Economy faces headwinds next year

Kirida Bhaopichitr
Kittiphat Buaubol 

The Thai economy is projected to grow 3.8% in 2019, slightly below this year’s 4.2%. The main reason is slower growth in the global economy. This will lead to a deceleration in Thai exports and tourism, which will impact domestic consumption.

However, foreign direct investment and government stimulus measures could prop up growth next year. Major economies such as the United States, European Union, Japan and China are projected to grow next year, also by a slightly narrower margin than in 2018.

The International Monetary Fund (IMF) projects China will see growth of 6.2%, down from 6.6% this year, as the impact of its trade war with the US continues to be felt. The US economy next year will also slow from 2.9% to 2.5% as a result of the trade war and Washington’s difficulty in passing stimulus measures as it no longer enjoys a majority in the lower House.

The Thai economy next year will be affected by these headwinds. The US, China, Japan and the EU are major export markets for Thailand. Exports this year are expected to grow by 8% in US dollar terms, but are tipped to drop to 4-5% next year.

In addition, several emerging markets are facing an economic crisis. Coupled with rising interest rates in the US and on the US dollar, there has been large capital outflows from emerging economies with greatly weakened currencies. Argentina, Turkey and Venezuela are in severe economic crisis and have massive capital outflows. Russia, India and Malaysia have also experienced large capital outflows that have weakened their currencies relative to the US dollar by more than 5% since the beginning of this year. On the other hand, the Thai baht has depreciated by 2% this year, and is projected to do the same in 2019.

The slowing of emerging market economies and the weakening of their currencies against the Thai baht will negatively impact Thai exports and inbound tourism in 2019. Tourism arrivals and receipts this year are expected to expand by 7% and 9%, respectively, compared to last year. Next year they will likely decelerate by 5% and 7%.

Domestic consumption will also be affected by the slowdown in exports and tourism, a slowdown in purchases of durable goods, and a decline in major global crop prices.

Although exports are concentrated in a handful of companies, and tourism in a handful of provinces, there is evidence of a trickle-down effect on the entire economy. Yet it is happening slowly. The incomes received by export and tourism companies and their employees have all been spent, benefitting other sectors of the economy.

Consumption grew by 4.4% in the first nine months of this year. With the slowdown of exports and tourism next year, disposable income and patterns of consumption will also be impacted.

Farm incomes next year will be negatively affected by declines in major crop prices. Prices in the futures markets for rice and rubber next March are down 12% and 6%, respectively, from this year. With oil prices next year projected to plateau at around US$75 per barrel, the prices of ethanol and biodiesel, which are made from sugar and palm oil, will not rise.

Purchases of durable goods are also projected to slow down after expanding rapidly this year. Automobile purchase have risen rapidly since last year after cars bought under the former government’s first-time car-buyer programme are allowed to be resold.

Under the programme, car owners who are eligible for excise tax refunds are blocked from ownership transfers for five years. This year, automobile purchase expanded by 20%. Next year, purchases of new automobiles could slow as many car owners under the programme have already bought new cars.

Foreign direct investment may accelerate in 2019, albeit slowly. With all the geopolitical risks and the trade war in North Asia, there has been greater interest by Chinese and multinational firms in China to relocate to Southeast Asia, including Thailand.

Delta Electronics from Taiwan, for example, has announced it will relocate from China to Thailand. The Eastern Economic Corridor (EEC), with its planned public infrastructure and tax and non-tax privileges, has also started to attract foreign companies, such as those in the airplane maintenance and repair operations, and airplane parts. However, the investments will only be at a preliminary stage in 2019.

Investments in Thailand by domestic companies next year may grow at a similar rate to this year. Domestic private investments have sped up as inventories fell. However, inventories have since started to build up. Moreover, commercial banks’ loan rates are projected to rise slightly next year as the policy rate may be raised by 0.25-0.50%.

This raises the cost of investments and also borrowing. Property construction next year may also slow as the Bank of Thailand’s new rules on mortgages take effect, particularly the lower loan-to-value amount allowed for a second property, and properties valued at over 10 million baht.

Several government measures to support people’s incomes and consumption will be extended through 2019. Most measures are aimed at assisting low-income and farm households. They include benefits for social welfare cardholders, agriculture support and a debt moratorium.

Other measures are shopping tax breaks – a maximum 15,000-baht income tax deduction on purchases in December and January, and a maximum 20,000-baht tax deduction for debit card spending in January and February.
In the past week, the government has deposited a 500-baht giveaway to each of the 11.4 million social welfare cardholders, equivalent to 5.7 billion baht in total (0.04% of GDP). Next year, the number of cardholders will be increased to 14.5 million.

A planned general election and a new government next year will temporarily boost consumption, but new public investments may be slightly delayed. In the past six elections, consumption rose in the month of each election.

Public investment growth tends to slow down after an election as it normally takes a new government a few months to approve and implement new projects.

Kirida Bhaopichitr, PhD, is a research director for international economics and development policy 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 Publish: Bangkok Post on Wednesday, December 12, 2018