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All queries on rights and licenses should be addressed to the Publishing and Knowledge Division, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Preface The Thailand Economic Monitor (TEM) reports on key developments in Thailand’s economy over the past six months, situates these changes in the context of global trends and Thailand’s longer -term economic trajectory, and updates Thailand’s economic and social welfare outlook. Each edition of the TEM also provides an in-depth examination of selected economic and policy issues and an analysis of Thailand’s medium -term development challenges. The TEM is intended for a wide audience, including policymakers, business leaders, financial-market participants, and the community of analysts and professionals engaged in Thailand’s evolving economy. The TEM is produced by the staff of the World Bank’s Bangkok office, consisting of Kiatipong Ariyapruchya, Kim Alan Edwards, Jaime Frias (Task Team Leaders), Ruchira Kumar, Warunthorn Puthong, Thanapat Reungsri, Phonthanat Uruhamanon, Nadia Belhaj Hassine Belghith, Tanida Arayavechkit, Uzma Khalil and Dilaka Lathapipat. Birgit Hansl, Lars Christian Moller, Cecile Thioro Niang, Souleymane Coulibaly and Ronald Upenyu Mutasa provided overall guidance. The team is grateful to Kevin Chua, Ergys Islamaj, Smita Kuriakose and Ekaterine T. Vashakmadze for their constructive peer review comments. Clarissa Crisostomo David, Kanitha Kongrukgreatiyos and Buntarika Sangarun are responsible for external communications related to the TEM, as well as the production and design of this edition. Sean Lothrop edited the report. The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The latest data that inform this report date from July 1, 2021 and the World Bank does not guarantee the accuracy of the data presented in the TEM. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Photographs are copyright of World Bank. All rights reserved. This and other reports are available for download via: worldbank.org/tem Previous editions of the TEM: ▪ July 2021: The long road to recovery ▪ January 2021: Restoring incomes; recovering jobs ▪ July 2020: Thailand in the time of COVID-19 ▪ January 2020: Productivity for prosperity ▪ July 2019: Harnessing fintech for financial inclusion ▪ January 2019: Inequality, opportunity, and human capital ▪ April 2018: Beyond the innovation paradox ▪ August 2017: Digital transformation To receive the TEM and related publications by email, please email buntarika@worldbank.org. For questions and comments, please contact Kiatipong Ariyapruchya (kariyapruchya@worldbank.org). For information about the World Bank and its activities in Thailand, please visit: wbg.org/thailand twitter.com/WB_AsiaPacific, follow hashtag #wbtem facebook.com/WorldBankThailand instagram.com/worldbank linkedin.com/company/the-world-bank Abbreviations ASEAN Association of Southeast Asian Nations BOT Bank of Thailand EAP East Asia and the Pacific EMDEs Emerging markets and developing economies FDI Foreign direct investment FY Fiscal year GDP Gross domestic product GEP Global Economic Prospects Report ILO International Labour Organization IMF International Monetary Fund NEER Nominal effective exchange rate NESDC Office of the National Economic and Social Development Council NPL Nonperforming loan REER Real effective exchange rate SMEs Small and medium enterprises TEM Thailand Economic Monitor UNCTAD The United Nations Conference on Trade and Development yoy year-on-year THAILAND ECONOMIC MONITOR | December 2021 i TABLE OF CONTENTS Abbreviations ....................................................................................................................................................i Part 1. Recent Economic Developments and Outlook: Living with COVID ...................................... 1 1. Recent Economic Developments: COVID resurgent ................................................................................. 1 2. Outlook: Signs of Recovery............................................................................................................................. 27 Part 2. Building Back Better by Boosting the Digital Economy ........................................................ 35 References...................................................................................................................................................... 58 TABLES Table 1: Financial and fiscal indicators suggest that Thailand continues to have strong external position and is less exposed to market risk-off sentiment. .................................................................................................... 16 Table 2: The current account and financial account have both deteriorated, but foreign-exchange reserves remain adequate. ............................................................................................................................................. 17 Table 3: Key fiscal-responsibility indicators remain well within their established parameters. ................. 23 Table 4: Despite the recent increase in the debt stock, Thailand’s debt-sustainability indicators are strong by regional standards........................................................................................................................................ 24 Table 5: A modest recovery is projected to start in 2021 and accelerate in 2022 and 2023. ....................... 28 BOXES Box 1: Vaccines, Mortality, and Availability .............................................................................................................. 5 Box 2: Private investment and economic cycles—Passing the Baton................................................................ 10 Box 3: The Impact of COVID-19 on Thai Households ......................................................................................... 25 Box 4: Harnessing the power of digital technology can unlock productivity in different ways. ................. 37 Box 5: The case of Thaitrade.com ............................................................................................................................... 41 Box 6: Digital-commerce dynamism. ......................................................................................................................... 45 Box 7: Regulations that deter entry. .......................................................................................................................... 48 THAILAND ECONOMIC MONITOR | December 2021 ii Executive Summary EXECUTIVE SUMMARY Recent Developments A major surge in COVID-19 cases severely slowed economic activity in Thailand during Q3 of 2021, but a recovery is now underway. The Thai economy contracted by 0.3 percent year-on-year in Q3, and seasonally adjusted output fell by 1.1 percent from Q2 following modest growth in the first half of the year. Thailand’s year-on-year contraction in Q3 was the third deepest among regional peers, after Vietnam (-6.2 percent) and Malaysia (-4.5 percent), while the Philippines and Indonesia registered strong growth.1 Private consumption declined, and the consumption of durable goods was particularly weak. External demand also softened, and global supply-chain and logistics issues disrupted exports and imports of productive inputs. However, recent indicators suggest that activity rebounded in September and October, as the number of new COVID cases per day fell from a peak of over 20,000 in mid-August to an average of fewer than 8,000 by mid-November. Containment measures have been eased, and mobility now exceeds pre-pandemic levels. Meanwhile, indicators of private consumption, consumer confidence, and business sentiment have all ticked upward. Progress on vaccinations has accelerated since August, and the government is now on track to achieve its target of vaccinating 70 percent of the population by the end of the year. The economy is expected to grow by 1.0 percent in 2021, unchanged from our previous projection published in October. This forecast reflects the persistent weakness in private consumption due to COVID- 19 and the expectation that tourist arrivals will remain negligible through to the end of 2021 despite the recent reopening of international borders. On the other hand, goods exports have supported growth amid resurgent global demand, and investment is expected to increase rapidly. Cash transfers, public health initiatives, economic recovery programs, and other forms of fiscal support have helped shore up private demand while supporting consumption among vulnerable households and attenuating the impact of the crisis on poverty. The current account remained firmly in deficit through the first three quarters of 2021. The goods trade balance continued to show a large surplus of 7.0 percent of GDP in Q3, but the services trade deficit widened from 3.1 percent of GDP in 2020 to 7.2 percent of GDP in the first half of 2021, largely reflecting the collapse of tourism receipts and rising freight costs. The combination of a widening current-account deficit and net outflows on the capital and financial accounts has caused the nominal and real effective exchange rates to depreciate since the end of 2020. However, improved investor confidence has spurred a modest appreciation since the end of September 2021. While international reserves have declined since the beginning of the year, they remain ample at around 10 months of imports and four times the level of short- term external debt. While the headline inflation rate has risen, core inflation has remained contained, and the Bank of Thailand has maintained the policy rate at 0.5 percent to support the recovery. After dipping to zero in August, the headline inflation rate rose to 2.4 percent in October 2021, due largely to supply-side factors such as rising global oil prices and the impact of flooding on fresh-food prices. However, the core inflation rate remained low at 0.2 percent, and the surge in headline inflation is expected to be temporary due to a large negative output gap (estimated at around 5 percent of potential output) combined with well-anchored inflationary expectations. Thailand’s experience contrasts with those of other emerging markets, such as the Philippines, Brazil, and Turkey, which are facing elevated inflationary pressures. The financial system remains stable overall, but asset-quality indicators have deteriorated, and risks associated with increased levels of corporate and household debt remain significant. Capital and liquidity buffers at commercial banks remain well above regulatory requirements, and profitability has stabilized following a significant decline in 2020. However, forward-looking indicators of asset quality have deteriorated. By end-June 2021, the share of nonperforming loans (NPLs) had risen to 3.2 percent of total gross loans, and several of the financial-sector assistance measures introduced by the government may mask THAILAND ECONOMIC MONITOR | December 2021 iii Executive Summary underlying vulnerabilities in loan quality. Risks associated with high levels of household debt—which had reached almost 90 percent of GDP at end-June 2021—may be exacerbated by a temporary easing of loan-to- value limits for mortgage lending, with borrowers able to borrow up to 100 percent of a house’s value until the end of 2022. Financial weaknesses among small and medium enterprises (SMEs) also continue to pose risks. The NPL ratio among SMEs remained above 7 percent through the first three quarters of 2021, well above pre-COVID levels of 4.5-5.0 percent. The central bank has extended the SME soft-loan facility until the end of 2022, while several businesses have entered debt restructuring through asset-warehousing programs. The central government fiscal deficit widened to 8.7 percent of GDP in FY21 due to further increases in pandemic-response spending, while public debt increased to 58.2 percent of GDP. As a share of GDP, revenue collection for the full year FY2021 was broadly in line with the last two years at 17.7 percent. On the other hand, spending rose to 26.4 percent of GDP, up from 23.5 percent in FY20 and an average of 20 percent in the three years FY17-FY19. Of the 1.5 trillion baht (9.3 percent of GDP) approved in off- budget borrowing to fund COVID-19 response, government disbursed THB 680 billion (4.2 percent of GDP) in FY2021, more than double the THB 300 billion disbursed in FY2020. The remainder is expected to be disbursed in FY2022. Almost all of the amount disbursed to date has been in the form of relief measures (recurrent spending) rather than capital spending, reflecting the impact of the second and third waves of COVID-19, which set back the timeline for economic recovery and extended the need for household relief beyond what was originally planned. The poverty rate is estimated to have stabilized in 2021, but a recent phone survey indicates that the pandemic has had a particularly severe impact on vulnerable groups. After rising from 6.2 percent in 2019 to 6.4 percent in 2020, the poverty rate at the upper middle-income poverty line of 5.5 dollars a day (2011 PPP) has remained broadly unchanged in 2021. While an estimated 160,000 people have fallen into poverty since the onset of the pandemic, a comprehensive social and economic response effort has helped contain the increase in the poverty rate. In the absence of government intervention, the poverty rate would now be an estimated 1 percentage point higher, implying that the response effort prevented 700,000 people from falling into poverty. A rapid phone survey of 2,000 adults between April and June 2021 showed that over 80 percent of all households—and an even larger share of low-income households—benefitted from the government’s emergency assistance programs. Nevertheless, 60 percent of low-income households reported running out of food. Reported coping mechanisms included reducing food and nonfood consumption, relying on government assistance, tapping savings, engaging in additional income-generating activities, and returning to agriculture in the face of rising urban unemployment. Outlook and Risks Economic activity is expected to return to pre-pandemic levels by end-2022, with continued progress on vaccinations and the resumption of tourist arrivals supporting the recovery. The GDP growth rate is projected to accelerate to 3.9 percent in 2022 and reach 4.3 percent in 2023, driven by a recovering service sector. If the current pace of vaccinations (about 750,000 per day) is maintained, and in the absence of a further resurgence of COVID-19, domestic consumer confidence and international tourist confidence are expected to strengthen. Given these conditions, private consumption is projected to expand by just under 4 percent per year in 2022 and 2023, up from an estimated 1 percent in 2021. The number of international tourists is projected to rise to almost 7 million in 2022, with a sharp increase in the second half of the year, before increasing further to around 20 million arrivals in 2023—still just half the 2019 level. Tourism is expected to contribute 2 percentage points to GDP growth in 2022 and 4 percentage points in 2023. The contribution of goods exports to GDP growth in 2022 is projected to be smaller than in 2021, reflecting softening global demand. Fiscal support is also expected to moderate, as most of the COVID response measures will have already been implemented. 1 Growth rates are expressed in year-on-year terms unless otherwise indicated. THAILAND ECONOMIC MONITOR | December 2021 iv Executive Summary Inflation is expected to remain contained, with a substantial output gap persisting in 2021 and 2022. GDP is estimated to remain below potential in 2021 and 2022. The headline inflation rate is projected to remain low in 2022 and gradually rise to 1.3 percent in 2023, reflecting subdued domestic demand and a limited pass-through effect from global oil prices. Consumer-price inflation is unlikely to see a significant surge, with administered prices accounting for approximately one-third of the Consumer Price Index basket. Monetary policy is projected to remain accommodative to support the recovery, with the policy rate remaining unchanged at 0.50 percent in 2022. While public debt is expected to increase, risks to fiscal sustainability remain manageable. As a result of the government’s COVID-19 relief and recovery spending, the public debt stock is projected to peak at almost 62 percent of GDP in 2022, below the debt ceiling, which was recently raised from 60 to 70 percent of GDP. This debt trajectory remains consistent with medium-term fiscal sustainability under a range of scenarios for GDP growth rates, interest rates, and primary deficits over the next few years. Fiscal risks are also mitigated by the fact that the debt stock is largely denominated in local currency and by the availability of sufficient domestic liquidity to accommodate the government’s refinancing needs. Risks to growth are skewed to the downside, as several uncertain variables cloud the outlook. The global trajectory of the pandemic remains unpredictable, and the probability of future waves of COVID-19 within Thailand will depend on continued progress with the vaccination rollout, the effectiveness of vaccines against new strains of the coronavirus, the ongoing implementation of other preventive and testing/tracing measures, and the sustained reopening of international borders. There is also significant uncertainty around how international tourism demand will evolve over the medium term, even if vaccination thresholds are met and COVID-19 cases are controlled, and supply disruptions and logistical bottlenecks could impede the ability of Thai firms to fully benefit from the recovery of global trade. Nevertheless, there is upside potential for a more robust external recovery to bolster trade and investment by creating new opportunities in the market for digitally delivered services that underpin many of the most sophisticated global value chains, as well as expanding global demand for Thailand’s current range of exports. The pandemic shock is expected to inflict lasting scars on productivity and socioeconomic development in Thailand. A decline in capital investment in 2020 diminished potential output, exacerbating the adverse effects of demographic aging and slow factor reallocation. Job losses and school closures will have some longer-term impacts on human capital accumulation, although in contrast to other countries, the substantial government response has helped to prevent large-scale losses in human capital. But firm closures and employee separations are likely to have contributed to the erosion of valuable intangible assets, such as management and technical know-how, employee skills, and workplace networks and relationships. Although investment began to recover in 2021 and is projected to continue increasing through 2022, a simultaneous rise in the levels of corporate and household debt could pose longer-term risks, including risks to the financial sector once existing forbearance measures expire. On the other hand, a deferral of productive investments due to weakened firm balance sheets would reduce potential output over the medium term. To reduce the potential for pandemic-related scarring and address underlying structural challenges, additional interventions are needed. In this context, investing in the digitalization of economic activity offers a valuable opportunity to raise both supply and demand in the short term, while permanently increasing potential output via productivity gains and reduced market frictions. Building Back Better by Boosting the Digital Economy The adoption of digital technologies has the potential to support Thailand’s post-pandemic recovery while enhancing its competitiveness over the longer term. Pandemic-related mobility restrictions and precautionary behaviors increased the use of digital production technologies and the consumption of digital services. The uptake of digital technologies has bolstered commerce and productivity by more efficiently connecting firms—especially new entrants—to global networks. Digital commerce is an especially important outlet for SMEs in Thailand, as it reduces transaction costs and allows entrepreneurs to reach new markets. THAILAND ECONOMIC MONITOR | December 2021 v Executive Summary In addition, innovative financial technologies can expand access to financing among smaller firms that might otherwise be capital constrained. While the Thai government has already shown a strong commitment to advancing the digital agenda under the banner of industry 4.0, more can be done to develop digital services and the digitalization of businesses. But more can be done to develop digital services and the digitalization of businesses. Efforts to boost competition and ensure a level playing field are necessary to promote market contestability and increase the interoperability of digital systems. The Thai market for digital services is highly concentrated, with e-commerce dominated by just two large firms. To lower barriers to entry, digital regulations should be simplified and redesigned to encourage the participation of smaller firms. Moreover, recent mergers have revealed opportunities for closer regulatory oversight. At the same time, a lack of interoperability between electronic payment systems constrains the dynamism of the digital services market. Pro-competition regulation is needed to reduce the potential for abuse of market power and encourage interoperability across digital platforms, while mechanisms to promote transparency and expand access to business data could help spur innovation and facilitate the entry of new firms. In addition, expanding provisions to prevent spectrum hoarding would increase the quality of broadband services. The availability of digital skills, as well as complementary managerial and organizational capabilities, is vital to support digital transformation. Such skills are in high demand, but supply is inadequate, and employer-employee mismatches result in a suboptimal allocation of existing skills. For instance, the private sector requires employees trained in information management, user experience design, integrated systems technology, cloud computing, and the internet of things, but these subjects have not been sufficiently incorporated into the education curriculum. Greater input from the private sector on curriculum design could help align training with employer demand, while enhanced market information and job-placement services could ameliorate skills mismatches. Finally, upskilling and reskilling existing workers could bolster the supply of workforce skills and reduce unemployment. Expanding access to innovation financing can ease constraints on the adoption of new business models and the uptake of digital technologies, especially by SMEs. Currently, regional venture capital (VC) funds and angel investors have only a limited presence in the Thai market, which deprives startups from regional market experience and customers, access to know-how and networks. Government grants for promoting innovation tend to target small firms, and to exclude mid-sized firms beyond seed stage. The 2020 Bank of Thailand survey revealed that the high costs of technology, a lack of reliable financial statements, and narrow margins all compromised the ability of smaller firms to obtain financing. Peer-to- peer lending and crowdfunding platforms present an opportunity to ease these constraints. A unified legal framework and collateral registry would help strengthen the secured-transactions regime, and the credit- reporting system could be expanded to cover more firms. Finally, a well-formulated policy for open banking would help promote competition and growth of financing for innovation. THAILAND ECONOMIC MONITOR | December 2021 vi Executive Summary Recent Developments and Near-Term Outlook Figure ES 1: Thailand’s incipient recovery was set Figure ES 2: …and disrupted already weak quarterly back in Q3 2021 as the delta variant spread… growth momentum. (% change, year-on-year) (% change, quarter-on-quarter, seasonally adjusted) 10.0 8.0 6.7 7.6 6.0 5.0 4.0 2.0 0.5 0.2 0.1 0.94 0.2 0.0 0.0 -0.3 -2.0 -1.5 -1.1 -2.1 -2.6 -4.0 -5.0 -4.2 -6.0 -6.4 -8.0 -10.0 -10.0 -9.4 -12.0 -12.1 -15.0 -14.