Asia Pacific Economic Outlook, May 2013

Last year was marked by significant improvements in Thailand’s economic parameters. However, there are three key challenges that the country faces from both external and domestic sources.

APAC May 2013 Thailand

Robust growth, low unemployment, stable inflation, strong currency, and a growing equity market—the year 2012 was marked by significant improvements in Thailand with respect to all economic parameters. The economy bounced back with a strong growth of 6.4 percent year over year after a dismal growth of 0.1 percent year over year in 2011 because of the devastating flood. Q4 2012 saw the biggest-ever jump (19 percent) in year-over-year performance of real GDP due to very strong growth in private investment, change in inventories, and services export. The growth in consumption demand was also robust during the quarter. The spending power of the growing middle class, augmented by income tax cuts and rise in general wages in 2012, along with the government’s intense efforts to build infrastructure, helped overall spending growth. Recently, the World Bank revised its forecast for Thailand’s GDP to 5.3 percent in 2013, up from its earlier prediction of 5 percent, citing the resilience of the economy.

The factors that helped

The consumer confidence index has been rising for six consecutive months and, this April, reached its highest level since 2006. It played an important role in boosting private consumption demand in 2012, which grew at 6.6 percent year over year, the highest rate since 2008. Accounting for more than half of the GDP, consumption demand is expected to remain strong this year and will be an important factor driving growth. The business confidence index too has been improving on the back of rising domestic demand, better export performance, and a stable political environment. Growth in industrial production has been stronger since the last quarter of 2012, though it was slightly moderated in March 2013.

The unemployment rate was never a challenge for Thailand, and has further come down to less than 1 percent due to a rise in minimum wages and price support to farmers in 2012. The rate of consumer-price inflation has remained low despite a rise in minimum wages. The fall in global oil prices, along with the expected appreciation of the Thai baht, is likely to keep inflation low this year as well. Inflationary pressures may build up in the later part of the year if general wages continue to rise as in the previous year. Faster economic growth and recovering oil and non-oil commodity prices may add to the pressures. However, inflation is not likely to rise before 2014.

The current-account surplus fell to 0.7 percent of GDP in 2012 from 1.7 percent in the previous year, primarily due to high trade deficit. Merchandise exports fell due to a sharp fall in exports of manufacturing goods and machinery products. Together, these two exports account for more than 50 percent of the total exports; disruption in manufacturing output due to the 2011 flood impacted their export performance. On the other hand, imports rose due to a sharp rise in the import of gold and crude materials. Services export picked up momentum only in Q4 2012.

The equity market witnessed a spectacular growth of 36 percent year over year by the end of 2012 and has grown another 14 percent since then. The quick rebound and strong growth outlook have attracted investors from all over the world. Thailand is a favorite foreign direct investment destination. Investment rose by 11 percent year over year in 2012 and is expected to remain robust this year as well.

A stable government and favorable policies

Political stability has played an important role in improving the economic resilience to external shocks. The new government has somewhat consolidated its position after longstanding political tension amidst the power struggle that destabilized Thailand in the past decade. Some of the policies initiated by the government, such as raising minimum wages, unveiling incentives for car buyers and rice farmers, and long-term infrastructure projects after the flood disaster of 2011, have benefitted domestic demand and exports.

Policy predictability and the investment environment have improved as well due to recent investor-friendly policies adopted by the government. Corporate rates have been cut further from 23 percent to 20 percent in early 2013, after being reduced from 30 percent a year earlier. This has helped boost business confidence and business investments. It has also improved Thailand’s competitiveness relative to other Southeast Asian economies bringing in foreign investment.

Government expansionary policies and reduced revenue collection led to a higher deficit of 4.6 percent in 2012, but, to reduce its deficit, recently the government has been scaling back some of its investment plans.

Q4 2012 saw the biggest-ever jump (19 percent) in year-over-year performance of real GDP due to very strong growth in private investment, change in inventories, and services export.

Risks in the near future

Economic stability is not a concern, at least in the short term, and growth is likely to be self-sustaining. However, there are three key challenges that the country faces from both external and domestic sources. The most important challenge is that of strong growth in private sector credits, particularly in the household sector. Fiscal stimulus and easy financial conditions in 2012 have fueled rapid credit growth, which may lead to excessive consumer leveraging and a rise in property prices, and eventually to financial imbalances.

The second challenge is that of the recent surge in capital inflows that has pushed up property and stock prices substantially. There have been rising concerns among policy makers about asset-price bubbles building up in the economy. In addition, the large capital influx has led to a strong appreciation of Thailand’s currency in the last couple of years. Last year saw a slight moderation in the appreciation, but since the end of 2012, currency has appreciated by 4 percent year over year. While currency appreciation has helped check inflation and cut the cost of imported raw materials, it has raised concerns about export competitiveness. Despite the strong demand for rate cuts by the business sector, the central bank has decided to keep rates on hold, reiterating its concerns about fast-growing credit and rising share and property prices.

Last but not least, uncertain global developments, particularly crisis conditions in the Eurozone, can affect the growth momentum of Thailand.

Turning risks to its advantage

The economy has stabilized in Q1 2013 after the phenomenal growth in the previous quarter. There are some signs of moderation in industrial production and domestic spending, but export performance has improved. More easing in the developed economies and the robust growth momentum in Thailand will attract more capital inflows, possibly leading to high appreciation pressures. However, currency appreciation also provides an incentive to many firms to implement a long-overdue technological upgrade and import more capital goods. The monetary policy stance should remain accommodative and closely monitor developments in the equity markets and housing markets.


Dr. Rumki Majumdar

Dr. Rumki Majumdar is a manager at Deloitte Research, Deloitte Services LP.

Asia Pacific Economic Outlook, May 2013: Thailand
Cover Image by Jessica McCourt