By PHUWIT LIMVIPHUWAT
Key financial institutions have been continuously lowering their GDP forecasts for 2019 as the economy looks to be decelerating faster than anticipated.
The National Economic and Social Development Council, Thailand’s top economic advisory body, has adjusted down its GDP forecast from 4 per cent made in February to 3.3 per cent in May. Kasikornbank (KBank) has also lowered its GDP forecast for 2019 from 4 per cent made back in December last year to 3.7 per cent in February and to 3 per cent last week.
The ongoing US-China trade conflict was unanimously cited as the key factor driving down growth, as Thailand is in the supply chain of goods that are impacted by the tariffs the US has imposed on China.
In May, the US raised tariffs from 0-10 per cent to 25 per cent on US$250 billion worth of goods from China. Many of these goods include electronic devices whose parts are manufactured in Thailand. This has led to a continuous drop in Thailand’s shipments to China, the Kingdom’s largest trading partner, since the beginning of this year.
From January to May, Thai exports to China declined by 8.7 per cent year on year with a value of $11.6 billion, reducing by over a billion dollars from the same period last year, according to the Commerce Ministry. The ministry has since reduced its overall year-on-year export growth target for 2019 from 8 per cent to 3 per cent, compared to last year’s 6.9 per cent growth.
However, the ministry’s 3 per cent target is still being viewed as optimistic by various institutions. Economic research units of various commercial banks have estimated that Thailand’s exports will be below 1 per cent. Krungthai Bank and Bangkok Bank predicted that exports would grow by merely 0.8 and 0.5 per cent respectively. KBank predicted that exports would not grow at all.
Another key factor contributing to the decline in exports is the appreciation of the baht throughout 2019. From December 31 to July 3, the baht appreciated by 5.2 per cent, making it the strongest currency to appreciate against the dollar in the Asia Pacific region, according to Siam Commercial Bank’s Economic Intelligence Centre.
The strengthening baht could wipe out as much as Bt66 million off the value of Thailand’s exports this year and cut companies’ profits by about Bt17 billion, according to a research by TMB Analytics.
The appreciation of Thailand’s currency is largely due to the country’s strong current account surplus, the high level of foreign currency reserves and arrival of foreign direct investments, said Jittipol Puksamatanan, chief market strategist of Krungthai Bank.
Businesses that distribute products locally and import raw materials are expected to benefit the most from the baht’s appreciation, said TMB Analytics. They will gain from an estimated reduction in import material of Bt62 billion, and an increase of 0.3-4.9 per cent in gross profit margin.
The final key factor that will negatively impact Thailand’s export figure is the establishment of the EU-Vietnam free trade agreement (EVFTA). Thailand’s trade with the EU has already declined by 7 per cent in the first five months of this year and will continue to decline further throughout the year due to the fact that Vietnam is a key trade competitor of Thailand, according to Aat Pisanwanich, director of the University of Thai Chamber of Commerce’s Centre for International Trade Studies (CITS)
Research from CITS suggests that after the EVFTA becomes active, Vietnamese exports to the EU would increase from $50 billion to $70 billion annually, reducing Thailand’s exports by $20 billion in the second half of this year and $40 billion in the next two years.
To cope with these economic challenges, the Thai government is urged to stimulate domestic spending through various policies such as welfare card policies. Krungthai Bank’s Global Business and Development Group expects the incoming government to inject up to Bt100 billion into the economy to stimulate growth in the second half of this year.
“To boost spending, the government should implement immediate measures to stimulate the economy by targeting consumer spending directly,” said Nattaporn Triratanasirikul, Kasikorn Research Centre’s assistant managing director.
The incoming government is also urged to continue its investments in mega-infrastructure projects to boost investment sentiment throughout the rest of the year, said Siriporn Suwannagarn, managing director and financial advisory head of KBank’s Private Banking Group.
However, infrastructure investment is expected to face major delays in 2019, as hiccups in major infrastructure projects occur and the incoming government facing budget delay issues. For instance, the Transport Ministry plans to invest Bt200 billion in infrastructure projects throughout this year, however, Krungthai Bank’s assessments suggest that only Bt77 billion will actually be spent on projects mainly located in the Kingdom’s central region.
“Our assessments suggest that the Bt77 billion public investment, which accounts for only 0.1 per cent of Thailand’s GDP, will not be sufficient to offset Thailand’s slow economic growth in the second half of this year,” said Mana Nimitvanich, first vice president of the bank’s Global Business Development and Strategy Group.
Finally, Thailand should move swiftly to establish a trade deal with the EU, which accounts for up to 10 per cent of its exports. Thailand should also seek further trade opportunities by establishing new trade agreements and finishing the Regional Comprehensive Economic Partnership negotiations by the end of the year, according to the Asean Business Advisory Council.