Intensifying geopolitical tensions accelerate economic decoupling.

The erosion of trust among countries, particularly major economies like the US and China, is exacerbating geopolitical tensions and straining international relations. In response, these nations are increasingly emphasizing self-reliance or reliance on allied nations, while preventing nations perceived as threats to national security from reaping benefits and gaining competitive advantages. As such, international policies in the periods ahead will likely emphasize trade and investment restrictions, with the aim to enhance national security, particularly by strengthening domestic supply chains and allied networks to maintain international order. Such a trend is expected to lead to deglobalization and more pronounced decoupling.

The changing global trade landscape is creating new opportunities for countries with a neutral stance.

To gain a deeper understanding of the circumstances, SCB EIC conducted an in-depth analysis of the impact of intensifying economic decoupling trends on international trade patterns by categorizing countries into 3 groups based on their ties with the US and China, as well as geopolitical factors. The findings reveal that post-economic decoupling, international trade patterns will shift significantly. Countries with conflicting stances will be less reliant on trade with each other and instead will rely more on countries with a neutral stance. Thailand, with its maintained neutral stance in the global geopolitical arena, is well-positioned to benefit from trade and investment diversions away from increasingly polarized countries. 

Thai business will be affected differently.

While Thai exports may benefit from the shifting trade landscape, the impact on different manufacturing sectors will be uneven. SCB EIC finds that these sectors can be classified into 2 groups (1) Sectors with potential upside. Sectors that are likely to enjoy the most benefits include computer and electronics, and automotive and parts, and (2) Sectors with downside risks from increasing competition from other countries with a neutral stance, and the US's growing reliance on imports from regional competitors. Sectors with high risks include textiles and electrical equipment.

To seize on the opportunity, Thailand needs support from export promotion policies as well as proactive business adjustments.

While some sectors may benefit from changes in the global supply chain landscape, the sectors may also face increasing risks and competition. To seize the opportunity, Thailand must tailor its export promotion policies and proactively adjust business strategies to the specific context of each sector, taking into account the varying potential gains and losses across different sectors, which can be classified into 4 groups:
 

1) High manufacturing competency, high-competition products: Government policies for this group should prioritize on increasing manufacturing capabilities, enhancing value-add, and creating competitive advantages. Similarly, businesses should adapt by highlighting their product strengths and expanding into targeted markets. Effective strategic planning will be crucial to increase market share and keep pace with evolving global trends.

2) High manufacturing competency, low-competition products: Government policies for this group should focus on encouraging new market expansions to diversify risks and upgrading manufacturing processes to meet environmental sustainability standards. Meanwhile, businesses should adapt to mitigate climate change risks and invest in renewable energy.

3) Low manufacturing competency, low-competition products: Government policies for this group should provide incentives to existing operations while encouraging investments to upgrade manufacturing capabilities with a focus on existing export markets. Concurrently, businesses should adapt by increasing their manufacturing technology potential and developing a deeper understanding of the preferences of US-allied and Chinese-allied markets to improve market access.

4) Low manufacturing competency, high-competition products: Government policies for this group should facilitate a smooth transition to high-potential manufacturing sectors based on modern supply chain dynamics. Meanwhile, businesses should quickly adapt to the modern supply chain and seek technology partners.

 
Amid global conflicts, Thailand can still benefit if the government and business sectors are attuned to the rapidly shifting global landscape and take proactive steps to adapt. By doing so, Thai exports can successfully navigate and thrive in both “united” and “divided” global market conditions. 

Thai economic growth forecast for 2024

SCB EIC revises the Thai economic growth forecast for 2024 to 2.7% due to a moderation in economic momentum and the slow recovery of the manufacturing sector, which can be attributed to structural challenges.
SCB EIC revises down the Thai economic growth forecast for 2024 to 2.7% from 3%. While the overall economy in 2024 is anticipated to continue its recovery, propelled by accelerated growth in various demand-side factors, particularly exports and private investments, there are notable challenges. The momentum from the public sector will continue to weaken , resulting from delays in the 2024 Budget Act. Additionally, the high level of accumulated inventory, which was a critical issue in 2023, is unlikely to drop in 2024, revealing structural issues within the Thai manufacturing sector. Particularly, Thai exports are facing diminished competitiveness and limited adaptability to changing global product demand patterns and long-term supply chain dynamics. Consequently, the manufacturing sector's recovery trajectory in 2024 is hindered, which does not align with the demand-side of the Thai economy, shedding light on substantial structural challenges within the manufacturing sector.

