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Uncertainty ahead for Thai economy

The Thai economy will face many headwinds but also tailwinds next year, mainly from the global economy and geopolitical tensions. In 2022, the Thai economy slowly recovered from the Covid pandemic as lockdowns ended and the economy was reopened to international travel.

After contracting by more than 6% in 2020, Thailand’s real gross domestic product (GDP) grew by 1.5% in 2021 and 3.2% in 2022.

Next year, the Thai economy is forecasted to grow by 3.5%. The continued expansion will be fueled by the growth of household consumption, remittances from tourism, especially international travellers, growing exports, especially to China, as well as private investments, particularly the relocation of high-tech production from China to Thailand.

Even so, recession in major economies, geopolitical tensions, high prices, and lending interest rate hikes continue to be key headwinds for next year. Thailand’s major export markets are forecasted to face a recession in 2023. The IMF’s most recent forecasts show a sharp slowdown in the growth of the US and European Union (EU) economies, which are Thailand’s major importers.

For the US, aggressive hikes in its policy rate this year to fight inflation will continue into 2023. The US policy rate could likely be hiked to more than 5% by the end of next year, compared to only 0.25% at the beginning of this year. This will slow down demand in the US.

As for the EU, the sharp rise in the price of natural gas, a major source of its electricity and heating, will elevate inflation even more, which limits purchasing power. Although natural gas prices are expected to have peaked, they will remain high into next year, thus continuing to put pressure on European economies.

Geopolitical tensions, especially the Russia-Ukraine conflict, will continue; therefore, energy prices and related commodities will be pricey, and supply chains will be disrupted, particularly in the energy and semiconductor markets. Natural gas and oil prices have peaked but will remain high next year as their supply from Russia is disrupted. However, should there be an escalation of the war in Ukraine, energy prices and freight prices could again soar. Semiconductor shortages will likely last until 2024 as China is unable to produce semiconductors due to the US’s export ban on semiconductor parts to China. New semiconductor fabrication plants, which cost billions of US dollars and at least two years to complete, are being built outside of China. These pose headwinds for the recovery of the Thai economy as Thailand relies on imports of energy and semiconductors, the latter mainly for its car and electronics manufacturing.

Prices will continue to rise next year. Headline inflation in Thailand is forecasted by the Bank of Thailand to average 2.5% in 2023, compared to 6.5% this year. Prices which have been kept more or less unchanged in 2022 by producers or by the government through subsidies are being gradually relaxed as domestic purchasing power is expected to recover next year. They include an electricity price hike, a minimum wage increase of 5% since October 2022, and the gradual passthrough of prices from producers to consumers, while diesel prices will likely continue to be fixed at 35 baht per litre.

Local interest rates will also rise in 2023. Indeed, the policy rate has risen to 1.25% this year-end from 0.5% at the beginning of the year. It is expected to rise to 2% by the end of next year as the US policy rates and domestic demand continue to rise. This will lead to a rise in commercial banks’ deposit and loan rates as well. Historically, when the policy rate rises by 1%, commercial banks will raise their rates by 0.6% with a lag of 1-2 months.

China’s reopening is the hope for Thai exports and tourism next year. Exports to China, Thailand’s second-largest export market, contracted this year as China’s Zero-Covid policy dampened demand. Chinese tourists have also not been allowed to travel internationally freely. However, China is loosening its Zero-Covid policy domestically and is anticipated to allow international travel by April 2023. This is good news for Thai exports and tourism. Nevertheless, the Thai business sector should not pin high hopes on China’s market. Mostly this is due to the risk that Covid-19 there may spread widely in the first few months of the relaxation, causing disruptions to production in the country as people fall ill and need to be quarantined.

Given the domestic situation in China and geopolitical tensions, many multinational companies have relocated from China to Southeast Asia. Thailand is so far the second-largest recipient of relocation from China to the region since the US-China trade war in 2018, with Vietnam being the largest. Firms generally relocate their production for exports while keeping production for the Chinese market in China. Relocations to Thailand are mainly in high-technology sectors such as automobiles and parts, including electric vehicles, electronics and electrical appliances, petrochemicals, and information technology and data centres. This trend is set to continue as geopolitical tensions will last into the foreseeable future. To attract greater foreign investments, Thailand needs to position itself based on its strength as a leading digital infrastructure provider in the region, as well as a green and low-carbon production base.

That said, 2023 will be a year of uncertainty with many downside risks. There is uncertainty around China’s reopening as the Zero-Covid policy could be re-implemented if death rates rise significantly from Covid-19. The unpredictable geopolitical developments present risks for higher energy prices, greater supply chain disruptions, and a deeper global recession.

Kirida Bhaopichitr, PhD, is a Research Director for International Economics and Development Policy and Director for the TDRI Economic Intelligence Service (TDRI EIS).

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