Thailand’s economy remains highly dependent on both exports and foreign tourism with the current storm again highlighting this factor. The loss of foreign tourism income since March 2020 is the single biggest impact factor as the country is now confronted by what could be a growing liquidity crisis and consistently high current account deficits if urgent action is not taken. After this, comes the threat from increasingly dangerous geopolitical tensions and concerns over China as financial capital takes flight from Asia with US interest rate rises.

The surging price of oil and spiralling demand within the kingdom is the latest problem for the government but the continued loss of foreign tourism income has and continues to inflict long term damage to Thailand’s financial position and financial liquidity with consistently high current account deficits. The country’s economy is being tested by dangerous geopolitical tensions, rising interest rates in the United States and a flight of capital out of Asia as investor confidence wanes not only in Asia but across the world in a situation not seen since the banking crisis of 2008. This has led to the downgrade of four Thai banks this week by rating agency S&P which saw the Bank of Thailand move to underline that the banking system in the country is strong enough to withstand any uncertainty or economic shocks.

Krystal Tan, a senior economist with Australia’s second-largest banking group ANZ, speaking on Bloomberg TV this week. She highlighted the impact of rising oil prices on Thailand’s energy-dependent economy and the loss of Russian tourists as significant downsides. She said that all this meant the kingdom was now more likely to see a second current account deficit this year. It comes as, S&P, the leading rating agency, downgraded four top Thai banks based on raised systematic risk as the kingdom still faces large losses in foreign tourism income with controlled entry into the country still in place. Officials are hoping to abolish this by July 1st next.

The rating agency Standard and Poor or S&P Ratings, one of the three biggest firms in the world, is understood to have downgraded four leading Thai banks in a report published on Tuesday by the International Financing Review (IFR), a leading financial magazine published in London.

The four banks were Kasikorn Bank, Krungthai Bank, Siam Commercial Bank and TMB Thanachart Bank.

The reason underpinning the decision is believed to be the heightened danger of systemic risk due to a downturn in the kingdom’s economic prospects driven by sky-high oil prices, the loss of tens of billions of dollars in foreign tourism income since 2020 and growing anxiety about the geopolitical situation which has seen severe threats to international supply chains and trade as a result of the Russian invasion of Ukraine and ongoing, indeed rising tensions between China and the United States.

Foreign tourism decline is still the main driver behind the country’s loss of credit and consistent current account deficits leading to a financial squeeze

Chief among the problems for Thailand, at this time, and the reason for the country’s growing current account deficit since 2021 which carried itself into 2022 is the absence of significant levels of foreign tourism income.

The move has drawn an assurance from the Bank of Thailand that the country’s financial system remains strong.

The key concern, at the moment, is the country’s current account which posted a $10.9 billion deficit in 2021 driven primarily by the country’s loss of its foreign tourism industry which saw 99% of the revenue stream achieved in 2019 wiped out last year with far lower levels than projected so far in 2022.

In 2019, the foreign tourism industry generated $62 billion for Thailand’s economy and the kingdom lost the bulk of this in 2020 and nearly 99% of it in 2021.

Kingdom’s problems began with US Chinese tensions in 2019 which have now escalated due to COVID-19 and the Ukraine crisis as confidence in China drops

However, the downturn in economic conditions for Thailand began in 2019 and can be linked to rising geopolitical tension between China and the United States first concerning a widening trade war, then linked with COVID-19 with the situation escalating further over the Russian invasion of Ukraine which has seen Russia now engaged in all out economic war with the United States and the western world.

China’s position, despite its soft rhetoric, is at best ambiguous.

Thai tourism emphasises its neutrality in the Ukraine war, calls for a review of payment systems

There is a concern in the West over Beijing’s media narrative and a February 7th wide-ranging partnership with Russia which appears to have anticipated the outbreak of war in Ukraine.

There has also been, like Russia initially, increasingly negative sentiment towards the Chinese economy within western nations extending from senior corporate executives to government ministers and the public since the COVID-19 pandemic.