Weak manufacturing conditions challenge Thai economic growth.

Regarding the supply side of the Thai economy in 2024, SCB EIC projects that the manufacturing sector will revert to an expansion fueled by strong consumer goods recovery. However, the growth is expected to stall, as numerous industries grapple with all-rounded demand-side and supply-side pressures , including (1) Higher penetration of imported products, especially from China. (2) Slow recovery of overseas demand coupled with lower export competitiveness on a global scale, partially from a cost disadvantage. The lower competitiveness is reflected upon the tepid growth of Thai exports over the past decade and the continual decline of Thai exports share since 2020 despite the robust expansion of export volume from other countries in the region. (3) Delays in the 2024 Budget Act. (4) High accumulated inventory. (5) Geopolitical risks, particularly in the Red Sea area, which may escalate and hurt Thai exports.

Structural challenges within the manufacturing sector also lower Thailand’s potential economic growth.

Thailand’s potential economic growth continues to drop following more severe structural challenges in the manufacturing sector. SCB EIC estimates that the pre-COVID-19 potential GDP growth (2017 – 2019) for Thailand stood at 3.4%, while the long-term potential GDP growth (2024 – 2045) should drop to 2.7%, declining from the previous estimate of 3% as of December 2023. A major contributor to this decline is the greater decrease in Thailand's total factor productivity, exacerbated by the deepening structural challenges in the Thai manufacturing sector. These challenges arise from the close interdependence of the Thai economy to the Chinese economy and the Chinese supply chain amid global geopolitical conflicts, limited adaptive capacity to long-term global supply chain, and slow adjustments to changing global product demand patterns.

SCB EIC foresees 2 policy rate cuts by the MPC in April and June to 2%, aligning with the lower neutral rate.

SCB EIC evaluates that the MPC will cut the policy rate to 2% during H1/2024 to sustain a neutral monetary policy stance. This is because by considering the structural factors that determine the appropriate interest rate, Thailand's neutral rate drops to 2.1% (from 2.5%). Therefore, these policy rate cuts will not only help maintain a neutral stance while fostering long-term economic growth at a sustainably lower rate but also further alleviate the high debt burden, particularly for vulnerable businesses and households that are disproportionately impacted by elevated interest rates. Beyond that, the anticipated rate cuts should strengthen Thailand’s economic confidence, especially amid limited momentum from the public sector this year.

Thailand has grappled with both droughts and floods over the recent years.

Thailand witnessed a series of extreme weather events throughout the year in 2023. During Jan-Aug, many regions faced below-average rainfall attributed to the El Niño phenomenon. In contrast, the subsequent two months (Sep-Oct) experienced a considerable upswing in rainfall brought by the monsoon trough, which helped mitigate the impacts of  El Niño. These unusual rainfall patterns resulted in a severe drought in early 2023, followed by substantial floods towards the end of last year.

“Droughts and floods” will result in agricultural loss of around  THB 50,000 million, particularly in Central Thailand.

The agricultural sector is highly vulnerable to variations in water levels, as either insufficient (drought) or excessive (flood) water can disrupt overall plant growth and productivity. Based on SCB EIC assessment, the combined impact of “droughts and floods” in 2023 will result in agricultural loss of at least THB 51,700 million—comprising THB 19,300 million in 2023 and THB 32,400 million in 2024. Sugarcane will bear the most significant damage, followed by off-season rice, in-season rice, and cassava. In terms of regional impacts, the Central part will suffer the highest loss, followed by the Northern, Northeastern, and Southern regions. 

