Outlook Quarter 1/2022

EIC revised down Thailand’s 2022 economic growth forecast to 2.7%, from the previous 3.2%. The downward revision was attributed to the Russia-Ukraine war, which sent energy and commodity prices soaring. This year, Thailand's annual average headline inflation will jump to a 14-year high at 4.9%, while domestic spending should pick up more slowly than our previous forecast. In particular, private consumption will be adversely affected by a decline in household purchasing power—on the back of surging fuel and food prices—and a sluggish rebound in labor wages, which currently fell behind living costs. Meanwhile, the increase in pent-up demand, driven by changes in consumer behavior with a better pandemic situation and lockdown easing, will be highly concentrated in upper-income households. Also, higher costs and falling profit margins will pressure firms to raise common product prices—passing on more rising costs to consumers—and hold up their investment amidst higher uncertainties.

 
The Russia-Ukraine war will take toll on Thai exports through a slowdown in the global economy—especially among the European nations—and exacerbated supply chain disruption. Overall, Thai exports are expected to witness a 6.1% increase this year. Still, the growth would mainly come from higher prices—especially from energy-related products, due to rising costs—rather than an increase in exports volume. For the tourism sector, an easing of entry restrictions and travel route reopenings among Asian countries would partly help offset a slowdown in tourist arrivals from Russia and European countries affected by the Russia-Ukraine war as well as higher travel costs. Hence, we expect Thailand to welcome around 5.7 million foreign tourists in 2022, a slight decline from our previous estimate of 5.9 million.

 
As for the labor market, a recovery in the service sector following the lockdown easing should help domestic employment resume growth momentum. Nonetheless, Thailand’s labor market remains fragile due to a sharp fall in working hours, more workers returning to farms, and the rise of an independent workforce. These trends have caused short-term problems from a sharp decline in labor earnings and longer-term dilemmas from an increase in long-term unemployment as well as lower access to labor welfare and skills training. Meanwhile, entrepreneurs still face migrant labor shortages whilst more Thai workers returned to their hometowns. In particular, construction and hotel businesses in big cities have experienced hardships due to labor shortages and higher operating costs, which could worsen an already-fragile balance sheet of SMEs. Furthermore, given such trends, labor wages would pick up at a slow pace, thus unable to cover rising costs of living. In 2021, real earnings (inflation-adjusted) of labor, particularly in Bangkok, shrank more than 10%.


Ballooning costs of living in line with global energy price rise will put more pressure on a rebound in spending of households who still grapple with economic scars—stagnant income from a subdued labor market and high household debt burden. Therefore, the government should still play a vital role to buttress economic recovery and alleviate impacts on households, especially the low-income group. Nevertheless, EIC views that fiscal deficits and rising public debt would constrain policy space, forcing the government to expend its budget more efficiently and direct fiscal measures more accurately towards the targeted recipients.

 
In particular, we observe that the recent diesel price freeze came with at least three unintended consequences: (1) Instead of cushioning impacts on low-income households, most subsidies benefited high-income cohorts who consume more energy — the top 20% of the high-income group has monetary gains of about 9.6 times higher than what households in the bottom 20% could attain. (2) Fuel price freeze that extends for too long would result in widening current account deficits, thus making this policy a large fiscal burden and an unsustainable measure that ensues economic risks if the government makes any abrupt policy change. For example, if the subsidies were withdrawn all at once, fuel prices might skyrocket and cause severe disruption to the Thai economy. (3) In the long term, subsidizing fossil fuels that fail to reflect true costs would only lead to structural problems— namely, low energy efficiency and too much reliance on fossil-based fuels.

 
For that reason, the Thai government should shift its policy focus to: (1) Adopting the managed float regime for energy price control, under which energy prices should be gradually lifted, without resisting a market direction, thus giving time for consumers to adapt and adjust. (2) Supporting the main policy with specific subsidies for low-income cohorts or public transport and logistics businesses, directing relief to the affected group. (3) Offering incentives to the private sector investing in renewable energy and enhancing energy efficiency, giving a short-term impetus to the economy and helping enhance Thailand’s energy stability in a longer horizon.

 
As for financial condition, Thailand’s headline inflation will likely exceed the target range of 1%-3% this year. Nonetheless, EIC expects the Monetary Policy Committee (MPC) to keep the policy rate steady at 0.5% throughout 2022. The reasons are that: (1) Maintaining growth of the currently fragile economy should remain MPC's top priority. (2) Accelerating inflation was primarily cost-push, and the racing pace will likely subside next year. (3) Policy rate hikes would exacerbate the debt service burden on households and SMEs, leading to NPL spikes and thus impairing financial stability. Meanwhile, we expect the Thai baht to be volatile and linger on the weaker side in the first half of 2022, given widening current account deficits—on the back of rising energy prices—and policy rate hikes among major central banks. The baht will return slightly to 32.5-33.5 against the greenback in late 2022, as promising tourism recovery helps improve the current account balance.

 
Overall, Thailand will likely see a slow economic recovery as inflation continues to rise and hover high throughout 2022, together with more limited policy space and lasting economic scars. Annual GDP growth is unlikely to return to 2019’s level until the latter half of 2023. Furthermore, there are still major downside risks to the Thai economy through the remainder of 2022: (1) Possible surges in already-high oil prices which might last longer than expected as the Russia-Ukraine war drags on. Given such circumstances, Thailand might fall into a long period of stagflation (bleak economy but high inflation). (2) Supply chain disruption in the manufacturing and transport sector, caused by China’s Zero-Covid strategy and international sanctions on Russia. The supply disruption may result in a larger-than-expected slowdown in the global economy—a big hindrance to Thai exports. (3) Tightening monetary policy of major central banks, particularly the US Federal Reserve (Fed), could lead to a more volatile and tightening global financial condition. (4) Slower recovery in tourist arrivals due to the Russia-Ukraine war and possible COVID-19 resurgence. (5) Scarring effects could be aggravated by higher living costs, thus broadly affecting the household's ability to service debt.