Outlook Quarter 3/2021

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EIC revises Thailand’s economic forecast for 2021 downward to 0.7% from 0.9% previously following a severe and prolonged third-wave outbreak which led to adverse impacts on private consumption. In addition, foreign tourist arrivals have been lower than expected due to concerns about the outbreak. EIC expects the situation to improve in the beginning of the fourth quarter from a significantly higher rate of fully-vaccinated individuals, which would benefit confidence and domestic economic activity recovery. Exports have continued to expand but should slightly slow throughout the rest of the year from a higher base and the spread of the Delta variant, which caused the global economy to decelerate and resulted in supply disruptions in many manufacturing supply chains in Thailand and emerging economies in ASEAN. On the fiscal front, stimulus spending has continued through public consumption and investment, alongside various relief measures. Nonetheless, recent measures are still inadequate in terms of areas, duration, and amount. EIC expects the government to implement additional relief measures this year using the rest of the fund from the THB 1 trillion borrowing decree and an additional THB 200 billion from the THB 500 billion borrowing decree.

For 2022, EIC forecasts Thailand’s economy to grow 3.4% with recoveries in both domestic and external demand. Exports should continue to expand, albeit at a slower pace, in line with the global economy. In addition, higher vaccination rates in Thailand and other countries in Asia to a level that would allow the resumption of international travels would benefit tourism sector recovery, with a forecasted foreign tourist arrivals to Thailand at about 6.3 million people. In addition, domestic spending would also recover from a resumption of economic activity close to normal levels. However, the recovery would be gradual due to a significantly lower tourist arrivals compared to normal times and headwinds from deep scarring effects during the past two years such as worsening business dynamism, fragile labor market, and high debt levels. On the fiscal front, although public investment projects would continue to expand owing to investments from state enterprises and public-private partnerships, the support from fiscal policy would decline from the previous year as public consumption under the budgetary framework decreases. Additionally, the THB 300 billion remaining from the THB 500 billion borrowing decree is lower than the amount spent for additional fiscal stimulus in 2021.

Although the economy would recover next year, the recovery is still substantially below potential level resulting in a large output loss and could affect Thailand’s potential economic growth in the future with the economy expected to return to 2019 levels in mid-2023. Therefore, the government should consider additional borrowings to support the recovery and restructure the Thai economy. While the public debt level would increase above the ceiling of 60% of GDP, it remains manageable under the low interest rate environment and high liquidity domestically. The government must communicate a convincing fiscal consolidation plan in the medium-term in order to increase confidence in fiscal stability.

For monetary policy, EIC expects the Monetary Policy Committee to maintain the policy rate at 0.5% throughout 2021 and 2022 to support the economic recovery. The Bank of Thailand will focus towards increasing the efficiency of monetary policy transmission through various monetary policies in order to increase liquidity for households and SMEs. At the same time, the Bank of Thailand will encourage financial institutions to restructure loans according to problems faced by each borrower group in addition to considering intervention in financial markets to stabilize interest rates in the case of volatility caused by tightening financial conditions globally.

The Thai economy still faces significant downside risks from 1) a potential resurgence in COVID-19 cases both domestically and abroad especially if virus mutations caused vaccine efficacy to fall 2) Supply chain disruptions which could occur due to closures of domestic factories and production stoppages in trade partners within the same supply chain and 3) a more severe impact from scarring effects than expected leading to widespread consequences on households and businesses debt servicing.