Erratic weather menaces the Thai economy and exacerbates inflation risks.

The damage incurred to the agricultural sector in 2023 and this year affect Thailand’s economic growth and inflation. SCB EIC assessed that direct impacts on Thai agriculture and indirect effects linked to other sectors will shrink Thailand’s economic growth by -0.34  percentage points (pp) compared to the base-case scenario without “droughts and floods.” This can break down to -0.13pp and -0.21pp in 2023 and 2024, respectively. Besides economic damages, extreme weather could also drive a surge in crop prices and heighten inflationary pressures in 2024. In particular, the escalating prices of sugar and rice will likely contribute to a 0.3pp increase in inflation this year through second-round effects from higher ready-made food prices (prepared food at home and food away from home).

2 Approaches and 3 Mechanisms to Enhance Water Security in the Agricultural Sector

Unprecedented damages caused by droughts and floods underscore the alarming threats of rising global temperatures. This year and beyond, Thailand will be at risk of further challenges from droughts and flooding. To proactively address such challenges, SCB EIC proposes 2 approaches along with 3 mechanisms to enhance water security for Thailand’s agricultural sector. 1) Improve Water Supply Management Efficiency by enhancing water infrastructure with a short-term focus on small-scale water storages such as ponds, and a long-term focus on large- and medium-scale reservoirs as well as water distribution systems. 2) Improve Water Use Efficiency (Demand) through measures to conserve soil moisture, modify irrigation systems, and enhance crop cultivation practices, such as adjusting crop planting schedule—all of which can be implemented as immediate measures in the short term.

Successful implementation of the 2 approaches requires robust support from 3 mechanisms: (1) Policy Mechanism including the enforcement of the organic laws under the Water Resources Act, higher budget for water infrastructure development, and R&D funding in water technology; (2) Financial Mechanism such as facilitating credit access for farmers seeking to enhance water management and developing crop insurance systems; and (3) Data Mechanism by harnessing digital technologies for effective data collection, connection, and analysis to enhance water management efficiency.

The success of these approaches and mechanisms lies on collaborative efforts among stakeholders, including the government, private sector, civil society, and farmers. Active contributions from stakeholders to fortify water security will help Thailand's agricultural industry stay resilient and sustainably thrive in the face of intensifying climate change hazards. 

The semiconductor industry continues to struggle with supply and demand imbalances, exacerbated by a surge in demand and disruptions in the manufacturing supply chain.

Global demand for semiconductors is expected to continue to surge as numerous countries shift toward digital economies. However, a series of events have disrupted the supply of semiconductors, including the China-US trade war, which escalated into a technology war, the COVID-19 pandemic, and the Russia-Ukraine dispute that resulted in surging raw material prices. While the imbalance has somewhat eased with the resumption of increased production capacity and output, the market dynamics and the balance between supply and demand still require close, ongoing monitoring as demand is poised for yet another surge, driven by the gradual recovery of global economic conditions. Conversely, the semiconductor manufacturing supply chain remains vulnerable to a multitude of risks.

 

Such imbalances have prompted many countries to prioritize securing chip manufacturing and promote domestic production.

Currently, many countries are vigorously securing and strengthening their domestic semiconductor industry. Prominent examples include the US and the EU, both of which have enacted the CHIPS Act, with an aim to boost domestic semiconductor production. Similarly, Asian manufacturers are firm in maintaining their semiconductor production positioning, which includes resorting to trade retaliatory measures. A notable example is China, with retaliations against technological barriers imposed by the United States. Nonetheless, several challenges continue to hinder China’s semiconductor industry development. Most notably, domestic production volumes still fall short of meeting local demand. Furthermore, many countries have relocated manufacturing of specific semiconductor and parts to other countries, with a notable focus on the Asian region, renowned for its production capabilities.

 

SCB EIC views that the relocation of foreign semiconductor production facilities to Thailand will play a pivotal role in enhancing the nation's capabilities to become both a front-end and back-end semiconductor manufacturer in the future.