Chinese censors support Moscow’s disinformation campaign behind the Great Firewall where anti-American sentiment reigns with no talk of invasion

This has impacted investment and confidence in Thailand’s northern neighbour and key strategic partner.

Western countries, driven by electorates, find it difficult to ignore issues such as human rights

China’s human rights record and its actions in Hong Kong have also become more controversial and a potent negative factor as western voters and younger generations grow increasingly intolerant of a laissez-faire acceptance of realpolitik in foreign affairs and business activities.

For Thailand, this year, the latest impact has been a surge in oil prices.

It comes at a time when the kingdom’s active adult population appears to be consuming more oil than ever and at prices that have jumped from historic lows during the pandemic.

From 2020 to 2021 alone, Thailand’s bill for crude oil grew by 63% from ฿37.2 billion per month to ฿60 billion in 2021 or roughly from $1.2 billion a month to $2 billion a month or $24 billion per annum.

Crude oil prices and surging demand, the latest headache for the Thai government trying to prod the economy forward with diminishing firepower 

The was the equivalent of $2 billion per month at the upper end, based on an average crude price of West Texas crude oil at $68.21 per barrel in 2021.

Oil still boss as Thailand’s economy faces a return to 1970s stagflation over the ongoing Ukraine war 

In recent weeks, this rose to a high of $126 a barrel but then fell back to approximately $110 leaving Thailand facing a raised cost of $3.2 billion a month for oil at the same time that the country is losing at least 85% of the $62 billion it used to earn each year in foreign tourism income.

The problem for Thailand is that problems posed from this increasingly perilous economic situation however don’t stop there.

Rising inflation worldwide and within the kingdom itself are damaging the potential for export growth while also forcing the Thai government to borrow more to help the poorest and most vulnerable in society.

Tightening of financial liquidity in the kingdom

This is impairing financial liquidity with disturbing reports from last year that increased borrowing by the government reduced excess liquidity in the market of ฿658.2 billion at the start of 2021 to a deficit of ฿329.20 billion at the end of 2021.

Since the beginning of the year, the country’s current account has continued to post a negative balance driven by higher oil costs and still depressed levels of foreign tourism income.

In addition, there is now a strengthening flight of capital from the kingdom’s bond market and other instruments as the US Federal Reserve, led by Jerome Powell, has committed itself to aggressive action in hiking US interest rates with a 25 point rise recently announced and comments from the Fed on Monday that bigger and faster rate rises can now be confidently expected to tame inflation.

This also means a movement of capital out of Asia as investors become increasingly spooked by the worsening COVID-19 crisis and financial downturn in China coupled with insecurity and rising tensions between not only the United States but the western world and China.

Concern over China is linked with a growing range of problems that are undermining confidence in Asia

The latest is its tacit support for Russia’s invasion of Ukraine despite diplomatic efforts to hold itself up as a potential peacemaker and contrived media messaging through China’s vast propaganda media network.

China could be an economic time bomb sitting on Thailand’s doorstep as Evergrande collapse nears

However, aside from this, there is its stance concerning territorial disputes in Asia, particularly over the South China Sea and its disregard for international law on the issue, its human rights record, doubts over its economic data, a property and regional financial crisis within the communist country, it’s zero Covid policy, the deteriorating situation in Hong Kong and its aggressive posture towards Taiwan.

Thai baht has depreciated by over 4% since the war broke out in Ukraine on the 24th of February 2022

All this can be seen in the depreciation of the Thai baht since the war broke out in Ukraine when it stood at ฿32.27 to the greenback to the close on Wednesday 24th March when it ended at ฿33.60, a loss of 4.12% in just one month.

At the end of 2021, foreign investors held just $30.85 billion in Thai government bonds representing 6.8% of total holdings.

This went up in 2021 with foreigners purchasing $4.31 billion in such instruments throughout the year.

The nervousness about Asia and the growing tensions rising in the region saw $15.8 billion taken out of high yielding investments across the region in the last month since the Russian invasion of Ukraine began according to Goldman Sachs in New York.

