It is hard to believe that one of the key growth centers in Southeast Asia could go into recession, but it happened in Q2 2013: Thailand entered its first recession since the global downturn of 2008–09. Real GDP contracted 0.3 percent relative to the previous quarter, following a 1.7 percent decline in Q1. Thailand’s economy has been struggling this year, weighed down by slowing exports, weakness in domestic demand, and delays in government spending on infrastructure. Adding to worries is high household debt, which has left the Bank of Thailand (BOT) wary of easing monetary policy to stimulate the economy. Consequently, growth is expected to remain low this year, at about 2.5–3.0 percent, before rising to almost 5 percent over 2014–17.
Personal consumption remains subdued
Personal consumption growth this year has been hit by rising consumer debt levels. Household debt as a share of GDP is about 80 percent, up from 56 percent in 2008. With incomes not growing as fast as debt, the burden of debt repayment on households also has risen. For example, since 2011 the ratio of average monthly debt payment to income has gone up by about four percentage points to 33.8 percent. Because the BOT is keen to curb this rise, it has avoided lowering rates to stimulate the economy. With a rate hike ruled out under the current economic weakness, the central bank is looking at alternative tightening measures, such as lowering the loan-to-value ratio in housing and tightening conditions for consumer credit. Meanwhile, the impact of the rise in minimum wages and subsidies to rice farmers in 2012 seems to be wearing off.
Consumers seem increasingly worried about the state of the economy, and consumer sentiment fell to a nine-month low in August. There are also fears of unrest due to a controversial bill on political amnesty being debated in parliament. In such a scenario, personal consumer expenditure is likely to remain subdued this year, growing by only 2.5–3.0 percent, down from a 6.7 percent rise in 2012.
Investments on a lower trajectory
Investment has been low this year, as construction and rebuilding activity post the 2011 floods comes to an end. Lower domestic and external demand has not helped either, reducing the need for businesses to add capacity. Government investment is expected to rise as the government goes ahead with its ambitious $75 billion plan to develop high-speed rail networks, mass transit systems, and water management infrastructure by 2020. However, the impact of these will be felt more from 2014 onward. Consequently, fixed investment growth is likely to be in the range of 3.5–4.0 percent in 2013, much lower than the 13.2 percent recorded in 2012.
Meanwhile, the expiry of fiscal sops, such as the one-off tax rebate on first-time car purchases, has dented industrial output. For example, car sales fell by an astounding 22.6 percent year over year in August, with production down 9.9 percent. This drop in turn pushed overall manufacturing output lower by 3.1 percent in August, the fifth straight month of decline. It is no wonder then that in August the Thailand Industries Sentiment Index touched its lowest level in 22 months.
Consumers seem increasingly worried about the state of the economy, and consumer sentiment fell to a nine-month low in August.
Exports likely to increase marginally in late 2013
There has been some positive news in the external sector, with exports gaining 3.9 percent year over year in August, reversing course from the declines of the past three months. Encouragingly, exports to all major destinations—the United States, China, Eurozone, and the rest of Southeast Asia—picked up during the month. This trend is likely to continue, especially with higher orders likely for the upcoming holiday season in December. Thai exports are also likely to benefit from an uptick in growth in the Eurozone, although much of this impact will be felt only from 2014. However, this may be partially offset by slower growth in China relative to previous decades.
Sovereign bonds may fund infrastructure plans
In September, Thailand’s parliament approved a bill to raise $64 billion for transport-related infrastructure projects. While the bulk of borrowing will be from the domestic market, the government also wants to tap overseas markets. As a start, it plans to issue $1–1.5 billion of fixed-rate dollar-denominated bonds (5, 10, or 30 years) in 2014. These will be Thailand’s first such fixed-rate sovereign bonds since 1997. Overall, the rise in government borrowing will force up public debt. According to the Economist Intelligence Unit, public debt is expected to rise to 53.3 percent of GDP by 2017 from 45.7 percent in 2012.1 Rising public borrowing is likely to stoke fears of private sector borrowing and thus investment being crowded out. However, such concerns are largely unfounded because funds are likely to flow in from sectors such as consumer credit and housing as the BOT intervenes. Moreover, tapping foreign markets will ease the impact of higher government borrowing. Meanwhile, despite higher proposed borrowing, better management of public finances in 2013 following a host of populist measures last year may reduce the budget deficit.
A delicate balancing act for the BOT
When the BOT held rates for the second straight month in August, it was obvious that the central bank was facing a delicate balancing act. Although the economy entered a recession in Q2 2013, any potential monetary policy easing has been complicated by current low interest rates, high household debt, and a weakening Thai baht. The baht has been under pressure since May, when the US Federal Reserve first hinted at a possible winding down of its asset purchase program. Prior to that, the baht was one of the strongest currencies in Asia, touching its highest level since the 1997 devaluation.
Fortunately for the BOT, price pressures are currently low, with headline inflation falling to its lowest level in 45 months in August at 1.6 percent. Inflation has edged down steadily due to a slowdown in aggregate demand, and steady food and fuel prices. Meanwhile, core inflation came in at 0.75 percent in August, moving down toward the lower end of the BOT’s 0.5–3.0 percent target. With a recession underway, this dip in core inflation has raised doubts about a potential deflationary situation. However, such a scenario can be ruled out given that aggregate demand is expected to pick up in the latter part of 2013 due to a recovery in exports and higher tourism inflows. The BOT is also likely to keep interest rates low, with any tightening of monetary policy not likely before the second half of 2014.
- Economist Intelligence Unit, Country report: Thailand, September 2013.