As a new global production supply chain takes shape, several production facilities are expected to relocate to Thailand, accompanied by increased investments in the semiconductor and parts manufacturing sector. SCB EIC anticipates that Thailand's chip industry holds the potential for further advancement, especially in front-end and higher complexity back-end processes. Meanwhile, a group of Thai companies exporting semiconductor and parts to China may experience a decline in orders due to US trade barriers. Nevertheless, SCB EIC views that increased investments in Thailand's semiconductor industry will have a far-reaching positive impact on domestic employment, eventually giving rise to a new production supply chain that can better serve the domestic market.

 

Nonetheless, Thai companies need to embrace change, either by forming new alliances or strengthening own capabilities to adapt to evolving demands.

Future development of Thailand's semiconductor sector remains challenging, primarily due to technological constraints and substantial investment prerequisites. Thai companies aspiring to be an integral part of the new semiconductor production supply chain must get into the swing of things by implementing these recommended strategies: 1) Establishing collaborations with governmental bodies and private entities to fortify strength within the semiconductor manufacturing industry. 2) Actively looking for joint venture opportunities with new partners and/or co-investors by capitalizing on the advantages of relocating production bases. 3) Strengthening domestic semiconductor production capabilities through increased focus on research and development and 4) Promoting workforce skills development, both hard and soft skills, to align with the future, evolving demands in the semiconductor industry.

What is the EU Emissions Trading System and how does it relate to CBAM?

The EU Emissions Trading System (EU ETS) is an important tool that the European Union (EU27) uses to reduce greenhouse gas emissions (GHG emissions). The EU ETS increases production costs for EU producers, therefore there is the risk that EU producers may decide to import products or move their production bases to countries where there are no costs, or lower additional costs, for emitting emissions which leads to the issue of carbon leakage. By design, EU ETS reduces its GHG emissions cap every year, and is progressively lowering the allocations of free allowances on GHG emissions that it had givento EU producers in hard-to-abate industries to help them maintain their competitiveness. As a result, EU producers are facing higher costs for their GHG emissions.

The EU introduced the Carbon Border Adjustment Mechanism (CBAM) Regulation to ensure an equitable carbon price between domestic EU products and imported goods. Importers to the EU must purchase CBAM certificates based on the volume of embedded GHG emissions in the imported goods. The price of CBAM certificates will be linked to the price of the EU ETS.

Recently, on 18 April 2023, the European Parliament approved the CBAM Regulation as a way to strengthen its climate measures and ambition. 

Enforcement of the CBAM and impacts on exporters/importers

Businesses exporting products to the EU will have a transitional phase to prepare for the CBAM before it enters into force in 2026. The transitional phase will be from 1 October 2023 – 31 December 2025, and will include the requirement only to report on embedded emissions in imported goods. The CBAM will enter into force in 2026, and from this point, importers must report on their GHG emissions data and pay for their emissions through the purchase of CBAM certificates. The CBAM will initially cover the following product categories: 1) Iron and steel, 2) Aluminium, 3) Cement, 4) Fertilizer, 5) Electricity, and 6) Hydrogen. However, it is expected that the EU will expand the CBAM’s scope to cover other product categories. It is also worth noting that these requirements still need to be clearly defined and may be subject to change, and therefore must continue to be monitored.

If importers are not able to report on the embedded GHG emissions of their imported goods, they may have to pay higher emission costs than what they should have paid, as the reference for the embedded GHG emissions of that good may be calculated based on the GHG emissions produced by the worst-performing group instead. 

The CBAM places pressures on producers/exporters to measure their GHG emissions and to make improvements to lower the carbon footprint of their production. If producers/exporters to the EU are not able to measure or reduce their GHG emissions, they may face the risk that their products are under less competitiveness, or negotiations with importers asking for lower prices.

