Covid third wave hurts economic recovery but export growth robust

The revised forecast follows downward revision of tourist arrival projections and the impact from the longer-than-expected domestic Covid outbreak, although the economy is propped by robust export recovery and government's stimulus measures.

The EIU said the Thai economy was greatly impacted by the domestic pandemic resurgence, which is projected to take approximately four months (April-July) to contain, leading to significant decline in private consumption, especially face-to-face activities.

Bleak tourism prospects

Meanwhile, foreign tourist arrivals are projected at only 0.4 million people, despite reopening plans in the latter half of the year, as many countries remain cautious about easing restrictions for international travel due to concerns about new Covid variants. Subdued tourism will add to deeper economic scars among businesses and workers, particulary in tourism-related sectors, the EIU said. However, the Thai economic growth will not be much slower than the previous forecast, owing to robust export growth in line with the global economic recovery, especially among developed economies with accelerated vaccination pace.

Stimulus support

Another equally important push factor is the government support from the THB240 billion stimulus from the THB1-trillion loan decree, and a projected additional THB100 billion stimulus under the newly launched THB500-billion decree.

Going forward, the Thai economy is expected to gradually recover to reach pre-Covid levels in early 2023 and still face downside risks from the possible longer-than-expected pandemic containment timeline and slow progress in vaccination, which could delay economic recovery and make the economy more fragile, the EIU said. Therefore, improvement in the pace of vaccination to help boost confidence and jump-start short-term economic recovery, followed by economic restructuring towards the new normal, would be crucial for minimising permanent output loss for the Thai economy, the EIU added.

The global economic recovery is expected to be robust this year, but uneven across countries, mainly hinging on the effectiveness of pandemic containment, the vaccination pace, and the size of fiscal stimulus support.

The EIU revised its 2021 global economic growth projection to 5.8 per cent from the previous projection of 5.6 per cent. The global recovery is led by earlier lockdown easing among developed economies after rapid vaccination along with sizable and continuous fiscal support.

With improving consumer confidence, households may bring forward accumulated savings from last year and gradually spend on additional consumption.

Meanwhile, recoveries among emerging markets (EMs) will remain sluggish as delayed vaccinations have forced governments to prolong strict lockdown measures. Also, fiscal support for EMs are smaller in size due to limited fiscal space compared to developed countries, the EIU said.

Higher inflation

A strong recovery in global demand, together with limited global supply from shortages of some commodities and production factors, has caused inflation rates to rise across many countries. Recently, global inflationary pressures came from:

▪︎ pent-up demand and excess savings, causing prices of goods and services to spike after reopening;

▪︎ rise in commodity prices adding to higher production costs;

▪︎ continuous expansion of the global housing market, especially in developed countries such as the US and UK, leading to higher rental costs;

▪︎ higher wages as labour markets in some countries (such as the US) continued to be tight: low-wage workers have not yet fully returned to work as they are still discouraged by both the pandemic and generous fiscal support as unemployment benefits. Inflationary pressures are expected to gradually subside in the second half of 2021, as fiscal support measures are gradually wound up, commodity supply adjustments follow price increases, as well as from slowing wage pressure with more workers returning to the market. As of now, global inflation spikes have already caused government bond yields to rise in many countries.

Nonetheless, the EIU expects major central banks to maintain accommodative monetary policies.

Policy rates are expected to remain on hold, but central banks could start to signal tapering of quantitative easing (QE) in the latter half of this year, potentially leading to volatilities in asset prices and cross-country funds flows.

Exports lead the way

Thai exports have seen robust recovery in line with the improving global economy and trade. In the first four months of 2021, Thai exports, excluding gold, remarkably expanded 12.8 per cent year on year, and the expansion was broad-based across essentially all key products.

For the rest of year, speeding up global growth, particularly among developed countries, coupled with thriving prices of export products following rising commodity prices, should further boost Thailand’s export performance, especially during May-July with low base support, the EIU said.

With these factors, the EIU has revised Thailand’s exports growth projection up to 15 per cent from the previous forecast of 8.6 per cent. Thailand’s improving exports will help boost private investments, particularly in tools and machinery. Nevertheless, private construction investments remain largely subdued following sluggish recovery in the real estate sector.

