Thai economy faces 4 risks in 2nd half: SCB Securities
A slowing global economy, electoral uncertainty, rising interest rates, and drought are the four key risks facing the Thai economy in the second half of this year, a senior analyst at SCB Securities said.
Piyasak Manasan, senior vice president of the company’s investment research department, said official figures for the first quarter of this year showed gross domestic product (GDP) expanded faster than expected but not enough to raise full-year forecasts of 3.2% GDP growth.
Private consumption increased, but private investment, public spending, and exports remained constrained, Piyasak said.
He also said that although the results of the election were clear, they had not resulted in the prompt formation of a governing coalition, which could impede growth. Moreover, the Bank of Thailand raised rates again last month, by 25 basis points to 2%, signalling that the economy faces the risk of inflation and that rates may rise even further.
Global constraints
Piyasak said a significant slowing of the global economy, and even a recession, is expected, especially in Western countries. This will reduce demand for Thai exports and could even reduce the number of tourists visiting Thailand, he said.
Both the United States and the European Union could be entering a period of extended interest-rate rises as they attempt to balance inflationary risks amidst robust labour markets. Moreover, banks in the United States and Europe have tightened lending requirements following the collapse of several banks.
Manufacturing in the US and EU is contracting while their service sectors are expanding, and this makes forming economic policies challenging, Piyasak said.
The US Federal Reserve and the European Central Bank will need to raise, or maintain interest rates for an extended period to manage the risks of inflation and robust labour markets, he explained.
Emerging markets, including China, are seeing growth slow and this will strengthen the value of the US dollar and weaken other currencies, leading to capital outflows, Piyasak said.
A slowing global economy will have a prolonged impact on Thailand's exports and may result in lower-than-expected tourist arrivals, he added.
Electoral uncertainty
Fiscal policy may remain tight in Thailand due to political uncertainty, Piyasak said.
He explained that there is a lack of clarity about the formation of the next government.
There are several risk factors to monitor, he said, noting a significant number of contested seats in the House of Representatives and complaints filed to the Election Commission, which could end up being passed on to the Constitutional Court for a decision.
Piyasak said a new government may not be formed until August and that this delay will slow down the budgeting process and affect government spending. It could lead to six to nine month delays in signing new contracts for government spending, he added.
Moreover, government agencies and ministries may work more slowly as they wait for approval from the next government for major projects. This could result in delays in planned projects, including budget allocations for both recurrent and investment budgets. This will have a cascading effect on procurement and other government processes, Piyasak said.
Higher rates
The tightening monetary policy has already started to have significant impacts on the economy, Piyasak said.
The Bank of Thailand’s policy rate has increased by 150 basis points over the past year (from 0.5% to 2.0%), leading to an increase in banks’ prime lending rate by 160 basis points (from 5.25% to 6.85%), he said.
Higher interest rates have resulted in a clear contraction in credit expansion, with annual credit growth falling from 8.9% in October 2021 to 2.3% in March 2023, Piyasak said.
The slowing credit expansion has had a significant impact on investment activities, particularly in the real-estate sector, he added.
The latest data shows a contraction in investment of -0.3% per year, Piyasak said.
As interest rates continue to rise, lending to businesses and private sector investment are expected to decline further, Piyasak said.
El Nino alert
The risk of drought is another concern, Piyasak said.
He said he is closely monitoring the Southern Oscillation Index, which is used as an indicator for possible El Nino effects.
If the index enters negative territory, it indicates problematic weather conditions and the potential occurrence of El Nino within the next three to six months. This weather pattern can severely damage farming in Thailand, leading to a crisis in the agriculture industry, Piyasak said.