Initially the CBAM will not affect Thailand in a significant way, given that the five CBAM product categories that are exported to the EU comprise a very small portion of Thailand’s total export value. Nevertheless, Thai businesses should be prepared, as the EU may expand the scope of goods covered under CBAM. Similarly, global trends in net zero will assume a greater role in Thailand, and Thai businesses should be prepared for such developments. They could start by collecting data on the GHG emissions of producing their products; implementing plans to maximize their process efficiencies andreduce emissions  in order to remain competitive; and prepare for potentially strengthened climate regulations in the future

The Bank of Thailand announced that Thai household debt rose 4.2%YOY to THB 14.3 trillion in Q3/2021. The growth was slower than Q2, but the household debt to GDP ratio remained high at 89.3%.

In Q3/2021, commercial banks’ lending to households saw a decelerating growth in all primary sources. Yet, personal loan growth kept swelling high on the back of household liquidity demand to offset income loss due to COVID-19 impact.

Informal debt will likely become an alarming risk ahead, as more households, particularly the fragile low-income group, seek loans to cover living expenses but are often barred by lacking access to the formal credit market.

Thailand’s household debt to GDP ratio might surge again in H1/2022, given mounting risks from Omicron outbreaks which will take a toll on household income and trigger an increase in loan demand to compensate for liquidity loss. As a result, household deleveraging would face hindrances while financial condition will recover at a slower pace. This way, outlook for consumption expenditure and credit quality worsen.

Government support will still play a vital role in providing solace for the vulnerable Thai household sector. These policy supports could come in the form of debt restructuring, income reliefs, employment supports, labor upskilling and reskilling to enhance earning potentials, and liquidity injection to ward off risks from informal debt dilemmas.

In Q2/2021, Thailand’s household debt continued to rise from the previous quarter to THB 14.3 trillion, but the ratio of household debt to GDP slightly dropped to 89.3% as GDP improved from low base in 2020. Nonetheless, the ratio remained far above its pre-pandemic level and the highest among developing countries.

The mounting household debt in Q2/2021 was driven by personal loans, since households still demanded lending to offset their liquidity loss amidst a subdued economy.

Going forward, EIC expects Thailand’s household debt to GDP ratio will remain high and continue to deter spending recovery, household financial position, as well as overall economic growth. In particular, the indebted low-income group would be left further disadvantaged. According to EIC Consumer Survey, the low-income group are struggling to repay debt and over one-fourth of them are already in debt distress.

Households with heavy debt will enter a deleveraging phase, reducing debt to income ratio, to restore their balance sheets. To this end, the government relief programs—such as debt restructuring and financial reliefs during the lockdown, along with employment supports and labor reskill-upskill to uplift future income—would continue to play an important role to facilitate household debt deleveraging and, at the same time, prevent downside risks to an economic recovery ahead.

Thailand's household debt swelled to a record high at 90.5% of GDP in Q1/2021, the highest among developing countries.

An increase in household debt to GDP ratio was attributed to growing household debt and stagnant economic rebound, particularly the household incomes, which are suffering from the COVID-19 crisis.

High-frequency data reflected that the household's demand for loans remained high due to the need to cover living expenses and declining liquidity during the pandemic. Some households might hinge on informal lending and become exposed to a higher risk of debt default going forward.

EIC views that Thailand will likely suffer a so-called 'Debt Overhang' problem where the household debt burden grew so large that it hampers future spending and economic recovery.

The gaming industry is currently growing at a remarkable rate, its global revenues have already surpassed those from music and movies combined. In 2019, the sector had generated $146 Billion¹ in revenue, which is accounted for 3 times higher than those of the global box office revenue recorded in the same year. This figure also nearly doubled music industry revenue². This growth is supported by COVID-19 pandemic, as gaming has become a common go-to activity for many people during the lockdown period. The surge of gaming activity came from both existing players who got the chance to spend more time playing and new players who just recently joined the gaming community. Additionally, there was also new releases of game console generation from both Xbox and PlayStation at the end of 2020. With these several supporting factors, Newzoo estimated that the global gaming industry would increase by nearly 20%YOY to $175 billion in 2020.

