Thailand Monthly Economic Monitor 16 March 2022 The economy showed signs of a rebound in Q4 2021. However, the combined shocks of the ongoing Omicron wave and the fallout of the Ukraine-Russia conflict on global energy prices, tourism and financial markets, will further set back the recovery. The number of foreign tourists fell in January, due to a pause of the Test and Go program amid rising COVID cases. The current account deficit widened as the goods trade surplus narrowed and the services trade deficit remained large. The Thai baht appreciated in February as investors gained confidence in Thai equity and bond markets, only to depreciate in March due to a global flight to safety as the Ukraine-Russia conflict intensified. Surging global energy prices caused inflation to rise significantly to 5.3% but second-round inflation pressures remained contained. The banking system remained resilient, despite deteriorated asset quality. The economy rebounded in Q4 2021, driven by exports Figure 1: Sectoral Recovery Remains Uneven (Output level Output level asas a share a share level (Q4level, of Pre-Covid of Pre-Covid 2019 =Q4 2019 100, SA) = 100 and private consumption. The economy posted stronger- 120 than-expected growth of 1.9% percent (yoy), up from -0.2 Accommodation and food service Financial and insurance activities Information and Communication 100 Total output percent in the previous quarter. On a quarterly basis, output Wholesale and Retail trade increased 1.9% (qoq, sa). Exports of goods and services were 80 Transport, and storage the key drivers of growth, reflecting strong external demand Real estate activities 60 and the reopening of borders. Private consumption also Manufacturing Other sevices improved, amid relaxation of lockdown measures, pent-up Construction 40 Agriculture demand for durables, and COVID-19 relief measures. On the 20 Mning supply side, manufacturing output surpassed its pre-COVID- 0 19 level, but services still lagged behind. In particular, 46 12 29 4548 54 58 85 93 100 Percentage share of GDP in 2020 tourism-related output stayed subdued at 40% below its pre- Source: NESDC; World Bank staff calculations COVID-19 level (Fig. 1). Overall, the economy expanded by 1.6% in 2021, after contracting by 6.2% in 2020. Figure 2: New Cases Reached 20,000 per Day (New COVID-19 cases per million, smoothed, log-scale) Indonesia Malaysia Philippines Thailand The Omicron wave delayed consumption recovery. 1000 Average new daily COVID-19 cases broke 22,000 during the first ten days of March, up from 16,000 cases per day in 100 February, due to the highly transmissible Omicron variant 10 (Fig. 2). Similar to regional peers, the surge in cases has 1 started to weigh on sentiment and mobility (Fig. 3). The 0 Mobility Index declined by 3 pts to -11 pts in the second half of February but remained significantly higher than the Delta 0 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 outbreak. The COVID death rate edged up from 0.2% of confirmed cases in February to 0.3% in March. The fully Source: Ourworldindata; World Bank staff calculations vaccinated population reached 71% while 30% are boosted. Figure 3: Mobility Fell as Cases Increased (Google Index, average of transit, retail and recreation, and workplace) The resumption of the Test and Go program attracted 10 Indonesia Malaysia tourists in February after a lull in January. Tourist arrivals Philippines Thailand posted 133,903 in January, down from 230,500 in the -10 previous month, due to the temporary pause of the Test and Go program. This remains well below pre-Covid levels of -30 about 40 million per year. Foreign tourists are expected to -50 increase in February following the resumption of quarantine- free entry for fully vaccinated visitors in February. However, -70 the recovery of tourism is likely to be gradual due to the Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 ongoing Omicron wave, continued travel restrictions by Source: CEIC; World Bank staff calculations THAILAND ECONOMIC MONITOR | 1 China, and the Ukraine–Russia conflict. Over the past 3 Figure 4: Foreign Tourism was Driven by Europe (Thousand people) months, Thailand relied mainly on visitors from Europe, which 250 Others accounted for more than 60% of tourist arrivals. Middle East 200 Oceania Headline inflation rose to 5.3% in February, breaching the USA 150 central bank’s target due to surging energy prices. Core Russia Europe inflation also started to pick up from 0.5% to 1.8% (Fig. 5). 