Bangkok--12 Dec--CIMB THAI Bank
- Spillover from external demand to domestic market in H2/2019
How trade wars could hurt local investors and consumers? When exports declined along softening global demand and on-going trade war uncertainty, exporters would likely order less from manufacturers. Then, investors tended to experience a problem of excess supply and could start lower their production as showed in lower capacity utilization rate and shrinking Manufacturing Production Index (MPI). Companies cut down work hours, resulting in a decline in overtime payment (OT). Consumers then got hit because of declining non-farm income whereas farm income remained volatile from drought and flood, affecting agricultural production. Meanwhile, the government tried to provide cash transfers to the poor and introduced consumption stimulus packages which could somewhat help stabilize purchasing power. However, it may be hard to revive spending when income remained low amid weak confidence. The BOT attempted to cut the policy rate twice this year from 1.75% to 1.25% while we would wait and see the transmission of higher liquidity to financial market that could stimulate investment and consumption. Despite rate cuts and relaxation of capital outflows by the BOT, the Thai baht remained strong against regional peers, deterring competitiveness on top of global economic slowdown.
- Will the economy go down further?
The National Economic and Social Development Council (NESDC) reported that the Thai economy in the third quarter of 2019 expanded by 2.4% from the same period last year (yoy) or increased by 0.1% from the second quarter after seasonal adjustment (qoq, sa). The slow quarterly growth is quite alarming because Thailand could experience
a technical recession, two consecutive quarters with negative qoq growth, if the downward trend persists. We do not think so. Well, we still look at the Thai economy on the bright side – just continual slow growth.
- Some good signs to expect in Q4
Despite softening growth, there are some indicators pointing towards rebounding economic activities. First, we could expect continual positive contribution to growth from
external factors. Export growth would likely fall modestly while imports could fall down more than exports, causing large trade balance surplus. Stronger tourism revenue could be a positive factor to growth. Local investors could run down inventory before accelerating their production which could cause a continual negative import growth for the next few quarters. Second, investment could likely pick up, especially projects with a collaboration between the private sector and the government or public-private partnership (PPP). An increase in project approval by the Board of Investment (BOI) for the Eastern Economic Corridor (EEC) and other areas signaled higher private investment going forward. However, we could watch out for residential construction as problems of over supply could linger. Third, private consumption grew well for tourism-related spending, such as hotels and restaurants, food and non-alcoholic beverage, whereas some items could continue slowing down amid weak purchasing power among low-income households. Car sales may fall down further amid lower consumer confidence. Fourth, public spending could be stronger to drive growth, especially when we could expect the budget bill to pass by January 2020.
- Outlook for 2020 – the year of 2 RATs
The year 2020 is a zodiac year of a rat. In economic outlook, we could look at it as both positive outcome and risk factors for RAT. For positive outcome, we could expect Relocation, Active stimulus and Tourism. We could expect industry relocation from China to Thailand, especially to the EEC area to avoid US-China trade war and use Thailand as a connectivity hub for ASEAN. Investors could resume increasing their production which could generate higher income for households and contribute to higher exports. The government would likely be more active in terms of fiscal stimulus when the budget bill is passed by January 2020. The BOT would likely hold the rate unchanged at 1.25% throughout the year but they may cut the rate down further if the economy decelerates further as they still have policy space to employ when necessary. Tourism would likely remain a growth driver for the Thai economy, especially after the number of Chinese tourists rebounded sharply in Q3. For risks that could restrain Thailand's economic growth are Real estate, Appreciating baht and Trade war. The problem of over-supply in residential real estate with tight regulation on mortgage by the BOT could lower outlook on private construction. The strong baht against peers could hurt exports, especially commodity exports which could subsequently lower outlook for farm income. Tourism may got hit slightly from stronger Thai baht
against peers but the number of tourists would likely to grow along higher Chinese demand for travelling. Meanwhile, at the present, we expected trade war not to escalate which could allow exporters and investors to adjust themselves no matter what tariff rates could be set. However, if trade wars escalate to more tariff or more countries fallin
into the list of President Trump or whether trade wars lead to currency wars and technological wars, global economy could decelerate which could subsequently hurt Thailand's exports and domestic market. In sum, we would project a moderate positive outcome with low likelihood for risk factors. We projected the Thai GDP to grow by 2.7% in 2020 from 2.4% in 2019.
- Outlook for FX and interest rate
The BOT would likely hold the rate unchanged at 1.25% throughout 2020. The BOT would monitor the transmission of interest rate cut on financial market before taking another step to loosen monetary policy. Meanwhile, liquidity in the market is rather high due mainly to slow business loan growth, especially from small enterprises. Consumer loan growth would likely soften from tight regulation on mortgage from the BOT together with more caution by commercial banks for fear of rising NPLs. Thus, Thailand would not have a problem of tight liquidity which requires another rate cut. On the other hand, Thailand's financial market is likely to experience a challenge of stability due to prolonged low interest rate environment which could induce investors to invest in risky assets without properly understanding risks. Meanwhile, the BOT could encourage more capital outflows from local investors so as to allow the Thai baht to weaken or slow the pace of appreciation against the US dollar and regional peers. In line with the attempt by the BOT, we projected that the Thai baht would strengthen to 29.50 baht against the US dollar by year end 2020 amid large current account balance surplus. Net exports could remain large due mainly to slow import growth from high inventory and low oil prices while tourism revenue could grow moderately from rebounding Chinese tourists. In addition to trade flows, foreign direct investment (FDI) could accelerate amid higher project approval by the BOI in line with industry relocation.