Dragon’s puzzle: The forthcoming economic challenges of Thailand
As Thailand ventures into 2024, it confronts a multifaceted economic landscape, characterized by both resilience and looming challenges. This complex scenario is shaped by global geopolitical tensions and pivotal domestic stimulus policies.
Economic Growth Forecast:
Thailand's economy is poised for a 3.1% expansion in 2024, following a 2.4% recovery in 2023. This promising growth trajectory is fueled by a revival in key sectors: tourism, agriculture, and manufacturing. These sectors exemplify the strength of Thailand's internal market and its integration into the global economy.
Growing Downside Risks:
The year 2024 is expected to witness persistent geopolitical tensions that present considerable risks, including reduced global demand and supply chain upheavals. Notably, ongoing conflicts in Ukraine and Israel, escalating US-China tensions, and a slowdown in China's economy due to increasing corporate debt and falling property prices will have ripple effects. The US, while potentially averting a technical recession, faces looming financial market uncertainties driven by extended high interest rates. Concurrently, a softening global economy and slowing inflation may prompt major central banks to start reducing rates by mid-2024 to bolster economic recovery.
The Digital Wallet Stimulus Challenge:
A critical test for Thailand in 2024 is the implementation of the digital wallet stimulus package, intended to energize consumption in lower-income regions. Although this policy could enhance growth(potentially raising it to 3.6% compared to 3.1% without the policy), it also raises alarms about increased public debt, which could lead to negative revisions in credit ratings and capital outflows. The uncertainty surrounding the policy's approval and execution necessitates considering two economic growth scenarios for 2024 - one with and one without the digital wallet policy.
Monetary Policy and Exchange Rate Outlook:
Given the expectation that inflation will stay below 2%, the Bank of Thailand is expected to pivot its focus toward stimulating economic growth. This strategic shift might include a reduction in the policy rate from 2.50% to 2.00% during the third quarter of 2024, aligning with the worldwide trend of monetary easing. Nonetheless, the introduction of the digital wallet initiative, which poses a risk to financial market stability, might lead the Bank of Thailand to maintain the current rate unchanged until the end of the year.
In terms of the exchange rate forecast, the Thai baht is anticipated to appreciate against the US dollar. This expected strengthening is supported by the Federal Reserve's planned cycle of rate reductions starting in May 2024, coupled with steady oil prices. Additionally, increasing revenues from tourism are likely to play a significant role in bolstering a more robust current account surplus. By the end of 2024, the baht is projected to reach 33.50 against the US dollar.
Sector-Specific Growth Drivers:
Tourism and Hospitality: These sectors are set for rejuvenation, with an expected influx of 34 million tourists in 2024. The growth will be predominantly driven by visitors from ASEAN, Russia, and Europe, with a slower increase in Chinese tourists. Agriculture and Agro-Industry: Favorable climatic conditions are anticipated to boost farm output, supported by stable or rising prices. This will likely rejuvenate consumption and investment in processed food and agricultural products. Manufacturing: A 2.5% growth in exports is projected for 2024, particularly in automobiles, electronics, and processed foods. Despite some challenges, signs of recovery are evident in key electronic components.
Conclusion: Solving the Dragon’s Puzzle:
Thailand is expected to experience steady growth from late 2023 to mid-2024, fueled by recovering exports and an increase in tourist arrivals. However, purchasing power among low to mid-income households may remain static. Government stimulus policies aimed at increasing taxpayer spending could temporarily boost consumption. The key to solving the Dragon’s Puzzle lies in whether Thailand can strategically balance local stimulus measures with global economic trends without triggering undesirable outcomes like rising bond yields, higher inflation, and capital outflows.
Amonthep Chawla, executive vice president, Head Research Office of CIMB Thai Bank