100 Korea Second-round inflation pressures have been largely Japan 50 contained due to the oil subsidy and subdued domestic China demand (Fig. 6). However, second-round effects may 0 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 potentially materialize if global oil prices continue to rise and Source: MOTS, CEIC; World Bank staff calculations the output gap closes. The government recently extended the cap on diesel until the end of May at 30 baht/liter, funded by Figure 5: Headline and Core Inflation Ticked Up the state oil fund and a cut in the diesel excise tax. The (Percent year-on-year) government estimated that the tax cut between February and 10.0 May could reduce fiscal revenue by THB 17 billion (0.1% of 8.0 GDP). The co-payment scheme, under which the government 6.0 BOT's Inflation Target:1-3% pays 50% of the cost of food and general goods purchased 4.0 by participants, was also extended at the amount of THB 43 2.0 0.0 billion (0.3% of GDP) to help offset household cost of living. -2.0 The fiscal cost could become larger if the global oil price -4.0 continues to rise. -6.0 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 The current account deficit widened as the goods trade Target range CPI Core CPI PPI surplus narrowed and the service trade deficit remained Source: MOC; CEIC; World Bank staff calculations large. The current account deficit widened to THB 2.2 billion Figure 6: Energy and Food Prices Drove Inflation in (7% of GDP) in January, the largest deficit in 5 months (Fig. February 7). This reflected a significant decline in the goods trade (Percent, numbers in parenthesis are weights in CPI basket) balance as export growth slowed to 7.9% (yoy), from 23% in Headline CPI Electricity, Fuel, Water Supply (5.5) the previous month, due to softening external demand, while Vehicles & Vehicle Operation (15.2) strong import growth continued at 21.6%. The services and Food & Non Alcoholic Beverages (40.4) income balance remained in deep deficit at 9% of GDP due Tobacco & Alcoholic Beverages (1.4) Cleaning Supplies (1.6) to low tourism receipts and the high cost of freight. Medical & Personal Care (5.7) Transportation Services (1.4) Shelter (15.5) The Thai baht appreciated in February, but the trend Communication and Equipments (4.4) reversed in March amid a global flight to safety. The baht Apparel & Footwears (2.2) appreciated in February to 32.7 against the US dollar. The Recreation, Education and Religion (4.5) Real Effective Exchange Rate (REER) outperformed the rest -5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 of Asia and appreciated by 1.7% during the same period, Source: MOC; CEIC; World Bank staff calculations reflecting investor confidence in the economic outlook. However, the Thai baht started to weaken in the beginning of Figure 7: The Current Account Deficit Widened (USD Million) March as a global flight to safety took hold. Thai bond and 10000 equity markets registered net outflows for the first time in 6 months at THB 46 billion (Fig. 8). 5000 The Russia-Ukraine conflict could impact the economy 0 via energy prices, trade and tourism, and financial market volatility. Although the economy does not directly rely on -5000 energy imports from Russia, the impact of the Russia-Ukraine Trade Balance, excludes Fuel and Minerals -10000 conflict is likely to be felt via rising global energy prices. Services, Primary Income & Secondary Income Balance Fuel and minerals Balance Thailand is a net importer of energy, with an energy trade Current Account Balance -15000 deficit of 4.5% of GDP in 2020 (Table 1). A price spike could 10/2019 04/2020 10/2020 04/2021 10/2021 affect the headline CPI, the fiscal costs of the diesel and LPG Source: Bank of Thailand; CEIC; World Bank staff calculations THAILAND ECONOMIC MONITOR | 