¹ Data from Newzoo, a provider of games/esports analytics and  market research
² Data from Newzoo, a provider of games/esports analytics and  market research

Author:  Economic Intelligence Center (EIC)



Last week, the US House of Representatives passed the additional stimulus package worth USD 1.9 trillion, and the draft bill is now pending approval from the Senate. EIC views that the Democrats could finally roll out this massive relief bill within the first quarter this year via a Budget Reconciliation, but they might need to pull out some elements (such as minimum wage hikes) and cut down some spending plans (such as financial aids to local governments). In the end, the stimulus size approved by the Senate would be around USD 1.5-1.9 trillion.

In our view, this additional relief plan will help bolster the US economic rebound this year while risks of overheating economy or surging inflation remain low in the short term, given that the current US labor market has not yet returned to its pre-pandemic level and that most of the additional measures are one-off. Nonetheless, even though short-term inflation risks are somewhat manageable, there remain risks that inflation might overshoot in the medium term due to fundamental changes. These are risks that should not be overlooked as they may induce fluctuation in financial markets.

The new stimulus bill has fuelled both inflation expectation and market anticipation that Fed might scale back its monetary easing earlier than expected. These could result in rising long-term US treasury yields and become an upward pressure on the weakening US dollar. Therefore, EIC has revised our forecast on the 10-year Thai government bond yields up to 1.9-2.0% (from 1.5-1.6%) by the end of 2021 and maintained our Thai baht forecast within a range of 29.5-30.5 THB/USD.

The recurring waves of the COVID-19 pandemic in various countries, including Thailand, will directly slow the pace of Thai economic recovery in 2021. As such, EIC revises the Thai GDP forecast down to 2.2% due to the following reasons:

• The recovery of foreign tourist arrivals should be slower than previously anticipated. Although citizens in various countries are receiving COVID-19 vaccinations and Thailand could allow inoculated persons to travel into the country with more relaxed quarantine limitations, the recovery in international travel should pick up once herd immunity is widely established in many origin countries. EIC estimates that advanced economies should gradually form herd immunity during Q2/2021 to Q3/2021. Meanwhile, developing countries in Asia, Thailand’s main source of tourists, should develop herd immunity, starting from Q4/2021 (such as China) to Q4/2022 (such as CLMV), a period slower than anticipated. With such regards, EIC revises the number of international tourist arrivals in 2021 down to 3.7 million persons, with recovery anticipated in H2/2021, particularly in Q4/2021.
  
  
• Export conditions should be weaker-than-anticipated during H1/2021 from the COVID-19-induced global economic soft patch, the container shortages headwinds, and the strengthening baht. However, factors that should speedup global economic recovery and export growth during H2/2021 include sizable stimulus packages issued in various countries, more targeted city lockdowns, and hastened inoculations that will lead to herd immunity establishments, especially in advanced economies. EIC expects that exports will improve by 4.0%YOY in 2021.
  
  
• Regarding domestic demand, high-frequency data indicated that the new wave outbreak moderated economic activities, especially those requiring face-to-face interactions. EIC views that the recurring outbreak could be largely contained within 2 months. Even though the second wave consequences might not be as damaging as the first wave due to more targeted lockdowns with support from government stimulus packages, the economic scars will still be further worsened and particularly impact the already vulnerable SME sector and service sector employees.
  
  
• The overall pace of Thai economic recovery should slowly progress as the tourism sector, Thailand’s key driver in terms of economic growth and employment, has yet to recover. Thus, the economic recovery will be uneven between different business sectors. Furthermore, various uncertainties and downside risks linger.
  
  
• Risk factors that warrant monitoring in 2021 include 1) the duration required to successfully contain the second wave outbreak, 2) potential delays in widespread vaccine distribution in Thailand, 3) economic scars that could deteriorate financial stability via increasing bad debt 4) political instability in Thailand that could weaken investor confidence, 5) drought as the water stored in major dams approached a level lower than the historical average, and 6) the stronger baht appreciation relative to trading partners and competitors, which could slow export recovery and international travel demands.

