Siam Commercial Bank Public: EIC revised upwards for the year 2022 of Thailand


The EIC has revised Thailand’s economic growth forecast upward from 2.7% to 2.9% in 2022, as Thailand’s reopening ushers in a rebound in the tourism and service industry, while the The agricultural sector is expected to gain momentum from rising global food prices, thereby supporting domestic demand. Still, inflation has hit a 24-year high and a possible slowdown in exports in line with global momentum are likely headwinds for the Thai economy. Going forward, we expect the tourism and service sector to replace export-oriented manufacturing as Thailand’s main economic driver.

EIC has revised Thailand’s GDP growth forecast for 2022 up to 2.9% (from 2.7% previously). The upward revision was attributed to a rebound in the tourism and services sector, supported by the reopening of Thailand and the easing of border restrictions around the world. Thailand is expected to welcome 7.4 million foreign tourists this year, up from a previous estimate of 5.7 million. Domestically, economic activities in the service sector are expected to pick up as people start to spend more time outdoors, given higher inoculation rates and the easing of lockdown rules. lockdown. The agricultural sector would be another growth driver this year. Crop yields are poised for sustained growth and agricultural commodity prices tend to improve alongside rising world food prices, driven by supply-side pressures resulting from war underway in Ukraine and Western sanctions against Russia. Nevertheless, domestic spending in pink – boosted by a rebound in the tourism and services sector which is the main source of employment, rising farm incomes and pent-up demand from higher-income households – would still come under downward pressure. lower due to soaring inflation which is now underway at its highest level in 24 years (EIC expects annual average headline inflation of 5.9%), while exports are likely to slow alongside the global economic downturn in the future.

The global economy in 2022 is poised to experience slower growth than the previous year, hampered by higher pressures from 3 critical risks: (1) The Russian-Ukrainian war would lead to a worsening and persistent bottleneck in the supply chain while keeping commodity prices at historically high levels, especially energy and food costs; (2) Lockdown and strict virus control measures due to China’s Zero-Covid policy would put pressure on domestic spending and exacerbate global supply chain disruptions, as China is one of the most major manufacturers in the world and a global logistics center; and (3) monetary tightening by major central banks in the hope of curbing inflation would in turn retard global economic growth and fuel volatility in global financial markets. The EIC expects the U.S. Federal Reserve (Fed) to hike policy rates at every meeting for the remainder of 2022 (seven rounds in total in 2022) – possibly with a 50 basis point hike to each of the next three meetings, resulting in the Fed funds rate reaching 3% by the end of this year. The Fed also launched its quantitative tightening in June. EIC has thus lowered our forecast for global economic growth to 3.2% in 2022, from 5.8% in 2021, following a synchronized slowdown in the main economies, namely the United States, Europe and China. In other words, the global economy will soon enter the era of post-pandemic instability where many countries face higher risks of economic recession.

The global economic slowdown and growing uncertainties ahead will weigh on exports, which have been the main drivers of the Thai economy. Thai exports are expected to experience slower growth amid falling demand from trading partners alongside the global economic and trade deceleration. In particular, the Chinese market is currently facing obstacles related to strict virus control measures and economic restructuring, while its European counterparts are facing the ongoing war in Ukraine. A slowdown in exports would hamper private investment which is still struggling with supply chain disruption and soaring commodity costs. As for public spending, despite expanding public construction driven by the advancement of megaprojects, we expect less impetus as only THB 48 billion remained to be disbursed for new projects under the government decree. THB 500 billion emergency.

EIC predicts annual average inflation of 5.9% in 2022 (from 4.9% previously), the highest in 24 years. As the government removes subsidies on the cost of living, there will be downward pressure on domestic purchasing power, household consumption, as well as private investment. According to our analysis, household income is expected to recover more slowly as the labor market has yet to regain full momentum, which would become a significant drag for households in the face of rising living costs this year. . In particular, more than 7 million or a third of Thai households whose incomes were already insufficient for their expenses would find this inflationary episode more difficult. Such circumstances would hurt their balance sheet due to diminished liquidity and increased debt burden as some households might apply for loans to cover the rising cost of living, thus increasing the vulnerability of Thai households. Apart from this, the corporate sector would face constraints in passing on rising costs to consumers, especially among discretionary goods.

Regarding the monetary policy outlook, we expect the Monetary Policy Committee (MPC) to raise Thailand’s policy rate to 0.75% in 3Q/22 in response to inflation surges and the outlook. optimistic of economic recovery after reopening Thailand. Increases in key interest rates would help to cushion the risks to price stability and curb the escalation of inflation expectations. In May 2022, the median household one-year inflation expectation rose to 3.1%, while Thailand’s current real interest rate (adjusted for inflation) remained negative and relatively low compared to compared to those of neighboring countries. This could lead to capital outflows from Thailand followed by a weakening of the Thai baht. Nevertheless, we expect the MPC to gradually wind down its ultra-loose monetary policy in order to bolster the fragile economic recovery amid lasting economic scars: stagnant unemployment, subdued incomes and high household debt. Like other regional currencies, the Thai baht has weakened 3.6% against the greenback since the start of 2022 through June 7, paralleling the recent depreciating trend of its peers. In the near term, EIC believes the baht will likely fall to 34.5-35.5 against the US dollar, given downward pressure from Fed rate hikes and war-induced risks. However, the year-end baht is expected to rebound slightly with support from an economic rebound and improving current account balance – ushered in by the services account. As a result, the Thai baht will likely strengthen to 33.5-34.5 against the greenback at the end of 2022.

In summary, the EIC expects the tourism and services sector to replace the export-oriented manufacturing sector as the major economic driver in the coming period, supported by the reopening of the country to foreign tourists and the easing of confinement. Nonetheless, a rebound in domestic spending would face headwinds from accelerating inflation, which is expected to remain elevated through 2022, given limited policy space and lingering economic scars. Consequently, Thailand’s economy through the remainder of 2022, given limited policy space and lingering economic scars. As a result, Thailand’s economic growth will experience a modest rebound this year. Thus, annual GDP is not expected to return to its pre-pandemic pace (in 2019) until Q3/23. Apart from this, there remain significant downside risks related to (1) continued high energy and commodity prices in the context of the protracted war in Ukraine; (2) Disruption of the supply chain in the manufacturing and logistics sectors caused by China’s Zero-Covid strategy, which could lead to a new reimposition of the containment; (3) supply chain decoupling fueled by geopolitical factors could hurt productivity and exacerbate rising trade and investment costs for the manufacturing sector; (4) The surge in the cost of living could aggravate the scarring effects, thereby significantly undermining household debt servicing; and (5) government relief packages would soon run out, both in terms of economic stimulus and subsidies to help with the rising cost of living, especially for energy prices.


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