Thailand: Economic recovery depends on internal stability Asia Pacific Economic Outlook, Q2 2015

2014 was a difficult year for Thailand’s economy. However, a recent rebound in tourism, along with the low price of oil, is expected to initiate an economic recovery.

2014 was a difficult year for Thailand’s economy. Tourist numbers fell due to political tension, manufacturing declined, and private consumption remained subdued. Economic growth for the year on the whole was down to 0.7 percent from 2.9 percent in 2013.

However, a recent rebound in tourism, along with the low price of oil, is expected to initiate an economic recovery. The strength and sustainability of recovery will depend upon how Thailand addresses its problems: high household debt, imminent drought in certain provinces, weakness in Thailand’s key export markets (China, Japan, and the European Union), and military rule, which could hurt the prospect of political stability.

Strong Q4 ends year of weak growth

Real GDP grew 2.3 percent year over year in Q4 2014. Government consumption expenditure grew 5.5 percent, picking up from 0.4 percent in Q3. This is in line with the military administration’s plan to increase fiscal spending.

However, household consumption expenditure remained weak, decelerating to 1.9 percent from 2.2 percent in Q3. This was mainly because of high household debt and a 1.6 percent contraction in the agricultural sector in Q4. Because approximately 40 percent of Thailand’s labor force is employed in agriculture, weak growth in this sector translates into weak consumption expenditure.

Gross fixed capital formation grew 3.2 percent from a year ago. Total investment was driven by private sector investment, which grew 4.1 percent on the back of a recovery in private construction and investment in machinery and equipment. On the other hand, public investment declined 0.3 percent in Q4 even though public construction grew 5.1 percent.

Net exports contributed 3.7 percent to GDP growth in Q4, as external demand resulted in improved exports while imports continued to shrink. The relatively strong performance of the external sector was reflected in manufacturing, which grew 0.7 percent after six consecutive quarters of contraction.

Q4 2014 was the strongest quarter of the fiscal year, but one must keep in perspective the low base of the comparison point: Q4 2013, when the political unrest began. Additionally, the low growth rate of 0.7 percent in 2014 made Thailand the slowest-growing Southeast Asian economy. Furthermore, the problems that plague Thailand’s economy are not likely to vanish in the coming quarter.

Slump in consumption

Household debt in Thailand has risen from 60 percent of GDP in 2009 to 85 percent of GDP in 2014. Low interest rates, easy access to credit, and populist schemes such as tax rebates for first-time car buyers have encouraged this trend. The debt-service ratio among farmers is critically high at 52 percent. This means that more than half the disposable income of an indebted Thai farmer is spent on servicing debt payments. Furthermore, the prices of two widely grown crops, rice and rubber, continue to remain low, keeping down incomes in the agriculture sector. Complicating matters further is the looming drought, which is expected to be the worst in a decade. These factors are likely to keep consumption expenditure subdued, particularly among Thailand’s rural majority.

The debt-service ratio among farmers is critically high at 52 percent.

Exports unlikely to come to the rescue

The outlook for Thai exports in 2015 is not too bright: The Bank of Thailand forecasts that exports will grow just 0.8 percent in 2015.1 Several factors contribute to this forecast.

Thailand’s main export destinations are not doing particularly well. China’s growth rate has slowed as the economy is going through restructuring. Japan remains fragile, and growth in the Eurozone is still weak. The only bright spot is the strengthening US economy, but this is unlikely to outweigh weakness in other major export destinations.

In January, exports to China dipped 19.7 percent from a year ago, while exports to Japan and Europe fell 7.5 percent and 5.0 percent respectively. Furthermore, Thailand is now excluded from the European Union’s Generalized System of Preferences because it is now classified as an upper-middle-income country. The European Union has also suspended free-trade talks with the Thai military administration and is unlikely to resume talks before the election of a civilian government, which could be as late as 2016.

The strength of the Thai baht relative to competitor nations’ currency is another cause for concern. The baht has appreciated 14 percent against Indonesia’s rupiah and 12 percent against the Malaysian ringgit from a year ago (mid-March).

Some bright spots

Low crude oil prices, however, have come as a welcome relief, helping slash Thailand’s import bill and keeping net exports positive. Lower energy prices should work to the advantage of the domestic economy by encouraging private consumption. Consumer prices in Thailand declined from a year ago by 0.41 percent in January and by 0.52 percent in February. These figures are well below the lower limit of the Bank of Thailand’s (BOT) target range of 1–4 percent for headline inflation in 2015.

Declining prices and weak economic growth resulted in the BOT cutting its policy interest rate in March by 25 basis points to 1.75 percent. This was the first reduction in the policy rate in a year. The accommodative monetary policy should provide respite to highly leveraged households as well as encourage private consumption to pick up.

The recent improvement in the tourism industry is another positive. Tourist arrivals were up 15.9 percent from a year ago in January and 18.0 percent from a year ago in the first half of February.2 A surge in the number of tourists from China, Thailand’s largest group of foreign tourists, has helped to boost the sector.

Factors that drive progress

While Thailand has posted a mild recovery from its poor showing in 2014, the near-term performance of the economy will depend to a large extent upon internal stability and the strength of the global economic recovery. In the short run, Thailand is expected to reap the benefits of low oil prices, easy money, and a rise in the number of foreign tourists.

However, long-term growth will depend upon how Thailand addresses its internal problems. A resurgence of political instability will put the brakes on economic growth and cause investors to turn their attention to other destinations in Southeast Asia.