Thailand Monthly Economic Monitor 23 August 2022 The economic recovery continued to pick up in Q2 2022, expanding by 2.5% (yoy), due to a stronger-than-expected boost in private consumption and tourism, which offset weak goods exports. However, among the major ASEAN economies, Thailand’s recovery has proven to be the slowest and inflation the highest. To tame cost-push inflation, the Bank of Thailand recently began raising rates; however, monetary policy normalization is expected to be gradual as the recovery is not yet complete. The fiscal deficit remained large as the government continued to introduce measures to counter the impact of the rising cost of living and the pandemic. The rising cost of energy subsidies administered by the State Oil Fund may potentially add to public debt levels. The Thai baht strengthened due to expectations of a swifter economic recovery and the decline of the US dollar. The economy accelerated in Q2 2022, supported by Figure 1: GDP Continued to Expand in Q2 (Contribution to growth, percent, year-on-year) private consumption and tourism recovery. The economy Private consumption Public consumption in Q2 expanded 2.5% (yoy), up from 2.2% in the previous 12.0% Investment Change in inventories quarter. On a quarterly basis, GDP rose 0.7% (qoq, 8.0% Net exports GDP, %YoY seasonally adjusted). The expansion was supported by strong 4.0% pent-up demand and rising incomes after the relaxation of 0.0% COVID containment measures, the relatively stable number -4.0% of hospitalized COVID-19 cases, and removal of border -8.0% restrictions (Fig. 1). Higher tourism receipts also supported -12.0% the recovery, with exports of services expanding 54.3% (yoy). -16.0% However, overall net exports contributed negatively to growth 1Q19 1Q20 1Q21 1Q22 for the first time in 3 quarters at 0.4 ppts, as rising exports of Source: NESDC; World Bank staff calculations services were more than offset by a slowdown in goods Figure 2: 2022 Q2 Output was 1.2 ppts Below the Pre- exports. The slowdown was similar to the regional peers. Pandemic Level Investments also shaved 0.3 ppts from the GDP growth as ( Index 2019 = 100, sa) public investment declined sharply, in keeping with planned 110 Indonesia Malaysia fiscal consolidation. On the supply side, a strong recovery of Philippines Thailand food and accommodation services added 1.6% to the GDP 100 growth, but their contribution remained 14.5% below the pre- pandemic level. Manufacturing output contracted slightly, in line with the softening global demand. 90 The economic recovery is likely to solidify in the second 80 half. Output should reach its pre-pandemic level by Q4 2022, 2019 2020 2021 (Fig. 2) supported by improved tourism and strong Source: CEIC; World Bank staff calculations consumption, driven by higher incomes and improved employment. The World Bank projects GDP to expand by Figure 3: High Inflation Was Driven by Rising Energy and Food Prices 2.9% in 2022 and 4.3% in 2023. (Percent, year-on-year) 0 5 10 15 20 25 30 Inflation reached a 14 year-high in July but projections 5.9 Headline inflation remain contained. Inflation has been driven mainly by supply 7.6 side factors, clustering in the energy- and food-related Energy & tranportation related 23.0 categories (Fig. 3), rather than demand-pull factors. Price (17%) 26.3 controls also limit inflation pressure. The gap between 5.0 Food related components (27%) producer price inflation and consumer price inflation remains 8.0 YTD, 2022 substantial (12.2% yoy versus 7.6% yoy); core inflation Non-food, energy & 1.2 1.8 July, 2022 sustained relatively stable at 3.0% (yoy), although it was transportation (56%) higher than 2.5% in the previous month. However, headline Note: Numbers in