Encumbered by high household debt, the impact of the pandemic and the war in Ukraine, Thailand’s economy is exploring foreign investment and infrastructure projects to give it a much-needed boost. Peter Janssen reports.
Thailand’s economy has suffered external shocks over the past two years, while also facing internal challenges, such as a rapidly ageing society, persistently high household debt and declining competitiveness in a fairly dynamic, fast-growing region.
While nowhere was spared from the Covid-19 pandemic, Thailand was perhaps affected more than its peers thanks to an over-reliance on foreign tourism, which accounted for about 12% of gross domestic product (GDP), or $62bn in revenue, in 2019. Thanks to Covid-related travel restrictions and lockdowns, Thailand’s GDP contracted by 6.2% in 2020. It inched back up by 1.6% in 2021 when a mere 430,000 international tourists visited — a stark drop from the 40 million in 2019. Until tourism gets up to speed, Thailand will have trouble balancing its books.
Just when things were starting to look a bit brighter in early 2022 — with the country steadily reopening to tourism and exports heading upwards on the back of economic recoveries in the US and Europe — the Russia–Ukraine war broke out. Neither country is a major trade partner, but Thailand is highly dependent on imports of oil, natural gas and chemical fertilisers, all of which saw price hikes as a result of the conflict.
South-east Asia is a net energy importer, but Thailand’s import dependency outpaces its peers in the region. For every 10% increase in average crude oil price, GDP is likely to decline by around 0.5–0.7%, according to the Kasikorn Research Center.
In response to the war, most economists have lowered their projections for Thailand’s GDP growth in 2022 to the 2.5–3.2% range.
Oil intensity
“Thailand’s oil intensity is one of the highest among non-oil producing countries in the world,” says Kirida Bhaopichitr, director of the Economic Intelligence Service at think tank the Thailand Development Research Institute (TDRI). This is not a new problem; it is the result of historic policy failures and oversights. Since the 1960s, Thai governments have favoured road over rail transport, which now accounts for less than 5% of all freight traffic.
To his credit, Thai prime minister Prayut Chan-o-cha has been placing an emphasis on expanding Thailand’s railway network by adding another 1000km to make it dual-track. This will speed up passenger and freight traffic, while extending the mass transit system in Bangkok, comprising nearly 180km of overhead and underground tracks by 2021.
Thailand, already a well-established automobile manufacturing hub, is also heavily promoting local production of electric vehicles. But these initiatives will take time and follow-up policies to reduce the nation’s oil import dependency.
While Thailand pledged at COP26 to reduce greenhouse gas emissions by 40% by 2030 and become carbon neutral by 2050, these targets are now less likely to be realised with the Russia–Ukraine war underway, as shuttering coal plants has become more difficult. As of 2020, Thailand depended on natural gas for 55% of its electricity production, 18% on coal and 14% on imports. Only 10% of Thailand’s energy usage came from renewables.
Stagflation fears
With the hikes in oil prices and rising costs of food production, inflation is now back with a bang.
In February 2022, Thailand’s Consumer Price Index shot up 5.8% year-on-year, marking a 10-year high, and is likely to remain at elevated levels throughout the year. The Bank of Thailand (BOT) does not think ‘stagflation’ (defined as a long period of high inflation and no growth) is on the cards. On March 30, the Monetary Policy Committee decided to maintain the policy rate at 0.50%, projecting that inflation will average 4.9% in 2022 and drop to 1.7% in 2023.
“The committee assesses that the Thai economy will remain intact in 2022 and 2023, despite impacts from sanctions against Russia which led to higher energy and commodity prices, and a slowdown in external demand,” said the BOT, while predicting that GDP would grow 3.2% in 2022 and 4.4.% in 2023.
Not everyone is convinced. “I think the big question now is whether private consumption, which is 50% of Thailand’s GDP, will clearly improve in time, so we can have a [good] economic outlook for the second half of the year,” says Tim Leelahaphan, Standard Chartered’s economist for Thailand and Vietnam. “If demand cannot improve in time, that is when we can say that Thailand is facing stagflation. When you look at the data, private consumption remains quite flat, despite a series of stimulus packages.”
Covid largesse and household debt
Thailand spent heavily on relief measures during the Covid-19 period, hiking public debt from 42% of GDP in 2019 to almost 60% of GDP in 2021. In 2020, the government announced a $71.2bn Covid response package representing almost 13% of GDP that focused primarily on providing relief to the most vulnerable households and small to medium-sized enterprises.
The World Bank has noted that the relief programme prevented millions from slipping into abject poverty and assisted many who had been neglected under former pro-poor policies. “The bulk of the assistance was allocated to informal workers and farmers who would not have been considered vulnerable prior to the pandemic,” says Birgit Hansl, World Bank country manager for Thailand. Thailand’s poverty lines, defined as people earning less than $5.50 per day, declined from 6.4% in 2020 to 6.2% in 2021, according to World Bank estimates.
While the relief measures put a temporary cap on poverty, they have not reduced household debt, which reached nearly $420bn, or 90.1% of GDP, by year-end 2021, one of the highest in Asia. According to BOT figures, household debt is owed to commercial banks (43%), state-owned specialised banks (28%), co-operatives (15%), credit cards (11%) and other financial corporations (14%). The central bank estimates that 8% of households are borrowing from the informal sector. “Frankly speaking, it is hard to estimate how much it is, but it’s out there,” says Ronadol Numnonda, BOT deputy governor.
As long as household debt remains high, consumption will remain flaccid, especially if accompanied by high inflation. “In the long run, it will hamper the consumption ability of households because if their income doesn’t rise quickly enough, then they will have to cut consumption to pay back their debt,” says TDRI’s Ms Bhaopichitr. Consumption should be boosted by the return of international tourists, who in 2019 accounted for about 20% of domestic spending. This is no doubt one reason why the Thai government is trying to rapidly reopen the country to tourism, despite the ongoing threat of Covid-19.
Boosting GDP growth
Another way to reduce household debt would be to increase GDP. Tourism is not the only engine of economic growth in Thailand — the country has a well-diversified economy that saw exports jump 17% in 2021, and are expected to reach 5–6% growth in 2022. Foreign direct investment (FDI) inflows also resumed last year, amounting to $11.4bn, compared with $4.8bn in 2019, according to BOT statistics.
Thailand stands to benefit from the “decoupling” of FDI from China that started with the US–China trade war a few years ago. “I think the Ukraine situation has accelerated the decoupling in the world, so many Western, Japanese, Taiwanese and South Korean companies want to decouple more from China,” says Ms Bhaopichitr. “They want to move their factories to south-east Asia.”
While much of it is going to neighbouring Vietnam, Thailand has its own attractions. “I think the advantage Thailand has over Vietnam is infrastructure, liveability and, for some industries, the supply chains are much stronger,” adds Ms Bhaopichitr.
Thailand also has the Eastern Economic Corridor (EEC), the government’s mega-project intended to catapult the economy into higher-tech, value-added industries. The EEC, based in the three eastern provinces of Chachoengsao, Chonburi and Rayong, is a combination of $50bn in infrastructure building (including a high-speed train and expansion of two deep-sea ports) and special incentives to attract FDI to high-tech sectors such as advanced electronics, bio-refining, electric vehicles, medical equipment, robotics and aviation.
Most economists concur that the EEC is heading in the right direction, albeit a bit slowed by the Covid-19 crisis. “I like the idea,” says Mr Leelahaphan. “And I believe that it is good not only for investors but for portfolio investors who like the idea. They like to see a medium-term theme for a country, to develop the country to reach new potential.”