Author: Kampon Adireksombat, PhD, Wachirawat Banchuen, Panundorn Aruneeniramarn, Paphon Kiatsakuldecha, PhD

The share of firms with prolonged debt-serving limitations due to low profitability, or so-called “zombie firms”, has continued to increase over the past 10 years, posing concerns for productivity and investment within Thai corporate sector. In 2019, just before the COVID-19 pandemic, the share of zombie firms among Thai businesses has already reached the same level prior to the Great Financial Crisis (GFC) in 2007. To provide better understanding of zombie firm issues, EIC analysis of zombie firms in Thailand has found the followings :

1. Zombie firms have significantly lower levels of productivity, profitability, and investment than their non-zombie counterparts. The existence of these firms tends to cause resource misallocation and is concerning for the overall productivity of Thai business sector.
   
   
2. Once a firm becomes a zombie firm, it is hard to reverse. Cured zombie firms are more likely to become zombie firms again. These firms generally remain in zombie status rather than close down and hence become chronic problems for the overall economy. Generally, zombie firms tend to concentrate among smallest and largest businesses as well as among
   long-established businesses.
   
   
3. Based on debt-servicing ability forecast under declined sales, EIC expects shares of zombie firms to rise significantly during 2020F-2022F after the COVID-19 crisis. The impacts tend to most severe among tourism-related businesses as well as among already-fragile small businesses.
   
   
4. The projected rise in zombie firms after the current crisis would differ from the global financial crisis (2007-2009), in which the share of zombie firms fell rapidly due primarily to a decrease in the policy interest rate, the condition of the Thai baht, the severity of the economic crisis, the unemployment rate, and the fragility of small firms.
   
   
5. Short-term policy supports such as debt-restructuring are necessary to curb out scarring effects. Looking forward, policy measures should focus on grouping recipients whereas non-competitive firms should be assisted with orderly exits while viable firms should receive competitiveness enhancement for post COVID-19 crisis business environment.

• During the spread of COVID-19, SMEs across various industries are facing liquidity crunch. This is especially true among restaurant businesses with limited cash reserve. When income is not flowing as usual, all cost saving initiatives must be carefully considered. The cost of raw materials for a restaurant is one of the largest operating expenses that owners or managers in the business face everyday. Without proper planning and efficient management, a great amount of raw materials, has become food waste and eat into the restaurant’s bottom line.
  
  
• Restaurant managers should follow three steps to control food waste before it reaches the consumers: 1) Inventory management 2) Raw material procurement and 3) Operating management. Additionally, setting up an acceptable level of food waste per restaurant is also recommended. The specific level could be varied, based on restaurant types. The indicator could help to identify where mistakes were made and also could work as an encouragement for operation staff. 
  
  
• Not only that the reduction of food waste is a great way to avoid excess costs and to improve cash flow for restaurant, but it is also a way to attract new generation of consumers who are becoming more ethically-contious in their consumption and lifestyle decisions.
  
  

Author: Economic Intelligence Center (EIC)



Thailand is stuck in an unforeseeable economic turmoil provoked by the infectious spread of the COVID-19. The impact has been heavy on nearly all economic sectors with fatal implications on tourism-related sectors. The current situation has put additional pressure on the already-weak labor market. Labor groups with the highest perceived risks due to high sensitivity to economic conditions include part-time workers, freelancers, self-employed, and SME employees, which accounts for 62% of Thailand’s labor force.

EIC estimates the number of unemployed persons will surge to 3-5 million persons, prompting Thailand to witness the highest unemployment figure among all past crises in its history. This is because the impact is more widespread and in tandem with a sudden stop of various economic activities. Meanwhile, the agricultural sector may not be able to absorb unemployment from other troubled sectors as in the past due to the drought problem.

EIC views that although many workers may still be employed, they tend to be handicapped with lower working hours and lower income. Some may even make no income during some periods. As such, the labor market recovery is expected to be slow following a U-shaped recovery of the economy and the impact of COVID-19 that will remain as long as there is no effective medicine and vaccine available. The risks in the labor market could spill over to affect the quality of life of the already-vulnerable household sector. Currently, around 60% of Thai households possess insufficient financial assets to cover for over 3 months of expenses.