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4f Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4f 2018 2019 2020 2021 2018 2019 2020 2021 Source: NESDC Source: NESDC Note: f is forecasted value Note: f is forecasted value Figure ES 3: Weak domestic demand and softening Figure ES 4: The policy response to the pandemic global demand dragged down growth in Q3 2021. significantly widened the central government deficit. (percentage-point contribution, year-on-year) (Percent of GDP) 15.0 10.0 35.0 0.0 30.0 -1.6 26.4 5.0 -1.8 -2.1 -2.0 23.5 25.0 19.9 19.9 20.1 0.0 18.1 18.3 17.9 -4.0 20.0 17.8 17.7 15.0 -5.6 -6.0 -5.0 10.0 -10.0 -8.0 5.0 -8.7 -15.0 - -10.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 2018 2019 2020 2021 Central Government_Revenue (GFS) Private Consumption Public Consumption Central Government: Expenditiure (GFS) Investment Change in inventories Net Exports GDP Growth Central Government: Surplus/Deficit (GFS), RHS Source: NESDC; World Bank staff calculations Source: Fiscal Policy Office, Ministry of Finance THAILAND ECONOMIC MONITOR | December 2021 vii Executive Summary Figure ES 5: Recent measures of manufacturing show Figure ES 6: ...but the recovery is expected to be a rebound… protracted with a negative output gap until 2023. (purchasing manager’s index: 50+ shows expansion) (THB trillion) 11.5 GDP projection and Output gap 60 Millions 55 11.0 50 45 10.5 40 35 10.0 30 25 9.5 Apr-20 Sep-20 Nov-20 Apr-21 Sep-21 May-20 May-21 Jan-20 Feb-20 Aug-20 Feb-21 Oct-20 Jan-21 Aug-21 Oct-21 Mar-20 Dec-20 Mar-21 Jun-20 Jul-20 Jun-21 Jul-21 9.0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Indonesia Malaysia Philippines Potential GDP - Level GDP Projection - Level Vietnam China Thailand Source: World Bank East Asia and Pacific Update October 2021; Source: World Bank staff calculations Haver Analytics Table ES 1: Macroeconomic Indicators 2019 2020 2021f 2022f 2023f Real GDP Growth Rate 2.3 -6.1 1.0 3.9 4.3 (at constant market prices) Private Consumption 4.0 -1.0 1.0 3.8 3.9 Government Consumption 1.7 0.9 2.5 2.0 -2.2 Gross Fixed Capital Investment 2.0 -4.8 5.6 6.0 3.6 Exports of Goods and Services -3.0 -19.4 8.5 10.8 8.9 Imports of Goods and Services -5.2 -13.3 16.6 6.3 6.7 Real GDP Growth Rate (at constant factor prices) Agriculture -0.6 -3.4 1.1 3.8 4.2 Industry 0.1 -5.3 1.4 1.3 1.2 Services 4.5 -6.9 8.8 4.8 3.9 Inflation (Consumer Price Index) 0.71 -0.85 1.1 1.4 1.3 Current Account Balance (% of GDP) 7.0 3.2 -3.4 0.5 2.3 Fiscal Balance (General Government, % of GDP) -0.8 -4.8 -7.8 -4.5 -1.0 Debt (% of GDP) 40.8 50.0 58.8 62.2 61.6 Source: NESDC; World Bank staff calculations THAILAND ECONOMIC MONITOR | December 2021 viii Part 1. Recent Economic Developments and Outlook Part 1. Recent Economic Developments and Outlook: Living with COVID 1. Recent Economic Developments: A Resurgent Pandemic Threatens the Recovery i. The Global Economy The ongoing The ongoing pandemic continues to exact a heavy toll on economic activity in resurgence of the Asia, the Americas, and Europe, pushing the global composite output Purchasing COVID-19 pandemic, Managers’ Index to a seven-month low in August. The decline in output was coupled with supply- broad-based across the manufacturing and services sectors, with the latter falling chain disruptions, has to its lowest level since February 2021. Furthermore, supply bottlenecks and slowed the strained global value chains (GVCs) have exacerbated input price inflation and momentum of the lengthened delivery times, though there are signs that these disruptions are now global recovery. easing. Indicators of global consumer confidence now exceed pre-pandemic levels, albeit with substantial disparities across regions and income groups. However, consumer confidence in emerging markets and developing economies (EMDEs), including Thailand, remains below pre-pandemic levels. The East Asia and In 2020, most EAP countries contained the spread of the disease, with economic Pacific (EAP) region activity recovering by the end of the year, while other regions continued to suffer has suffered a from rising caseloads and economic recessions. However, the EAP region was hit reversal of fortune in hard by the 2021 resurgence of COVID-19. While many advanced economies THAILAND ECONOMIC MONITOR | December 2021 1 Part 1. Recent Economic Developments and Outlook its fight against have successfully mitigated the worst consequences of the pandemic and imposed COVID-19. robust stimulus measures, rising caseloads are threatening the recovery in EAP. The incipient The unbalanced recovery of EAP countries has continued (Figure 1). China’s recovery was uneven, economy is projected to grow by 8.5 percent in 2021, faster than expected, while but the recent the rest of the region is projected to grow by just 2.5 percent, down roughly 2 setback has affected percentage points since the last edition of the East Asia and Pacific Economic countries across EAP. Update was published in October 2021. Output in China and Vietnam had already exceeded pre-pandemic levels by 2020, but rising caseloads and supply-chain disruptions slowed economic activity in Vietnam in Q3 of 2021. Output in Indonesia is now close to pre-pandemic levels, while the recovery in Thailand, Malaysia, and the Philippines continues to lag. Regional goods The weakening of regional export performance stems from at least six factors. exports softened due First, global import demand peaked in Q2 2020, and its composition is shifting to shifting global slightly away from EAP’s comparative-advantage sectors, such as machinery and demand and snarled electronics (Figure 2). Second, exports from other countries have recovered, and supply chains EAP exports are no longer outperforming the rest of the world. Third, commodity prices have stopped increasing, adversely affecting the exports of major commodity producers like Indonesia, Myanmar, and Mongolia. Fourth, the spread of the Delta variant throughout East Asia is disrupting activity in individual economies and intraregional production chains. The resulting shortages of vital inputs such as semiconductors ripple upstream and downstream through the global economy, affecting industries such as electronics, medical devices, and automobiles. Fifth, many EAP economies have critical tourism sectors, but travel and tourism activity remained around 60 percent below pre-pandemic levels in 2021. Finally, recent increases in shipping costs and delays, attributable in part to COVID-19–related port disruptions, are also damaging EAP exports. Supply-related factors have increasingly weighed on global industrial output growth and trade in recent months. Figure 1: A downturn in economic activity has Figure 2: …and regional goods exports plateaued at interrupted EAP’s uneven recovery… above pre-pandemic levels. (Seasonally adjusted real GDP indexed to 2019 Q4 = 100) (Change in goods exports relative to 2019 Q4, percent) 115.0 30.0 110.0 20.0 105.0 10.0 100.0 95.0 0.0 90.0 -10.0 85.0 -20.0 80.0 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 -30.0 Apr-20 May-20 Sep-20 Nov-20 Apr-21 May-21 Sep-21 Feb-20 Aug-20 Feb-21 Aug-21 Jan-20 Mar-20 Oct-20 Jan-21 Mar-21 Oct-21 Jun-20 Jul-20 Dec-20 Jun-21 Jul-21 2019 2020 2021 Indonesia Malaysia Philippines Vietnam China Thailand World EAP countries Thailand Source: World Bank East Asia and Pacific Update October Source: World Bank East Asia and Pacific Update October 2021 2021; Haver Analytics THAILAND ECONOMIC MONITOR | December 2021 2 Part 1. Recent Economic Developments and Outlook ii. COVID-19 Situation and Related Control Measures Thailand has faced Cases surged to above 5,000 in July and peaked at over 20,000+ in mid-August, especially acute resulting in a daily death rate above 200. Vaccinations were initially slow, and challenges in Q3 amid Thailand lagged Indonesia and the Philippines for much of the year. A the spread of the combination of a wait-and-see approach towards vaccine procurement, a slow Delta variant and procurement system,2 and a limited global vaccine supply left Thailand initial delays in vulnerable to new waves of COVID-19. As a result, the authorities imposed vaccine delivery. curfew and stringent restrictions on domestic travel and services establishments to contain the spread of the virus.3 The wave started to After peaking in August, new infections fell to an average of fewer than 8,000 per abate in Q4. day in November (Figure 3). The authorities ramped up the distribution of vaccines from end-August onwards due to an increase in vaccine deliveries. The number of deaths fell substantially to less than 100 per day in October 2021. While the decline in infections has been slow relative to the regional peers, the tightening of public health measures combined with expanded testing and tracing caused the positivity rate to gradually fall to 17 percent in early November 2021 after reaching its peak at 38 percent in mid-August 2021. Nevertheless, the positivity rate is high compared to peers and authorities should expand testing to bring the rate down to 5 percent.4 The average number of additional infections caused by each infection (i.e. reproduction rate) has remained stable at 0.9 since August 2021. Following a renewed Average number of vaccinations administered each day reached highs of 1 per effort, the authorities 100 people, comparable to the levels observed in the United Kingdom and are close to achieving Germany. The share of the Thai population having received at least one vaccine their target of dose climbed to 61.2 percent, while the share that is fully vaccinated reached 52.7 vaccinating 70 percent (Figure 4), surpassing Indonesia and the Philippines. Recent trends percent of the suggest that the vaccination target of 70 percent of the population by end-2021 population by end- is within reach, which could usher in a new phase of coexistence with COVID-19 2021. (Box 1). In November, the Amid an accelerated vaccination effort and a slowing daily case rate, the government reopened authorities eased their strict COVID containment policies to restart the country’s Thailand’s vital tourism sector. Since November 1, fully vaccinated tourists from 63 low- international borders risk countries have been able to travel to Thailand without mandatory and lifted the curfew quarantine. Fully vaccinated visitors from other countries will also be allowed to in Bangkok to revive enter through a special tourism program in 17 provinces—including Bangkok, 2 ProACT Procurement Anticorruption and Transparency platform (WB, Government Transparency Institute and the Centre for the Study of Corruption at the University of Sussex) www.procurementintegrity.org. 3 In general, economic disruption has been less in countries with higher vaccination. A 10-percentage point higher vaccination coverage was associated with a one-half of a percentage point higher quarterly gross domestic product (GDP) growth (EAP Update October 2021). 4 This metric offers key insights into the adequacy of testing and the spread of the virus. The positivity rate indicates the level of testing relative to the size of the outbreak. To be able to properly monitor and control the spread of the virus, countries with more widespread outbreaks need to do more testing. According to criteria published by the WHO in May 2020, a positivity rate of less than 5 percent is one indicator that the epidemic is under control in a country. THAILAND ECONOMIC MONITOR | December 2021 3 Part 1. Recent Economic Developments and Outlook tourism and domestic Samut Prakan, Chon Buri, Phuket, and Phangnga—where more than 60 percent economic activity. of the population has been fully vaccinated. Tourists who are not fully vaccinated will be required to quarantine at a hotel for 10 days. The number of high-risk provinces with a curfew in place was reduced from 23 to six, including Bangkok. However, tourist International tourist arrivals for the Phuket Sandbox and Samui Plus Model, arrivals have been tourist sandboxes launched July 2021, fell short of expectations. In Q3 2021, the below expectations. country welcomed 45,400 tourist arrivals, roughly one-third of the authorities’ target of 129,000 people of the quarter, partly due to the ongoing third wave and then-low rates of vaccination. Despite the wider reopening of the country starting November 1, 2021 amid improved national vaccination rates, the Fiscal Policy Office (FPO) projects the number of tourist arrivals to pick up only gradually to 90,000 people in the fourth quarter as global travel and tourism remain stagnant. Achieving the The early experiences of high vaccination countries suggests that it may be targeted 70 percent possible for countries to transition from the more malignant phase of the disease coverage may usher to a relatively benign phase of “managed endemicity.” High transmission and mortality rate previously seen during Thailand’s third wave have since steadily in a new phase of less declined as the vaccination drive accelerated (See Box 1). Restrictions on mobility severe mortality and and economic activity were lifted as coverage reached 40 percent. However, greater mobility Thailand must address disparities in vaccination rates between metropolitan despite renewed areas such as Bangkok—where 87.5 percent of adults are fully vaccinated—and waves. the rest of the country. Effective vaccination efforts in areas with low vaccination rates will minimize outbreaks of new variants as the economy reopens and travel, tourism, and trade resume. Figure 3: Thailand’s daily COVID-19 case rate has Figure 4: The vaccination effort is fast approaching gradually declined from its peak in August 2021. the target of 70% of the population by end-2021. (Cases, 7-day moving average, log scale) (% of the population fully vaccinated) 80.0 10,000 70.0 60.0 1,000 50.0 40.0 100 30.0 20.0 10 10.0 0.0 1 22-Oct-2021 12-Feb-2021 26-Feb-2021 7-May-2021 16-Jul-2021 23-Apr-2021 18-Jun-2021 30-Jul-2021 13-Aug-2021 27-Aug-2021 15-Jan-2021 29-Jan-2021 21-May-2021 10-Sep-2021 8-Oct-2021 26-Mar-2021 5-Nov-2021 9-Apr-2021 4-Jun-2021 2-Jul-2021 24-Sep-2021 1-Jan-2021 12-Mar-2021 29-Feb-2020 10-Oct-2020 5-Dec-2020 27-Feb-2021 25-Apr-2020 18-Jul-2020 15-Aug-2020 24-Apr-2021 17-Jul-2021 14-Aug-2021 1-Feb-2020 20-Jun-2020 30-Jan-2021 19-Jun-2021 9-Oct-2021 23-May-2020 12-Sep-2020 22-May-2021 11-Sep-2021 28-Mar-2020 7-Nov-2020 2-Jan-2021 27-Mar-2021 6-Nov-2021 Indonesia Malaysia Philippines Indonesia Malaysia Philippines Vietnam Thailand Vietnam Thailand Source: ourworldindata.org/coronavirus Source: ourworldindata.org/coronavirus THAILAND ECONOMIC MONITOR | December 2021 4 Part 1. Recent Economic Developments and Outlook Figure 5: The reproduction rate spiked due to the Figure 6: Thailand quickly delivered the available Delta variant but has since declined. vaccines, after initial procurement delays. (Reproduction rate above 1 means that infections will continue to (Perception) spread) 2.50 Thailand Least Distribution capacity, importance 7 2.00 Cambodia 6 Indonesia 1.50 5 Vietnam 1.00 4 Philippines 0.50 3 Lao PDR 0.00 2 22-Oct-2021 12-Feb-2021 26-Feb-2021 7-May-2021 30-Jul-2021 23-Apr-2021 18-Jun-2021 16-Jul-2021 13-Aug-2021 27-Aug-2021 8-Oct-2021 15-Jan-2021 29-Jan-2021 26-Mar-2021 9-Apr-2021 21-May-2021 4-Jun-2021 2-Jul-2021 10-Sep-2021 24-Sep-2021 1-Jan-2021 12-Mar-2021 5-Nov-2021 Most 1 Myanmar 80% 0 0 1 2 3 4 5 6 7 Indonesia Malaysia Philippines Most Least Delivery delay, importance Vietnam Thailand Deliverd vaccines: 4 1 <40% 3 1 1 40%-80% 1 7 ≥80% Source: ourworldindata.org/coronavirus Source: Delivered vaccines from COVID-19 Task Force (November 16, 2021), survey responses from World Bank staff; Perceptions on constraints from survey responses from World Bank staff. Note: The size of circles represents relative population size. Importance (1: the most—7: the least) was assessed among potential constraints (delivery delays, financing, procurement process, domestic production, distribution capacity, regulation, hesitancy). The number of delivered vaccines as the percentage of eligible population (ages 15 and above) was adjusted for the required doses per person; if a vaccine brand was not available, two doses per person was assumed. Eligible population was defined as population ages 15 and above; this may be different across countries and may change as countries consider vaccinating people younger than 15. Box 1: Vaccines, Mortality, and Availability5 Like most other countries, Israel and the UK initially suffered recurrent waves of the pandemic that were associated with high levels of infection and significant mortality per 1,000 population. However, a combination of vaccinations and acquired resistance blunted the impact of subsequent waves of infection, which entailed less severe morbidity indicators and mortality rates (Figure B.1). Nevertheless, the risks of a resurgence persist even in countries with high vaccination rates. Immunity wanes over time, and booster shots may be required to sustain it. Israel vaccinated a large share of its population early 2021, and its daily cases dropped to near zero by June. However, just weeks later the country experienced one of the highest infection rates in the world as the Delta variant spread, prompting the government to introduce booster shots. Going forward, containing COVID-19 will require the continued implementation of effective public health measures and preventive behaviors, including wearing masks indoors. The government must continue to invest in: (i) expanded COVID-19 testing and tracing; (ii) improved testing and surveillance at tourism hubs; and (iii) enhanced 5 As of 22 November 2021. THAILAND ECONOMIC MONITOR | December 2021 5 Part 1. Recent Economic Developments and Outlook Box 1: Vaccines, Mortality, and Availability5 health information systems. Timely data are essential to adapt policies and interventions to evolving outbreaks. For example, Israel, Denmark, and Sweden have all relied on strong digital health and immunization information systems, and Israel’s decision to roll out COVID-19 booster doses to the population 65 years and older, and eventually the entire population, was grounded in an analysis of trends in immunity levels. The WHO recently recommended providing booster shots to vulnerable groups while continuing to vaccinate the general population. The Thai government must continue to adapt its vaccination strategies based on expert advice and the latest domestic and international evidence. Data from Israel reflects the benefits of introducing booster doses, which enabled the country to contain a fourth wave of infections and achieve a steep reduction in infections, hospitalizations, and deaths among the people who received the booster shot. Figure B.1: The United Kingdom’s rising Figure B.2: In Thailand, infections and mortality vaccination rate reduce mortality even as rates have both declined as vaccination rates infection rates remained high. have surged. (LHS: cases and deaths; RHS: share of population fully (LHS: cases and deaths; RHS: share of the population fully vaccinated) vaccinated and mobility change relative to yearly baseline) 400 900 90 60 750 75 300 600 60 40 450 45 200 300 30 20 100 150 15 0 0 0 0 -150 -15 -100 -20 -300 -30 Jan 2021 Jun 2021 Jul 2021 Nov 2021 May 2021 Sep 2021 Dec 2020 Mar 2021 Oct 2021 Feb 2021 Apr 2021 Aug 2021 Jun 2021 Jul 2021 Jan 2021 Nov 2021 May 2021 Mar 2021 Sep 2021 Dec 2020 Oct 2021 Feb 2021 Apr 2021 Aug 2021 Cases per 1 million Cases per 1 million Deaths per 100,000 Deaths per 100,000 Vaccination rate (rhs) Mobility reduction (rhs) Vaccination rate (rhs) Manufacturing PMI (rhs) Services PMI (rhs) Mobility of grocery & pharmacy (rhs) Source: ourworldindata.org/coronavirus, World Bank East Source: ourworldindata.org/coronavirus, Google Mobility Asia and Pacific Update October 2021. Report. THAILAND ECONOMIC MONITOR | December 2021 6 Part 1. Recent Economic Developments and Outlook iii. A Resurgence in COVID-19 Set Back the Recovery The Thai economy The third wave of COVID-19 has proven to be a larger-than-expected disruption contracted in Q3 to the modest recovery in activity observed over the first half of the year. The 2021 amid a third resurgence in cases resulted in a year-on-year contraction of 0.3 percent in Q3 wave of COVID-19 2021 (Figure 7), due primarily to negative contributions from private infections. consumption and net exports. Thailand’s contraction in Q3 was the third deepest among regional peers, after Vietnam (-6.2 percent) and Malaysia (-4.5 percent), while the Philippines and Indonesia posted relatively strong growth. On a seasonally adjusted basis, GDP fell 1.1 percent qoq in Q3 (Figure 8). Containment As the government tightened restrictions to counter the third wave of infections, measures weakened private consumption fell by 3.2 percent in Q3 2021, a more severe impact than domestic demand. what was expected in July. Domestic demand faltered, and contractions were observed across many categories, particularly durable goods, recreational and cultural activities, and transportation (Figure 9). Private investment growth slowed to 2.6 percent due to a broad deceleration in machinery, equipment, and construction investment as business confidence weakened. Government transfers to vulnerable groups and businesses affected by the lockdowns provided support in Q3, as did a pick-up in inventory, but these were not enough to offset the impact of containment measures. COVID-related restrictions on activity also led to a 6.0 percent decline in public investment, compared with 4.1 percent growth in Q2. Softening external In the first half of 2020, rebounding goods exports (especially automotive parts, demand in Q3 2021 electronics, machinery, and agricultural products) supported economic activity. exacerbated the However, the export growth rate fell from 36.2 percent in Q2 2020 to 15.7 downturn. percent in Q3 and remained low relative to peer countries in 2021. As a result, exports of both goods and services contributed negatively to growth (Figure 9). Thailand benefitted less than some regional peers from the surge in global demand for electronics and suffered more from rising global oil prices (Figure 10). Supply-side disruptions including COVID-related factory shutdowns, a global shortage in semiconductors and global logistics bottlenecks also weighed on exports. Import growth slowed from 41.8 percent in Q2 to 31.8 percent in Q4 but remained strong due to imports of capital goods and sales of domestic machinery. Over the first three In the first three quarters of 2021, the economy grew 1.3 percent from the same quarters of 2021, the period last year, driven by investment and exports. Exports grew by 17.9 percent economy grew only in the first three quarters of 2021, while imports also grew strongly at 26.3 modestly, but growth percent. On the other hand, private consumption grew by only 0.4 percent in this would have been still period. Government relief measures are estimated to have supported overall weaker in the absence private consumption by 0.6 percentage points: without this support, private of government relief consumption would have contracted by 0.3 percent. This estimate is aligned with measures. international empirical evidence which suggests that transfer payments can have a multiplier effect on national GDP in the short-term (Pennings, 2021).6 6 The multiplier is estimated to be larger for transfer payments targeted at low-income residents. In Thailand, a large proportion of the transfers have been distributed to informal workers or farmers living in remote areas, who seem likely to spend most of their income on locally produced goods and services. THAILAND ECONOMIC MONITOR | December 2021 7 Part 1. Recent Economic Developments and Outlook Figure 7: The spread of the Delta variant set back Figure 8: …and weak quarterly growth rates turned Thailand’s incipient recovery in Q3 2021… negative. (% change, year-on-year) (% change, quarter-on-quarter, seasonally adjusted) 10.0 8.0 6.7 7.6 6.0 5.0 4.0 2.0 0.5 0.2 0.1 0.94 0.2 0.0 0.0 -2.0 -0.3 -1.5 -1.1 -2.1 -4.0 -2.6 -5.0 -4.2 -6.0 -6.4 -8.0 -10.0 -10.0 -9.4 -12.0 -12.1 -15.0 -14.