Grim prediction and outlook for Thailand’s economy, battered even before the Covid 19 emergency by changing world trends and trade tensions, but now, to quote one of the country’s leading economists this week, being kept alive ‘with the help of ventilators’. The same economist has warned that if Thailand’s closed businesses and economic sectors during this crisis fail to rebound in strength by October, that the level of bad debt on the balance sheets of the country’s banks will become a serious issue.

A leading Thai bank economist has predicted that October will be a key month of reckoning for Thailand in what he described as a bigger setback to the kingdom’s economy than the 1997 Asian Financial crisis. Charl Kengchon, the Executive Chairman of Kasikorn Bank’s financial analysis unit, predicts that if businesses do not reopen fully by then and the economy fails to rebound, then non-performing bank debt will begin to weigh heavily on Thailand’s financial institutions. The economist says what is saving Thailand right now is the financial strength of the Thai banks in recent times. Another expert, the Chief Economist of Bangkok Bank, Burin Adulwattana, has said that this is Thailand’s worst economic crisis possibly in the last 120 years.

Several economists have warned that the outlook for the Thai economy is darkening and that the situation cannot continue without a reckoning. Bangkok Bank chief economist Burin Adulwattana (right) judges this the worst economic crisis in 120 years while Somprawin Manprasert of Krungsri Bank is predicting a 10.3% contraction for 2020. Charl Kengchon (left) of Kasikorn Bank is warning of the rising level of bad debt within the banking system and sees a recking in October if the economy does not rebound strongly and closed businesses reopen.

Bangkok Bank is seen as one of the country’s strongest banks and recently expanded in Asia with its acquisition of Indonesia’s PT Bank Permata for $2.7 billion or ฿84 billion. Yet, at home in Thailand, the leading retail bank’s economic thinker sees the current crisis as a historic challenge.

It comes as the kingdom has been left reeling from the continuing impact of the Covid 19 emergency which has hit the two drivers of the export-led economy head-on.

Foreign Tourism, which makes up 15% of Thailand’s GDP and up to 20% when taking into account ancillary economic activity, is at a standstill since late March. The country’s exports have shrivelled with darker global economic prospects and an environment which has severely dented the international car industry. The industry is key to Thailand’s industrial base and a driver of exports.

Thailand’s exports fell also in 2019, well before Covid, but trade exports excluding gold, contracted on a massive scale by 34.8% to the end of May 2020

Thailand’s exports had begun to contract in 2019 falling 2.65% for the year driven by the US-China trade war and a stubbornly high Thai baht. 

In the first three months of 2020, even before the catastrophic shutdown, exports from Thailand declined by just over 5% in baht terms.

Figures for March and April, coinciding with a sharp drop in the value of the baht, as the shutdown kicked in, saw Thai exports surprisingly go up but it soon became apparent that this was driven by the export of gold.

Figures released this week by Thailand’s Commerce Ministry show, in fact, that when gold is excluded, Thailand’s exports to the world from January until May inclusive fell by a staggering 34.8%.

Thailand exported ฿225 billion in gold in five months which distorted the picture in April and May

The kingdom exported ฿225 billion in gold during the first five months of 2020 as worldwide investors sought the precious commodity in these uncertain times. 

The surge in gold exports coincided with the sell-off by many poorer Thais of gold jewellery which many Thais use as a form of savings, cashflow or financial bulwark against hard times which can be easily brokered for cash at a gold shop.

Since then, the Thai baht has risen again climbing 6% against the US dollar in the last 3 months. The Bank of Thailand has warned that the appreciation of Thailand’s currency is a real threat to any prospect of the kingdom’s recovery from the Covid 19 calamity.

It has also confirmed that the trend defies the country’s economic fundamentals and there are concerns, referenced by the bank itself, that Thailand’s economy has become the subject of international speculation.

U shaped recovery or even an L shaped one by 2023 emerging as economists see a darker outlook

The Bangkok Bank economist, Burin Adulwattana, summed up the situation this week when he said: ‘A stronger baht is also making exports worse, while other economies are also weakening, and the Thai tourism and auto industries are contracting sharply.’

Leading economists in Thailand are now, increasingly, predicting either a U shaped economic recovery or indeed an L shaped one as many believe the Thai economy may not return to pre covid levels of employment until 2023 if at all.

Bigger economic challenge than the 1997 Asian Financial Crisis, banks have been a buffer this time

Many economists are in broad agreement that the scale of the challenge facing Thailand is larger than the 1997 financial crisis.

The buffer for Thailand in recent months has been the banks. This is due to the exemplary work undertaken on this front by the Bank of Thailand under its outgoing governor Veerathai Santiprabhob in preparing Thailand’s commercial banks and those under its remit for just such a shock.

However, the scale of the downturn and the slow-moving, extended nature of it will now test these defences.

The bank, in recent weeks, ordered all financial institutions to suspend dividend payments and is preparing to conduct new stress tests on the retail and commercial banks as the impact of the Covid 19 economic shutdown feeds itself into the wider economy and financial system.

90,000 Thai firms in difficulty with a ฿1.7 trillion cash injection required to keep firms open

There are reports of financial difficulties and a shortage of cash in many Thai firms right now including large corporate businesses.

