The Year of two Rats for Thai economy
When exports decline along with softening global demand and the on-going trade war uncertainty, exporters would likely order less from manufacturers.
Then, investors tend to experience a problem of excess supply and could start to lower their production as seen in the lower capacity utilisation rate and the shrinking Manufacturing Production Index (MPI). Companies cut working hours, resulting in a decline in overtime payment.
Consumers then get hit because of declining non-farm income whereas farm income remains volatile from drought and floods, affecting agricultural production.
Meanwhile, the government has tried to provide cash transfers to the poor and introduced consumption stimulus packages which could somewhat help stabilise purchasing power.
However, it may be hard to revive spending when income remains low amid weak confidence.
The BOT cut the policy rate twice this year from 1.75 per cent to 1.25 per cent while we would wait and see the transmission of higher liquidity to the financial market that could stimulate investment and consumption.
Despite rate cuts and relaxation of capital outflows by the BOT, the baht has remained strong against regional peers, deterring competitiveness on top of global economic slowdown.
Will the economy slow down further?
The National Economic and Social Development Council (NESDC) reported that the Thai economy in the third quarter of 2019 expanded by 2.4 per cent from the same period last year or increased by 0.1 per cent from the second quarter after seasonal adjustment.
The slow quarterly growth is quite alarming because Thailand could experience a technical recession -- two consecutive quarters with negative quarter-on-quarter growth -- if the downward trend persists.
We do not think so. We still look at the Thai economy on the bright side – continual slow growth.
Some good signs to expect in 4th quarter
Despite softening growth, there are some indicators pointing towards rebounding economic activities.
First, we could expect continual positive contribution to growth from external factors. Export growth would likely fall modestly while imports could fall more than exports, causing a large trade balance surplus.
Stronger tourism revenue could be a positive factor to growth. Local investors could run down inventory before accelerating their production, which could cause continued negative import growth for the next few quarters.
Second, investment could likely pick up, especially projects that are a collaboration between the private sector and the government or public-private partnership.
An increase in project approval by the Board of Investment (BOI) for the Eastern Economic Corridor (EEC) and other areas signalled higher private investment going forward.
However, we could watch out for residential construction as problems of oversupply could linger.
Third, private consumption grew well for tourism-related spending, such as hotels and restaurants, food and non-alcoholic beverage, whereas some items could continue slowing down amid weak purchasing power among low-income households.
Car sales may fall further amid lower consumer confidence. Fourth, public spending could be stronger to drive growth, especially when we could expect the budget bill to pass by January 2020.
Outlook for 2020 – the year of 2 Rats
The year 2020 in the Chinese zodiac is the Year of the Rat. In economic outlook, we could look at it as both positive outcome and risk factors for RAT. For positive outcome, we could expect Relocation, Active stimulus and Tourism. We could expect industry relocation from China to Thailand, especially to the EEC area to avoid the US-China trade war and use Thailand as a connectivity hub for Asean.
Investors could resume increasing their production, which could generate higher income for households and contribute to higher exports.
The government would likely be more active in terms of fiscal stimulus when the budget bill is passed by January 2020.
The BOT would likely hold the rate unchanged at 1.25 per cent throughout the year but they may cut the rate if the economy decelerates further, as they still have policy space to employ when necessary.
Tourism would likely remain a growth driver for the Thai economy, especially after the number of Chinese tourists rebounded sharply in the third quarter.
Risks that could restrain Thailand’s economic growth are real estate, the appreciating baht and the trade war.
The problem of over-supply in residential real estate with tight regulation on mortgage by the BOT could lower outlook on private construction.
The strong baht against peers could hurt exports, especially commodity exports which could subsequently lower outlook for farm income.
Tourism may suffer a slight hit from the stronger baht against peers but the number of tourists would likely grow along higher Chinese demand for travelling.
Meanwhile, at present, we don't expect the trade war to escalate, which could allow exporters and investors to adjust themselves no matter what tariff rates could be set.
However, if trade wars escalate to higher tariffs or more countries are added to US President Donald Trump's list or trade wars lead to currency wars and technological wars, the global economy could decelerate which could subsequently hurt Thailand’s exports and domestic market.
In sum, we would project a moderate positive outcome with low likelihood for risk factors. We projected the Thai GDP to grow by 2.7 per cent in 2020 from 2.4 per cent in 2019.
Outlook for FX and interest rate
The BOT would likely hold the rate unchanged at 1.25 per cent throughout 2020. The BOT would monitor the transmission of interest rate cut on the financial market before taking another step to loosen monetary policy.
Meanwhile, liquidity in the market is rather high due mainly to slow business loan growth, especially from small enterprises.
Consumer loan growth would likely soften from tight regulation on mortgage from the BOT together with more caution by commercial banks for fear of rising NPLs.
Thus, Thailand would not have a problem of tight liquidity which requires another rate cut.
On the other hand, Thailand’s financial market is likely to experience a challenge of stability due to the prolonged low interest rate environment which could induce investors to invest in risky assets without properly understanding risks.
Meanwhile, the BOT could encourage more capital outflows from local investors so as to allow the baht to weaken or slow the pace of appreciation against the US dollar and regional peers.
In line with the attempt by the BOT, we project that the baht would strengthen to Bt29.50 to the US dollar by year-end 2020 amid the large current account surplus.
Net exports could remain large due mainly to slow import growth from high inventory and low oil prices while tourism revenue could grow moderately from rebounding Chinese tourists.
In addition to trade flows, foreign direct investment could accelerate amid higher project approval by the BOI in line with industry relocation.