Monthly Economic Bulletin (December 2021)

2021 Recap: Two COVID-19 waves undermined economic recovery

• In 2021, the Thai economy was adversely affected by two waves of infections. The Delta-dominant wave and tight containment measures caused 3Q21 GDP to contract quarter-on-quarter, the first negative growth since 2Q20. However, for the whole of 2021, GDP growth is estimated to turn positive at +1.2%, compared to -6.1% in 2020, underpinned by fewer daily infections and accelerating mass vaccination in 4Q21, coupled with additional spending by the government and impressive export performance.
• Export sector was the main economic growth driver, marking double-digit growth following (i) the global economic recovery, especially in core countries with high vaccination rates; (ii) rising demand for products that support work-from-home policy, infection prevention and containment measures; and (iii) a surge in commodity prices in late 2021 which also supported growth of related export goods.
• Despite reopening, Thailand’s tourism sector has not recovered from the global pandemic which has prompted travel restrictions in many countries. Thailand  had been listed as high-risk due to the large number of daily cases. The Phuket Sandbox program starting July 2021 and allowing quarantine-free entry to vaccinated foreign tourists since November have helped to nudge up foreign tourist arrivals.
• Private consumption is supported by government measures, but remains weak. Economic activity had been suspended for several months, resulting in subdued wages and sluggish domestic spending. The government’s relief program and subsidy measures boosted household spending but there was limited positive impact because of legacy high household debt and rising unemployment.
• Private investment has been improving, led by strong export growth and a low base in 2020. However, SMEs, especially in tourism-related services sector, continued to suffer from tight liquidity as a result of extended COVID-19 outbreaks in 2021.
• Public spending helped to cushion COVID-19 impact on the Thai economy. Thailand experienced two waves in 2021. To ease the economic impact, the government approved an additional THB500bn loan decree after the THB1trn loan decree in 2020,  to ease the impact and revive the economy.
• Thai baht was volatile and weak, because of (i) severe pandemic impact on Thailand, (ii) the country’s current account deficit, and (iii) US dollar appreciation as the US economy continued to improve, prompting the Fed to unwind monetary easing  earlier than market expectation.
• The Bank of Thailand (BOT) kept policy interest rate at a record low and introduced more targeted measures as economic recovery had been delayed and uneven due to the pandemic impact. The BOT focused on targeted monetary policy, including on hard-hit sectors, and included soft loan facility for businesses, debt restructuring through asset warehousing, and subsidy for retail debtors.

2022 outlook: First steps on the path to recovery

• Thailand’s economic activity (or GDP) is expected to return to pre-pandemic level in 2H22; full-year 2022 growth is projected at +3.7%. Improving economic activity, rising exports, rising FDI, and accelerating infrastructure projects, would lead to a new investment cycle. Reopening effects and lockdown easing would encourage tourism activity and consumption. Fiscal supports will continue to relieve the pandemic impact and help to revive the economy.
• Consumption is recovering unevenly amid easing restrictions and stimulus measures; rising income is key to sustainable spending. Private consumption is projected to improve by 3.6% in 2022. Although the relaxation of control measures, progress in domestic vaccination program, and government stimulus spending will help in the near-term, labor market will remain weak. We expect average wage to rise in 2022 but remain below pre-pandemic level. Consumption recovery is also patchy by region, income group and business sector, and so income and expenditure in harder-hit sectors will remain weak.
• Exports will grow further following global economic recovery and regionalization; export growth could be above-trend. We project 2022 export growth at 5.0%, higher than average of 2.9% during 2001-2019 (pre-pandemic), supported by widespread vaccination programs and recovery in the world economy. In addition, Thailand will benefit from greater regionalization, including the enforcement of the RCEP from 2022.
• Recovery in domestic and external demand will spur a new investment cycle. Businesses will also invest in response to the ‘new normal’, accelerating digitalization, and signs of rising foreign direct investment (FDI). Pushing ahead with government infrastructure spending will also induce private investment, with most projects organized as public-private partnerships (over 80% of infrastructure investment during 2022-2026 are PPPs). Alongside this, private investment is projected to grow by 4.6% in 2022.
• Tourism sector shows signs of nascent recovery; will take several years to return to pre-pandemic level. We expect foreign tourist arrivals to increase to 7.5 million in 2022, but that would still be far below 40 million registered in 2019. Domestic tourism is expected to improve to 90 million trips in 2022, supported by the nationwide vaccination program and measures to boost domestic tourism. Tourism is expected to reach pre-pandemic level in 2024, one year sooner than the inbound tourism sector.
• Expect BOT to hold policy rate at a record low of 0.50%, at least until the end of 2022. Even though domestic inflation will rise and possibly climb close to 3% in 1Q22 driven by a low base and cost pass-through effect, the impact would soften later. In 2H22, inflation is likely to drop back closer to 1%, the lower bound of the BOT’s inflation target, as global crude oil prices are likely to decline and domestic demand would recover only gradually. As such, the MPC is expected to keep policy rate low to support a still-fragile recovery and below-potential economic growth.
• Risks & Challenges: (i) Still-fluid COVID-19 situation with concerns over mutant strains and vaccine efficacy; (ii) side-effects of US unwinding monetary stimulus on financial markets; (iii) lingering global supply-side issues despite an improvement following rising investment; (iv) geopolitical risk and conflicts between major countries; and (v) domestic political risk and its impact on continuity of economic policies.

Krungsri Research forecasts 2021-2022

2021 growth to turn mild-positive after largest drop in more than two decades in 2020; output gap remains in negative territory

Severe impact of Delta-dominant outbreak hit domestic demand and disrupted manufacturing and construction activities; export sector was key growth engine

Tourism sector has been hit hard by pandemic-induced international travel restrictions in Thailand and abroad

Services sectors, especially those related to tourism, recovered at slower pace than other sectors

Exports expanded favorably driven by improving global demand and growth is more broad-based across product items

Exports to major economies grew following economic recovery in those countries; stronger raw material imports suggest exports will remain robust

Manufacturing production expanded in line with robust export growth and improving domestic demand after lockdown easing

Capacity utilization in several sectors showed positive signs driven by strong export performance

FDI starting to register net inflows in several industries, including food, rubber products, and electrical equipment

Domestic economy has been severely hurt by the pandemic; investment looks set to recover faster than consumption

Non-farm income remains weak compared to pre-pandemic level

Farmers will benefit from recovering global demand, favorable weather, and higher prices for major crops under farm income guarantee scheme

Employment conditions reflect a return of full-time workers in several sectors, but recovery is uneven with weakness in accommodation sector

Bank lending has improved moderately led by large corporates; SMEs show early signs of access to credit supported by BOT’s assistance programs

Inflation moved into positive territory driven by rising energy and commodity prices in late 2021

Sustainable Debt levels: Public and household debts are at record highs but economic recovery should cushion the impact in the period ahead

External stability remains strong with high foreign reserves; current account could turn from deficit in 2021 to a moderate surplus in 2022 driven by improving tourism activity