Bangkok--1 Sep--AVP Communications
The pace of export contraction moderated to 3.6% y-o-y in July vs. 7.9% in June. Strong passenger-car exports did much of the heavy-lifting while agriculture and processed food stayed weak due to falling commodity prices. Export order indicators suggest that exports will stay tepid in the near term, in line with sluggish global demand growth. While this poses downside risk to GDP growth, the Bank of Thailand (BoT) is likely to ensure that the Thai baht will not be an outperformer and an obstacle to exports. This may be one of the reasons why the BoT appears willing to stick to its long-term plan to allow greater flexibility for investment overseas and plans to hold a press conference tomorrow to update on such measures. That willingness may have also come from the outlook that trade surpluses will remain high because of significant energy import savings.
Facts
Customs exports fell 3.6% y-o-y (HSBC: -3.8%, Bbg: -4.5%; Prior: -7.9%). Based on our calculations, exports rose 1.9% m-o-m on a seasonally-adjusted (sa) basis.
Customs imports fell 12.7% y-o-y (HSBC: -4.5%, Bbg: -12.0%; Prior: -0.2%). Sequentially, imports fell 5.5% m-o-m sa.
The trade balance recorded a surplus of USD 770mn in July, a significant increase from USD 150mn surplus in June and the last 5 years average of USD 742mn deficit, mainly due to saving on energy import bills.
Year-to-date, exports contracted 4.7% y-o-y while imports contracted 8.6% y-o-y. The cumulative trade balance year-to-date is USD 4.2bn.
Implications
Exports remained weak although the pace of contraction has moderated. The Thai baht has depreciated significantly against the US dollar since April, but there is little gain in price competitiveness since the year-to-date depreciation had been in line with most of the EM and Asian currencies. Surveys of export orders (see Chart 2) also continued to show subdued demand improvement for the near term.
Exports by sector: The main drags are still products that are sensitive to global commodity prices (e.g. agriculture, processed and frozen food, chemicals) and labour-intensive products (e.g.apparels and footwear) where production bases had been moved to lower-cost neighbouring countries. Exports in these sectors will likely stay sluggish due to weak global commodity prices. Among the key sectors, the auto sector's performance has been most positive and strong passenger-car exports did much of a heavy-lifting (+4ppt contribution) for overall exports in July. Nevertheless, other two sectors - namely electronics and electrical appliances - continued to record moderate contraction.
Exports by destination: Exports to the US returned to y-o-y expansion while exports to CLMV (Cambodia, Lao PDR, Myanmar, Vietnam) markets continued to accelerate in July after a period slowdown in April and May. Nevertheless, exports to most of East Asian economies recorded deeper contraction in July, in line with economic slowdown in the region. Exports to Europe continued to fall on the y-o-y basis albeit at a slower pace, possibly because domestic demand improvement in the Eurozone. (see Table 1 for details)
Meanwhile, imports contracted at a larger-than-expected pace vs our forecast but still in line with market's expectations. Excluding the marked contraction in energy imports, other types of imports also continued to record y-o-y declines, suggesting that domestic demand and export orders remained weak. In particular, imports of capital goods contracted sharply, especially for machinery and parts, in line with the sluggish private sector investment. (see Table 2 for details)
We forecast exports to fall 1.1% and GDP to grow 3.1% in 2015 but this outlook may be tempered with sluggish global demand recovery. Furthermore, as the risks of further EM currency depreciation remain, the BoT may tolerate further weakness in the Thai baht to ensure that it is not an outperformer and not an obstacle to exports recovery.
We expect substantial trade balance surpluses to continue in the remainder of this year, primarily due to low oil prices (net imports of oil = 8.8% of GDP in 1H15). This may be part of the reasons why the BoT still appears willing to stick to its long-term plans to further relax capital flow regulations despite rapid portfolio outflows and significant Thai baht depreciation in recent months.
*The BoT announced today that it will hold a press conference tomorrow (28 August) to update on capital flow regulations. On 30 April, it had announced plans, without giving full details, to allow individuals to invest overseas with greater flexibility and to further relax FX regulations. More clarity on the new sets of measures could be provided tomorrow.