Monthly Economic Bulletin (July 2023)

Global: Lower risk of recession but economy could slow down ahead

Good news is softening inflation in response to multi-year high interest rates in key countries but policy moves and fading reopening tailwinds could dampen economic growth ahead

 

US: FOMC might end this rate-hike cycle possibly after another hike in July premised on signs of disinflation, downside risk to growth, and effects of positive real interest rates

 

Euro-zone: Strong labor market and falling commodity prices could lead to only “mild recession” in 2023

 

Japan: Wage hike policy against backdrop of high inflation could strengthen domestic consumption and space to tweak monetary policy

 

China: Growth is losing steam amid fading reopening tailwinds, weak global demand, and US-China tension; structural problems would limit policy space and effectiveness

 

Thailand: Lingering uncertainty over government formation

 

Krungsri Research Forecasts for 2023

Rising uncertainty over government formation (and the next PM) amid several threats that could reshape the coalition government

Political timeline: Expect next government to be formed by August but there could be delays in approving and implementing FY2024 budget bill

There is only two months before the start of 2024 fiscal year (starting October 1, 2023), which suggests possible delay in approving and implementing the FY2024 budget bill. In the 2019 election, the government was formed in early July but the FY2020 budget bill (which should start on October 1, 2019) was delayed by 3-4 months and only approved in January 2020. 

 

Budget Bureau expects FY2024 Budget Bill to be delayed by 6 months or take effect in late March 2024 if the new government is formed in August

Mr.Chalermphol Pensoot, Budget Bureau director, said the bureau has yet to adjust the timeline for the Budget Bill for fiscal year 2024, which was originally planned to align with the prime minister selection process in July. The expectation was for the new PM and cabinet to assume duties in August. The Budget Bureau will start the process of preparing the FY2024 budget in August, starting with proposing the budget calendar to the Cabinet for consideration in the 2nd week of August. However, he said the Bill might only come into effect in March 2024 or be delayed beyond the regular budget timeline by 6 months. The next fiscal year will start on 1 October 2023. Based on data on the previous election in March 2019, the preparation of the FY2020 Budget Bill was delayed and had an impact on budget disbursement, particularly the capital budget or public investment, in the first 2 quarters of the fiscal year. However, once it took effect, disbursements had accelerated.

Impending drought might start to hit farm output in 2H23; impact would be limited this year but is expected to worsen in 2024

The emergence of El Niño conditions have started to impact the climate in Thailand but the full effect is likely to manifest in 2024 and 2025 as the country experiences higher temperatures resulting from the delayed onset of seasonal rains and cause below-average precipitation across the country. In 2023, the effects would be most visible on output of crops that are sensitive to water shortages, such as off-season rice and cassava. In 2024 and 2025, the negative impact will expand to include other major crops, including sugarcane, corn, fruits, and forestry goods; though in some cases, the effects will be felt more strongly by downstream industries than upstream suppliers. In our baseline case, overall drought-related losses are expected to amount to THB 50 billion or 0.29% of GDP; it could reach THB 78 billion or 0.45% of GDP if the drought is more severe than expected.

Tourism sector remains a key economic growth driver with 1H23 foreign tourist arrivals at 13 mn; full-year arrivals could beat our 27 mn forecast given a peaceful political transition

The Tourism Authority of Thailand’s data show the country welcomed 2.20 mn foreign tourists in June, up from 2.01 mn in May. In the first half of this year, tourist arrivals reached 12.87 mn or 65% of pre-Covid level (2019). Arrivals from Malaysia, Russia, South Korea and India reached 78-110% of pre-pandemic levels. Chinese tourists are returning slowly (26% of pre-Covid level). For the rest of this year, we expect more Chinese tourists following more slots for Chinese airlines, from 150 flights per week to over 400 starting in September. The number of inbound tourists in 1H23 was better-than-expectations and will rise in 2H23, particularly from China. And, Q4 is peak tourist season in Thailand. Hence, full-year tourist arrivals could beat our 27 mn estimate if there is peaceful political transition in the country.

Private consumption will continue to grow amid lower unemployment but growth would be capped by still-low income, still-high debt, higher interest rates, and drought impact

Private Consumption Index rose 7.3% YoY in May. There was improvement in most categories driven by recovering tourism activity, a growing services sector ((which reduced unemployment rate to pre-pandemic level and pushed up labor cost index to its highest since 2Q20), improving confidence, and economic activity during the May general election. For the rest of the year, recovering tourism activity and easing inflationary pressure following lower fuel prices would continue to foster consumption. However, rising interest rates, still-low labor wage (below 1H20 average), and slowing farm income growth (due to drought impact and lower agricultural product prices) could make fragile households more vulnerability, especially the low- and middle-income groups.

Household debt stood at 90.6% of GDP in 1Q23, while 85% of indebted households are classified as “fragile” group

The BOT has redefined and broadened its definition of indebted households to include additional lenders^1/, which pushed up total debt owed by Thai households to THB 16trn in 1Q23, or 90.6% of GDP vs 86.3% under previous definition. However, it is below that registered in 4Q22, at 91.4% of GDP (87.0% pre-adjustment). However, the structure of household debt classified by purpose remained close to pre-adjustment level, which are mostly real estate loans (34% of total debt), followed by credit card & personal loan (27%) and own business loans (18%). Based on NSO data, 85% of indebted households (earnings below THB 50,000/month) are in a situation where their monthly outgoings (including debt repayments) are greater than their monthly income. Those households will find it difficult to increase future spending or secure borrowings. And their problem would be made worse by the current rate hike cycle.

Private investment: Positive signs from improving sentiment in the manufacturing and services sectors and rising FDI, but there is lingering headwind from domestic political uncertainty

Private Investment Index rose 2.2% YoY in May mainly due to specific factors, especially imports of airplanes. The Business Sentiment Index (BSI) improved to 51.0 in Jun from 49.7 in May led by expansion in manufacturing and non-manufacturing BSI (above-50). This is in line with the improving Service Production Index (SPI) and smaller contraction in the Manufacturing Production Index (MPI). For the rest of this year, we expect private investment to be stable as investors might delay investment decisions pending clarity on the formation of the next government and their economic policies. However, there are still positive signs for medium-term investment premised on rising number of foreign direct investment applications, by 33% YoY to 507 projects in 1H23 with a total investment value of THB304 bn (+141%), led by China, Singapore, and Japan.

Exports: May export value fell less than expected as shipments of industrial products expanded for the first time in 8 months led by a few product categories

 

Outlook clouded by weak global production and Asia exports, though specific factors could boost export of some product categories

In the first five months of this year, Thai exports contracted 5.1% YoY led by a 5.4% decline in orders for industrial products such as computers & parts, oil-related products, and 1.3% decline in agricultural & agro-industrial products such as rubber and tapioca products. China reopening and easing chip shortage helped to boost exports of cars & parts, fresh-frozen & dried fruit, and electrical appliances. However, Thailand's exports remain fragile given signs of weaker manufacturing activity in major countries and slower exports in key Asian countries.

Headline inflation slipped to only 0.2% in June with full-year average expected at 1.9%;  MPC might raise policy rate to 2.25% in August but that could be the last hike in this cycle