Merchandise exports and public consumption continued to shrink in 1Q23. Looking ahead, economic growth is expected to stabilize in 2Q23 and 3Q23 amid political uncertainty but would register growth in 4Q23 premised on rising foreign tourist arrivals and the low-base last year.
Service Production Index (SPI) for the first four months of this year surged 13.1% YoY with tailwinds from reopening and relaxation of containment measures. Production in many service sectors have exceeded pre-pandemic levels with accelerating momentum, led by Information & Communication, Real Estate Activities and Wholesale & Retail Trade. Sectors that are still weaker than pre-covid levels but continue to improve include Accommodation & Food Service and Transportation & Storage, supported by stronger tourism activity and improving domestic activity post-pandemic.
The Manufacturing Production Index (MPI) for the first four months of this year shrank 4.7% YoY. The sector which activities have exceeded pre-pandemic levels and continue to accelerate include petroleum amid ASEAN reopening and recovering tourism activity. Sectors which activity has exceeded pre-pandemic level but are registering steady momentum include IC & semiconductors amid easing chip shortage problem. Sectors which remain below pre-pandemic levels but are improving include electrical appliance and automotive due to easing global supply disruption. Sectors which remain below pre-pandemic levels with steady momentum include Food & Beverage and Cement & Construction given gradually improving domestic demand. Sectors which production remain weak and are still below pre-pandemic levels include Rubbers & Plastics, Textiles & Apparels, Chemicals and HDD as global demand has slowed down.
The defeat of the Pheu Thai Party (PTP) in the 2023 election means it will not lead the coalition government and might not be able to implement its major campaign promises, such as “digital wallet”. We think the THB 10,000 in digital cash wallet proposal (for all Thais aged 16 and above) might be reduced or reallocated to the most fragile households (income less than expenses), especially those with monthly incomes below THB 50,000. We estimate the original THB 10,000 digital cash wallet proposal would boost Thai GDP by 2.52% within a year of it being implemented and significantly increase purchasing power for all households, particularly those with less than THB 50,000 monthly income. If the digital cash wallet is halved to THB 5,000, it would boost Thai GDP by 1.26% and would still be sufficient to rescue fragile households without creating an excessive fiscal burden for the Thai government.
By 2027, around 70% of the welfare budget (THB452bn out of THB650bn total budget) would be used to finance the focus groups - children, parents and senior citizens - in order to minimize wealth inequality, lift birth rate, and improve the wellbeing of Thai people from birth to death. We estimate the welfare package has increased household purchasing power and lifted Thai GDP by 2.07% per year since launch. However, the budget comes from funds saved by trimming costs such as downsizing the military budget and improving tax collection. Without borrowing, it could be difficult for the Move Forward Party to push forward the policies or any legislation.
The COVID-19 outbreak has had a significant impact on Thailand's fiscal position. At the end of April, public debt had reached 61.6% of the country's GDP, equivalent to THB10.9 trillion. Although the government has raised the public debt ceiling to 70% of GDP as a buffer for the new government to support crucial policies, there is still a noticeable gap in debt coverage. If the government borrows an additional THB500 bn, Thailand’s public debt will rise to 64% of GDP, higher than that of other Southeast Asian countries. Fitch Ratings has warned that this uncertainty and delays in forming the next government could interrupt disbursement of the annual budget. In addition, Thailand’s fiscal position has deteriorated markedly since the Covid-19 pandemic and if the next government is unable to regain control of government debt, it would drag Thailand’s credit profile.
By Krungsri Research (Macroeconomic Team)
19 June 2023