Outlook Quarter 2/2023

SCB EIC kept its 2023 Thai GDP growth forecast at 3.9% given continued recovery in private consumption and tourism as well as services sector, despite subdued exports. 

The number of foreign tourists is still expected to be 30 million persons, while revenue from foreign tourists is likely to reach THB 1.27 trillion thanks to foreign tourist spending which has now rose to the level close to 2019 average. This will support the continued recovery in labor market, especially employment in tourism-related services sector. Meanwhile, Thai exports outlook remains subdued for the rest of this year and is considered a key downside risk to economic growth. SCB EIC revised down its forecast for Thai export value to 0.5% this year (from previously 1.2%) given subdued global demand, weaker-than-expected demand from the Chinese market, and an increased downside risk to the global economy. Moreover, in the baseline scenario, the Thai economy will likely face a mild to severe El Nino in the second half of this year. This is expected to cause damages to the agricultural sector by approximately THB 40 billion, which most of damages will occur next year. Headline inflation is projected to grow at a slow pace of 2.1% in line with lower domestic energy prices. However, there remains uncertainty surrounding government energy subsidies. Meanwhile, core inflation is expected to remain high relative to the past at 1.7%, reflecting a gradual cost passthrough to consumer prices and demand-pull inflationary pressures following Thai economic recovery.

SCB EIC revised down its 2023 global GDP growth forecast to 2.1% (from previously 2.3%).

This is due to weaker-than-expected economic outturns at the beginning of the second quarter, a highly divergent recovery between manufacturing and services sectors, and greater downside risks to the global enocomy during the remainder of this year. These risks include credit standards which will likely continue to be tightened, profitability of businesses which could be pressured by falling demand, high inflation and interest rates, and weaker business sentiments, as well as geopolical tensions which could possibly become more severe.

Major central banks are expected to raise policy rate no more than 1-2 hikes this year as core inflation tends to decline slowly given tightened labor market condition. 

Given that global headline inflation has declined faster than expected and real interest rates have gradually turned positive, global rate hike cycle is therefore likely to end soon. However, quantitative tightening policies of advanced economies could cause global liquidity to continue decreasing, which could affect emerging markets via capital flows and bond yields. 

The Thai economy following the election remains highly uncertain due to the new government formation and its policies.

SCB EIC, in the baseline scenario, expects the new government to be in place by August. This is expected to have a limited impact on government disbursement in this fiscal year as the interim government has accelerated capital budget disbursement and approvals of new investment projects before the parliament dissolution. However, there is a possibility that the new government formation could be delayed until late October, which will affect budget disbursement for FY2024. Moreover, implementation of key election campaigning policies will be key factors shaping the Thai economy going forward. In the baseline scenario, SCB EIC expects that the key policies of the leading parties in forming the next government will benefit consumption-related businesses including small businesses. Meanwhile, some businesses could be affected by the minimum wage increase policy and monopoly-related policy. Public debt is expected to rise in all scenarios of new government formation following implementation of campaigning policies, in addition to existing pressures from aging-related expenditures. This reflects the need for fiscal reform to promote fiscal sustainability.

SCB EIC expects the Thai policy rate to be gradually increased to terminal rate of 2.5% in Q3.

This is because the Thai economy is likely to continue expanding, while inflation has already resided within the target range despite upside risk from cost passthrough and demand-pull pressures. Looking ahead, Thailand’s financial conditions will continue to tighten. In the short run, the baht will still face weakening pressure due to strengthening USD and additional pressure on the baht from depreciating yuan. However, the baht will strengthen to the range of 32-33 baht per USD at the end of this year supported by Thai economic recovery outlook, improving investor confidence as political uncertainty subsides, and weakeningUSD following the end of the Fed’s rate hike cycle.