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4f Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4f 2018 2019 2020 2021 2018 2019 2020 2021 Source: NESDC Source: NESDC Noted: f is forecasted value Noted: f is forecasted value Figure 9: Softening domestic and external Figure 10: Thai exports continued to rise but demand dragged down growth in Q3 2021. remained low compared to peer countries. (Percentage-point contribution to real GDP growth, year-on- (% change, year-on-year) year) 15.0 Indonesia 10.0 China 5.0 Taiwan 0.0 Malaysia -5.0 Hong Kong -10.0 South Korea -15.0 Year to date Singapore -20.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Vietnam September 2018 2019 2020 2021 Philippines Private Consumption Public Consumption Thailand Investment Change in inventories Net Exports of Goods Net Exports of Services -10 0 10 20 30 40 50 60 GDP Growth Source: NESDC Source: Haver Analytics; World Bank staff calculations A rebound is In the final quarter of 2021, the economy is projected to grow by 0.2 percent yoy expected in Q4 2021 and 0.94 percent (qoq sa). The Purchasing Manager’s Index (PMI) rose sharply as the economy in October, buoyed by the release of pent-up demand and accelerated COVID-19 reopens. vaccinations (Figure 11). The Private Investment Index, a monthly measure compiled by the Bank of Thailand, rebounded slightly in October as the economy reopened. The continued climb of PII toward pre-pandemic levels (Figure 12) indicates that investment is playing a role in supporting a nascent recovery and could be harnessed to lift medium-term growth prospects (Box 2). The expansion of private investment was driven by increased imports of capital goods and sales of domestic machinery to meet resurgent external demand. The Manufacturing THAILAND ECONOMIC MONITOR | December 2021 8 Part 1. Recent Economic Developments and Outlook Production Index increased 2.7 percent in October from the previous month, driven by improved consumer confidence and rebounding exports. Business sentiment The Business Sentiment Index ticked up in October, reflecting improved improved as the sentiment across the economy, particularly in export-oriented sectors with government eased backlogs caused by temporary COVID-related shutdowns. Major non-tradeable pandemic sectors such as real estate and construction continued to face low sentiment due restrictions. to rising production costs and weak domestic demand. Figure 11: Recent indicators of manufacturing Figure 12: Private investment returned to pre- activity show signs of an incipient recovery. pandemic levels, and business sentiment rebounded as the economy reopened. (Purchasing Manager’s Index 50+ = expansion) (LHS: Private Investment Index: ase Jan 2019 = 100, RHS: Diffusion Index: unchanged = 50) 60 110 60 55 105 50 50 100 40 45 95 30 40 90 35 20 85 30 10 80 25 75 0 Apr-20 May-20 Sep-20 Nov-20 Apr-21 May-21 Aug-21 Sep-21 Feb-20 Aug-20 Feb-21 Jan-20 Mar-20 Oct-20 Jan-21 Mar-21 Oct-21 Jul-20 Dec-20 Jul-21 Jun-20 Jun-21 JUL 2019 JUL 2020 JUL 2021 MAY 2019 MAY 2020 MAY 2021 SEP 2019 SEP 2020 SEP 2021 NOV 2019 NOV 2020 JAN 2021 JAN 2019 MAR 2019 JAN 2020 MAR 2020 MAR 2021 Indonesia Malaysia Philippines Private investment index (LHS) Vietnam China Thailand Expected BSI - next 3 months (RHS) Source: World Bank East Asia and Pacific Update October Source: Bank of Thailand 2021; Haver Analytics In Q4, indicators of Private consumption rebounded in October, although it remained below pre- private consumption pandemic levels due to low consumer confidence around the economic recovery ticked up and and the state of the labor market (Figure 13). On the other hand, the Google mobility surged as Mobility index has reached to its highest level since the third wave of infections restrictions eased and in April 2021 (Figure 14), reflecting the easing of public health measures as well vaccinations as the decline in infections and the increase in vaccinations in line with regional accelerated. peers. THAILAND ECONOMIC MONITOR | December 2021 9 Part 1. Recent Economic Developments and Outlook Figure 13: Private consumption and consumer Figure 14: Mobility rebounded to pre-pandemic confidence rebounded but have yet to fully recover. levels after the authorities lifted restrictions. (LHS: base Jan 2019 = 100, RHS: Diffusion Index = 50) (Change in visits relative to Jan 2020 baseline) 105 55 50 40 50 30 100 20 10 45 0 95 -10 40 -20 -30 90 -40 35 -50 -60 85 30 Apr-2020 Aug-2020 Apr-2021 Aug-2021 Sep-2020 May-2020 Jun-2020 Jul-2020 Jan-2021 May-2021 Jun-2021 Jul-2021 Nov-2020 Sep-2021 Nov-2021 Dec-2020 Oct-2021 Feb-2020 Mar-2020 Oct-2020 Feb-2021 Mar-2021 MAY 2019 JUL 2019 MAY 2020 JUL 2020 MAY 2021 JUL 2021 SEP 2019 NOV 2019 SEP 2020 NOV 2020 SEP 2021 MAR 2019 MAR 2020 JAN 2019 JAN 2020 JAN 2021 MAR 2021 Private Consumption Index Consumer Confidence Index Retail and Recreation Grocery and Pharmacy Source: Bank of Thailand and Ministry of Commerce Source: Google Community Report Box 2: Private investment and economic cycles—passing the baton The size and composition of domestic demand—in particular private investment--plays a key role in driving economic upturns and downturns in Thailand. Private investment plays an asymmetric role, contributing to approximately 32 percent of output growth during a typical upturn but less than 15 percent during a typical downturn. The positive role of private investment is even stronger in the initial stages of a recovery. In a downturn, both inventory and investment tend to weigh down output growth with inventory contribution turning negative. The contribution of private investment turned negative during the Asian financial crisis (1997-1999) and the COVID-19 pandemic beginning in 2020. Private consumption has traditionally been the largest contributor to output growth, accounting for close to 40 percent of output growth over 2006-2020. In an upturn, private consumption leads output growth, contributing the largest share at one-third of output growth while in a downturn it helps support aggregate demand, contributing to more than half. Recent growth decomposition show that the current downturn, which began in Q2 2019 amid rising trade tensions before deepening due to the pandemic, is markedly different from previous downturns. Both private consumption and net exports exhibit large and negative contributions to growth, reflecting Thailand’s exposure to COVID -19 as a trade and tourism hub. The contribution of private investment has fallen more sharply than in previous downturns. Public investment, which is typically slightly pro-cyclical, is now playing a countercyclical role as major infrastructure projects (dual tracking of railroads, expressways and air linkages) approved prior to the pandemic are being implemented. Private investment is critical to a strong recovery and sustained output growth, but during the previous upturn private investment contributed less than 20 percent to GDP growth. Findings from the Long-Term Growth Model show that Thailand will need to double its total investment rates to reach high-income status.7 The role of public investment may become more constrained in the medium term due to mounting pressure for fiscal consolidation, 7 WB Thailand Manufacturing Productivity Report 2020 THAILAND ECONOMIC MONITOR | December 2021 10 Part 1. Recent Economic Developments and Outlook Box 2: Private investment and economic cycles—passing the baton while household debt and deleveraging will slow the recovery of private consumption. Private investment could be harnessed to play a more prominent role in the upcoming recovery though the expansion of private infrastructure, and Part 2 of the TEM discusses strengthening private-sector-led growth. Figure B2.1: Real GDP Growth by Component (2006–2021) (Percentage-point contribution, year-on-year) 20.0 20.0 15.0 15.0 10.0 10.0 5.0 5.0 0.0 0.0 -5.0 -5.0 -10.0 -10.0 -15.0 -15.0 Q3 Q1 Q1 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Private Investment Public Investment Private Consumption Public Consumption Change in inventories Net Exports GDP Growth Source: NESDC; World Bank staff calculation. Note: Shaded background indicate down-cycles defined as periods of GDP growth below average growth of 2.7 percent over 2006 Q1-2021 Q3 and coincides with the Global Financial Crisis of 2008, the Great Flood of 2011, political unrest of 2013, global trade tension of 2019, and the Covid-19 pandemic. Figure B2.2: Private consumption leads growth Figure B2.3: …while the contribution of private during economic upturns… investment falls sharply during downturns but private consumption remains positive. (Percentage-point contribution to real GDP growth) (Percentage-point contribution to real GDP growth) 2.0 -1.2 -0.7 0.9 -0.1 0.6 0.2 0.5 0.3 0.4 0.6 0.3 -1.5 -1.0 -0.5 0.0 0.5 1.0 0.0 0.5 1.0 1.5 2.0 2.5 Change in inventories Private Investment Private Consumption Private Investment Public Consumption Public Investment Private Consumption Change in inventories Net Exports Public Investment Net Exports Public Consumption Source: NESDC; World Bank staff calculations. Source: NESDC; World Bank staff calculations. Note: Upturns are defined as periods of GDP growth greater Note: Downturns are defined as periods of GDP growth less than 2.7 percent (average over 2006 Q1-2021 Q3). than 2.7 percent (average over 2006 Q1-2021 Q3). THAILAND ECONOMIC MONITOR | December 2021 11 Part 1. Recent Economic Developments and Outlook Manufacturing and Manufacturing contracted by 1.4 percent and construction by 4.1 percent in Q3 services have been hit 2021 during the pandemic amid weakening external demand. Hospitality hard by the pandemic. services, including accommodation and restaurants fell drastically by 18.7 percent due to the lockdown. Nevertheless, agriculture grew by 4.3 percent and certain services sectors improved such as information & communication and finance & insurance grey by 6.8 percent and 3.5 percent as firms and consumers adapted to COVID-19 by using digital payments (see part 2 for a discussion of the impetus for increased digital technology during COVID-19). Figure 15: Manufacturing and services remained Figure 16: Agricultural production expanded during weak amid a resurgent pandemic soft global the pandemic. demand. (Percentage-point contribution to real GDP growth, year-on-year) (Base year 2005 = 100, seasonally adjusted) 170 10.0 160 150 5.0 140 0.0 130 120 -5.0 110 100 -10.0 90 MAY 2019 JUL 2019 MAY 2020 JUL 2020 MAY 2021 JUL 2021 SEP 2019 SEP 2020 SEP 2021 NOV 2019 NOV 2020 MAR 2021 JAN 2019 MAR 2019 JAN 2020 MAR 2020 JAN 2021 -15.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q3 Q1 Q2 Q3 2018 2019 2020 2021 Agricultural Production Index Agriculture Industrial Services Agricultural Price Index Source: World Bank staff calculations Source: Office of Agricultural Economics, Ministry of Agriculture and Cooperatives iv. The current-account balance remained in deficit, and the financial account recorded net outflows, but Thailand’s the external position remained strong The current account The current-account balance turned negative in 2021, from a surplus of 4.0 fell into deficit in percent of GDP in 2020 to a large deficit of 3.0 percent during the first nine 2021, as tourism months of 2021. Driven by robust external demand, the goods trade balance receipts continued to continued to show a large surplus of 7.0 percent of GDP in Q3 2021, in line with contract, and the most regional peers (Figure 18). However, in contrast to the experience of peer trade surplus countries, Thailand’s rising goods trade surplus was more than offset by a narrowed. widening services trade deficit, which expanded from 3.1 percent of GDP in 2020 to 7.2 percent in the first half of 2021 as tourism activity collapsed and freight costs soared. Thailand has been especially affected by the recent surge in freight costs, and tourism receipts have remained well below the pre-pandemic levels despite the reopening of borders to vaccinated tourists starting with Phuket in Q3. THAILAND ECONOMIC MONITOR | December 2021 12 Part 1. Recent Economic Developments and Outlook Figure 17: In Q4 2020, the current account surplus Figure 18: Thailand’s current-account deficit narrowed sharply due to a mounting services widened more than that of any regional peer. deficit. (% of GDP) (% of GDP, 2021 comprises of Q1-Q2) 15 15.0 10.0 10 6.9 5.0 5 3.5 4.2 4.0 3.1 3.6 0.0 0 -0.9 -0.6 -0.4 -0.6 -2.8 -2.7 -5.0 -5 -10.0 -10 -15.0 -15 Q3 2020 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q4 2020 Q1 2021 Q2 2021 2019 2020 2021 2019 2020 2021 2019 2020 2021 2019 2020 2021 Thailand Philippines Indonesia Malaysia Goods Services Primary & Secondary Income Primary Income Secondary Income Services Current account Goods Current Account Balance Source: Bank of Thailand; World Bank staff calculations Source: CEIC; World Bank staff calculations Net capital-account The capital account remained in deficit, but net outflows moderated from 4.1 outflows continued percent of GDP in Q1 2021 to 0.6 percent in Q2 (Figure 20). Meanwhile, net for the fourth outflows of portfolio and other investments fell from 4.9 percent of GDP in Q1 consecutive quarter. 2021 to 0.9 percent in Q2. Driven by foreign investment in the Thai bond market, net inflows reached 1.7 percent of GDP, their highest level since 2018, more than offsetting outflows of portfolio and direct investment by Thai investors. The continued focus of Thai investors on foreign securities, especially foreign investment funds, reflected the favorable investment outlook in major developed markets, the relaxation of regulations on domestic retail in late 2020, and institutional outflows. The easing of public Net foreign investment in the Thai bond market shifted from a net outflow of health measures and US$2.3 billion during the first half of 2021 to a new inflow of US$1.3 billion the reopening of during the second half of the year, surpassing the Association of South East Asian borders bolstered Nations (ASEAN) average (Figure 21). This change reflected improved investor foreign investor confidence following the announced reopening of borders to fully vaccinated confidence. tourists and the easing of lockdown measures. Thailand’s subdued inflation outlook has also attracted investment in the bond market. As a result, the Thai 10-year government bond yield remained low by regional standards despite its recent increase (Figure 22). However, net foreign equity inflows were slightly positive during the second half of 2021. FDI inflows in the Net foreign direct investment (FDI) inflows turned positive in the first half of first half of 2021 were 2021 but were more than offset by outward direct investment. Net FDI inflows more than offset by rose to 2.2 percent of GDP in the first half of 2021, reflecting the recovery of the outward direct business climate after the contraction reached its lowest point in 2020 (Figure investment. 20). FDI inflows from the European Union, China, and Hong Kong were especially significant. Meanwhile, Thai firms continued to invest in foreign businesses during the first half of 2021, and outward direct investment reached 2.4 percent of GDP, led by investment in Vietnam, the European Union, and Hong Kong. Going forward, the recent increase in approved FDI to 8.8 percent THAILAND ECONOMIC MONITOR | December 2021 13 Part 1. Recent Economic Developments and Outlook of GDP during the first nine months of 2021—its highest level in three years— indicates further improvements in the investment climate. Figure 19: Net financial account outflows were Figure 20: FDI rebounded in the first half of 2021, driven by outward portfolio flows and deposits. while outward direct investment continued. (% of GDP) (% of GDP) 15.0 4.00 2.6 2.2 10.0 2.00 0.9 5.0 0.00 -0.9 -2.00 -1.9 0.0 -3.4 -2.4 -4.00 -3.8 -5.0 -6.00 -10.0 2018 2019 2020 1H 2018 2019 2020 1H 21 2021 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Foreign Direct Investment: Direct Investment Abroad: Net Net Outward FDI Inward FDI FDI : Singapore EU China Hong Kong Outward Portfolio Inward Portfolio Japan Others Indonesia Singapore Financial Derivatives Other Investments ODI: Vietnam EU Hong Kong Others Financial Account Source: Bank of Thailand; World Bank staff calculations. Source: Bank of Thailand; World Bank staff calculations Figure 21: Portfolio inflows returned in the first 2 Figure 22: Thai government bond yields stayed months of Q4, mainly headed for the bond low due to the weak inflation outlook. market. (%) (10-year government bond yields, percent) 4.0 2.0 0.0 -2.0 -4.0 -6.0 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 TH: Equity Foreign net buy TH: Bond Foreign net buy ASEAN Average: Equity Foreign net buy ASEAN Average: Bond Foreign net buy Source: Official Sources; CEIC; World Bank staff calculations Source: Haver Analytics; World Bank staff calculations Note: *ASEAN consists of Thailand, Malaysia, Indonesia, and the Philippines. Bond flows in Q3 and Q4 do not include the Philippines The Thai baht The Real Effective Exchange Rate (REER) for the Thai baht depreciated by 7.9 continued to percent year-to-date, as of October 2021. The depreciation of the Thai baht depreciate in 2021. reflected the COVID-19 induced risk-off sentiment as well as the large current account deficit in the wake of a collapse in tourism receipts. Expectations of the U.S. Federal Reserve’s announcement to reduce the size of asset purchases under THAILAND ECONOMIC MONITOR | December 2021 14 Part 1. Recent Economic Developments and Outlook the quantitative-easing program also led to the outflows from EMDE’s equity markets, including Thailand. Nevertheless, the currency has become relatively more stable since September, after the easing of lockdown was announced, followed by the reopening of borders in October. Comparing to regional peers, the Thai baht proved to be the worst performing currency year-to-date, followed by Malaysia’s REER and Philippine’s REER which depreciated by 2.2 percent and 2.8 percent, respectively. Figure 23: The Thai baht has depreciated since the Figure 24: In REER terms, the Thai baht, Malaysian beginning of 2021. ringgit, and Philippine peso depreciated. (Base year 2012 = 100) (January 2020 = 100) 130 110 125 105 120 115 100 110 95 105 90 100 95 85 JUL 2021 MAY 2019 JUL 2019 MAY 2020 JUL 2020 MAY 2021 JUL 2021 MAY 2020 JUL 2020 MAY 2021 OCT 2020 DEC 2020 FEB 2020 FEB 2021 OCT 2021 SEP 2019 SEP 2020 SEP 2021 SEP 2020 SEP 2021 JAN 2019 NOV 2019 NOV 2020 NOV 2021 JAN 2020 JUN 2020 AUG 2020 NOV 2020 JUN 2021 AUG 2021 MAR 2019 JAN 2020 MAR 2020 JAN 2021 MAR 2021 MAR 2020 APR 2020 JAN 2021 MAR 2021 APR 2021 Nominal Effective Exchange Rate (NEER) China Indonesia Malaysia Philippines Real Effective Exchange Rate (REER) United States Thailand Source: Bank of Thailand; World Bank staff calculations Source: Bank for International Settlements (BIS) Despite a large current Due to the large and persistent current-account deficit, international reserves account deficit, the (including the net forward position) declined from a peak of 54.7 percent of reserve position GDP in January to 49.8 percent in October. Nevertheless, Thailand’s reserve remained strong. position remained strong at about 10 months of import coverage and more than four times the level of short-term external debt (Figure 25 and Figure 26), well above the levels of most regional peers (Figure 26). Financial and fiscal Apart from the strong international reserves position, external debt as a share indicators suggest that of GDP has stayed relatively low by the standards of global comparators (Table Thailand continues to 1). Fiscal indicators also suggest that Thailand is relatively less susceptible to be less vulnerable to external risk, owing to low foreign holding of government bonds and public global market risk-off debt levels that remain below those of many peers. Inflation has also remained sentiment. comparatively contained. However, the recent widening of the current account deficit warrants close monitoring. THAILAND ECONOMIC MONITOR | December 2021 15 Part 1. Recent Economic Developments and Outlook Figure 25: Thailand’s international reserves and Figure 26: …and its international reserves have forward position remain adequate at over four consistently exceeded those of most regional times the level of external debt… peers. (LHS: % of GDP, RHS: short-term debt) (% of GDP) 60 6 80.0 55 70.0 5 50 60.0 5 50.0 45 4 40.0 40 30.0 35 4 20.0 30 3 10.0 Nov-19 Nov-20 May-19 Sep-19 May-20 Sep-20 May-21 Sep-21 Jan-19 Mar-19 Jan-20 Mar-20 Jan-21 Mar-21 Jul-19 Jul-20 Jul-21 0.0 China Indonesia India Taiwan South Korea Malaysia Thailand Philippines International reserve and forward position (net), % of GDP International reserve and forward position (net)/Short-term external debt (RHS) Source: Bank of Thailand; World Bank staff calculations Source: Haver Analytics; World Bank staff calculations Table 1: Financial and fiscal indicators suggest that Thailand continues to have strong external position and is less exposed to market risk-off sentiment. (% unless otherwise indicated) CA balance (%GDP) -10 -5 0 5 10 External debt (%GDP) 0 20 40 60 80 Foreign holding govt debt (%total) 0 10 20 30 40 Government debt %GDP 0 20 40 60 80 100 Gov budget balance %GDP -15 -10 -5 0 Reserve to ST external debt 0 2 4 6 8 Reserve to GDP 0 10 20 30 40 50 Consumer Price Inflation* 0 5 10 15 20 Household Debt (% of GDP) 0 20 40 60 80 100 Other Emerging Market Economies Thailand Note: Other Emerging Market Economies include China, India, Philippines, Russia, Mexico, Brazil, Indonesia, South Africa, Colombia, Turkey, Chile, and Malaysia Source: World Bank, IMF, CEIC, Haver Analytics, IIF, Asia Bond Online, *Jan-Oct 2021 THAILAND ECONOMIC MONITOR | December 2021 16 Part 1. Recent Economic Developments and Outlook Table 2: The current account and financial account have both deteriorated, but foreign-exchange reserves remain adequate. (% of GDP unless otherwise indicated) Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Current account 8.27 1.48 6.22 0.00 -2.08 -3.50 Exports of goods 45.86 44.82 47.17 43.07 47.60 54.13 Imports of goods 38.91 36.88 35.71 36.63 42.10 46.37 Tourism receipts 7.88 1.26 0.90 0.90 0.73 0.79 Financial account -7.24 5.37 -5.12 -1.50 -3.82 -0.65 Outbound FDI -4.02 -4.82 -2.98 -3.44 -2.45 -2.28 Inbound FDI 2.01 -0.28 0.24 -5.56 3.27 1.18 Outbound portfolio investment -0.93 3.82 -1.44 -3.92 -7.54 -2.88 Inbound portfolio investment -5.48 -1.34 -0.61 1.06 0.33 0.52 Reserves, excluding net forward position 226.5 241.6 251.1 258.1 245.5 246.5 (US$ billions) Reserves relative to short-term external 3.8 3.9 4.0 3.4 3.4 3.5 debt (times) Reserves relative to import values 92.3 104.4 114.4 119.3 110.8 98.7 (percent) Reserves relative to import values 10.5 15.6 13.9 13.0 10.0 10.1 (months) Source: Bank of Thailand; World Bank staff calculations v. Inflation accelerated into the middle of the central bank’s target range. Inflation rose sharply The headline inflation rate rose to 2.4 percent in October 2021, its highest level due to supply-side in five months (Figure 27). Increased global energy prices fueled by a worldwide factors but remains energy supply crunch, coupled with the negative impact of flooding on domestic contained. fresh food prices, drove the uptick in inflation. Transport price rose in line with fuel prices. Housing and furnishing price declined. In response, the government announced a cap on diesel prices at BHT 30 per liter. While administrative pricing can help temporarily contain supply-side shocks, it can also complicate monetary policy.8 Meanwhile, the core inflation rate rose to 0.21 percent but remained low due to the government’s household water-consumption subsidy, which was designed to reduce the cost of living during the COVID-19 outbreak. The Bank of Thailand The central bank maintained an accommodative monetary policy stance, citing held the policy rate the need to contain inflationary pressures. The inflation rate is projected to constant at 0.50 remain low at 1 percent in 2021, close to the lower bound of the central bank’s 1- percent 3 percent target range. Inflationary pressure is likely to remain contained given well-anchored inflation expectations, the Thai economy’s protracted recovery, and the anticipated persistence of the negative output gap until 2023. 