The biggest fear for Thailand is that it may be caught up in this new flight away from risk to the dollar stoked by rising interest rates.

Higher rates may have to follow in Thailand as America hikes borrowing costs which could be the last straw for heavily indebted businesses and consumers 

At the same time, Thailand may also be forced to raise interest rates for this reason which will inflict further damage on the already depressed and heavily over-borrowed economy forcing many families and highly leveraged business concerns following nearly three years of crises, over the edge.

Nevertheless, the markets remain somewhat sanguine even as analysts such as ANZ Bank Group, Australia’s second-largest bank, are already predicting a second year of a current account deficit for the kingdom.

Kingdom faces back to back current account deficits, not seen since 1997 but analysts are not in a panic

This is the first time that this has happened since 1997 despite some turbulence from 2010 to 2013.

‘The odds are now shifting towards a current account deficit for Thailand this year,’ declared Krystal Tan, a senior economist at the bank on Tuesday speaking on the New York-based financial news service, Bloomberg TV. 

‘The Russia-Ukraine conflict has significant negative implications for Thailand’s current account given its high reliance on imported energy. There are also potential second-round effects to watch, such as a fall in Russian tourist arrivals and a potential increase in global freight costs.’

Travel sector calls for endemic status, scrapping of Thailand Pass and full normality on entry

With this, the chief economist of Bank of Ayudhya or Krungsri Bank, the kingdom’s fifth-largest bank, Somprawin Manprasert, sounded pessimistic.

He has now revised the country’s growth forecast to 2.8% for this year, still ahead of its 1.6% GDP gain for 2021.

Reopening of Thailand with normal pre-pandemic entry criteria is now urgently required as a boost

This is based on uninterrupted export growth and a full reopening of the country with unfettered access with the virus being declared as endemic from July 1st, a move that is increasingly seen as critical to the country’s economic prospects and has, this week, been urged by industry with calls on the government to accelerate the process.

‘It will be a double-whammy for Thailand as it faces rising inflation and a slowdown in the economy,’ Mr Somprawin explained on Tuesday. ‘Tourism will be affected as it’s not only Russians who will not travel, as the sour sentiment and falling income will discourage others too. Thai economic outlook is worrisome.’

Notwithstanding this, there is still all to play for provided the kingdom can keep its exports turning over which will also be a challenge as over 29% of Thailand’s exports go into its two largest markets, the United States and China, while reopening its door to foreign tourists.

Tourism dependent economy may see higher numbers this year as foreign tourism demand remains resilient linked with the country’s well known charms 

Even with the limitation imposed by the continued absence of Chinese tourists who accounted for nearly 28% of all arrivals in 2019, there is an anticipation that Thailand can achieve a figure of over 6 million visitors this year or even somewhere near a target of 18 million set by the Tourism Authority of Thailand if the country assiduously drops all barriers to entry, returns to open access and reopens its nightlife industry.

This is dependent on the virus being declared endemic and all emergency controls being abolished.

The consistent demand for Thailand as a tourism destination based on its proven attractions such as sunshine, exotic environment, hospitality and nightlife has shown itself in the last six months to be remarkably resilient but only thwarted by demanding entry procedures.

Baht is trending lower but this is not unusual

Analysts believe that such a move will immediately see an improvement in the value of the baht which is currently seen on a downward trend, something which is not unusual.

‘We see more downside bias for baht volatility,’ Mr Pipat Luengnaruemitchai, the Chief Economist at Kiatnakin Phatra Securities in Bangkok explained this week. ‘The currency’s outlook is rooted in tourist arrivals. And whenever signs of a firm tourism recovery emerge, the sentiment towards the baht too will turn right away.’

However, there is no denying that Thailand and its economy finds itself presently in yet another economic storm driven by a world in a dangerous flux of ratcheted up geopolitical tensions which could objectively be described as a world confronted with the very real prospect of war, at the very least an economic one, and not immediately turning away.

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