Global: From banking turmoil to recession risk
IMF sees smaller chance of a soft landing for the global economy given stubbornly-high inflation and the recent financial sector turmoil
The IMF and the WTO project global growth and trade would fall below trend this year. The IMF said the global economic outlook is uncertain again following the financial sector turmoil, high inflation, and the impact of the ongoing Russia-Ukraine war and three years of pandemic controls. The IMF has trimmed 2023 global economic growth forecast from 2.9% to 2.8%, slower than 3.4% in 2022 and averaging only 3% over the next 5 years compared to 3.8% over the past 2 decades. The IMF views that significant tightening in the financial sector could bring down 2023 global growth to 2.5%, or even down to 1% if it is severe. The IMF also expects geopolitical tensions, especially the US-China conflict over access to technology, would cut long-term global GDP by 2%. Likewise, given the extended conflict in Ukraine, stubbornly-high inflation, and tighter monetary policies worldwide, the WTO forecasts global trade would grow by only 1.7% this year vs 2.7% last year and 2.6% average for the past 12 years.
Global economic activity improved in 1Q23 driven by services sector since China reopening and improving weather, but manufacturing activity contracted
The global services sector as well as those in many countries continued to benefit from the China reopening, but world trade is slowing and the WTO and IMF predict weaker global growth in 2023. Latest data also indicate manufacturing activity is softening. In March, the Manufacturing PMI remained in contraction zone in the US and it contracted for the 11th straight month to a 4-month low in Eurozone. In Asia, Japan’s Manufacturing PMI contracted for the 5th month and the Chinese Caixin Manufacturing PMI fell to 50, indicating zero growth.
US: Easing financial stress and still-high underlying inflation suggest the Fed might hike rates in May but higher recession risk could prompt end to monetary tightening in 2H23
Europe: Macro backdrop is deteriorating as higher interest rates and tighter bank lending conditions will drag economic activities, raising fears of a hard-landing
China: Reopening effects have supported economic activity especially in the services sector, but there are signs of weakening momentum and tighter liquidity
Japan: Despite improving domestic spending, overall growth is expected to be flat this year premised on weak exports and business investment
2023 Thai Election: Uncertainty over next government and direction of economic policies
Polls show PM Prayut is less popular than Pheu Thai Party candidate
In the 1Q23 Nida poll, Prime Minister Prayuth Chan-Ocha’s secured only 15.7% of votes. Despite improving from 14.1% in 4Q22, he is still in 3rd place, behind first place holder Paetongtarn Chinawatra (Pheu Thai Party) with 38.2% of votes and Pita Limjareonrat (Move Forward Party) with 15.8%. This suggests low probability of Prayuth Chan-Ocha returning a Prime Minister for another term.
Polls suggest core opposition party is likely to return to be part of the next government and there would be a coalition government
Opinion polls show most voters expect the liberal democratic parties such as Pheu Thai and Move Forward to win the election rather than the conservative parties, Palang Pracharath, United Thai Nation, Bhumjaithai, and Democrat. Likewise, the favorite Prime Minister (PM) candidates are from Pheu Thai Party (PTP), followed by Move Forward Party (MFP). Nevertheless, no single party would secure majority seats and there would be a coalition government.
NIDA and Thairath polls predict major opposition parties would win majority seats in the Lower House
The prediction is based on 500 seats in the House of Representatives (400 seats for single-member constituencies, and 100 seats party-list MPs). They suggest the major opposition parties, including Pheu Thai, Move Forward, and Sereeruamthai, are likely to win a total of 309 seats in the Lower House, beating the rival camp that includes Palang Pracharath, United Thai Nation, Bhumjaithai, Democrat, and Thai Sang Thai which are expected to get a total of 158 seats. However, the polls are based solely on public opinion as of March 23, and actual results could be very different.
Based on polls, conservative parties have little chance of winning the election and Pheu Thai is likely to get the most seats, which could change Thailand’s political direction
We summarize four scenarios for Thailand’s election results based on the assumption that the 250 senators would support the core parties who win majority seats in the Lower House (at least 250 seats) to form the next government. The 2023 election contest will be between two rival camps – conservative political parties and current opposition parties. Pheu Thai Party (PTP) is likely to get the most seats and to form the next government. The list of parties who will form the coalition government with PTP will determine whether there would still be deep conflicts or a chance for a reconciliation.
However, if Pheu Thai gets a landslide victory or conservative parties have sufficient votes to form the next government, there will continue to be deep conflicts
On policy direction, most political parties are focusing on policies to boost spending (e.g., cash aid, wage hikes, and debt moratorium), raising concerns over the national fiscal position
The Thailand Development Research Institute (TDRI) has called on parties to clarify the fiscal and legal feasibility of their policies. The TDRI warned that the announced policies could worsen public debt which stands at 61% of GDP and wholesale debt forgiveness would create a moral hazard. "Although many policies announced by political parties are well-intentioned and aimed at resolving suffering," TDRI wrote in February, "there are still many policies that are likely to cause problems for the country in the long run.“ TDRI also suggested political parties propose new policies to increase productivity in the manufacturing, business and agricultural sectors, as well as labor market.