Regarding tourism, the EIU has lowered the projection for foreign tourist arrivals in 2021 to 0.4 million, from the previously projected 1.5 million. Despite Thailand’s relaxation of lockdown measures to accept more foreign tourists, such as the Phuket sandbox, many countries are still imposing strict travel restrictions in fear of new virus variants. For example, the UK, despite high domestic vaccination rates, continues to maintain tight travel restrictions under Traffic Light system while UK returnees must be quarantined for durations according to the colour scale of their travel destinations. In the UK, countries are classified into red, yellow, and green scale, from strictest to most relaxed quarantine requirement. Thailand is in the yellow zone, requiring a 10-day home quarantine upon return to the UK.

If countries with early herd immunity like UK choose protective measures like the one in the UK, recovery for global travel could be further delayed. As a result, the EIC has adjusted foreign tourist arrival projection downward for this year.

On the domestic front, the economic damage from the third Covid-19 wave could be larger than expected. Even though the government has avoided strict lockdown measures to limit economic impacts, large and continuous spread of the pandemic has made residents more cautious about travel and significantly lowered their levels of economic activities, as suggested by high-frequency indicators such as various mobility data.

In its previous forecast, the EIU had projected that containment of the third wave could take up to three months. However, the situation has recently worsened from rising number of cases and clusters. The EIU now expects that this round of the pandemic could take up to four months to contain and cost around THB310 billion in economic damage to private consumption, including losses from declining domestic tourism.

Rising unemployment

The prolonged pandemic could potentially cause deeper economic scars.

Recent data indicated that unemployment rate rose again in the first quarter of 2021 to 1.96 per cent, from 1.86 per cent in the previous quarter. The number of unemployed people was at 0.76 million people, which already exceeded the number during the first lockdown last year. As rising unemployment in the first quarter has not taken into account the impact of the severe third wave, it is likely that Thailand’s unemployment rate could rise further this year, the EIU said.

At the same time, the average working hours shrank 1.8 per cent as the number of underemployed people (working less than 35 hours per week) rose, including 0.78 million furloughed workers who had not lost jobs but reported zero working hours. This furloughed worker figure more than doubled from 0.36 million in the previous quarter while the number of full-time and overtime workers decreased. In addition, work income, including salary, bonus, and overtime pay, significantly declined 8.8 per cent from the same period of last year across most major non-agricultural business sectors. Consequently, deeper scars in the labour market would negatively impact household incomes and confidence, resulting in slower consumption recovery and more sluggish restoration of household balance sheets from higher debt-to-income ratio, the EIU said.

Higher household debt

Thailand’s household debt-to-GDP ratio is expected to increase in the first quarter, due mainly to GDP contraction, and stay high throughout 2021 in line with ongoing debt forbearance measures.

With slow recovery of household income, debt overhang will be another obstacle for Thailand’s economic growth going forward, the EIU said.

Government fiscal support, with both on-budget and off-budget financing, will play crucial roles in shoring up economic growth in 2021. Regarding on-budget financing, the EIU expects construction investment in 2021 to expand 9.6 per cent from multiple construction projects, including the high-speed train between Bangkok-Nakhon Ratchasima, high-speed train linking three major airports, and dual-rail train etc.

Meanwhile, the off-budget financing would mainly come from the THB1-trillion loan decree with approximately THB530 billion of injection this year, consisting of THB290 billion approved before the third wave and an additional THB240 billion approved after the third wave, which depleted the THB1 trillion budget.

New relief measures include electricity and water fee subsidies, expansion of the Rao Chana and Mor33 Rao Rak Gun handout schemes, welfare card owner benefit payments, third-phase of Kon-la-krueng copayment scheme, and Ying-Chai-Ying-Dai subsidy. In addition, the government recently passed another THB500-billion loan decree with budget plan lasting up until next year. Based on the current state of the Thai economy, the EIU expects the government to inject another THB100 billion from this new budget decree in 2021.

These fiscal measures will be vital to limit the impact of the longer-than-expected third wave on Thailand’s private consumption.

The EIU has revised consumption growth down to 1.9 per cent this year from the previous projection of 2 per cent.

