As a small, open economy, Thailand stands to be affected by global economic developments. The recovery of the US economy, with higher interest rates and bond yield rates, has an impact on capital flows and the Thai baht exchange rate. The rise in global oil prices from geopolitical tensions pushes our petrol prices and other prices up, while the looming US-China trade war will have a definite effect on our performance while the changes in global farm prices are having an impact on Thai farmers’ incomes.
With rising interest rates in the US and inflation at home, Thailand’s interest rates are also on an upward trend. The policy rate and government bond yields in the US have been rising, resulting in capital outflows from emerging markets to the US. Countries with high foreign debt, low international reserves, and current account deficits such as Argentina, are badly hurt by the outflows. At its latest meeting this month, the Fed raised its policy rate to 1.75-2.00%, surpassing Thailand’s policy rate of 1.50%. Moreover, the Fed is likely to raise rates two more times this year, each time by 25 basis points. This has spurred capital outflows from the Thai stock market over the past few weeks. However, Thailand still enjoys large capital inflows from a current account surplus as exports and tourism continue to grow robustly; the inflows surpass the amount of capital outflows many times. Moreover, Thailand’s foreign debt is low and international reserves are high, making it less vulnerable to capital outflows compared to other emerging economies. As a result, the baht will strengthen further from last year by around 7% according to the consensus forecast.
The rise in global oil prices this year, as a result of increasing demand in the first half of this year and the re-institution of sanctions on Iran, has led to an increase in our oil prices over the past months. This is expected to ease in the second half of the year as Opec and US shale oil production increase. Global oil prices this year will average US$70 per barrel, a 30% increase compared to last year. This has put an upward pressure on petrol prices in Thailand as well as logistics costs. The Bank of Thailand has estimated inflation this year to be at 1.1%, up from 0.7% last year.
With regard to the farm sector, prospects are brighter for rice farmers, compared to rubber planters. Global rice prices are expected to go up by 5% this year due to the lower global supply compared to last year’s. In addition, Thailand’s rice production is estimated to be higher than last year’s due to favourable weather conditions. However, rubber prices will be 10% lower this year compared to the exceptionally high price last year that resulted from China’s demand for rubber re-stocking.
With the rise in global interest rates, higher inflation, and stronger demand, Thailand’s policy interest rates may be hiked at the end of the year. The Monetary Policy Committee (MPC) maintained its one-day repurchase rate at 1.5% in its latest meeting this month, with one member voting for a hike. Strong exports and tourism growth have slowly trickled down to domestic demand; there are now early positive signs of rises in employment and wages for most sectors in the economy. Private investments are also showing early signs of recovery as capacity utilisation has been rising sharply since the beginning of this year. Hence, we expect the MPC to hike the policy rate by the end of the year.
Uncertainties around the US-China trade war pose a threat to trade and investments. So far the US has initiated a trade war targeted at Chinese high-tech imports and investments by raising tariffs and preventing US technology transfers to Chinese companies. The Chinese have retaliated by raising tariffs on a similar amount of imported goods from the US but targeted at farm products, which will affect President Trump’s voter base. The most recent move by the US was to slap 25% tariffs effective July 6 on $34 billion worth of imported Chinese products, while preparing to raise tariffs on another list of products worth $16 billion. China has almost immediately announced its response of imposing 25% duties on $50 billion of imported US products as well – the first set of duties on $34 billion of products, including soybeans, electric cars and whiskey, to be effective the same day as the US and another round of products, including medical equipment and energy products, to be effective later.
Thailand, as a trade partner of both the US and China, will unavoidably affected by this trade war. In the short run, the immediate direct impact will fall on Thai exporters in the supply chain for Chinese exports to US and US exports to China; these include computers and electronics, motor vehicles, textiles, rubber and plastics. Nonetheless, as Thailand’s value-added products in both the China and US supply chains are relatively small, the impact will be limited at around -0.04% of GDP at most. On the other hand, Thai producers may enjoy lower prices for some targeted products that could be dumped onto the world market in the short run such as steel and aluminium.
In the long run, Thailand could gain from a US-China trade war as trade and investment diverts to Thailand. As the two countries slap heavy tariffs on certain goods, there could be opportunities for Thailand to export them – computer parts to the US and farm products to China. Thailand and other Southeast Asian countries could also gain from investment relocation from Chinese firms for products that are targeted by the US. In addition, US companies whose products in China are discouraged would be looking to relocate to the region as well. Potential products include robotics, aviation parts, automotive, computer parts, electronics, energy equipment, and agricultural machinery.
The global economy will be uncertain due to economic and geopolitical reasons. Hence, Thailand as a small open economy must closely keep an eye on these developments and prepare for both opportunities and risks.
Kirida Bhaopichitr PhD, is a research director for the International Research & Advisory Service. Punpreecha Bhuthong is a senior researcher and Kittiphat Buaubol is a researcher at the Thailand Development Research Institute (TDRI). Policy analyses from the TDRI appear in the ‘Bangkok Post’ on alternate Wednesdays.
First published in Bangkok Post, June 27, 2018