• In 2020, the dry season started early and harsh with a tendency to last longer than in the previous year. The Thailand Meteorological Department estimated that the 2020 drought could persist until June 2020.
  
  
• EIC evaluates that the drought will notably hurt the output of sugarcane and off-season rice. In the worst-case scenario, sugarcane and off-season rice production may tumble by as high as 27% and 21%, respectively. Meanwhile, cassava output could drop by 7%. Although the price of sugarcane, rice, and cassava should increase from the drought, the potentially higher magnitude of output decline will cause the farmer’s overall income to drop.
  
  
• The government could encourage farmers to modify agricultural practices according to the changing water situation as short-term mitigation as well as implement other relief measures. However, long term water management, a lingering structural problem, needs to be addressed in parallel. Other longer-term solutions include developing water resources, increasing irrigation areas, allocating water resources, and promoting more efficient water usage. Furthermore, the government could also urge farmers to thoroughly plan cultivation, for example, grow crops that require less water in areas that repeatedly suffer from drought, promote crops with high value-add to the economy, and support farmers to switch to cultivate crops as planned. Also, the introduction of Agritech to aid water usage, such as automatic irrigation systems to increase water use efficiency and climate warning systems will be beneficial.

• The EIC sees the baht continuing to face appreciation pressures in 2020, but to a smaller degree than in 2019. The EIC feels  that the baht at the end of 2020 will prevail within a range of 29.5-30.5 baht per USD as Thailand is still facing strutural challenges causing the current account surplus to remain high. Meanwhile, demand for outward investment is still low due to a high degree of home-bias and thus considerable demand for the baht relative to USD. The US dollar index is also expected to weaken slightly, prompting the baht to strengthen.
   

• However, other factors leading to a slower pace of baht appreciation compared to 2019 include an improvement in outward invesment by Thai corporates, a likely decline in the selling of gold to realize profits, and a Thai – US interest rate gap that could possibly widen.

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Mixed-use property projects are an interesting investment alternative for real estate developers, especially under the current volatile economic environment. This is because the projects diversify streams of income from the different integrated property formats, enabling a more stable recurring income as opposed to dependency on a single type of real estate format. Furthermore, mixed-use projects increase and maximize land-use efficiency, especially in prime areas with expensive land price.

Going forward, the growing supply of mixed-use projects in Bangkok, especially when compared to the past, could lead to an oversupply in the real estate market. Commercial space for rent should see the most impact. Data suggests that within the next 3 years, a new mixed-use supply of approximately 900,000 square meters from commercial projects is expected, accounting for 40% of new supply within the same period. These new mixed-use supplies will be clustered in the central business district (CBD), which is already crowded with similar real estate supply. With such regards, competition in the real estate market should be fiercer in the near future.

The development of several new mixed-use projects will increase competition among the mixed-use projects themselves with impact on single use buildings, such as office buildings, department stores, and hotels within the proximity as well. For this reason, single use project developers might need to lower sales/ rent, shift project launch timeline, or undergo renovations to attract tenants or customers and retain competitiveness.

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• In Q3 2019, Thailand’s financial conditions were tighter than historical average despite policy rate cut by the Monetary Policy Committee (MPC) in August. It was due to persistent Thai baht appreciation, increase in corporate spread, and slowdown in corporate borrowing as well as commercial bank loan growth.
  
  

• When compared to the two policy rate cuts in 2015, which has similar economic slowdown as in recent year, the latest round of rate cuts (in August and November 2019) may not be able to deliver as much accommodation as in 2015 due to limited responses from other financial indicators.
  
  

• Going forward, with slow and precarious growth in 2020F together with tightened financial condition, EIC expects further monetary and fiscal policy easing. However, MPC may not be able to cut policy rate much further due to potential financial stability risk.
  
  

• EIC maintains our view on policy rate unchanged at 1.25% in December 2019 MPC meeting, but now sees rising probability of another rate cut by 1Q20 (40%).

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