A volatile currency market, a slowing world economy amid war in Europe and raised geopolitical tensions as well as a brush this week with political uncertainty means that Thai policymakers must be constantly on guard even to achieve the paltry 3% to 3.5% growth that is being pursued this year. A very comfortable foreign exchange reserve level has, so far, protected the kingdom but even this has been falling since March.
Amid turmoil at Government House in Thailand this week with the suspension of Prime Minister Prayut Chan ocha and Deputy Prime Minister Prawit Wongsuwan taking the reins as caretaker PM, officials were anxious to underscore that the kingdom’s economic recovery remains intact and on course for growth of between 3% and 3.5% for 2022. However, there are causes for concern such as a slowdown in export growth and significantly, lower expenditure per capita among incoming tourists as the country still appears to be running a current account deficit.
Figures released on Friday show that the rate of growth of Thai exports slowed dramatically in July from the month before from 11.9% in June to 4.3%.
An earlier poll of leading economists conducted by Reuters had suggested a growth rate of 11.5% for the month.
The figures were released by the Minister of Commerce and Deputy Prime Minister Jurin Laksanawisit at a press conference.
Government spokesperson insists economic recovery on track with growth of up to 3.5% projected for 2022
The figures are coming as the Thai government insists that the economy is on target to grow by up to 3.5% in 2022 on the back of stronger exports and foreign tourist numbers with over 1.2 million arrivals seen between the end of July and the end of August.
It is not clear what the reason for the slower-than-expected export growth is at this point but it may be linked to disruptions caused by economic problems in China and weaker conditions in the United States as well as other key export markets currently experiencing rising interest rates and persistently high inflation with warnings that world economic growth this year is slowing with projections of 6% falling to nearer 3%.
On Thursday, a spokesperson for the government, Ratchada Thanadirek, also revealed that the taxation yield in Thailand for the first ten months of the year is up with the Revenue Department collecting ฿1.67 trillion in the first ten months of the year which ends on September 30th, an increase of ฿206 billion so far for the year or 14.1%.
Figures show a 14.1% hike in tax take this year as economy fully reopens from last year’s emergency
She also highlighted that despite the political challenge presented to the kingdom this week with the suspension of the prime minister, things are moving forward smoothly with the budget being approved by the House of Representatives and goals set by the country’s economic planners being achieved.
On Friday, caretaker PM General Prawit Wongsuwan spent his first working day at Government House after the Constitutional Court suspended Prime Minister Prayut Chan ocha over a challenge to his tenure over a constitutional term limit.
Prime Minister suspended from duty by the Constitutional Court as it takes up term limit case for hearing
The rising tax yield has been attributed to a marked increase in private consumption in the second quarter of 2022 which saw Thailand’s economy grow by 2.5% and domestic consumption by 9.8%.
Remarkable figures for domestic consumption in second quarter with a 23.5% rise in spending on restaurants, bars and tourism despite inflation
The figure is remarkable given that inflation from April to June rose from 4.65% to 7.66% while spending in restaurants, bars and domestic tourism rose by an impressive 23.5% as the country fully reopened.
However, there are points of concern with the recovery which the government hopes to bolster in the coming months by boosting expenditure to promote foreign tourism into the country as the high season approaches and pushing forward with public investment projects which Minister of Finance Arkhom Termpittayapaisith, on Monday, pointed out will be worth ฿1 trillion this year.
Minister of Finance Arkhom promises the economic recovery remains intact and would be supported by a boost in public investment spending at this time
Mr Arkhom predicted that the Thai economy would grow by 3% to 3.5% this year and admitted that this was a slow level of economic growth.
Indeed the minister has consistently pointed to the setback the country suffered in 2020 when GDP contracted by 6.1% as the reason for pushing growth this year as a priority.
Growth rates well behind its Asian neighbours are insufficient to power economic transformation with underlying issues exacerbated by inequality
‘The economy will remain in a steady, albeit slow, recovery, and we have to ensure the recovery remains intact,’ Minister Arkhom explained. ‘I believe this year we will grow 3% to 3.5%, a satisfactory trend.’