parenthesis indicate shares of the CPI basket Source: MOC; CEIC; World Bank staff calculations THAILAND MONTHLY ECONOMIC MONITOR | 1 inflation continued to stay well above that of regional peers as Figure 4: Short-Term Inflation Consensus Forecasts Thailand relies heavily on imported energy, with net imports Have Ticked Up but Remain Contained in the Medium Term amounting to 5% of GDP. Electricity tariffs are scheduled to (Percent, year-on-year) increase for a third time this year by 18% in September, due 10.0 Headline inflation to the rising imported liquified natural gas (LNG) price. Consensus forecast, 1 years forward Consensus forecast suggests that inflation is expected to Consensus forecast, 5 years forward 5.0 remain contained over the short and medium terms due to the large negative output gap and peaking of global energy prices 0.0 (Fig. 4). However, short-term consensus forecasts have ticked up in June. -5.0 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 The Bank of Thailand (BOT) has begun gradual monetary Source: Consensus forecast; CEIC; World Bank staff calculations policy normalization. The BOT raised the policy rate for the first time since December 2018 by 25 basis points to 0.75% Figure 5: Bank of Thailand Started to Raise the Policy Rate (Fig. 5). The BOT expects the economic recovery to gather (Percent) strong momentum, citing strong support from tourism sector 10.00 Indonesia Malaysia recovery and private consumption, but inflation is expected to 8.00 Philippines Thailand United States remain high. Despite the tighter monetary policy, the BOT will 6.00 continue to provide monetary support, through soft loan schemes, to those affected by the rising cost of living, 4.00 particularly SMEs and low-income households. Further policy 2.00 rate hikes are likely later this year as the real policy rate remains more negative than that of peers (Table 1). However, 0.00 01/2017 05/2017 09/2017 01/2018 05/2018 09/2018 01/2019 05/2019 09/2019 01/2020 05/2020 09/2020 01/2021 05/2021 09/2021 01/2022 05/2022 the path of the policy rate increase is unlikely to be aggressive due to the lagging recovery. Source: CEIC; World Bank staff calculations The fiscal consolidation path remained largely intact but Figure 6: Central Government Fiscal Deficit slightly set back by additional short-term measures. The Remained Higher Than the Pre-Pandemic Level central government’s deficit narrowed to 6.0% of GDP in the (Accumulated fiscal deficit, Percent of GDP) first nine months of FY22 (Oct 2022-June 2022), down from 0.0 7.8% of GDP in the same period last year. However, the deficit remained larger than the pre-pandemic level (Fig. 6); -5.0 the trend is expected to continue as the government rolls out -10.0 another set of relief measures amounting to THB 27.4 billion (0.16% of GDP) in late July. The measures include the fifth -15.0 round of the subsidy program in which the government Oct-Dec Jan-Mar Apr-Jun Jul-Sep subsidizes 50% of the purchase of goods and services under FY18 FY19 FY20 FY21 FY22 the THB 800 per person limit and the cash transfers to low- Source: MOF; CEIC; World Bank staff calculations income earners at THB 200 per month for 3 months. These measures will be funded from the off-budget borrowing of Figure 7: The State Oil Fund Deficit Widened THB 500 billion for the COVID-19 response. (THB billion) 60.0 The State Oil Fund deficit widened due to the rising cost 27.5 30.0 of energy subsidies, warranting close monitoring. The 0.0 State Oil Fund deficit widened to THB 117 billion (0.7% of -30.0 GDP) as of the first week of August (Fig.7), as the government -4.5 -60.0 continued to maintain caps on the prices of diesel and cooking Oil LPG Total -90.0 gas. The announced cap on diesel prices at THB 35 per liter -120.0 from July to September is estimated to have incurred an -116.3 -150.0 additional cost of THB 14.8 billion per month (0.1% of GDP). Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Public debt rose to 61.1% of GDP at the end of June 2022, up Source: Oil Fuel Fund Office; World Bank staff calculations from 58.3% at the end of FY21. The risk of higher public debt has risen as the cabinet recently approved a law to guarantee up to THB 150 billion (0.9% of GDP) of the State Oil Fund’s THAILAND MONTHLY ECONOMIC MONITOR | 2 additional borrowing to replenish the fund, should the need Figure 8: Manufacturing Exports Weakened in May (left: PMI Index, right: YoY, percent) arise. Manufacturing PMI: Global Thai Exports: Agriculture, Agro Industrial Products, YoY (RHS) 60 Thai Exports: Manufacturing, YoY (RHS) 50 Goods exports slowed in Q2 and softening global demand is expected to weigh on the outlook. Goods 55 25 exports in Q2 expanded 9.7% (yoy), down from 14.4% in Q1 as manufacturing export growth slowed due to the decline in 50 0 demand for electronics and electrical appliances, as well as the supply chain disruptions in the automotive industry. In 45 -25 contrast, agricultural goods and mineral products exports continued to show strength. A weakening global environment 40 -50 could further weigh on the export outlook, and the declining Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 global manufacturing PMI dropped to its lowest level since Source: MOC, CEIC; World Bank staff calculations mid-2020, pointing to weaker demand for the exports of manufacturing goods (Fig. 8). Figure 9: Thai Baht REER Appreciated in August (Percentage change) A stronger-than-expected nascent tourism recovery is VND Percentage change, YTD developing. Tourist arrivals in July increased further by 46% SGD August (1-15) (mom) to 1.12 million, reaching 34% of the same period in IDR CNY 2019. Asian tourists, especially from ASEAN, continued to TWD rise substantially as border restrictions were relaxed. Tourist MYR arrivals are projected to continue to surge in the second half PHP KRW of 2022. The government expects international tourist arrivals THB to hit 8 million this year, reaching 20% of the pre-pandemic JPY level. However, lingering concerns about future COVID -25% -20% -15% -10% -5% 0% 5% 10% 15% outbreaks, the ongoing travel restrictions imposed by China, Source: J.P. Morgan; Haver Analytics; World Bank staff calculations the slowing global economy, and the impact of the war in Ukraine on travel costs remain the key risks surrounding the Figure 10: The Current Account Deficit Remained tourism outlook. Large Due to the High Energy Import Bill (USD Billion) The Thai baht started to appreciate in the first half of 8000 August due to optimism surrounding the economic 6000 outlook. The Real Effective Exchange Rate (REER) gained 4000 3.0% after being one of the weakest currencies in Asia during 2000 the first 7 months of 2022, when it depreciated by 8.0% (Fig. 9). The Thai baht strengthened due to greater optimism about 0 the economic recovery and weakening sentiment on the US -2000 dollar as markets are growing skeptical about further -4000 BOP: USD: Trade Balance aggressive Fed tightening. The Thai bond and equity markets -6000 BOP: USD: Services, Primary Income & Secondary Income registered net inflows of THB 38 billion, following large BOP: USD: Current Account Balance -8000 outflows over the two months. The continued current account 10/2019 04/2020 10/2020 04/2021 10/2021 04/2022 deficit (4.4% of GDP in May) continued to be the key factor Source: CEIC; World Bank staff calculations weighing on the Thai baht (Fig. 10). Table 1: Policy rates and real policy rates