Can Thailand buy its way out of a growth slump?

All eyes are on the Thai economy as it struggles to restore a robust growth momentum after the pandemic.

Thailand’s 2023 performance is below its average expansion of 3.64 per cent between 2010-2019 and is far from returning to the above 7 per cent growth trend seen in the previous decade, with record-high interest rates and elevated household debt restricting growth prospects. Weak external demand also dampened Thai exports.

A new dawn has come for Thailand as its new Prime Minister Srettha Thavisin seeks to boost the domestic economy through direct cash transfers to its citizens. Thavisin is also exerting indirect pressure on the Bank of Thailand (BOT) to roll back interest rate hikes introduced since 2022 to rein inflation in, but it will likely come at a huge cost.

Manufacturing slump

Thailand’s manufacturing sector has hit a five-month slump as its Purchasing Managers’ Index has settled consistently below the 50-point threshold since August 2023, indicating a contraction in factory output. Exports contracted by 1.5 per cent from January to November due to weak global demand, particularly from China, an economy that is also experiencing its own slowdown. That about two-thirds of Thailand’s GDP is drawn from exports of goods and services explains the sluggish growth. The revival of the tourism sector has proven to be a significant booster for the Thai economy, but this appears not enough to offset the declining trade in goods.

Thailand’s GDP growth is far from returning to its pre-pandemic pace, settling at 1.9 per cent in the first nine months of 2023. Thavisin believes that the impact of interest rates has bottomed out as Thailand began seeing negative inflation, softer domestic liquidity growth, and a weaker baht against the US dollar.  

Already, there are fears that Thailand could be heading into crisis mode that’s reminiscent of the 1997 Asian Financial Crisis but we think this is overblown.

While Graph 1 shows similarities in the trend lines, we know that the currently slower economic growth is due to COVID-19 scarring effects and the exchange rate depreciation is no longer caused by the sudden removal of support for the baht against the dollar.

The BOT raised the key policy rate by a cumulative 200 basis points between August 2022 to September 2023 to arrest rising inflation before it voted to keep the rate steady at 2.50 per cent in November 2023. For comparison, the US Federal Reserve implemented rate increases worth a total of 525 basis points during the same period, triggering capital flight out of developing Asia over the past year. Thavisin, who also sits as Minister of Finance, told monetary officials in a January 2024 meeting that rate cuts are needed to reinvigorate demand for credit and stir further economic activity in Thailand. The BOT said it will stand its ground despite mounting pressure to unwind tightening moves, citing the independence of monetary policy.

Spending spree?

The Thai government is preparing a USD 14-billion cash handout to its citizens as a direct subsidy to raise consumer spending and lift growth prospects. However, this could be too costly of an intervention as the dole outs would be financed through additional public borrowings that would ultimately widen the fiscal deficit. In a case of classic populism, some 50 million Thais are seen to benefit from cash handouts worth THB 10,000 (around USD 281) targeted for release in May 2024. A one-time cash stimulus offers a small growth multiplier and is unlikely to support long-term and high-impact expansion more than greater public investments such as infrastructure.  

Early signs indicate an improving but still lackluster consumer outlook as the University of the Thai Chamber of Commerce’s consumer confidence index recorded a three-year high of 62 per cent in December. However, net confidence remains below 100 points, meaning pessimists outweigh optimists based on the survey’s 200-point scale. Consumer appetite isn’t too positive either; December 2023 saw 50 per cent of Thai consumers uncertain whether it was a good time to travel or buy a new car while another 50 per cent thought it was an inappropriate time to buy a house or invest in a small business.

Thai households are likewise grappling with piling consumer debt swelling faster amid easing economic growth. The central bank has outlined measures to trim household debt in February 2023 as the household debt-to-GDP ratio hovers above 80 per cent – a level too hot for the domestic economy to handle, as seen in Graph 2.

There is a risk that cash subsidy beneficiaries would use their stimulus money to pay off credit card and personal loans, which account for one-third of the private debt profile. This would have little effect on stimulating the larger economy, defeating the purpose of digital transfers. We agree there is some benefit to reducing households’ debt burden, but a better remedy would be to restructure loans to allow longer repayment schemes than write-offs or cash handouts.

The government’s plan to borrow THB 500 billion (about USD 14 billion) to finance the cash transfers also sparked concerns about tighter domestic liquidity conditions, fueling market jitters which have manifested in a steep 15 per cent drop in the bellwether Stock Exchange of Thailand index last year. Still, we remain overweight on Thailand’s equities market and anticipate a recovery in private consumption and investment as borrowing costs decline and international tourist arrivals climb.