2 subsidies, and lead to a deterioration of the current account Figure 8: Financial Inflows Rose Substantially balance. The latter is likely to be additionally affected by During Jan-Feb 2022 (Left: THB million, Right: THB per US dollar) weaker global demand and tourism. Since the reopening of 150,000 34.0 TH: Equity Foreign net buy borders in July 2021, Russian tourists accounted for 6% of TH: Bond Foreign net buy: Short-Term (TTM<=1Y) 33.5 TH: Bond Foreign net buy: Long-Term (TTM>1Y) total foreign visitors. Portfolio flows to stock and bond markets 100,000 USD/THB, RHS 33.0 32.5 could become more volatile as the Thai economy is reliant on 50,000 32.0 imported oil. However, Thailand continues to maintain 31.5 relatively strong buffers against external shocks, including - 31.0 high foreign reserves and relatively low foreign holdings in the 30.5 sovereign bond market. -50,000 March 1-8 30.0 29.5 -100,000 29.0 The Thai banking system remained resilient in Q3 2021 Jan 20 Jan 21 Jan 22 with sufficient capital and liquidity buffers. The system- Source: SET; Thai BMA; CEIC; World Bank staff calculations wide regulatory capital to risk-weighted assets ratio (CAR) Figure 1: NPL and CAR in the Thai Financial remained stable in Q3 2021, above the minimum regulatory Figure 9: Capital to SectorRisk-Weighted Assets Remained Stable in Q3 (In2021 percent) requirements as well as the Basel III minimum required level. 3.4% (Percent) 25% Thai commercial banks also maintained adequate liquidity 3.3% 20% (Figure 9), with a liquidity coverage ratio of 186.6%, well above 3.3% the minimum regulatory requirement of 10% (Figure 10). 3.2% 15% Banking sector profitability showed a stabilizing trend after a 3.2% 10% significant decline from pre-pandemic levels with return on 3.1% assets and return on equity at 1.0% and 7.2% respectively. 5% 3.1% Asset quality deteriorated as nonperforming loans to total 3.0% 0% gross loans rose slightly and special mention loans increased 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2 2021Q3 significantly from 2.8% of total loans end-2019 to 6.4%. In NPL (LHS) CAR (RHS) Tier-1 Capital (RHS) Source: Bank of Thailand, IMF FSI, and World Bank staff analysis addition, as of end-2021, NPLs for SMEs edged up from 7.0% in 2020 to 7.5% of total SME gross loans, while NPLs for large Figure 10: Liquidity Coverage Ratio was Well Above enterprises declined from 2.1% of non-SME gross loans to the Minimum Regulatory Figure Requirement 2: Selected Liquidity Ratios (Percent) 1.9% during the same period. The financial assistance Loan to Deposit Ratio (RHS) (in percent) Liquid Assets to Total Assets (LHS) measures to support borrowers may mask underlying Liquid Assets to Short Term Liabilities (LHS) 40 115 vulnerabilities in loan quality, which could deteriorate further 35 110 as some of these measures expire in 2022. The increase of 30 household debt from 79.8% of GDP at the end of 2019 to 105 25 89.3% could negatively impact the financial sector. 100 20 95 15 90 10 5 85 0 80 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 2021Q1 2021Q2 2021Q3 Source: Bank of Thailand, IMF FSI, and World Bank staff analysis Table 1: Economic Exposure Ukraine–Russia Conflict Share of Net Energy Current Foreign holding International Share of Energy Im ports Exports Account governm ent Reserve Exports to Share of from Russia (% of GDP) Balance (%GDP) debt (%total) (%GDP) Russia Exports to EU Thailand 4.1 -4.5 -1.6 13.4 40.6 0.3 8.9 Philippines 2.4 -2.0 -1.0 1.9 24.3 0.1 10.7 Malaysia 2.3 1.1 3.6 25.9 28.7 0.3 9.6 Indonesia 1.2 0.9 0.4 19.1 11.1 0.6 8.8 Source: IIF, Asia Bond Online; Trade map; Haver Analytics; CEIC; World Bank staff calculations THAILAND ECONOMIC MONITOR | 3 Issues to Watch: News Highlights: • Inflation: Will rising prices of raw food and energy • The government has two choices to cope with the upsurge significantly affect core inflation and wages? in global oil prices (Bangkok Post, Link) • Trade: Will the Russia-Ukraine conflict cause a • The BoT is concerned about inflation, but believes the Thai significant decline in merchandise exports, disrupt economy will recover this year (Bangkok