8Justin-Damien Guénette (2020). Price Controls: Good Intentions, Bad Outcomes. World Bank Policy Research Working Paper. THAILAND ECONOMIC MONITOR | December 2021 17 Part 1. Recent Economic Developments and Outlook Figure 27: Surging oil prices drove an increase in Figure 28: … while rising processed food and the headline inflation rate… beverage prices contributed to an uptick in core inflation. (Contribution to inflation, % change y-o-y) (Contribution to inflation, % change y-o-y) 5.0 1.00 4.0 3.0 0.50 2.0 1.0 0.00 0.0 -0.50 -1.0 MAY 2019 JUL 2019 MAY 2020 JUL 2020 MAY 2021 JUL 2021 SEP 2019 NOV 2019 SEP 2020 NOV 2020 SEP 2021 JAN 2019 MAR 2019 JAN 2020 MAR 2020 JAN 2021 MAR 2021 -2.0 -3.0 -4.0 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Rent Food & Beverage Raw Food Energy Non-food & Beverage ex Rent Core inflation Headline inflation Core Inflation Source: CEIC; World Bank staff calculations Source: Haver Analytics; World Bank staff calculations vi. Thailand’s financial system remains stable, but asset quality has deteriorated. The banking system The system’s reported regulatory-capital-to-risk-weighted-assets ratio held has remained stable at 19.7 as of end-June 2021, above both Thailand’s statutory minimum and resilient, with the Basel III minimum of 10.5 percent. Thai commercial banks maintained adequate capital and adequate short-term liquidity, with liquid assets equal to 34.6 percent of short- liquidity buffers. term liabilities at end-June. The loan-to-deposit ratio also remained broadly stable at between 107 and 110 percent (Figure 30), while the liquidity coverage ratio stood at 186.8 percent at end-September, well above the regulatory minimum of 100 percent. However, Indicators of banking-sector profitability showed evidence of stabilizing after a profitability has sharp decline from pre-pandemic levels. The average return on assets fell from declined. 1.7 percent at the end of December 2019 to 1.1 percent in June 2021, while the average return on equity dropped from 11.8 percent to 7.8 percent. The deterioration of Although the banking sector’s nonperforming loan (NPL) ratio has remained asset quality warrants manageable, with only a modest increase since the start of the pandemic, other increased monitoring. asset-quality indicators have experienced a more pronounced deterioration. Asset quality in the banking sector declined moderately at the end of June 2021, as NPLs reached 3.2 percent of total gross loans, but other forward-looking indicators of asset quality worsened significantly. For example, the share of special-mention loans fell from 2.82 percent at end-December 2019 to 6.37 percent at end-June 2021. Though banks’ provisioning levels are adequate, the ratio of NPLs (net of provisioning) to capital remained significant at 8.9 percent at end-June 2021. Importantly, emergency government interventions designed to support borrowers may mask underlying vulnerabilities in loan quality, which could deteriorate further as some of these measures expire in 2022. Elevated corporate Due to declining incomes, the corporate and household sectors are emerging and household debt from the pandemic with larger debt burdens and increased financial THAILAND ECONOMIC MONITOR | December 2021 18 Part 1. Recent Economic Developments and Outlook levels pose risks to vulnerabilities. Household debt increased from an already high 79.8 percent of the financial sector. GDP end-December 2019 to 89.3 percent in end-June 2021, with personal loans and real estate accounting for most liabilities. Deteriorating household income slowed the growth of consumer loans—including mortgage loans, auto loans, credit cards, and personal loans—during the third quarter of 2021, as households became more cautious about their spending, and a further erosion of household income amid an uncertain recovery could negatively impact the quality of the mortgage and personal-loan portfolio. The nonfinancial corporate debt to GDP at 53.7 percent and financial corporate debt to GDP at 38.6 percent remained elevated. Of this, foreign-currency denominated debt remained stable at about 7.7 percent and 7.2 percent of GDP for nonfinancial and financial corporate debt respectively. Corporate bond yield spreads, which reflect default risk, for higher quality bonds (AAA and AA) have come down to pre-COVID levels but lower quality yield spreads (A) remain high (Figure 31). Vulnerabilities in the SME sector have increased. NPLs for small and medium enterprises are likely to worsen due to a significant slowdown in economic activities. As of end-September 2021, the NPL ratio for SMEs increased slightly to 7.18 percent while the NPL ratio for large enterprises declined to 2.41 percent (Figure 32). The authorities In September 2021, the Bank of Thailand introduced additional measures under maintained and its soft-loan facility, which has been extended until the end of 2022. As of extended policies to November 2021, about 39,000 debtors had benefitted under this scheme, with support the recovery SMEs accounting for about 44 percent. While several businesses have entered of the private sector. debt restructuring through asset warehousing programs, this initiative is still in its early stages, and few firms have taken advantage of it. In October 2021, the Bank of Thailand announced a temporary easing of the loan-to-value ratio for mortgage lending between October 20th, 2021, and December 31st, 2022, which will enable homebuyers to borrow up to 100 percent of their house’s value. These measures are necessary to support the recovery, but providing adequate near- term stimulus while avoiding a buildup of long-term risks to financial stability will require well-targeted and transparent policy implementation. THAILAND ECONOMIC MONITOR | December 2021 19 Part 1. Recent Economic Developments and Outlook Figure 29: The banking sector’s liquidity indicators Figure 30: The NPL ratio remains elevated but have proven resilient during the pandemic. manageable, while the capital adequacy ratio has been broadly stable. (Percent) (Percent) 25 3.4 40 115 35 110 3.3 20 30 105 3.3 25 100 15 20 3.2 95 15 3.2 10 90 10 5 85 3.1 5 0 80 3.1 2019Q4 2020Q3 2020Q1 2020Q2 2020Q4 2021Q1 2021Q2 0 3.0 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2 Loan to Deposit Ratio (RHS)* Liquid Assets to Total Assets (LHS) NPL (RHS) CAR (LHS) Tier-1 Capital (LHS) Liquid Assets to Short Term Liabilities (LHS) Source: Bank of Thailand, IMF FSI, and World Bank staff Source: Bank of Thailand, IMF FSI, and World Bank staff analysis analysis Note: Loan to Deposit ratio is calculated as Non-Interbank loans to customer deposits. Figure 31: Default risk for higher quality corporate Figure 32: NPLs for SMEs have ticked up. bonds have returned to pre-COVID levels. (Basis Points) (Percent) 250 8% 7% 200 6% 5% 150 4% 100 3% 2% 50 1% 0% 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Jan-10 Jan-16 Jan-18 Jan-08 Jan-09 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-17 Jan-19 Jan-20 Jan-21 2018 2019 2020 2021 % of SME NPL to Total SME Loan AAA: 3 to 5 Y AA: 3 to 5 Y A: 3 to 5 Y % of Non-SME NPL to Total Non-SME Loan Source: The Thai Bond Market Association Source: Bank of Thailand and World Bank staff analysis vii. The policy response to the pandemic has significantly widened the central government deficit. Government Central-government revenue for FY21 remained broadly unchanged from FY20 at revenue remained 17.7 percent of GDP, with tax revenue ticking up from 14.3 percent of GDP to 14.6 below pre-pandemic percent. Value-added tax (VAT) and corporate income tax revenue—which levels in the 2021 represent about 60 percent of total revenue—improved modestly in line with the fiscal year (FY). economic recovery. Personal income tax revenue has held steady at 2.0 percent of THAILAND ECONOMIC MONITOR | December 2021 20 Part 1. Recent Economic Developments and Outlook GDP since FY19. However, excise tax revenue continued to decline in FY21, as surging oil prices diminished oil tax collection and domestic lockdown measures caused oil imports to decline. (Figure 33 and Figure 34). Over the medium to long term, there is significant scope for the government to boost revenue mobilization, , as its tax-to-GDP ratio is low by the standards of regional and OECD peers. Figure 33: The central government’s budget Figure 34: …while fiscal revenues remained deficit widened in FY21, as spending increased… relatively low. (% of fiscal year GDP, GFS basis) (THB billions (LHS), cash basis ) 35.0 0.0 900 2,536.9 2,566.1 2,800 -1.6 800 2,600 30.0 -1.8 2,387.4 2,369.9 -2.1 26.4 -2.0 700 2,400 23.5 25.0 19.9 19.9 20.1 600 2,200 18.1 18.3 17.9 -4.0 20.0 17.8 500 2,000 17.7 -5.6 400 1,800 15.0 -6.0 300 1,600 10.0 -8.0 200 1,400 5.0 -8.7 100 1,200 - -10.0 - 1,000 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2018 FY 2019 FY 2020 FY 2021 Central Government_Revenue (GFS) Personal Income Taxes Value Added Taxes Central Government: Expenditiure (GFS) Excise Department Corporation Taxes Central Government: Surplus/Deficit (GFS), RHS Others Total (RHS) Source: Fiscal Policy Office, Ministry of Finance Source: Fiscal Policy Office, Ministry of Finance Government The government continued to use expansionary fiscal policy to counter the spending increased negative impact of the pandemic, and current spending increased substantially. substantially in FY21 Total central government spending rose from 23.5 percent of GDP in FY20 to due to the ongoing 26.4 percent in FY21, accelerated by the rise in current spending, grants, and COVID-19 relief other spending under the THB 1.5 trillion loan decree. (Figure 35). Of the 1.5 measures. trillion-baht envelope, the government disbursed THB 679.5 billion (4.2 percent of GDP) in FY2021, more than double the 300 billion disbursed in the previous fiscal year. Most of the disbursements were in form of relief (98.5 percent of total), rather than capital spending. By contrast, capital spending declined from 2.0 percent of GDP to 1.5 percent. THAILAND ECONOMIC MONITOR | December 2021 21 Part 1. Recent Economic Developments and Outlook Figure 35: Fiscal expenditure continued to Figure 36: … causing the public debt stock to increase in FY21… increase substantially. (% of fiscal year GDP, GFS basis) (% of GDP) 60 58.15 30.0 50 49.35 25.0 41.95 41.04 20.0 40 15.0 30 10.0 20 5.0 10 - 0 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY2018 FY2019 FY2020 FY2021 Off-Budget COVID-19 stimulus package Central Government: Regular Expenses Central Government: Capital Expenditure Government Debt State Enterprise Debt Source: Fiscal Policy Office, Ministry of Finance Source: Fiscal Policy Office, Ministry of Finance The central The central government deficit widened significantly from 5.6 percent of GDP government’s fiscal in FY20 to 8.7 percent of GDP in FY21 as the government ramped up emergency deficit widened spending to support the recovery and protect vulnerable households. The deficit further in FY 2021. now substantially exceeds the levels that prevailed during the five years prior to the COVID-19 crisis, when the deficit remained below 2.5 percent of GDP. The public debt stock The public debt stock increased from 49.4 percent of GDP at the end of FY20 to reached a 20-year 58.2 percent at the end of FY21 (Figure 36). In FY21, the government borrowed high. THB 690 billion (4.3% of GDP) of the THB 1.5 trillion authorized for the COVID-19 response, bringing total borrowing during FY20-FY21 to THB 1.03 trillion (6.4% of GDP). The borrowing undertaken during FY 2021 was used to fund cash transfers, co-payments, income subsidies, subsidies for students, and vaccine procurements from Pfizer and Sinovac (Figure 37). The remaining balance of THB 475 billion (2.9% of GDP) - out of the total 1.5 trillion in approved borrowing - is expected to be disbursed in FY22 (Figure 38). The government Accommodating the emergency policy response required temporary changes to raised the debt the fiscal mandate, including raising the public debt ceiling from 60 to 70 percent ceiling to 70 percent of GDP. This change was consistent with the Fiscal Responsibility Act, which of GDP. stipulates that the government has the discretion to adjust the public debt ceiling every three years. Raising the ceiling will allow the government to fully utilize the THB 1.5 trillion in borrowing authorized for the COVID-19 response effort during FY2020-22, which would push the debt-to-GDP ratio above 60 percent in 2022. THAILAND ECONOMIC MONITOR | December 2021 22 Part 1. Recent Economic Developments and Outlook Figure 37: The 1.5 trillion-baht loan decree was Figure 38: … and more borrowing to finance off- used primarily to fund relief measures… budget fiscal stimulus is expected in FY22. (% of fiscal year GDP) (THB billion) 1,000 1000 Relief 750 750 Restoration/Recovery 500 500 250 250 Health related 0 0 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% THB 1 Trillion borrowing THB 500 billion borrowing (FY20-21) (FY21-22) THB 1 Trillion borrowing (FY20-21) THB 500 billion borrowing (FY21-22) Envelope FY2020 FY2021 Source: NESDC Source: PDMO Nevertheless, public The public debt stock is still below the fiscal sustainability framework’s ceiling debt dynamics remain of 70 percent of GDP. The government’s debt-service-to-revenue ratio also consistent with the remains low at 10.7 percent, far below its ceiling of 35 percent, indicating that government’s criteria debt sustainability risks remain contained (Table 3). Other fiscal sustainability for fiscal discipline indicators also suggest that the debt path will remain sustainable, especially the and are broadly 98 percent share of debt denominated in local currency, which is far higher than sustainable. the levels of most regional peers. In addition, the relatively stable 10-year sovereign yield of 2.0 percent implies that domestic liquidity has remained sufficient (Table 4). Table 3: Key fiscal-responsibility indicators remain well within their established parameters. Key fiscal responsibility Ceiling (%) Latest (%) As of Public Debt / GDP 70.0 58.1 Sep-21 Government Debt Service / Revenue 35.0 10.7 Sep-21 Foreign Currency Debt / Public Debt 10.0 1.8 Sep-21 Foreign Currency Debt Service / Export 5.0 0.1 Sep-21 Source: Public Debt Management Office, Ministry of Finance; World Bank staff calculations THAILAND ECONOMIC MONITOR | December 2021 23 Part 1. Recent Economic Developments and Outlook Table 4: Despite the recent increase in the debt stock, Thailand’s debt -sustainability indicators are strong by regional standards. External Public Debt Budget 10 Year Debt to GDP growth Inflation % to GDP Balance Government government 2021-2025 2021-2025 (FY22) (FY22) Bond Yield debt (FY20) Indonesia 43.3 -4.8 13.8 5.3 2.7 6.2 Thailand* 62.2 -4.5 1.2 3.3 1.3 2.0 Philippines 62.3 -6.2 31.7 5.9 3.3 4.8 Malaysia 69.9 -4.1 26.1 5.1 2.1 3.6 China 72.1 -6.8 n.a. 5.9 1.8 3.3 Note: * World Bank staff projections for inflation, public debt, and the budget balance Source: Public Debt Management Office, IMF WEO, Haver Analytics; World Bank staff calculations Poverty is estimated The unemployment rate remained well above the pre-crisis level at 2.06 percent to stagnate in 2021 in 2021 Q3 (Figure 39 and Figure 40) doubling from 0.94 percent in 2020 Q1 due amid slow labor to the pandemic.9 Indicators of underemployment (self-employed, unpaid family market recovery and worker) have also ticked up (Figure 40). The weak labor market recovery gradual phasing out continued to put downward pressure on household income. A rapid phone survey of the government’s by the World Bank implemented from April 27 to June 15, 2021 estimated that relief measures. more than 70 percent of households experienced a decline in their income since March 2020, with vulnerable groups being hit hardest (Box 3). While large and generous relief assistance from the government helped mitigate the pandemic’s impact on poverty in 2020, several programs were gradually phased out during 2021, leaving some vulnerable groups unprotected. The headcount poverty rate is estimated to remain stagnant at 6.4 percent in 2021, implying that 160,000 people have fallen into poverty since the onset of the pandemic. 9 Unemployment is defined as all persons who are without work or work less than one hour per week, in line with the International Labour Organization (ILO) definition. This definition has proven limited due to Thailand’s large informal and agricultural sectors which typically serve as de-facto social protection buffers. As a result, the unemployment rate may undermeasure actually unemployment, especially during downturns when underemployed workers move to the informal sector or return to agricultural households. THAILAND ECONOMIC MONITOR | December 2021 24 Part 1. Recent Economic Developments and Outlook Figure 39: The unemployment rate ticked up to Figure 40: Underemployed and unemployed the highest since there is a pandemic. persons have increased. (Percent of population aged 15-64 years) (Population aged 15-64 years) Total working-age population in 2021 Q3: 41.9 mln 2.50 20.0 Millions 18.0 16.0 2.00 14.0 15.09% 12.0 12.26% 1.50 10.0 8.0 6.0 24.38% 26.89% 1.00 4.0 2.0 0.0 0.50 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2020 2021 0.00 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Self-employed Unpaid family worker Unemployment 2018 2019 2020 2021 Source: Labor Force Survey, NSO Source: Labor Force Survey, NSO Box 3: The Impact of COVID-19 on Thai Households To monitor the social and economic impact of the COVID-19 pandemic in Thailand, a rapid phone survey was implemented from April 27 to June 15, 2021. The survey interviewed 2,000 adults aged 18 and above, and it was designed to provide an up-to-date assessment of the pandemic’s effects on employment, income, food security, education, and health, as well as the coping mechanisms used by households. The survey’s results showed that despite the government’s generous relief efforts the COVID -19 crisis inflicted a severe shock to vulnerable groups. The national employment rate remained stable at 68 percent between March 2020 and June 2021, but large variations were observed between regions and population groups. Employment rates declined by 8 percentage points in Bangkok and other urban areas, while it increased by 8 percentage points in rural areas and the northern regions, as displaced urban workers returned to agriculture. More than half of respondents were affected by job losses, temporary work stoppages, reduced working hours, or reduced pay. More than 70 percent of the interviewed households reported experiencing a decline in their income since March 2020, with about 80 percent of households in rural areas, the southern regions, and low-income groups experiencing income declines. Farming activities and nonfarm businesses were also severely affected, with about half reporting a decline in their incomes by more than 50 percent. Households in the south and those in low-income groups were the most significantly affected by income losses. Over 80 percent of households benefitted from the emergency assistance programs introduced in 2020, including almost 90 percent of low-income households and those reporting income shocks. The share of social assistance beneficiaries almost doubled between 2019 and 2020 , yet many households reported running out of food, including 60 percent of low-income households and households with children. The most common household-level coping mechanisms including reducing food and nonfood consumption, relying on government assistance, drawing down savings, and engaging in additional income-generating activities. THAILAND ECONOMIC MONITOR | December 2021 25 Part 1. Recent Economic Developments and Outlook Box 3: The Impact of COVID-19 on Thai Households About 90 percent of households reported having all children ages 6 to 17 years enrolled in school during the last academic semester, but this share fell to 86 percent among lower-income households, versus 96 percent of higher-income households. Over half of all children attended a mix of in-person and remote classes, and one-fourth attended in-person only classes. About 57 percent of respondents indicated that enrolled children in their households faced learning issues, and children in rural and low-income