Outlook Quarter 1/2016
EIC forecasts that Thai GDP will grow 2.5% in 2016. The economy still lacks the catalysts needed to help its expansion reach full potential. Growth in 2016 will rely significantly on domestic demand, especially domestic investment. The government’s budget for investment in infrastructure is set to increase by 20% from 2015. Stimulus packages will power private investment back into expansion after shrinking in 2015. The packages include the Pubic-Private Partnership fast-track measure and new incentives from the Board of Investment. On the consumption side, recent economic stimulus measures have boosted non-durables consumption and consumer confidence, but the effect is likely to be short-lived. Farm incomes have been weakened by falling prices and will be further hit by drought in 2016. The high level of household indebtedness will stay high. On the bright side, one key industry that will remain a growth engine is tourism. The number of foreign tourists will rise by 9% to a record high, led by arrivals from China.
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Global Economy of 2016
The global economy as a whole will improve in 2016, with the major excpetion of China. The U.S., European and Japanese economies showed signs of recovery in the second half of 2015, and their growth momentum will continue in 2016, supported mainly by domestic demand. Consumer purchasing power has benefited from the prolonged period of low inflation and strengthening conditions in labor markets. These factors will continue, and will help the service sector become an important economic growth engine in all regions, China included. The manufacturing sector, on the other hand, will grow only slowly because international trade flows remain sluggish despite continuing global economic recovery. This trend is now a major hurdle to growth in developing countries, including Thailand. The Chinese economy will decelerate, but its moderate pace of decline should not be a major concern. The Chinese government still has several tools, both monetary and fiscal, to help smooth out the transition and reach its new GDP growth target.
Bull - Bear: Oil Prices
EIC’s view: BEAR
In the first quarter of 2016, oil prices continue to plunge. The price hit a seven-year record low in the fourth quarter of 2015 due to concern regarding excess supply, mainly from OPEC. EIC expects oil prices to remain under downward pressure from excess supply in the first half of 2016. OPEC supply should continue to increase; their meeting showed that members support OPEC’s high production level. The lifting of sanctions on Iran will also increase oil production and exports. Moreover, the Fed’s policy rate hike in late 2015 is another determinant of low oil prices. However, we continue to closely watch non-OPEC producers such as the U.S., which will tend to lower production, and monitor the increasing unrest in the Middle East. Demand might grow because the global economy is recovering. Conflicts within OPEC might also contribute to oil price volatility in 2016.
In focus: Fed policy rate hike: Implications on Thai financial market and economy.
In its December 2015 meeting, the U.S. Federal Reserve raised its policy rate by 25 basis points, its first hike after seven years of an unprecedentedly low rate of 0% and its first official step toward returning monetary policy to normal. Now the policy rate stands at 0.25%-0.50%. EIC expects the Fed to raise the rate by another 50-100 basis points during 2016. We estimate that capital outflows from Thailand in 2016 will be mild, at around 50 billion baht, with the baht weakening to 37 baht against the dollar. EIC expects Thailand’s policy rate and short-term interest rates to remain steady in 2016, while medium- to long-term government bond yields will rise in line with U.S. Treasury yields.
In focus: Emerging market debt binge: Thai households and SMEs most at risk
In mid-2015, a number of international economic organizations, including the International Monetary Fund (IMF) and the Bank of International Settlements (BIS), released reports warning of excessively rapid growth in private credit in emerging market economies that could sow the seeds for severe financial problems in the business sector.
Now that foreign funds are leaving regional economies and funding costs are on the rise, the critical questions are whether the level of lending to Thai businesses is indeed alarming; whether Thai firms are well equipped to handle the problem; and how the economic slowdown would hurt the profitability and liquidity of Thai companies.