Persistent high inflation and reduced per capita spending among incoming tourists are threats with an ongoing current account deficit and capital outflow
However, some key challenges remain such as persistently high inflation which will be driven higher by increases in electricity charges this month as well as lower expenditure per incoming foreign tourist this year compared to pre-pandemic levels.
In 2019, the average spend for incoming tourists visiting the kingdom was ฿50,251. However, figures for foreign tourist spending in the second quarter of 2022 to the end of June came in at only ฿31,735 according to topline government data.
There is also concern about the kingdom’s current account and foreign exchange reserves which appear to have fallen from $256.8 billion in March to $218.5 billion at the end of the month, a fall of nearly 15%.
This still leaves the kingdom in an extremely comfortable position compared to other Asian economies.
Capital outflow of ฿1.2 billion in July with fears that a widening divergence of interest rates between Thailand and the United States will become an issue
Figures also show that $1.2 billion in financial capital left Thailand in July despite an influx of over 1 million foreign tourists as the country’s current account deficit remains elevated.
Citibank warns of a tightening of liquidity worldwide later this year feeding into Thailand’s markets
This is despite assurances by the Bank of Thailand, up to that point, that Thailand had seen net inflows of capital for the year.
The fear is that rising interest rates in the United States and interest rates, regionally, that are well ahead of those in Thailand, may see money leaving the country for a better return as the rate divergence widens.
Most Thai people have small account balances with 87.7% having less than ฿50,000 in funds meaning capital outflow to a higher return can occur swiftly
This may be particularly so due to the traditionally unequal nature of Thai bank account balances, something that has been exacerbated by the pandemic which contributed further to the country’s economic inequality.
Figures from 2020, admittedly during the height of the pandemic, show that only 1.52% of all funds deposited in Thai bank accounts came from 91.22% of bank account holders with funds of ฿1.128 trillion.
By comparison, foreign residents in Thailand account for only 3.52% of all bank accounts with funds to the value of ฿596,779 billion.
Figures show that 87.7% of Thai bank accounts have less than ฿50,000 with the average account balance being ฿4,241.50.
Difference in interest rate return on funds between Thailand and the United States will be at least 2.75% before the end of 2022 with three more hikes due
Currently, US interest rates are at 2.25% to 2.5% compared to 0.75% in Thailand, a divergence of 1.5 to 1.75%.
The Bank of Thailand has indicated that it will continue with its modest and gradual approach to raising interest rates this year which is expected to see Thailand with a rate of 1.25% by the end of 2022.
However, despite some signs of an easing of the rate of growth of inflation in the United States with the impact of rising prices and interest rates causing the world’s largest economy to gradually slow, the Federal Reserve remains committed to further rate rises of a similar nature to that seen in July at 75 basis points in September, November and December which will see US rates of at least 4% or even up to 4.75% by the end of the year with a very significant divergence, at that point, between US rates and Thai rates.
Bound to accelerate capital outflow
On Friday, US Federal Reserve Chairman Jerome Powell made it clear that the hawkish policy of the Fed would continue despite the pain that may be caused to the US economy in pursuit of price stability.
This signals that the danger of wider divergence in interest rates between the United States and Thailand is increasing.
With an open market economy like Thailand’s and a liberal foreign exchange regime, this is bound to see accelerated capital outflow from Thailand.
Baht again loses ground against the US dollar even though it has gained 7.6% this year against the Euro
Since Thailand raised its key rate by 25 basis points on August 10th, the Thai baht has lost ground by nearly 3% against the US dollar again falling from ฿35.21, at that point, to the US currency, to ฿36.21 on Friday.
At the same time, the baht has increased in value dramatically this year against the euro which is now below par with the US dollar falling from ฿39.38 in September 2021 to the same level as the dollar to ฿36 or 7.6%.
At the same time, the baht has been quite volatile against the UK pound falling from the 10th of October 2021 when it was valued at ฿46.17 to the 14th of June 2022 at ฿42.06 or 8.9% but recovering to ฿44.62 at the end of July or 6% before falling again to ฿42.31 on the 25th August.
This volatility in currency values may well discourage deposit account holders from moving funds offshore but it may also result in more currency speculation.