households were more likely to have difficulty accessing remote-learning devices. The digital divide has aggravated the impacts of COVID- 19 on education. Around 30 percent of households in the bottom income group cited the lack of access to remote-learning devices as the top barrier to effective education, and 15 percent cited inefficient internet as the top barrier, compared to 1 percent and 6 percent, respectively, for households in the richest income group. In addition to these effects on learning outcomes, school closures and disruptions could also negatively affect disadvantaged students who rely on schooling-linked social programs, including nutrition and early childhood support. Roughly one-third of households that needed medical assistance reported being unable to access the necessary services due to concerns about COVID-19. Most respondents were aware of the availability of the vaccine and where to get it, with most having been informed through traditional media or social media. Concerns about potential side effects were among the main reasons for vaccine hesitancy, and more than 36 percent of respondents in the low-education and low-income groups, as well as younger respondents, did not plan on getting vaccinated. THAILAND ECONOMIC MONITOR | December 2021 26 Part 1. Recent Economic Developments and Outlook 2. Outlook: Signs of Recovery i. Economic growth is projected to pick up in 2022 and 2023 Economic activity is Economic growth is projected to reach 1.0 percent in 2021, unchanged from the projected to remain October 2021 East Asia and Pacific Economic Update forecast (Table 5). Private subdued in 2021 and consumption is expected to remain soft, due to the impact of mobility restrictions will not return to pre- and containment measures on incomes and activity. However, income losses have COVID levels until been partially offset by social assistance measures. Investment is expected to end-2022. expand by 5.6 percent. Private investment is expected to be supported by the rising capacity utilization in export-oriented manufacturing. Goods exports of are projected to be the main source of growth, supported by resurgent global demand. Meanwhile, service exports—which are largely related to tourism— will remain very weak in 2021 due to the third wave of COVID-19. The economy is Given the decline in COVID-19 cases, the surge in the vaccination rate, and the expected to gain relaxation of containment measures, economic growth is expected to accelerate momentum in the Q4 in 2021, fueled by rising domestic travel and increased local mobility. By 2021. contrast, foreign tourism revenue is expected to recover gradually in Q4 despite the reopening of international borders. In addition, as changes in inventory drove GDP growth in Q3, a partial drawdown of inventories is expected in Q4 as supply-chain disruptions and logistics challenges ease. THAILAND ECONOMIC MONITOR | December 2021 27 Part 1. Recent Economic Developments and Outlook Table 5: A modest recovery is projected to start in 2021 and accelerate in 2022 and 2023. Contribution to GDP Share Forecast growth of 2020 Percentage change GDP 2019 2020 2021F 2022F 2023F 2021F 2022F 2023F GDP 100% 2.3 -6.1 1.0 3.9 4.3 1.0 3.9 4.3 Private Consumption 55% 4.0 -1.0 1.0 3.8 3.9 0.6 2.1 2.2 Government Consumption 16% 1.7 0.9 2.5 2.0 -2.2 0.4 0.3 -0.4 Fixed Investment 24% 2.0 -4.8 5.6 6.0 3.6 1.4 1.5 0.9 GFCF-Private 17% 2.7 -8.4 5.9 5.5 4.6 1.0 1.0 0.9 GFCF-Public 7% 0.1 5.7 4.8 7.2 1.0 0.3 0.5 0.1 Exports of Goods and Services 61% -3.0 -19.4 8.5 10.8 8.9 5.2 7.1 6.3 Exports of Goods 54% -3.7 -5.8 13.2 6.2 3.9 7.1 3.8 2.5 Exports of Services 7% -0.5 -60.1 -26.9 53.3 49.1 -1.9 2.8 3.8 Imports of Goods and Services 59% -5.2 -13.3 16.6 6.3 6.7 9.8 4.3 4.8 Import of Goods 49% -5.8 -11.2 17.2 5.9 6.7 8.5 3.4 4.0 Imports of Services 10% -2.7 -21.1 13.8 6.3 6.9 1.4 0.7 0.8 Net Export of Goods and Services -4.6 2.8 1.5 BOP Exports of Goods, US$ term -3.3 -6.5 16.6 5.7 5.0 Imports of Goods, US$ term -5.6 -13.8 25.0 8.5 7.2 Trade Balance (US$ Billion) 26.72 40.86 30.73 25.94 21.66 - Current Account Balance (US$ Billion) 21.18 -18.64 16.68 2.73 12.89 Current Account Balance (% of GDP) 4.2 -3.6 -3.4 0.5 2.3 Source: NESDC, Haver Analytics; World Bank staff calculations Rising vaccination The recovery is currently projected to accelerate to 3.9 percent in 2022, an rates will contribute upward revision from the 3.6 percent projected in the October 2021 East Asia to the economic and Pacific Economic Update. The pace of the recovery will depend on how recovery, but it will quickly foreign tourist arrivals rise and domestic consumption increases. The hinge on the forecast assumes that the government will achieve its vaccination target by the resumption of end of 2021, bolstering the confidence of international tourists. Meanwhile, the international tourism. decline in new COVID-19 cases amid rising vaccination rates would also improve business and consumer confidence. However, the growth of goods exports is projected to slow in 2022 due to the softening global demand. Government consumption and investment are expected to decline in 2022 as the recovery gains traction and fiscal support measures wind down. The projected path of The 70 percent vaccination target is now expected to be reached by the end of COVID-19 this year, instead of in the first half of 2022 as previously projected (Figure 41). vaccinations has been The significant increase in the pace of vaccination since August, including for revised upward. school-aged children, reflects easing of constraints on the vaccine supply (Figure 42). Vaccine delivery in the third quarter rose sharply to 59 million doses, sufficient to fully vaccinate 40 percent of the population. An additional 79 million doses are expected to arrive in Q4. Recent trends suggest that the government THAILAND ECONOMIC MONITOR | December 2021 28 Part 1. Recent Economic Developments and Outlook will be able to achieve its target of vaccinating 70 percent of the population by end-2021. Figure 41: The vaccination rate is projected to Figure 42: …due to the increase in vaccine reach 70 percent by the end of 2021… deliveries since Q3 2021. (Millions of doses) (Millions of doses per quarter) 90 90 120 Aztrazeneca 79 Millions 80 80 100 Sinovac 6 70% of population 70 Pfizer 70 80 Sinopharm 59.4 60 60 60 Moderna 28 50 18 50 40 40 3.5 6 40 20 30 17.5 30 - Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 20 20 13.4 37 Doses vaccinated 10 7 20.4 10 400000 Doses Per day (TEM July21) 1.12 5.4 0 0 750000 Doses Per day (TEM December21) Q1 Q2 Q3 Q4 Source: Our world in data, CEIC; World Bank staff Source: Department of Disease Control; World Bank staff calculations calculations The recovery of Renewed domestic demand is expected to drive the growth of services as the domestic demand is impact of the pandemic wanes and the economy reopens. Emergency fiscal projected to be measures are expected to continue supporting domestic economic activity during supported by the first half of 2022, when the remaining THB 354 billion (2.3 percent of GDP) strengthening of the THB 500 billion pandemic relief package is disbursed. As the recovery consumer confidence takes hold, fiscal support in FY22 is expected to be much lower than in FY21. and additional fiscal Moreover, fiscal measures are expected to be more heavily weighted toward relief. economic rehabilitation rather than social assistance and cash transfers. The projection for The reopening of borders is expected to attract more foreign tourists in 2022, international tourist but the increase is projected to be gradual. Despite the reopening of borders for arrivals has been fully vaccinated foreign tourists, beginning in Phuket in July and expanding revised upward to 6.8 countrywide in November, the number of foreign tourist arrivals in 2021 is million in 2022. projected to reach just 200,000 due to the third wave of COVID-19 infections and associated lockdown measures. As new infections decline and the government reaches its vaccination target, the number of international tourists is projected to pick up to 6.8 million in 2022, albeit just 17 percent of its 2019 level. The number of international tourists is projected to rise further in 2023, reaching 50 percent of the 2019 level by the end of 2023 (Figure 43). However, an The pace of the tourism sector’s recovery continues to depend on the loosening uncertain external of restrictions in other countries and the confidence of travelers. Tourists may environment clouds remain hesitant to travel internationally, particularly if doing so requires a the tourism sector’s quarantine period when returning home. Many Asian countries continue to outlook. impose mandatory quarantines upon entry, including for fully vaccinated travelers. Restrictive international travel policies in China are expected to keep THAILAND ECONOMIC MONITOR | December 2021 29 Part 1. Recent Economic Developments and Outlook the number of Chinese visitors low at least through the first half of 2022. As China accounted for 28 percent of total tourist arrivals in 2019, this will be a major drag on the tourism sector’s recovery. The Chinese government has continued to ban outbound package travel and maintain a “zero-COVID” policy. Goods exports are The projected growth of goods exports in 2022 has been revised down to 5.7 projected to remain percent (in US dollar terms) in the wake of a 16.6 percent increase in 2021, the strong, though strongest rebound since 2010. The downward revision reflects softening global moderating global demand as macroeconomic support diminishes, risks of new COVID-19 waves demand will slow persist, and supply bottlenecks linger. Global growth is projected to slow further their expansion. in 2023 as pent-up demand is depleted and supportive macroeconomic policies continue to wind down. Total output in advanced economies is projected to return to its pre-pandemic trend in 2022, while emerging markets and developing economies will continue to suffer from low vaccination rates and the scarring effects of the pandemic. Thailand’s external The current-account balance is expected to recover from a deep deficit of 3.4 position remains percent of GDP in 2021 to a slight surplus in 2022 (Figure 44). The 2021 deficit strong, with the largely reflects the collapse in tourism receipts and the narrowing of the goods current-account trade surplus from 7.9 percent of GDP to 6.2 percent amid rising imports of oil balance projected to and intermediate goods. In 2022 and 2023, the easing of international travel normalize over the restrictions and the eventual resolution of the supply bottleneck will improve the medium term. services trade balance, pushing the current account to a surplus of 0.5 percent of GDP in 2022 and 2.3 percent in 2023. However, moderating global demand and rising imports fueled by stronger domestic consumption are projected to weigh on the trade surplus. Figure 43: The recovery of international tourist Figure 44: … and rising service exports will help arrivals is projected to accelerate sharply in push the current-account balance into surplus. 2022… (Millions of arrivals) (Percent of GDP) 15.00 12.0 Forecast 10.00 Millions 10.0 5.00 8.0 0.00 6.0 -5.00 4.0 -10.00 -15.00 2.0 2015 2016 2017 2018 2019 2020 2021 2022 2023 0.0 Primary and Secondary Incomes Trade in services balance Q3 Q4 Q2 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q1 2020 Q1 2021 Q1 2022 Q1 2023 Trade in goods balance Current Account Balance Source: Forecast numbers since Q4 2021; World Bank staff Source: World Bank staff calculations calculations THAILAND ECONOMIC MONITOR | December 2021 30 Part 1. Recent Economic Developments and Outlook The fiscal deficit is Thailand’s fiscal deficit (general government) is projected to widen from 4.8 projected to narrow percent of GDP in FY20 to 7.8 percent in FY21 (Figure 45). In FY22, stronger in FY22, and the revenue collection supported by the economic recovery, coupled with a decline public debt stock is in emergency relief spending, is projected to reduce the fiscal deficit to 4.5 expected to remain percent of GDP. As the remaining THB 354 billion of the debt-financed below 70 percent of pandemic relief package is expected to be disbursed in FY22, the public debt GDP. stock is expected to peak in FY22 at 62.2 percent of GDP before declining to 61.6 percent by the end of FY 23. Consequently, the debt stock is not expected to breach the new debt ceiling of 70 percent of GDP (Figure 46). The debt trajectory remains sustainable overall, as fiscal risks are mitigated by the fact that the debt stock is largely denominated in local currency and by the availability of sufficient domestic liquidity to accommodate the government’s refinancing needs. Figure 45: The central government’s fiscal deficit Figure 46: …and the public debt stock is is projected to widen in FY21… projected to rise along with those of regional peer countries. (LHS: THB billions, RHS: Percent of fiscal year GDP) (Percent of fiscal year GDP) 30.0 Forecast 1.0 100 0.1 0.0 25.0 -0.4 90 -0.8 -1.0-1.0 -2.0 80 20.0 -3.0 70 15.0 -4.0 -4.8 -4.5 60 -5.0 10.0 -6.0 50 5.0 -7.0 -7.8 40 -8.0 0.0 -9.0 30 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 20 Total Revenues FY0 FY2 FY4 FY6 FY8 FY10 FY12 FY14 FY16 FY18 FY20 FY22 Expenditures China Indonesia Malaysia Philippines General Government Balance, RHS Thailand* Source: Fiscal Policy Office, Haver Analytics; World Bank Note: *Thailand Public debt projection is based on the staff calculations World Bank forecast Source: IMF WEO October 2021; World Bank staff calculations Inflation is The headline inflation rate is forecast to remain low at 1.1 percent in 2021, expected to remain reflecting subdued domestic demand and the limited pass-through effect of rising contained. global oil prices, which is being mitigated by the government’s cap on diesel prices at THB 30 per liter. Nevertheless, high oil prices are projected to boost headline inflation to 1.4 percent in 2022 and 1.3 percent in 2023. The core inflation rate is expected to remain low in 2022, reflecting the sizeable output gap. In 2023, some additional inflationary pressures may emerge as the economy continues to recover and the output gap closes. However, inflation is unlikely to experience a significant surge over the medium term, in part because prices administered by the government account for approximately 35 percent of the Consumer Price Index THAILAND ECONOMIC MONITOR | December 2021 31 Part 1. Recent Economic Developments and Outlook basket.10 Monetary policy is expected to remain accommodative to support the recovery, with the policy rate forecast to remain unchanged at 0.50 percent in 2022. ii. Downside risks remain considerable due to the possibility of a COVID-19 resurgence and the anticipated scarring effects of the pandemic The global growth The pandemic has been damaging the global economy - particularly in many trajectory continues emerging markets and developing economies (EMDEs) - and is projected to linger to hinge on the over the medium term, and the future trajectory of the pandemic cannot be reliably evolution of COVID- predicted. In 2021, the Delta variant drove renewed economic turmoil, which was 19 infections and the exacerbated by the uneven vaccine rollout in advanced and developing countries. pace of vaccination. In advanced countries, the lower number of deaths due to the Delta variant relative to the previous wave of infections in 2020 has demonstrated the effectiveness of vaccinations and enabled governments to largely avoid the reimposition of strict containment policies. In contrast, the full vaccination rate in developing countries stayed below 60 percent of the population on average and vaccine supply has been limited, suggesting that the stringent mobility measure to contain the virus could continue to damage the EMDEs. Another risk arises The region’s recovery now lags that of the industrial countries, and regional from tightening production disruptions could accentuate inflationary pressures abroad by creating monetary policy by input shortages. The concern is that rapidly growing economies such as the advanced countries. United States are likely to raise interest rates to counteract inflationary pressures. The prospect of higher interest rates in the United States could lead to capital outflows and depreciation pressures in some of the region’s economies—an echo of the “taper tantrum” of 2013, when the Federal Reserve began normalizing monetary policy after the financial crisis. The presence of foreign currency- denominated debt in firms’ balance sheets is a source of vulnerability in some EAP countries, such as Cambodia, Indonesia, and Malaysia. However, Thailand is relatively less exposed due to its strong external position (See Table 1). The reopening of Despite its high vaccination rate, Thailand will remain vulnerable to renewed international borders outbreaks and new variants, which may prove resistant to existing vaccines. A is vital to the resurgence in COVID-19 cases could also increase policy uncertainty regarding economic recovery, the reopening of borders and the lifting of mobility restrictions, damaging but it also increases business sentiment and consumer confidence—especially in the vital services the risk posed by new sector. Such uncertainty could be challenging for the economic recovery in 2022 disease variants. and 2023 (Figure 47), through the losses of business sentiment - especially in the services sector - and consumer confidence. The emergence of Over the past year, consecutive downward revisions in our GDP forecast were due new variants suggest to initial over-optimism over the improvement of tourism and the global that the path of pandemic. Going forward, should a new vaccine-resistant strain of coronavirus recovery remains emerge, the nascent recovery would be set back again. The economy could drop highly uncertain. into a slight contraction at 0.3 percent in 2022, before rebounding by 5.2 percent in 2023 (Figure 48). The downside scenario assumes the reimposition of border 10Wanicha Direkudomsak, (2016). “Inflation Dynamics and Inflation Expectations in Thailand” in Wanicha Direkudomsak (eds.) BIS Papers, vol 89, Bank for International Settlements. THAILAND ECONOMIC MONITOR | December 2021 32 Part 1. Recent Economic Developments and Outlook closures and mobility restrictions during the first half of 2022. As a result, the private consumption and exports of services are likely to continue to be severely hit, whereas the government is expected to release more reliefs measure to help alleviate the losses. To avoid the risk of economic contraction, further vaccine distribution and expanded testing and tracing to protect the citizens against new variants will remain critical to mitigate the risk posed by variants. Figure 47: Projected contributions to GDP growth. Figure 48: Output will only return to the pre- pandemic level in 2022. (Percentage Point) (GDP Index, 2019 = 100) 8.0 Forecast 110 6.0 3.9 4.0 4.3 105 2.3 2.0 1.0 0.0 100 -2.0 -4.0 95 -6.0 -6.1 -8.0 2019 2020 2021F 2022F 2023F 90 2017 2018 2019 2020 2021F 2022F 2023F Historical Change in Inventories TEM (Jan 2020) Net Export of Goods and Services TEM (Jan 2021) Fixed Investment TEM (Jul 2021) Government Consumption TEM (Dec 2021)-Downside Scenario TEM (Dec 2021)-Baseline Private Consumption GDP Source: NESDC; World Bank staff calculation Source: Haver Analytics; World Bank staff calculations Lasting scars from In the years prior to the onset of the COVID-19 pandemic, the potential the crisis will GDP growth rate was estimated at 3.0-3.5 percent per year. Post-pandemic reduce potential estimates now put the potential GDP growth rate at below 2 percent, output… reflecting the diminished growth of the physical capital stock, loss of human and intangible assets, and impacts on total factor productivity. In contrast to other countries, the government response including substantial social assistance and mass vaccination has helped to prevent large-scale losses in human capital. But firm closures and employee separations are likely to have contributed to the erosion of valuable intangible assets, such as management and technical know-how, employee skills, and workplace networks and relationships. In addition, aging continues to reduce the share of the working-age population, putting further downward pressure on potential output (Figure 49). Diminished potential growth will constrain actual growth over the longer term unless action is taken to remedy the scarring effects of the crisis and capitalize on emerging opportunities (EAP, September 21). Although the recovery in investment projected in the baseline forecast would support the growth of the capital stock, firms may be reluctant to borrow and invest to the extent that their balance sheets have weakened due to the COVID shock. A deferral of productive investments could reduce THAILAND ECONOMIC MONITOR | December 2021 33 Part 1. Recent Economic Developments and Outlook potential output in the medium term. On the other hand, a further increase in debt levels in a context of prolonged uncertainty may also pose risks to the outlook—some of which may only become apparent once existing forbearance measures expire. …while aging poses In the medium and long term, rapid aging is likely to weigh further on additional longer- growth. The working-age share of the population is projected to decline term risks. from 71 percent of the population in 2020 to 66 percent in 2030 and then 56 percent in 2060. Job losses and school closures associated with COVID- 19 may also have adverse long-term effects on skills and human capital accumulation. Figure 49: The impact of the pandemic has lowered Thailand’s estimated long-term potential GDP growth rate. (Potential output and GDP projections, index, 2015 = 100) 130 125 120 115 110 105 100 95 90 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Potential GDP: Pre-Pandemic Potential GDP: Post-Pandemic GDP (Actual) GDP (Projection) Source: World Bank staff calculation Note: The pre-pandemic potential GDP growth rate was estimated in September 2019 The adoption of Mobility restrictions and precautionary behaviors have accelerated the digital technology uptake of digital technologies in Thailand. In addition to supporting has the potential to economic recovery from COVID-19, digitalization also offers the support Thailand’s opportunity to permanently increase potential output via improvements in recovery and raise productivity and reduced market frictions. Digital commerce and service delivery can lower operating and transaction costs and allow businesses to potential output reach a wider range of customers, suppliers, and workers. Financial over the longer- technology can ease financing constraints among SMEs, while data term. analytics, artificial intelligence, and machine learning can help increase firm efficiency and augment worker skills. As described in Part 2 of the TEM, the government has taken important steps to advance the digital agenda, but more can be done to develop digital services and spur the digitalization of businesses. Key priorities include promoting competition and incentivizing interoperability in digital markets, increasing the availability