Policies to boost investment include infrastructure development, digital economy, new business zones, and measures to support SMEs & tourism, but details are scarce
The TDRI said the consequence of increasing public debt would be a smaller investment budget for Thailand. The money must be used to repay the debt, which will affect the long-term ability to sustain development. This could force the state to secure extra-budgets through state-owned specialized financial institutions (quasi-fiscal measures) which do not require approval from the House of Representatives. This would raise questions about transparency. In addition, they are still scant details on budgets and project feasibility.
Other policies are to improve social welfare and education, amend charter, and anti-corruption; the key campaign policies could require a 3 trillion baht budget
The TDRI analyzed a total of 87 policies promised by 9 parties as of February 20. The policies covered the economy, society, education, health, SME, as well as reforming laws and regulations. It found many policies were targeted at enhancing competitiveness, which are long-term policies with hazy budgets. It also found that if political parties implement their campaign promises, they would need up 3 trillion baht budget. That means the government would be forced to raise public debt.
Domestic spending could improve, like after past elections, but direction of public spending would depend on how quickly the next government is formed
2023 General Election timeline: Expect next government to be formed in August, which means there could be delays in approving and implementing FY2024 budget bill
The general election will be held on May 14, which implies the next government would be formed by August. That is less than two months before the 2024 fiscal year (starting October 1, 2023). So, there is risk of a delay in approving and implementing the FY2024 budget bill. In the 2019 election, the government was formed in early July but the FY2020 budget bill (which should start on October 1, 2019) was delayed by 3-4 months and only approved in January 2020.
Thai economic outlook: Balanced upside and downside risks
Krungsri Research Forecasts for 2023
Tourism sector: Foreign tourist arrivals have recovered to 60% of pre-Covid level
Preliminary data from the Tourism Authority of Thailand indicates the country welcomed 2.21mn foreign tourists in March, up from 2.14 mn in January and 2.11mn in February. In 1Q23, tourist arrivals should reach 6.46mn or 60% of pre-Covid level (2019). They generated THB256 bn receipts (50% of pre-Covid level). In the first 2 months of 2023, arrivals from Malaysia, Russia, South Korea, and the UK had reached 80-100% of pre-pandemic levels. Chinese tourists are returning slowly but that could surge in 2H23 (preliminary TAT data shows 500,000 Chinese tourists visited Thailand in 1Q23, or 16% of pre-Covid level).
Private consumption will continue to recover driven by tourism activity during long holidays and general election activities in April-May
Private Consumption Index rose 3.9% YoY in February led by all expenditure categories following improving confidence, better employment data since the pandemic, and strong farm income. We expect private consumption to continue to improve in April-May supported by long holidays and domestic tourism stimulus measures (We Travel Together scheme) and election-related activities in April-May. However, high household debt could limit consumer spending, especially in the low-income segment. Household debt level remained high at 86.9% of GDP at end-2022.
Exports could weaken due to slow global trade and sluggish manufacturing activity in major countries
In February, merchandise export value fell for the fifth consecutive month, by 4.7% YoY to USD22.4 bn. Exports to all major markets and in several products fell. Looking ahead, exports will remain weak, given that the WTO forecasts global trade volume would grow by only 1.7% in 2023 from 2.7% in 2022, and had been below the last 12 years’ average of 2.6% (since the 2008 financial crisis). In addition, there are discouraging signs in PMI Manufacturing data for the US, Europe, and Japan, which remain in contraction territory. Despite reopening effects, China’s PMI Manufacturing index slid to non-expansion territory.
Private investment recovered only gradually amid weak exports. However, FDI is higher than pre-Covid level, which suggests investment would improve in the medium-term
Private Investment Index rose for the first time in 3 months in February, by 0.7% YoY and by 2% MoM. Recovery will be gradually as the weak export sector might discourage export-related investments. However, there are positive signs from strong FDI last year into several sectors. The value of FDI in some sectors had exceeded pre-pandemic levels, such as in financial and insurance, food products, computer & electronics, and wholesales & retail trade. This could drive private investment in the periods ahead.
Inflation slowed to a 15-month low of 2.8% in March, returned to the BOT’s target range of 1-3% quicker than expected
BOT has normalized monetary policy on concerns about demand-pull inflation
At the March meeting, the BOT revised down 2023 GDP growth outlook to 3.6% from 3.7% previously, to reflect slower-than-anticipated 4Q22 GDP growth and a weaker export outlook. However, it raised forecast for foreign tourist arrivals to 28 million from 22 million. It trimmed 2023 headline and core inflation to 2.9% and 2.4% from 3.0% and 2.5%, respectively. The BOT said “core inflation remains elevated with upside risks from higher cost pass-through and demand pressures”. We expect the BOT to keep policy rate at 1.75% at the MPC meeting on May 31 given easing upward pressure on interest rates. First, inflationary pressure had softened in March with headline inflation slipping back to the official target range 3-4 months earlier than the BOT’s expectation. Core inflation, currently at 1.75%, would be below the BOT’s forecast of 2.4% for the whole of 2023. The 1.7% YoY drop in the Producer Price Index in March suggests cost-push inflationary pressure is easing. Second, Thai exports would remain weak following a slowdown in the world’s major economies. Lastly, Thailand’s GDP growth would be below 3% YoY in 1H23, slower than the long-term average of 3.7%. However, if the MPC focuses on bringing real interest rate back to positive territory, based on the BOT’s optimistic view on growth and concerns over sticky inflation, it might hike rate by 25bp to 2% at the next meeting.