Post, Link) supply chain and lower tourism receipts? • Consumers will be affected by the higher cost of living and • COVID-19: Will the government continue loosening become more cautious with spending (Bangkok Post, Link) COVID-19 restrictions? Prepared by Warunthorn Puthong, MTI, Uzma Khalil, FCI, under the guidance of Kiatipong Ariyapruchya and Kim Alan Edwards. For further questions, please email wputhong@worldbank.org THAILAND ECONOMIC MONITOR | 4 Selected Economic and Financial Indicators 2021 2021 2022 2020 2021 Q1 Q2 Q3 Q4 Oct Nov Dec Jan Feb GDP and Inflation (%YoY) GDP growth (real) -6.2 1.6 -2.4 7.7 -0.2 1.9 Contribution to GDP growth: Private consumption -0.5 0.2 -0.1 2.7 -1.9 0.2 General Government consumption 0.2 0.5 0.3 0.2 0.3 1.2 Gross fixed capital formulation: Private -1.5 0.6 0.5 1.6 0.4 -0.2 Gross fixed capital formulation: Public 0.3 0.3 1.1 0.3 -0.5 0.1 Net Exports of goods and services -5.0 -4.1 -7.5 -0.1 -9.2 0.5 Change in Inventory 0.2 4.2 3.3 3.1 10.7 0.1 GDP, nominal (USD Billion) 501 506 134 125 119 129 GDP, nominal (THB Billion) 15,654 16,180 4,053 3,914 3,918 4,296 Consumer Prices Index: Headline -0.8 1.2 -0.5 2.4 0.7 2.4 2.4 2.7 2.2 3.2 5.3 Consumer Prices Index: Core 0.3 0.2 0.1 0.4 0.1 0.3 0.2 0.3 0.3 0.5 1.8 Output Indicators Manufacturing Production Index (%YoY) -9.4 6.5 0.7 21.0 -0.3 -0.6 2.7 4.6 6.7 2.0 Capacity Utilisation (%) 60.1 63.0 66.3 62.7 58.5 60.2 63.1 65.2 65.2 65.9 Farm Production Index (%YoY) -5.5 2.2 0.6 4.9 4.3 2.0 -2.6 -0.6 0.9 3.1 Service Index (%YoY) -12.8 -2.3 -10.7 -0.6 -1.8 4.0 3.0 2.5 6.4 9.1 Labor Market Unemployed workers (Thousand Persons) 651 748 758 732 871.3 631.9 Unemployment rate (%) 1.7 2.0 2.0 1.9 2.3 1.6 Underemployment/1 (Thousand Persons) 485 584 651 469 778 438 Underemployment (%) 1.3 1.5 1.7 1.2 2.1 1.2 Balance of Payments (USD million) Current account 21,178 -10,902 -1,222 -2,478 -5,112 -2,090 -1,058 346 -1,378 -2,204 Current account (% of GDP) 4.2 -2.2 -0.9 -2.0 -4.3 -1.8 -3.3 1.1 -4.3 -7.1 Trade Balance 40,856 39,955 8,885 10,929 9,264 10876 3,804 4,238 2,835 596 Exports of goods (%YoY) -6.4 19.6 5.0 36.4 15.7 21.3 17.0 23.7 23.0 7.9 Imports of goods (%YoY) -13.7 24.5 6.5 39.0 31.8 20.6 20.1 13.5 28.2 18.4 Service, primary and secondary Income -19,677 -50,857 -10,108 -13,407 -14,375 -12,966 -4,862 -3,892 -4,213 -2,801 Tourist Arrivals (Thousand Persons) 6,701 428 20.2 20.3 45.4 342.0 20.3 91.3 230.5 133.9 Financial account -11,991 - -5,142 -1,927 2,197 - Financial account (% of GDP) -2.4 - -3.8 -1.5 1.8 - Foreign direct Investment, net -23,847 - 1,104 -1,726 -1166.0 - Portfolio flows -12,148 - -9,697 -3,757 158.1 - Others Investments 24,414 - 3,550 4,160 3,476 - Central Government Budget (Fiscal Year, THB billion)/2 Revenue 2,822 2,858 591 842 824 661 215 188 259 257 Expenditure 3,669 4,205 1,017 934 1209 1209 519 283 407 311 Central Government balance -847 -1,346 -426 -91 -385 -548 -304 -95 -148 -53 Central Government balance (% of GDP) -5.6 -8.4 -11 -2 -10 -13 Public debt (% of GDP) 49.4 59 52.0 56.1 57.980 58.760 58.8 59.6 59.6 59.9 Financial Markets Indicators Policy rate (%) 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 M2 (%YoY) 9.2 6.0 9.5 4.2 4.0 4.2 6.2 5.2 4.9 5.4 - SET Index 1,449 1,658 1587 1588 1522 1639 1,623 1,569 1,658 1,649 1,685 Thai government bond yield, 10 year (%) 1.13 1.90 1.76 1.57 1.56 1.57 1.98 1.85 1.90 2.11 2.15 Foreign exchange reserve and FX forward position (USD billion) 274 258 267 263 263 261 258 257 258 255 255 USD/THB, end of period 30.04 33.42 31.34 32.05 32.90 32.39 33.18 33.69 33.42 33.43 32.73 THB NEER 123.2 114.4 121.9 118.9 115.8 114.3 113.69 115.54 114.41 115.54 117.56 1/ Underemployment account for workers who work less than 35 hours per week and available for additional work (defined by BOT) 2/ Fiscal Year 2021 starts in October 2020 to September 2021, Fiscal Balance according to GFS Source: Office of the National Economic and Social Development Council, Bank of Thailand, Office of Industrial Economics, Ministry of Industry National Statistical Office of Thailand, Fiscal Policy Office, Public Debt Management Office, Haver Analytics THAILAND ECONOMIC MONITOR | 5