of digital skills and complementary capabilities, and enhancing access to innovation finance. THAILAND ECONOMIC MONITOR | December 2021 34 Part 2. Building Back Better by Boosting the Digital Economy Part 2. Building Back Better by Boosting the Digital Economy i. Building back better requires bold action--a private sector led recovery can put the Thai economy back on track. Thailand’s policy In response to the business disruptions due to COVID-19, many firms have makers have an adopted digital technologies to overcome mobility restrictions and keep opportunity to operations running. This development, part of a global trend, presents risks but leverage global also enormous opportunities. As set out below, there is much that the Thai trends and promote government can do to take advantage of these opportunities while minimizing an economic recovery the risks. model centered on innovation. This Part 2 starts by describing the potential for digital and innovation in Thailand. The account emphasizes how the adoption of digital technology and digital services can accelerate economic recovery and address prevailing structural issues in the Thai economy. The next section discusses recent advances in growth, investment, and market participation of digital services in Thailand. This account also emphasizes the government’s efforts to advance targeted policy measures to promote digitalization and improve enabling conditions for the digital economy to flourish. The narrative also includes progress in digitalization of businesses induced by the recent COVID-19 pandemic. This part concludes with the THAILAND ECONOMIC MONITOR | December 2021 35 Part 2. Building Back Better by Boosting the Digital Economy profiling of opportunities to build on these recent gains in digital services and take these to the next level. The final section describes how promoting competition of digital markets, boosting availability of digital and complementary skills, and enhancing access to innovation finance, can speed the business transition toward the digital technology and the increased participation of Thai firms in digital service markets. The narrative concludes by discussing the ways through which policy makers can seize these opportunities. Part 2 builds on previous Thailand Economic Monitoring reports. The 2017 summer edition of TEM introduced Thailand’s digital institutions and aspirations for the digital economy. It discussed priorities for Thailand to shorten the gap towards the digital frontier, including foundational investments in connectivity. The 2018 spring edition of the TEM discussed service liberalization, data strategy, intellectual property rights, and skilled labor as measures that could make the Thai economy more innovative (beyond the innovation paradox). A few months before the pandemic hit, the July 2019 edition of the TEM discussed how the fintech revolution could increase financial inclusion, efforts from the government to use the regulatory sandbox to support fintech innovation, the importance of policy coordination, engagement with the private sector and venture capital in helping leverage the full potential of Fintech. This edition of the TEM expands on the previous discussions of the digital economy to put it in the context of COVID recovery and business in a post COVID world. It discusses the recent trends resulting from the pandemic, and it goes deeper than all previous editions on the topic of promoting market competition, innovation finance and the digital skills. THAILAND ECONOMIC MONITOR | December 2021 36 Part 2. Building Back Better by Boosting the Digital Economy Use of digital The adoption of digital technology can help generate commerce opportunity, technologies and improve productivity, and provide resilience against the economic shocks, like consumption of the COVID-19 pandemic. Digital encompasses innovative technologies that have digital services the potential to radically change the increased during the way organizations and people Box 4: Harnessing the power of pandemic in response operate, creating new markets and digital technology can unlock to extended mobility business models, and making goods productivity in different ways. restrictions. and services accessible to more consumers. Digital solutions can reduce costs of search, replication, transportation, Firms started to cope with mobility tracking and verification1. In restrictions and health concerns from addition, integrating digital workers and consumers by adopting technology into business operations, digital solutions almost as soon as the such as data analytics, artificial pandemic began. Business pulse intelligence, and machine learning, surveys conducted by the World increases firm efficiency and Bank found that by the summer of augments worker skills. Moreover, 2020, almost two thirds of firms have digital solutions can generate used digital platforms for running spillovers and connect firms, their businesses. However, the type of workers, suppliers, and customers digital technologies acquired – and easily. This can accelerate the the level of digitalization, was not the transformation of business processes same across firms. Firms of all sizes from analog to digital, opening have adopted front end digital opportunities for expansion of tele- business solutions, such as customer- health, fintech and travel tech facing digital platforms, for business models, just to name a few. marketing and promotion. However, the use of backend business solutions, such as platforms for supply chain management or for internal business processes, was higher for larger firms. The monitoring surveys also found that adopting digital solutions was linked to increased sales, especially for those technologies related to backend business processes and supply change management. Long term productivity from adopting digital solutions needs to be matched with managerial and workers skills, which can enable full absorption of these technologies (World Bank Group, 2021). Digital technologies also enable the service economy. Digitally enabled firms can improve service delivery by reducing the need for physical proximity through remote assistance, virtual communications, and empowered distant work. Thailand relies heavily on the tradable services of travel and tourism. These subsectors typically spawn few links to the rest of the economy and do not contribute significantly to diversification (Mc Millan et al.2017). Thailand’s participation in export-led global innovator services has been much lower than might be expected from its income level (Figure 50). But export-led global innovator services create greater linkages to other sectors of the economy, including manufacturing, and hence tend to be more productive Developing competitive digital services, such as digital commerce is important to promote growth. For example, digital commerce can reduce operating and transaction costs and allow small businesses to reach new markets. In Thailand, for SMEs engaged on digital commerce platforms, digitalization can lead to increased revenues, productivity, and market reach. According to a study conducted by SEA Group, digital commerce adoption in Thailand increased THAILAND ECONOMIC MONITOR | December 2021 37 Part 2. Building Back Better by Boosting the Digital Economy revenue by 133 percent, on average for SMEs with an offline business. This ranges from a 93 percent increase for merchants with online sales below 20 percent of total sales, to as high as 369 percent for sellers with online sales representing more than 80 percent of sales. Adoption of digital commerce also brought significant increases in efficiency, household income and employment for SMEs, as well as allowing SMEs to sell outside their local markets and gain access to larger demand.11 Figure 50: Thailand’s participation in global innovator services is below expectations for its level of income. Share of global innovator services in total exports and log of 2017 GDP per capita Global Innovators 1 0.9 IRL 0.8 KWT BHR IND ISR GBR 0.7 CYP CAN 0.6 Share of Total Exports GHA AUS PHL CHE BEL USA BRA ESP SWE DEU LUX 0.5 PAK JPN NPL DZA CHN CRI ARG ITA SAU FIN NOR URY FRA NLD MLT SEN NZL SGP ISL BGD SWZ LBN 0.4 AUT GUY CHL ROU EST ZAF CZE RUS POL KOR HKG PER MUS MYS SVK PNG HUN CMRKEN NGA UKR COL BRN 0.3 IDN MKD SVN IRQ BLR LVA PAN OMN GTM MDA SUR BGR SYC TUN LKA MNGALB PRT DNK SDN BLZ SLV ARM 0.2 CIV BWAMEX UGA NAM BIH THA HRV MMR TON DJI HND TTO KAZ ZMB NIC CPV BOL LBY KGZ WSM DMA TUR LTU MDG GIN LSO ZWE EGY PRY ATG KNA GRC 0.1 TZA JAM BTN VCTAZE VNM ECU FJI GEO DOM HTI ETH VUT BEN AGO MOZ LAO GRD GMB BHS COD RWA TJK STP KHM JOR LCA MDV 0 6 7 8 9 10 11 12 GEP Per Capita (Natural Log) High Income East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa Linear (Trend) Source: Nayyar, Gaurav, Mary Hallward-Driemeier, and Elwyn Davies. 2021 Thailand’s prospects According to data from the Electronic Transactions Development Agency, for digital service digital commerce in Thailand grew close to 36 percent from 2017 to 2018 in market growth and terms of value. Thai digital commerce was estimated to be valued at close to US$ investments look promising. 11Sea Insights (2019) “E commerce & SMEs. Uncovering Thailand’s Hidden Assets” Available at: https://cdn.sea.com/webmain/static/resource/seagroup/sea%20insights/%5B2019-11- 07%5D%20Thailand%20Seller%20Report%202019/Thai%20Seller%20Report%202019.pdf THAILAND ECONOMIC MONITOR | December 2021 38 Part 2. Building Back Better by Boosting the Digital Economy 5 billion12 in 2020, representing 3 percent of total retail sales13, and is expected to generate revenue growth rates of 13.2 percent annually through 2020, 2021 and 2022.14 Digital commerce company Lazada, which hosts roughly 200,000 merchants on its platform, added 26,000 new merchants in March 2020 alone.15 This trend may be intensified in the COVID-19 context. In Thailand, 30 percent of all digital service consumers were new since the beginning of the pandemic, and 95 percent of these new consumers intend to continue after the pandemic. 16 According to a recent report for online merchants, by August 2021, about 9 million new individuals became digital consumers since the start of the pandemic. Consumption among internet users was 90 percent, the second highest in the region (after Singapore). The same report estimates that in 2021, Thailand’s total Gross Merchandise Value will reach US$ 30 billion, driven primarily by the expansion of digital commerce. Looking at the yearly deal activity for digital services, the e-Conomy report projects record investments for 2021, in line with the growth in consumption of digital services such as digital commerce. A recent World Bank Group study,17 suggests that an investment opportunity of about US$ 1.8 billion lies unexploited both in currently untapped potential in five B2B digital sectors and in the possible expansion of four B2C sectors, based on an analysis of regional risk capital funding flows to digital startups (Figure 51). The study concludes that if Thailand’s digital firms were to attract levels of venture capital (VC) or private equity (PE) investments comparable to Asian frontier markets, additional funding of US$ 1.2 billion would flow into Thailand on an annual basis. The remaining US$ 0.6 billion would result from Thailand strengthening the sectors in which it is already well-positioned. Investments in these underlying sectors and technologies would help accelerate the digitalization of primarily analog sectors such as automotive, health and agribusiness. 12 Economist Intelligence Unit; RISE. Perspective on Thailand Digital Ecosystem. Available at: https://www.boi.go.th/upload/content/Perspective%20on%20Thailand%20Digital%20Ecosystem.pdf; Google, Temasek, Bain and Co. “E-conomy SEA 2020”. Available at: https://www.bain.com/globalassets/noindex/2020/e_conomy_sea_2020_report.pdf 13 https://www.boi.go.th/upload/content/Perspective%20on%20Thailand%20Digital%20Ecosystem.pdf 14 https://www.idginsiderpro.com/article/3301337/how-ecommerce-is-changing-thailands- economy.html#:~:text=2018%20concluded%20with%20good%20news,to%20hit%2020%25%20this%20year. 15 https://www.globaldata.com/E-commerce-emerges-mainstream-payment-thailand-amid-covid-19-crisis- finds-globaldata/ 16 Google, Temasek, Bain and Co. “E -conomy SEA 2020”. Available at: https://www.bain.com/globalassets/noindex/2020/e_conomy_sea_2020_report.pdf 17 World Bank Group (2020) Thailand Country Private Sector Diagnostic. THAILAND ECONOMIC MONITOR | December 2021 39 Part 2. Building Back Better by Boosting the Digital Economy Figure 51: Regional risk capital funding flows to digital startups suggests an opportunity of about US$ 1.8 billion a year by 2025. Thailand’s funding gap/potential in key digital business industries relative to Asian peers Source: World Bank Global Digital Business Database, based on CB Insights and Pitchbook data Digital financial Supporting the development of digital services, such as fintech is important to services, or fintech, is promote broad based investment and increase financial inclusion. Fintech another digital provides SMEs access to financing that might not otherwise be available to them. service that can Access to more and lower cost financing allows SMEs to invest and grow. power businesses. Promoting the growth of SMEs is important to the Thai economy since this segment of businesses represents over 99 percent of firms in the country. From 2016 (the year PromptPay was launched in Thailand) to 2020, there was a 169 percent increase in digital payments in the country.18 According to the Bank of Thailand (BoT), e-payments increased by 18 percent in volume and 44.4 percent in value year-to-year by July 2020. The volume share that immediate payments represent, from overall non-paper-based transactions, increased from less than one percent in 2017 to around 25 percent in 2019.19 By August 2021, 96 percent of the respondents in the merchants e-Conomy survey reported using digital financial payments, and 82 percent report using digital lending solutions. Thailand performs less well on measures of the utilization and quality of financial services, however. In 2018, less than 19 percent of Thai adults reported shopping or paying bills online, far below the regional average of 39 percent and the middle-income-country average of 38 percent.20 It has been estimated, that closing the regional gap with Singapore’s financial-inclusion indicators could 18 https://www.mastercard.com/news/perspectives/2020/how-the-mobile-payment-revolution-in-thailand-is- empowering-a-generation-of-entrepreneurs/ 19 ACI Worldwide. “Prime Time for Real-Time. The Global Real-Time Payments Report” 2020. Available at: https://go.aciworldwide.com/Global-Payments-Report-thailand.html 20 WBG. “Thailand Economic Monitor July 2019” Available at: http://documents1.worldbank.org/curated/en/765751562176921636/pdf/Thailand-Economic-Monitor- Harnessing-FinTech-for-Financial-Inclusion.pdf#page=36 THAILAND ECONOMIC MONITOR | December 2021 40 Part 2. Building Back Better by Boosting the Digital Economy reduce the country’s Gini coefficient by 10-20 percentage points.21 Fintech innovations could play an important role in filling these gaps. Thailand's e- payment transactions have rapidly grown since the introduction of Promptpay by the Bank of Thailand and the Thai Banker Association in 2016. According to the Bank of Thailand, by mid-2021, there were over half a billion transactions per month conducted through PromptPay.22 This is an important development but broadening the range of digital financial services available in Thailand could accelerate gains in financial inclusion. The Thai government “Digital Thailand” and is committed to “Thailand 4.0” are core to the Box 5: The case of Thaitrade.com advance new government’s vision for the An example of Thailand’s government technology, and in digital transformation of the Thai economy23 The National efforts to foster e-commerce growth and particular the digital technologies, under Economic and Social participation of SMEs in it. This is the banner of Digital Development Plan (NESDP) designed to facilitate and provide Thai Thailand and (2017–2021) also emphasizes SMEs’ opportunity for cross border e- Thailand 4.0 support for new entrepreneurs commerce by using national e-commerce initiatives. and for SMEs that utilize as a fundamental platform. In 2016, the innovation and digital Bank of Thailand, together with the main technology. There is also an emphasis on public-private commercial banks, launched PromptPay, partnership (PPP) investments, an interbank mobile-payments system the creation of funds, and that enables users to transfer funds using government investment in only the mobile number or national ID higher-risk disruptive number of the recipient. PromptPay technologies (Office of the eliminated many fees charged to the National Economic and Social customer for small amounts of interbank Development Board, Prime Minister’s Office, Thailand and inter-region fund transfers and has 2017).24 Furthermore, the lower fees for other operations. Eastern Economic Corridor PromptPay has catalyzed the adoption of (EEC) has made the expansion digital payments, forcing down bank fees of digital technologies a key and expanding financial inclusion. component of its strategic However, PromptPay could be better initiatives. Under Thailand 4.0 leveraged to allow for the development of there is a focus on a value-based strategic plan that has an other digital financial services. important focus on SMEs and their participation in digital markets and technological 21IMF Asia and Pacific Department (2018), “Financial Inclusion in Asia-Pacific” Available at: https://www.imf.org/en/Publications/Departmental-Papers-Policy-Papers/Issues/2018/09/18/Financial-Inclusion-in- Asia- Pacific-46115. 22 https://www.bot.or.th/App/BTWS_STAT/statistics/BOTWEBSTAT.aspx?reportID=921&language=ENG 23 These include agriculture and biotechnology, smart electronics, medical and welfare tourism, automotive, food, biofuels and biochemicals, the digital economy, healthcare, automation and robotics, and aviation and logistics. 24 See the third development target, p. 26. See also section 3.1.2. THAILAND ECONOMIC MONITOR | December 2021 41 Part 2. Building Back Better by Boosting the Digital Economy adoption.25 The Bank of Thailand, in the Financial Sector Master Plan, is looking to transform infrastructure, modernize technology, drive innovation, address inclusion and tackle an over-reliance on cash in the financial sector. The government is looking for Thailand to move towards a cashless economy and position the country as an economic and financial powerhouse in the region.26 However, there is a significant opportunity to develop digital service markets further. ii. Unlocking the opportunity to leverage expansion of digital services to accelerate economic recovery, however, will require targeted interventions Removing constraints The rapid expansion of digital services and solutions in Thailand relies on market to private investment enabling conditions. These enablers include i) the level of readiness by firms to and improving adopt digital solutions and take up of internet services by the general population, enabling factors can ii) a large talent pool in STEM and ICT subjects, iii) availability of high-quality expand and accelerate connectivity infrastructure, with good coverage, that includes electronic business participation payment systems, iv) the presence of a vibrant digital ecosystem, which includes in digital markets. innovation finance, and v) a conducive regulatory environment that promotes competition, investment and dynamic entrepreneurship. This part focuses on the regulatory environment that promotes competition, STEM, ICT, and complementary skills and innovation finance for the following reasons. Thailand has shown gaps in aggregate metrics of market competition in digital markets. The tendency of Thai markets to concentration and conglomeration have been observed in E-commerce marketplaces. In addition, finance for digital upgrading and innovation is a critical ingredient in a dynamic digital ecosystem but Thailand has shown an underdeveloped finance scene for early-stage ventures. Finally, technological absorption capacity depends on the availability of highly skilled workers, yet digital literacy, while increasingly important, is not systematically taught in the country. STEM skills are below par, and firms have reported difficulty finding technical skills. A detailed discussion on these topics is offered in the next section. There are opportunities to sensitize potential consumers on the benefits of digital services, expand usage of electronic payments, and coverage of digital infrastructure, particularly for data intensive services, which may require 5g. However, recent reports have shown that Thailand has made advances in these areas. The recent e-Conomy report reported explosive growth in consumption of digital services, and a surge in digital commerce, boosting electronic transactions. For example, the average number of new digital services consumed over time has increased from 4.2 (pre-pandemic) to 8.1 in 2021. Thailand has 25 https://thaiembdc.org/thailand-4-0- 2/#:~:text=Thailand%204.0%20is%20an%20economic,advanced%20industry%20(Thailand%203.0).; https://www.boi.go.th/upload/content/Thailand,%20Taking%20off%20to%20new%20heights%20@%20belgi um_5ab4f8113a385.pdf ; https://unctad.org/system/files/non-official- document/dtl_eWeek2018p18_ChantiraJimreivatVivatrat_en.pdf 26 Bank of Thailand (2017) “Bank of Thailand’s 3 -years strategic plan 2017-2019” Available at: https://www.bot.or.th/English/AboutBOT/RolesAndHistory/Documents/3yearsStrategicPlan.pdf THAILAND ECONOMIC MONITOR | December 2021 42 Part 2. Building Back Better by Boosting the Digital Economy performed decently in access to broadband infrastructure, a measure of digital connectivity. In 2020, Thailand featured 16.6 broadband subscriptions per 100 people, within the range of comparator countries such as Mexico (16.4), Colombia (15.2) and Chile (19.6). Promoting market With respect to improving competition, digital services show characteristics of contestability that being dominated by networks of connected firms that create barriers to entry for rewards performance, new and independent firms. These barriers limit the choice of platforms and and provides a level services available to entrepreneurs. Vibrant digital commerce relies on a playing field for competitive ecosystem where suppliers have adequate choice over which entrants that platforms they link to and are protected from asymmetric bargaining power in introduce innovations favor of large platforms. Digital commerce markets should balance the power would create value dynamics, empowering SMEs and small entrepreneurs when interacting with for the digital digital platforms. The World Bank Group Country Private Sector Diagnostic for economy. Thailand revealed issues related to practices of large platform players vis-a-vis small suppliers and the presence of an unleveled playing field between local and international suppliers. As in other countries, market concentration of digital services remains high in Thailand. The B2C e-marketplace segment of digital commerce markets is dominated by two large players that belong to business conglomerates that account for almost 100 percent of market share. In 2019, Shopee was the e- marketplace leader in Thailand, accounting for 54 percent of market share.27 Shopee is owned by SEA Group, a digital economy conglomerate with presence throughout Southeast Asia. In second place is Lazada at 46 percent market share. Lazada is one of the largest players in digital commerce in the region and is backed by the Chinese digital business conglomerate, Alibaba Group. In the B2B segment, digital commerce platforms in Thailand are part of large conglomerates that also operate in the B2C digital commerce segments. The leading B2B digital commerce services are Officemate and Pantavanij. In 2020 Officemate was acquired by Central Group, the major shareholder of the JD Central B2C platform. This merger was controversial as it was not reviewed by the competition authority. Pantavanij another B2C digital commerce platform is part of the CP and True Group, the largest Thailand conglomerate which has operations in the B2C segment through WeMall, in e-payment platforms and Fintech through TrueMoney and Ascend Nano, as well as in telecommunications. Making fintech stronger could also benefit from efforts to boost competition and open markets to players beyond the existing large conglomerates. Ensuring that traditional financial players do not receive preferential treatment in design of regulations would also boost competition. Efforts to dismantle conditions favoring incumbents in the financial sector will allow the development of nontraditional business models that expand access and utilization of fintech operators in the country. 