NESDC names economic challenges new government will face
The National Economic and Social Development Council (NESDC) has named four economic challenges which the new Thai government must tackle this year.
Although the political landscape in Thailand has become clearer now the general election is over, there is still uncertainty about the parties that will form the new coalition government.
The recent release of significant economic data by the NESDC shows considerable risks for the Thai economy going forward. The new government will have to navigate through challenging circumstances because both the Thai economy and the global economy are currently facing high levels of uncertainty and challenges.
Danucha Pichayanan, the Secretary-General of the NESDC, has projected that the Thai economy will expand in the range of 2.7% to 3.7% this year. However, it will still be exposed to various risks and constraints.
Apart from domestic challenges, the Thai economy will also have to deal with uncertain external factors that can impact its performance. These factors include global economic trends, trade policies of major economies, and geopolitical developments.
1. The risks of a greater-than-expected slowdown in the global economy and volatility in the global financial market encompass conditions that need close monitoring and assessment. These risks include:
Greater-than-expected economic slowdown: The ongoing high inflationary pressure has led central banks to continuously raise interest rates, resulting in tight money market conditions and higher borrowing costs. This can limit economic expansion.
Instability of financial institutions in major economies: Both the United States and Europe are facing liquidity problems, leading to volatility in the financial markets, particularly in the banking sector. This can affect deposit amounts and investment shifts from risky assets to safer ones.
Geopolitical conflicts: Tensions between nations and the recovery of the global economy, especially between the US and China, which are still strained and tend to lead to increased trade, investment, and technological competition, resulting in disruptions in the global production chain.
Public debt ceiling of the US: The debt ceiling issue may lead to government default and have an impact on confidence and the overall US economy, as well as the global economy and the stability of economies holding US government bonds.
2. High levels of domestic household and business debt amid rising interest burdens:
Non-performing loans (NPLs) and the ratio of special mention loans (SML) to total loans in medium-sized and small and medium-sized enterprises (SMEs) remained high in the fourth quarter, at 7.4% and 12.1% respectively, higher than the 4.6% and 3.5% in the same quarter of 2022.
The household debt-to-GDP ratio in the fourth quarter declined slightly to 86.9% from 87% in the previous quarter, but was still higher than 79.9% in the same quarter of 2022.
These high levels of debt for businesses and households can limit domestic recovery efforts and their ability to repay debts at higher interest rates, especially for SMEs and low-income households. Additionally, certain vulnerable groups who depend on loans from non-bank financial institutions that have not fully recovered from the COVID-19 impact may face difficulties.
3. Volatility in weather conditions that may impact agricultural production:
According to the National Oceanic and Atmospheric Administration (NOAA), there is a 62% chance of entering an El Niño phase in the Asia-Pacific region from May to December 2023, continuing until February 2024.
For Thailand, this may result in lower-than-average rainfall, with the Meteorological Department forecasting an average of 133.6 millimeters of rainfall in the second quarter of 2023, lower than the normal average of 154.8 millimeters. The average temperature is also expected to be 30.3 degrees Celsius, higher than the normal average of 29.1 degrees Celsius. These weather fluctuations may impact agricultural production.
4. Political and economic challenges after the election and delays in the approval of the 2024 fiscal year budget:
While the formation of a new government is expected to proceed smoothly, the political environment and policy directions after the election may still pose challenges. Delays in passing the 2024 fiscal year budget could also impact economic and investment activities. The government's policy stance and budget allocation will be closely watched for their effects on various sectors and investor confidence, according to the NESDB analysis.