Monetary policy

In monetary policy, the EIU expects the Bank of Thailand (BOT) to hold the policy rate at 0.5 per cent for the rest of 2021 but will emphasise loan restructuring and widespread loan disbursement measures to increase the efficiency of monetary policy transmission. Thailand’s overall financial condition continues to be accomodative, as the BOT holds its policy rate at a record low and although inflation is expected to rise from the previous year due to higher oil prices, it remains at a low level. Headline inflation is forecasted at 1.3 per cent for 2021. However, rising long-term Thai government bond yields in line with rising US treasury yields have led to higher financing costs for businesses and the government. In particular, businesses with higher credit risks are more impacted since the credit spread has widened due to weaker economic conditions.

Going forward, the EIU expects the BOT to hold its policy rate steady at 0.5 per cent for the rest of 2021 alongside purchasing government bonds in the secondary market as necessary to maintain interest rates in the financial markets at a low level and support the economic recovery.

In addition, extensions for measures already in place which will expire soon are also necessary, including the Financial Insitutions Development Fund fee reduction scheme and relaxation of loan quality classification for financial institutions, which would assist financial institutions in maintaining support for their customers through both financing costs and loan restructuring.

Furthermore, the effectiveness of the rehabilitation loan scheme and the asset warehousing scheme must be monitored closely in order to improve the scheme’s conditions to ensure that SMEs have widespread and prompt access to the loans.

The way forward for the baht

The EIU expects the baht to depreciate year on year at the end of 2021 to a range of THB31-32 to the US dollar.

Since the beginning of the year, the baht has depreciated 4.2 per cent against the US dollar which is a greater depreciation than most other regional currencies, mainly as a result of lower economic growth outlook due to the new Covid-19 wave and lower current account balance.

For the rest of 2021, the EIU expects domestic factors to put downward pressure on the baht from the current account, which could see a deficit for the first time in eight years, and the sluggish Thai economic growth which would limit capital flows into the Thai financial markets. However, the baht compared to the US dollar would not depreciate much since the US dollar is also expected to depreciate in the second half of the year, as other major economies see an accelerated recovery going forward, especially in Europe, while economic recovery in the US may decelerate.

The European Central Bank (ECB) is expected to taper its quantitative easing programme before the Fed, which is expected to start tapering in early 2022. Nonetheless, the baht could appreciate again towards the end of the year and at the beginning of next year if progress in vaccination allows Thailand to almost achieve herd immunity, the EIU said.

Downside risks for the Thai economy going forward include:

▪︎ containment timeline for the third wave outbreak, which may be longer than expected, alongside potential new outbreaks as long as vaccination rate remains low; 

▪︎ slow progress in vaccination and low vaccine efficacy, which may not be effective enough against new virus strains;

▪︎ Covid-19 resurgence or new outbreaks in many countries, especially in Asia, which could impact Thai exports;

▪︎ deeper than expected impact from scarring effects such as a significant rise in non-performing loans.

Sluggish recovery

The EIU expects Thailand’s economic recovery in the next 2-3 years to remain sluggish, GDP would reach the pre-Covid level only in early 2023. This could result in a large permanent output loss mainly because the Thai economy is heavily reliant on the tourism sector, which is expected to see a slow recovery. Additionally several challenging factors remain, such as deep scarring effects on the Thai economy, pre-existing vulnerabilities from high household debt, and challenges for SMEs to adapt to new technological changes and stronger competition.

The EIU suggested that the public sector, which is the main economic driver amid the crisis, should implement measures to support a faster economic recovery and reduce the size of permanent output loss.

The EIU sees the THB500 billion additional borrowing by the government as suitable theoretically but in practice should be disbursed cost-effectively to build confidence and reduce scarring effects on the economy in the short-term. This could be done through accelerating vaccine procurement and distribution, supporting impacted people and SMEs, and promoting employment, the EIU said. In addition, the government should implement measures to restructure the economy for recovery in the medium and long term, such as upskiling and reskilling labour for the modern economy, especially in digital skills, educating SMEs about digital technologies and applying them practically, and supporting new growth industries which would become Thailand’s key economic drivers in the future.

The rising public debt remains managable despite likely crossing the 60 per cent of GDP threshold next year, as government bond yields remain low, which would limit the interest servicing costs to government revenue ratio, the EIU said. Nonetheless, going forward, the government would need to outline a clear practical plan to expand revenue base and manage expenses more efficiently to maintain fiscal sustainability, the EIU said.

(The writer is chief economist at the Economic Intelligence Unit, Siam Commercia Bank Plc)