27 https://www.bangkokpost.com/business/1921656/2020-online-trade-set-to-hit-b220bn THAILAND ECONOMIC MONITOR | December 2021 43 Part 2. Building Back Better by Boosting the Digital Economy Figure 52: Challenges to a competitive market in the digital economy Investors Perceive Business Risks Relating to Competition in Thailand as Relatively High (individual component score, 0 = best, 4 = worst) 14 12 10 8 6 4 2 0 China Vietnam Indonesia Mexico Laos Cambodia Mongolia Thailand Bulgaria Malaysia South Korea Singapore Colombia Philippines Vested interests/cronyism Discrimination against foreign companies Unfair competitive practices Price controls Five years ago Source: Economist Intelligence Unit (EIU) Risk Tracker, March 2021. A competitive digital ecosystem: sizing on an important contributor to economic recovery Thailand presents significant space to add dynamism to the digital economy. Large conglomerates Paired with high market shares and vertical integration, this creates a market have a diversified structure that could be prone to market dominance, barriers to entry, and abusive offering of products anticompetitive practices. SEA (Shopee) and Lazada are vertically integrated into and services that upstream and downstream segments of the digital commerce value chain, such as reach several in logistics, and technology solutions. They are also present in adjacent markets different sectors in such as electronic payments and E-wallets.28 Also, Shopee is looking to expand SEA and in Thailand. to microloan services provided to sellers in the platform (an example of embedded finance). Moreover, SEA has partnerships with Gojek, one of the most important players in the ride hailing and logistics platforms in the region. Two of the largest conglomerates in Thailand, CP and Central, participate in both digital commerce and fintech sectors and have extraordinarily strong business presence in multiple different sectors of Thai’s economy like retail, tourism, and food. These two conglomerates also provide logistics services and CP is a prominent telecommunications provider in Thailand. 28Shopee and Lazada are vertically integrated to logistic services Shopee express and Lex Express respectively. Both firms also own their own E-payment/wallets in ShopeePay (Airpay) and Lazada Wallet. THAILAND ECONOMIC MONITOR | December 2021 44 Part 2. Building Back Better by Boosting the Digital Economy Market concentration This market structure can facilitate the sharing of business-related information can increase the risk between supposedly competing of collusion from the firms in markets such as fintech, Box 6: Digital-commerce existing linkages digital commerce, and other digital dynamism. between firms that services, facilitating collusion. E-commerce markets in Thailand offer services in the Large digital commerce firms that have had a very small number of same digital sectors. are also vertically integrated to entries to the market. The only upstream and downstream levels of recent entry of an e-commerce the value chain, as well as with platform was that of JD Central, a expanded operations to joint venture of Thai Central and adjacent/related digital markets JD.com from China launched at the could impose barriers to end of 2018. This launch was competition using cross- envisioned by the large subsidization between business conglomerate Central Group to segments across the conglomerates. provide a “complete digital This would create difficulties for ecosystem” to complement their new entrants wanting to participate other businesses in retail, hospitality, and grow in the market. New financial services and fintech. JD entrants that are not part of a big Central has grown over its first conglomerate with a network of years of operation, but it remains to operations in other business be seen how the dynamics in the segments and levels of the value market with the three players chain, and that are not backed up develop. JD Central is still very far with large amounts of funding as the away from Shopee and Lazada in incumbents are, could find it very terms of its web traffic. Additionally, hard to compete. This is especially in recent months, there seems to be true in markets where incumbents an increase in the gap of this metric employ strategies based on between Shopee/Lazada and JD providing heavy discounts and Central. promotions to consumer to gain market share and that are prone to tipping into dominance. Siloed market An example of these issues is epitomized by electronic payments, where structures and interoperability is absent. There is many e-wallets and digital money services missing operating in Thailand. Nevertheless, most e-wallet providers link with Thai or interoperability multinational conglomerates to be used within their shopping and payment across market players ecosystem. For example, True Money, the largest digital wallet in Thailand, is slows down market mainly used to pay products and services within the Charoen Pokphand Group dynamism. extensive business lines like telecommunications (True Corp), retail (Lotus/Tesco/7eleven), digital (Ascend), etc.29 In their respective silos, ShopeePay and Lazada Wallet, are used within the digital commerce platforms of SEA Group and Lazada respectively. Grab Pay is mainly used for transport and delivery services within the Grab ecosystem. Rabbit Line is mainly used for transportation payments but since its merger with Line has tried to expand to be accepted in other third-party outlets. In general, there is a lack of interoperability between these systems. 29 https://thelowdown.momentum.asia/who-will-be-the-alipay-of-thailand/ THAILAND ECONOMIC MONITOR | December 2021 45 Part 2. Building Back Better by Boosting the Digital Economy Siloed payments Siloed payments can distort markets since it allows for cross subsidization and systems can create other retention strategies that reduce consumer switching to other digital market power in payment method/digital commerce platforms. As mentioned above, several digital commerce digital payments services in Thailand were introduced by digital commerce firms and are being used within a conglomerate ecosystem. Commercial strategies from these firms are frequently focused on ensuring customers use the adjacent products/services provided by the conglomerate. To do this, they commonly offer benefits for the use of the platform’s digital wallet to make purchases in its digital commerce marketplaces or even offline retail store. The kind of benefits offered range from point collection and redemption, rebates and cashback when using digital payments within the conglomerate’s environment. The user of each digital commerce platform then tends to use the respective digital wallet since it offers better promotion and services. For example, the use of ShopeePay in the Shopee marketplace entails benefits like free shipping vouchers, higher number of loyalty points (Shopee Coins) collected, points redemption, exclusive deals.30 While this certainly has benefits for the consumer in the short term it also raises entry barriers and may be worth monitoring as it can create lock-in effects for both digital wallet and digital commerce platform. In Thailand, digital Good practice suggests that large mergers need review by the competition platforms have authority to check for potential anticompetitive effects. Digital commerce has merged in recent been the sector with the largest Mergers and Acquisitions (M&A) activity, years – but mergers followed by tourism and financial services. From the thirteen M&As where Thai present opportunity firms were target, ten were acquisitions by foreign firm. Foreign acquirer firms to be subject to came from Malaysia. Singapore, Japan, and India. Some platforms in the Digital stronger oversight. commerce (vehicles) and the tourism sectors have acquired more than one firm. Make my Trip, an Indian online travel company acquired hoteltravel.com and itc.travel. Malaysia’s iCar Asia, from Catcha Group, acquired thaicar.com (2013) and one2car.com (2014). These were the second and first largest auto classifieds sites in Thailand. There have also been reports of acquisitions of fintech firms by commercial banks after the entering of these firms into the regulatory sandbox of the BoT. Mergers in digital markets are not all anticompetitive and could produce efficiencies in the markets. Nevertheless, it becomes important to be aware of possible anticompetitive mergers that could undermine competition and affect innovation in Thai markets. Away with entry barriers and market distortions that slow digitalization. Thailand presents A sound and enforceable regulatory framework for development of digital opportunities for services is crucial to build trust in online and digital commerce participation. simplifying digital Digital commerce regulations involve rules on e-signature, e-document, online regulations and intermediation liability, data protection, cybersecurity, and online consumer adding dynamism to protection. There are also obstacles linked to the lack of an enabling regulatory digital service framework or lack of a new regulatory framework for new activities. Some markets. countries lack a well-designed regulatory framework that enables online intermediation while protecting consumers. However, competition in digital service markets is characterized by high regulatory risk and uncertainty, low de facto enforcement, and a vicious cycle of increasingly tight regulations due to the government’s perception of excessive risks in the digital ecosystem. 30 https://shopeepay.co.th/service THAILAND ECONOMIC MONITOR | December 2021 46 Part 2. Building Back Better by Boosting the Digital Economy Personal Data The PDPA imposes disproportional costs on smaller firms, by generating Protection Act uncertainty on requirements for cross border data flows, and through the (PDPA) represents a dampening effect of highly stringent criminal sanctions. Although based on positive step towards European Union’s General Data Protection Regulation (GDPR), the Thai PDPA regulating data but might have a dampening effect on investment derived from lack of clear might unintentionally definitions, tight registration requirements, and scarce leniency for small stifle competition. businesses. Thus, PDPA stringent registration requirements may affect small firms unevenly. Small firms face disproportionate costs under PDPA since the requirement for constant permission soliciting and reporting is more cumbersome to them than to large established players with better compliance capacities. PDPA allows business operators only a two-year grace period before legal enforcement, so small firms will find it complicated to adjust their operations to comply. THAILAND ECONOMIC MONITOR | December 2021 47 Part 2. Building Back Better by Boosting the Digital Economy Excessive regulation Unlike in other countries, a for firms to register firm willing to participate as a Box 7: Regulations that deter entry. to supply products supplier in digital commerce New laws that affect digital firms’ market and services through must go through several activities like the Computer-Related digital commerce – layers of registration with Offences Act and Cybersecurity Act may be may deter different agencies including over-stringent and lack flexibility, which participation of the Department of Business could dampen the investment atmosphere in young and SMEs. Development, the Office of the sector. The fact that these laws have Small and Medium Enterprise criminal liability could be worrisome for Promotion, the Bank of market participants, especially since there is Thailand, and the Consumer no clarity on what constitutes an offence and Protection Board. Digital how omissions will be treated. This could be commerce registration is dampening new investments in the sector, scattered under these especially in business models and different agencies according technologies that are highly based on to the type and size of handling of large volumes of data such as businesses, creating confusion Internet of Things (IoT) and artificial among business operators. Intelligence (AI). Some cloud service For example, an SME that providers want to enter the Thai market wants to participate in digital through the eastern Economic Corridor commerce, would need to (ECC) to install data centers but seem to register under the show concern with the legal regulatory Department of Business uncertainty. This would be indicative of Development and, once their legal uncertainty and risks of high penalties earnings exceed 1.8 million not being compensated by the incentives baht, they also need to given to investors under EEC. Furthermore, register with the Revenue Lack of clarity of high paid up capital Department to be part of the requirements to handle electronic payments VAT system. To get any could be another obstacle for the entry of support from the Office of small businesses to operate an e-commerce Small and Medium Enterprise platform. Current regulation1 lacks clarity in Promotion, then it must also terms of small business requirements to register there. If a firm wants register with BoT to handle payments to have its own payment electronically, even if not with their own system, permission from the payment system. If this is the case, small Bank of Thailand is required. businesses (with paid-up capital below 10 Registration is million baht) may not be permitted to handle disincentivized for small firms e-payments from their customers in their e- due to cumbersome and commerce businesses1. unclear processes. Small firms that are not registered cannot access state services which can prevent them from strengthening their capacities, increase their market reach, and are at a disadvantage with bigger players.31 31 https://tdri.or.th/en/2019/10/bureaucratic-maze-hampers-E-commerce-growth/ THAILAND ECONOMIC MONITOR | December 2021 48 Part 2. Building Back Better by Boosting the Digital Economy Enabling pro-competition regulation can speed digital uptake Procompetitive Some of the features of digital markets raise the need for pro-competition regulation could regulation to mitigate risks. Asymmetric bargaining power between large reduce risks platforms and the small businesses and individuals that connect to them need to associated with be addressed. This can ensure that third party platforms and innovators can market power of connect to and interoperate with the systems on large platforms. Thai regulators platforms. are reviewing approaches of Australia and Japan in regulating digital platforms to curb their market power and prevent harmful effects on their users. They are also looking at the Digital Services and the Digital Markets Acts in the European Union. In Thailand, this could translate to regulations being imposed on transparency and fairness in the terms and conditions imposed on small suppliers to platforms, regulations around sharing data and establishing interoperable systems, managing risks associated with algorithmic decision making (e.g., the risks of discrimination and bias). Expansion of An important constraint for platform adoption is lack of trust in conducting mechanisms to transactions online. Small suppliers to prominent digital commerce platforms in promote Thailand report practices such the use of data on transactions to develop the transparency, platform’s own products that then compete alongside the products from small managing reports of businesses. Regarding commissions, there also seems there is a possibility to abusive practices, and improve clarity and transparency on the commission fees being charged to sellers mechanisms to in leading digital commerce marketplaces.32 Regulation along the lines the EU is resolve disputes, adopting, which prevent these types of practices, is one option, but other should be considered. mechanisms such as facilitating industry codes of conduct and dispute resolution mechanisms are also possible. A direct and clear path for channeling complaints would be beneficial for small businesses participating in digital markets, especially in digital commerce. Currently, there is no clear path for a provider to follow when in need to report issues in its interaction with digital commerce platforms. If a supplier faces such an issue, they can go to Electronic Transactions Development Agency (ETDA) and ETDA will try to discuss the issue with the platforms, or its legal team would look for relevant provisions under other laws/regulations to channel the complaints. Expanding investor’s One goal of ETDA is to enable access to digital data for business planning and access to businesses development. However, opening access to data should not violate provisions of data that does not the PDPA Act. In the EEC, the government is establishing a data lake to pool infringe on data data from public and private sectors for use by businesses.33 The aim is that this privacy could help should contribute towards innovation in the industry 4.0 space. This is a positive potential investors in effort but there is room for improvement in its implementation. For example, digital markets in entities have lacked incentives to add their data to the data lake as there is no Thailand. mechanism for contributors to concentrate. It is difficult to update data as there is a lack of standardization. In practice, much of the data that has been contributed is low value government data. Moreover, given the segmentation of 32 For example, Shopees’s terms and conditions to sellers stipulate that sellers agree that Shopee can charge them a sales transaction fee. The fee shall be deducted from the purchase amount of the buyer that Shopee transfers to the Seller. Nevertheless, the details of the sales fee calculation method and any other relevant conditions are notified through the Shopee platform from time to time. Shopee Thailand Terms of Service. Available at: https://shopee.co.th/docs/3607 33 https://www.thaitch.org/wp-content/uploads/2021/01/210217-PPT-webinar-TICC_EEC- ProgressInvestment-Opportunities_Dr-Luxmon.pdf THAILAND ECONOMIC MONITOR | December 2021 49 Part 2. Building Back Better by Boosting the Digital Economy Thai digital financial services, regulations34 that mandate data sharing in the financial sector could help to spur innovation and entry (this could follow the Open Banking example being pioneered by several countries, including Singapore and the Philippines). Some countries have introduced national level data strategies and instituted protection policies for data-intense solutions to underpin digitalization in several traditionally ‘analog’ sectors, such a health, and retail services. Transparency in data-sharing arrangements (e.g., access rules, security measures) and clear rules on data safeguards have emerged as good regulatory practices. Estonia’s data- sharing infrastructure X-Road is a case in point. X-Road provides a distributed information platform that represents a pillar in the country’s digitalization initiative as it connects different information systems and allows the secure exchange of public and private data. The platform architecture ensures interoperability using common Application Programming Interfaces, APIs, and open standards. Expanding provisions Low availability of spectrum at high prices in Thailand can produce more to prevent spectrum expensive, lower quality mobile broadband services and impose limitations of hoarding can increase firms for the adoption of cutting-edge digital technologies (Figure 53). Thailand the quality of has considerably less spectrum available for use by telecom operators than many broadband services. countries. There have been reports of high amounts of spectrum assigned in perpetuity to government bodies (police, military, intelligence) which is left unused but is also not auctioned for private sector use. Although there might be valid concerns regarding the possible need to use this spectrum in emergency situations, this spectrum could be auctioned to private sector providers that are obliged to run dynamic capacity networks to allow for government needs in case of emergencies. There is no clear roadmap for spectrum management that can put unused spectrum to more efficient use, which creates uncertainty for private sector operators and undermines their capability for improvements in capacity, coverage, quality, and innovation. It is worth noting, at the time of writing this note, DTAC and True have announced intention to merge. If this merger goes through (The merger would need to go through a regulatory review before being approved), it will likely shape competition in both, upstream services markets of telecommunications and downstream digital technology markets. Thai authorities would need to consider how to best undertake this regulatory review, since the merger will likely impact the dynamics of competition in adjacent markets and downstream digital markets, well beyond the sole responsibility of the telecoms regulator as they have a narrower remit than a competition authority. 