One estimate by Krungsri Bank suggests that ฿1.7 trillion is needed as a cash injection into the system while up to 90,000 Thai firms are said to be facing a financial challenge.

The economic research team at Krungsri Bank is predicting that Thailand’s economy will contract by 10.3% this year which compares to an 8.1% already predicted by the central bank in Bangkok.

Krungsri only predicts a 2.9% recovery in 2021 and a modest 4.4% in 2022, long road to recovery

The bank suggests that the economy will only grow 2.9% in 2021 and a further 4.4% in 2022 meaning this economic downturn will not be short-lived. An L shaped recession.

The bank has warned that an inept government response to the crisis could make matters even worse. ‘If government policies fail to address economic woes, the recovery will be L-shaped, and it may take more than three years for the economy to recover,’ Somprawin Manprasert, the bank’s chief economist has cautioned.

The economist has been critical of Thailand’s economic policies given the countries strong international reserves.

Thailand’s chronic ageing problem is hitting the economy hard right now as older workers opt-out

The Bangkok Bank economist, Mr Burin, also points out that the kingdom’s ingrained problems before the Covid 19 emergency are certainly not gone away and indeed are biting even harder than before.

Chief among them is Thailand’s chronic problem with an ageing workforce.

The crisis has seen many older workers retire from the fray and they will not return. This has coincided with the return home of cheaper migrant labour to neighbouring economies where they are more likely in the future to find employment.

Foreign tourism losses of ฿1.6 trillion

Mr Burin also expressed alarm at the writing off of the foreign tourism industry and predicted only 9 million visitors for this year of which 7 million had already arrived before April.

This could see the sector contract by 80% with the loss of a further ฿1.6 trillion.

The UN last week suggested a loss of ฿1.47 trillion while some economists have calculated a figure close to ฿2 trillion.

Government planning to borrow ฿1.9 trillion bringing it to its legal limit even as GDP contracts

The government is in the middle of a plan to borrow ฿1.9 trillion of which ฿1 trillion is earmarked for income supports for the less well off and ฿400 billion to support business and the bond market.

The borrowing plan will bring it close to the legal borrowing limit under Thai law. The Thai government’s borrowing limit is 60% of the kingdom’s Gross Domestic Product.

However, the problem is the economy is contracting so sharply that this may become a political issue as well as a financial one.

Progress of Thailand’s economy has been lacklustre

Mr Burin outlined a picture of Thailand falling between the stools with an economy where 30% of the population still works on the land generating 8% of GDP. The country’s industrial base has been battered not only by the Covid 19 crisis but by changes in world trade, supply chain systems and indeed technology.

The switch to electric cars has befuddled car makers worldwide and Thailand has been impacted by the efforts of international companies to come to grip with a declining and confused car market as well as the current unprecedented emergency.

Furthermore, the kingdom’s flagship projects, Thailand 4.0 and the Eastern Economic Corridor, have failed to deliver on their key goals despite initial optimism, hype and exuberance.

Bank shares have lost 35% of their market value

Thailand’s banks have seen their share price crater by 35% in the last year.

Notwithstanding this, despite the damage caused by the Covid 19 emergency and the trade war contraction before it, economists still feel that larger banks are more protected due to the nature of their loan bases. These institutions are more linked with government projects and larger corporate funding.

The concern is for smaller and medium-sized lenders.

Focus will move to the level of bad debt on the balance sheets of Thai banks later in the year

Charl Kengchon is the executive chair on Kasikorn’s Bank’s research unit. He readily accepts that this crisis is bigger than the Asian Financial crisis, twenty-three years ago.

‘The most important thing to focus on now is the asset quality, as bad debts were estimated to be 21 per cent of ฿15 trillion of total bank loans in the first quarter, and it might spike to 29.9 per cent in the second quarter,’ he explains.

Non-performing debt estimated at 30% at the end of June from 21% at the end of the first quarter

He references the stronger balance sheets of banks this time around. However, he points to the fact that in the first quarter of 2020, a large proportion of bank debt was reported as non-performing or bad at 21%.

He predicts that this will rise sharply to 29.9% or just shy of 30% when figures to the end of June are examined.

Mr Charl further predicts that if, in the third quarter of the year, there is not a significant recovery in the Thai economy, then these debts will begin to weigh heavily on Thailand’s financial institutions. It will become a problem.

The bank economist has pinpointed October as a month of reckoning.

The question, as he sees it, is will the businesses that have been slow to reopen have come back by then.

‘Everyone is like a patient, surviving with the help of ventilators, but what happens after that is still not clear. Nobody knows if businesses will be able to come back.’

Further reading:

Thailand’s closure biting harder as one airline gets ready to cease operations forever and lays off staff

Tourism industry could be left on its knees if curbs on inbound foreigners are not relaxed or lifted in time

Thai economy in even greater peril as Covid 19 shutdown appears to have had a bigger impact than expected

Election of Prawit as Palang Pracharat leader will see more grassroots politics in government

Economic hole caused by virus pandemic yawns as Bank of Thailand flags large current account loss

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