in selected Asia Change from 12 Real policy GDP Growth Inflation % Policy rate months ago rate* Outlook outlook Philippines 3.75 +1.25 -1.18 7.1 4.9 Malaysia 2.25 +0.50 -0.80 6.4 3.0 Thailand 0.75 +0.25 -5.45 3.4 6.2 Indonesia 3.75 +0.25 -0.19 5.2 3.9 United States 2.50 +2.25 -5.40 2.1 7.9 Note: *Policy rate minus inflation (Consensus forecast for 2022) Source: CEIC; Consensus forecast; World Bank staff calculations THAILAND MONTHLY ECONOMIC MONITOR | 3 Issues to Watch: News Highlights: • Inflation: Will rising prices derail the private • The cabinet approved a law to guarantee up to THB 150 consumption recovery? billion of the state oil fund’s loans (Bangkok Post, Link) • Tourism: Will the inflows of foreign tourists surpass the • Energy Regulatory Commission approved a rise in the projected 6 million in 2022? price of electricity for the September-December quarter • Exports: Will goods exports be significantly affected by (Bangkok Post, Link) the global economic slowdown? • Thai GDP notches the fastest growth in a year on eased COVID curbs. (Reuters, Link) Prepared by Warunthorn Puthong, MTI, 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 Mar Apr May Jun Jul GDP and Inflation (%YoY) GDP growth (real) 1.5 -0.2 1.8 2.3 2.5 Contribution to GDP growth: Private consumption 0.2 -1.9 0.2 1.8 3.9 General Government consumption 0.5 0.3 1.2 1.0 0.4 Gross fixed capital formulation: Private 0.6 0.4 -0.2 0.5 0.4 Gross fixed capital formulation: Public 0.3 -0.5 0.1 -0.3 -0.7 Net Exports of goods and services -4.1 -9.2 0.5 3.5 -0.4 Change in Inventory 0.0 7.2 -1.1 -2.0 1.0 Residual and errors 4.1 3.5 1.0 -2.1 -2.1 GDP, nominal (USD Billion) 506 119 129 130 123 GDP, nominal (THB Billion) 16,179 3,918 4,294 4,308 4,228 Consumer Prices Index: Headline 1.2 0.7 2.4 4.7 6.5 5.7 4.7 7.1 7.7 7.6 Consumer Prices Index: Core 0.2 0.1 0.3 1.4 2.3 2.0 2.0 2.3 2.5 3.0 Output Indicators Manufacturing Production Index (%YoY) 6.5 -0.3 4.7 1.6 -0.7 0.4 0.0 -2.0 -0.1 Capacity Utilisation (%) 63.0 58.5 64.5 66.5 61.1 69.3 58.5 62.3 62.4 Farm Production Index (%YoY) 1.3 6.9 -3.6 6.5 5.7 13.5 1.5 9.1 6.5 Service Index (%YoY) 0.3 1.5 5.6 8.9 13.9 6.0 13.1 13.5 15.0 Labor Market Unemployed workers (Thousand Persons) 748 871.3 631.9 607.6 546.6 Unemployment rate (%) 2.0 2.3 1.6 1.5 1.4 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 -8,647 920 -3,057 -3,716 -1,873 Current account (% of GDP) -2.2 -3.9 -1.1 -1.7 -7.0 2.2 -7.3 -8.9 -4.5 Trade Balance 39,885 9,391 10,225 9,282 5,170 5,200 1,126 1,985 2,059 Exports of goods (%YoY) 20.0 16.1 22.3 14.4 9.7 18.9 6.6 11.3 11.1 Imports of goods (%YoY) 25.0 32.0 23.1 16.3 22.4 16.7 19.4 23.3 24.3 Service, primary and secondary Income -50,903 -14,077 -11,661 -11,471 -13,816 -4,280 -4,183 -5,702 -3,932 Tourist Arrivals (Thousand Persons) 428 45 342 498 1,582 211 293 521 767 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 2,857 805 643 632 881 219 235 308 338 Expenditure 4,124 1124 1188 840 895 338 267 239 389 Central Government balance -1,266 -319 -545 -208 -14 -119 -32 68 -50 Central Government balance (% of GDP) -7.9 -8.1 -12.7 -4.8 -0.3 Public debt (% of GDP) 58.75 58.31 59.61 60.6 61.1 60.6 60.8 60.9 61.1 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 6.1 6.6 6.3 5.8 6.3 - 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 1,695 1,667 1,663 1,568 1,576 Thai government bond yield, 10 year (%) 1.90 1.89 1.90 2.26 2.81 2.26 2.72 2.86 2.81 2.50 Foreign exchange reserve and FX forward position (USD billion) 258 257 258 251 230 251 239 239 230 228 USD/THB, end of period 33.42 33.92 33.42 33.30 35.30 33.30 34.35 34.19 35.30 36.81 THB NEER, average 117.4 114.8 114.5 116.7 116.0 117.1 116.4 116.3 115.3 112.7 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