34 There have been talks about implementing this in Thailand but it has not been established yet. THAILAND ECONOMIC MONITOR | December 2021 50 Part 2. Building Back Better by Boosting the Digital Economy Figure 53: Thai reserve prices versus actual prices in other countries 900 MHz 1800MHz Source: Richard Marsden and Hans-Martin Ihle (2017) “Spectrum Auction Risks Leaving Thailand Stranded in a Mobile Data Slow Lane” Nera Economic Consulting. iii. Availability of factor complementarities in the digital ecosystem are key to promote investment on digital services. Innovation finance Expanding access to innovation financing presents the power to boost the ability and improving digital of firms, especially SMEs, to adopt new business models and digital technology. skills can serve as As well, unless the high demand for digital skills can be met, digital technologies accelerants to digital will remain relatively unexploited. transformation. Digital and complementary skills. Expanding the pool While more digitalization at the level of the firm will increase demand for tech of skilled workers savvy workers, there exists the possibility that many untrained workers fall could help meet the behind in skills and face employment difficulties. Demand for digital skills is best needs of modern exploited when coupled with good cognitive and socioemotional skills. A recent industries in the regional study, which includes Thailand, found that digital occupations require process of not only digital skills, but also cognitive and socioemotional skills (Cunningham digitalization et al. 2021) Thailand is faced IT, engineering, and programming skills, and other STEM related disciplines with the opportunity are critically needed in the digital economy. Business managers point out that to bridge the gap Thai tech and entrepreneurs do not have deep, differentiated experience in their between demand for sectors and are mostly recent graduates. The inability to meet the rising demand digital skills and is owed to both, a lack of supply of the right digital and complementary skills, supply. and a problem of misallocation, stemming from skills mismatch. Technology skills are in high demand, but their availability is still limited – a major constraint to the adoption of technology. Trend analyses The share in total jobs is roughly equivalent to that of Vietnam, which has a GDP suggest that high- per capita just under a third of Thailand’s. Thailand, however, has a large skilled jobs in concentration of mid-skilled workers. The medium-skills jobs comprise the largest pool of workforce available in Thailand, but they stand to bear the highest THAILAND ECONOMIC MONITOR | December 2021 51 Part 2. Building Back Better by Boosting the Digital Economy Thailand lag regional risks of obsolescence (Figure 54). The relative scarcity of digital skills is peers. aggravated by the falling share of the working age population. Furthermore, the working-age population is expected to drop from 71 percent in 2020 (as a share of the total population) to 56 percent in 2060. The absence of Why the economy would not pay workers a premium to make it worth their while complementary to get those skills? The absence of high-skilled jobs points out toward potential investments and the problems of market distortions, coordination externalities, and information presence of labor asymmetries in labor markets. In addition, the absence of complementary firm- market externalities level investments in projects and business initiatives, such as R&D activities and may explain some of non-R&D based innovation (quality improvement, or business process the digital skill gap. innovation), and the unavailability of complementary cognitive and socioemotional skills at the level of workers, could play a part in the diminishing returns to education investments. A firm-level productivity analysis from the World Bank conducted in 2020 found that manufacturing firms with an increased share of skilled labor payments in their operating budget did not have significantly higher productivity. However, the same study found that firms that spend simultaneously more on R&D and skilled labor payments show a significantly higher TFP growth than firms that do not spend as much (or not at all). Notwithstanding, the recent CPSD study found that Thailand’s R&D expenditure as a percentage of GDP, although it has increased over time, continues to lag peers. This provides evidence that advanced skills necessitate complementary investments on innovation to pay off, but that the low level of complementary investments in innovation may be part of the problem. Similarly, the presence of complementary cognitive and socioemotional skills can also be affecting the incentives to acquire advanced digital skills. The cognitive skills linked to analytical and critical thinking can help workers make sense of the information accessed through digital skills (Cunningham et al, 2021). Similarly, critical reasoning can help to develop more digital skills and take advantage of advanced computer and programming routines. Socioemotional skills, such as team playing and group collaboration, can enable workers to conduct collective work through digital solutions, and leverage the utilization of digital technology to combine several results or continuously acquire ever more sophisticated skills (i.e., by learning how to learn). Increasing female In addition to an aging workforce, the female labor force participation rate, before labor force the pandemic hit was comparatively low, especially after childbirth. In 2018, participation and female workforce participation was at about 67 percent, and drop out of the labor enhancing the pool during motherhood was found to be a contributing factor. This suggests availability of foreign that if labor force participation for women were reversed, they would be able to professionals emerge fill some of the unmet demand for high-tech workers. It is worth noting, the as potential ways to measures to contain COVID-19 pandemic may have changed the female bridge skills gaps in participation in the labor market. Further, foreign professionals who could bring the short term. expertise and know-how in digital and STEM related disciplines, are scarce – a situation worsened by restrictions on foreign ownership of firms. The CPSD study found that obtaining work permits and visas were frequently referred to as one important hindrance to foreign operations. Challenges reported by sources included lengthy paperwork to be completed in Thai language, location restrictions reducing worker mobility, stringent reporting requirements, high standards for staff-to-capital ratios, and requirements for local hires. THAILAND ECONOMIC MONITOR | December 2021 52 Part 2. Building Back Better by Boosting the Digital Economy Inter-agency coordination was also identified as a challenge, given that hiring of foreign experts requires involvement of several different institutions, including the Ministry of Labor, profession-specific bodies who set their own rules and regulations, and the Immigration Bureau. It is worth acknowledging that the government has taken steps to address these issues. The BOI introduced the SMART Visa program, which is a valuable measure to attract foreign professionals. Yet because of multiple paper-based and disconnected bureaucratic requirements, uptake has been slower than expected. The BOI can take the program a step further making SMART visa program fully digital. For example, allowing all documentation to be centralized and uploadable to a secure website, relaxing requirements for certification by the issuing organization (or notarization or legalization by any government agency), and accepting English version for the required documents can go a long way to attract foreign talent. Figure 54: Workforce lacks skills of the future Share of employment by skill level and country, 2019 Skills penetration of disruptive tech skills relative to OECD average 60% Skill penetration (percentage) 2.00 1.80 Share of employment 50% 1.60 1.40 40% 1.20 1.00 30% 0.80 0.60 20% 0.40 0.20 10% 0.00 Computer… FinTech Materials Nanotechnology Robotics Engineering Data Science Development Engineering Intelligence Aerospace Science Human Artificial Genetic 0% Tools High-skilled Mid-skilled Low-skilled Republic of Korea Malaysia Thailand Vietnam Thailand OECD Source: ILOStat (Left); World Bank LinkedIn Data for Development (Right) Market information Design of training curricula for digital and complementary skills could better and employment align with employers’ demand. Measures to reduce market mismatch in the labor services emerge as a market were already identified in the January 2021 Thailand Economic Monitor. useful proposition to These included the lists of gaps in market skills, occupational professions, job reduce the mismatch matching and placement services. The CPSD study (forthcoming) also found that of skills. including the private sector’s perspective on the curriculum design of training and academic establishments could be a valuable way to address the problem. These could be coordinated by MOL/TVET agency and industry associations. Furthermore, the introduction of skills -monitoring to address skill shortages is also a potential measure to bridge the availability of digital and complementary skills in the Thai labor market. Thailand Professional Qualification Institute (TPQI) has recently established the E-workforce Ecosystem to electronically link relevant public databases from MOL, MHESI and MOE. Prospective job applicants can update their skills profile in the electronic database and allow potential employers to access their data. This system can also provide policymakers with market information, opening the opportunity for cooperation in designing evidence-based policies. THAILAND ECONOMIC MONITOR | December 2021 53 Part 2. Building Back Better by Boosting the Digital Economy Other countries have introduced similar programs to improve the efficiency of investments in skilling. The UK and Australian governments have set up skills imbalances monitoring procedures and published regular “skilled occupation shortage lists” based on labor market data and inputs from the private sector. These lists are used to inform a range of policies, including curricula development and public employment programs. Recently, Malaysia has also introduced a similar tool—the Critical Occupations List—to inform both immigration and human resource development policies. Reskilling the Upskilling and reskilling of existing workers offers one solution and would workforce, in the address the supply issue and the issue of reducing unemployment from workers context of the rapidly that technology would otherwise pass by. With a higher stock of aged workers, aging population can the need to update employer skills to satisfy evolving needs of an ever-more- expand the pool of demanding market becomes imminent. Thai policymakers have a chance to digital skills in the expand the availability of lifelong learning models through e-learning platforms, market. tax incentives, and voucher systems, in partnership with the private sector. Complementary skills to ICT and digital capabilities include metacognitive and cognitive skills, which should remain as part of the long-term labor planning policy. Policy makers could also link re-skilling and training in emerging sectors to wage subsidies to incentivize firms to hire workers. Financing business digitalization and acquisition of digital technology Financial support for Most financial services that support investments in innovation and acquisition of digitalization and technology are relevant for supporting digitalization of businesses. A vibrant investment in new innovation finance ecosystem can generate income, high growth employment and technologies is an entrepreneurship opportunities. This includes the type of financing that supports essential first step in digitalization at the level of the firm, as well as innovation finance, which the process of a fully supports entry of digital technologies, including risk capital, investment fund, digital economy. and corporate funds. Innovation finance, Thailand’s landscape has relatively little presence of regional-level financial VC which is relevant for funds - pool money from investors to take equity shares in high-growth, high- accelerating the risk startups and features a dominant role of Corporate Venture Capital fund, process business primarily representing in-house financing arms of business conglomerates. digitalization, Further, while some high-net-worth individuals have entered the innovation presents a potential finance space, angel investors thus far play only a limited role in contributing to for growth. early-stage funding in startups and providing guidance and mentorship to aspiring entrepreneurs. Government funding, primarily through grants, presents a third option for accessing innovation financing. However, mid-sized firms (that is, firms that are beyond seed stage) are unable to benefit from government grants set out for smaller firms yet are also unable to access later-stage VC funding, which is typically targeted to larger companies that have achieved some degree of regional expansion. Based on the evidence collated under the recent CPSD, the gaps in presence of innovation finance, can be attributed to problems with prospective borrowers (or investees), issues related to the supply of innovation capital, and opportunities to make the operating environment more conducive. THAILAND ECONOMIC MONITOR | December 2021 54 Part 2. Building Back Better by Boosting the Digital Economy Figure 55: Limited access to innovation financing impedes the ability of firms to adopt new business models and technology. Access to finance between Thailand and selected Size of venture capital funding in Southeast Asia comparator % of Percentage of respondents VC funding ($bn) in 2019 GDP 40 Singapore 6.70 2.04% 35 30 Indonesia 2.67 25 0.24% 20 15 Vietnam 0.99 0.53% 10 5 Malaysia 0.23 0.06% 0 % of firms with a % of loan rejection % of firms using Philippine 0.26 bank loan/line of bank to finance s 0.08% credit investment Thailand 0.13 0.03% Thailand EAP Global benchmark Source: World Bank Enterprise Survey, 2016 ; SEA venture capital landscape 2020, White Star Capital (Right) On the demand side, The 2020 Bank of Thailand (BOT) Survey of SMEs35 revealed that elevated costs information of technology, lack of reliable financial statements, and narrow margins asymmetry problems compromised their ability to obtain finance (Figure 55). The undependability of appeared to be financial records leads to higher interest rates on the loans for SMEs. Financial prevalent among institutions impose stringent standards in considering loans to SMEs, given data young, small, and paucity. In addition, the World Bank Enterprise Survey found that collateral medium sized firms. requirements for a loan in Thailand were high, at over 300 percent of the value of the loan, much higher than the regional average of about 200 percent. On the supply side of Regional risk capital for digital enterprises is relatively absent, while innovation finance, a conglomerate-led finance remains dominant. The absence of regional VC few signs suggest the operators in Thailand deprives startups not only of financing, but also of regional availability of finance market experience and customers, access to know-how and networks (Figure 55). remains subdued The range of policy instruments that can support early-stage innovative ventures is varied. The Thai government could expand its existing support in this area. Some of the best-known instruments include incubators, accelerators, science, and technology parks. The Thai government has introduced several of these instruments to support startups, and to improve the investment readiness of promising entrepreneurs. Typically, this support has been channeled through grants to young firms. Governments can also play a critical role in facilitating the investment process, particularly on the supply side of the risk-capital market. Equity finance for innovative enterprises can be made available through direct investment funds, co-investment funds and funds of funds. These funds typically operate at arms- length from government institutions and present rules for government involvement and exits, letting private investors take a leading role in making investment decisions and committing to the longer-term maturity of investment. 35The Bank of Thailand conducted a nationwide survey and in-depth interview of SMEs in 2020. The survey covered 2,416 SMEs nationwide. THAILAND ECONOMIC MONITOR | December 2021 55 Part 2. Building Back Better by Boosting the Digital Economy The Thai government has made use of these instruments. It has introduced Private Equity Trusts over the past years to support high growth SMEs, and technology intensive SMEs. One example of these is the SME Private Equity trust, which was established in 2017 and counts with the participation of specialized trust management and advisors. The fund supports mid to late funding stage for high growth potential SMEs (Pre series A, Series A and Series B++). However, opportunities to expand government support in this area are ripe. According to the CPSD study, despite funding exists at seed stage, access to non- financial support in the form of managerial advisory and commercial linkages, which are indispensable for sustaining growth until maturity remains limited. Second, the current equity instruments that would help de-risk and increase the attractiveness of investments seem underutilized. The scale of support seems limited. The Thai government could take steps to enhance the use of matching equity fund schemes to de-risk investments and catalyze early-stage capital markets (co-investment funds, fund-of-funds). These present the potential to expand the availability of expertise and funding from regional financial VCs. Several countries like Israel, Brazil and Singapore have scaled the use of such instruments. It is believed that Israel’s Yozma Fund helped successfully catalyze the VC industry, which is one of the largest centers for VC financing in the world. Other countries have put in place programs that promote innovative startups attracting foreign talent at the same time. Examples include Start-Up Chile, which was launched in 2010, and seemed effective in attracting early-stage entrepreneurs, regardless of nationality. The program offered a 24-week training program in which selected entrepreneurs working with startups less than two years of age receive about US$28,000 in grants as seed capital. Another is Bridge Alfa, launched in 2012 in Poland by the National Center for R&D. The program aimed to support young innovative startups by co-financing private seed venture capital funds. In addition, financial regulations in Thailand do not align with international practices and standards, and there is no comprehensive regulatory framework in place for venture capital (VC) financing. The SEC has introduced measures to improve exit options for venture capital investors in Thailand. Exit options can increase the country’s attractiveness for private VCs/PEs to invest in startups. However. there are opportunities to improve the Thai Civil and Commercial Code – for example, by introducing Employee Stock Option Plans (ESOPs) and issuing convertible notes and preferred shares, areas which have shown gaps and provide disincentives to regional investors. Another opportunity is related to Peer to Peer (P2P) lending and crowdfunding platforms. These could expand financing for innovative SMEs. A few of these platforms have been launched in the sandbox but the number of borrowers has significant room for growth, and the ratio of borrowers to users who start the application process can be boosted. The SEC regulates security-based crowdfunding platforms, under which corporate issuers can raise funds through issuance of stocks or debentures, while the BOT regulates P2P lending platforms, under which individual borrowers, including SME owners, can obtain loans. The BOT’s sandbox can be further improved in speed and flexibility. The BOT is THAILAND ECONOMIC MONITOR | December 2021 56 Part 2. Building Back Better by Boosting the Digital Economy reviewing the existing framework accordingly. However, other factors such as adjustments in either the platform’s business model or target customers, as well as the lack of readiness of key platform’s partners, can also come into play and delay sandbox exit. The operating First, a unified legal framework and collateral registry can go a long way in environment of strengthening the secured transactions regime. The range of assets that can be innovation financing used as collateral for SMEs was expanded in 2015 through the promulgation of also presents the Business Security Act (BSA). However, the framework could be significantly opportunities for enhanced if it were to adequately cover non-bank credit providers. In addition, development. the BSA could enhance its coverage of current assets such as inventory and accounts receivable as well as security rights of various claimants throughout the supply chain, broadening the availability of collateralizing assets for SMEs. Finally, increased capacity of financial institutions to develop movable asset- based lending products can significantly expand the available options to SMEs. Second, expansion of coverage for the credit reporting system can bridge a gap and financial service availability. The credit bureau coverage is almost entirely focused on consumers and offers limited data on firms. The advent of fintech, P2P lending, crowdfunding and PromptPay36 open the opportunities to expand information-based lending, adding urgency to the improvement of credit information systems. Third, well-formulated policy for open banking will also promote growth in financing for innovation. Many banks have digital strategies to modernize their products and delivery channels and to enable the use of digital data for decision- making purposes. However, there is an absence of an open Application Programming Interface (API) regulatory framework that would allow third- party providers (TPPs) to access the financial information of banking customers. Further, a lack of privacy and data ownership standards creates a lack of trust among customers who become unwilling to share their information. With digital led The recovery from COVID-19 is likely to be uneven, given the unequal effects of development, the the economic shock between the haves and the have nots. If the path to develop Thai government can digital service markets is left completely unattended, it could head in two ensure growth that is alternative and divergent destinations. One where a widening digital divide could inclusive and increase the income gap, leaving behind the most disadvantaged and vulnerable equitable. groups of society, such as the poor, the youth, and women. Or an alternative path (and the one advocated in this note), where the regard for digital led development becomes an inclusive force of opportunity, which can help policy makers to extend young and smaller firms with access to markets and income generating opportunities. Fostering a new development model, which gives prominence to the role of digital technology can be useful to steer the business sector, particularly young and innovative entrepreneurs, into the more inclusive and equitable development path. 36PromptPay is a real-time electronic fund transfer system launched in January 2017. It was part of national strategy aimed at development of an integrated digital payment infrastructure. 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