Thai economy is currently chugging along in choppy waters as China’s problems grow and the US dices with recession. However, the key worry is, increasingly, the danger of a growing economic downside in China where a property market valued at twice the US national debt has already fallen by 40% threatening to deepen an already existing banking crisis.
Thailand still aims for 3% to 3.5% growth this year while, unlike many western countries, planners are confident of reining in inflation towards the end of 2022 while maintaining steady export growth and driving a recovering foreign tourism industry. The key threat facing the kingdom and one that is still emerging is a deteriorating Chinese economy and the possibility of a shock wave created by a collapse of the Chinese property sector, in addition to rising insecurity caused by heightened tensions between the United States and its western partners and Thailand’s strategically important trading partner to the north.
The jury is still out on whether the United States will enter a recession this year despite a technical recession in the opening quarters of 2022 and signs that rising interest rates are starting to dampen demand.
This is a key factor for Thai economic planners as the United States is the country’s biggest export market as well as being a key investor and potential economic ally going forward as prospects begin to dim for China.
Thailand’s export growth slowed in July mostly due to Chinese supply chain problems and reduced demand
Thailand’s export growth slowed to 4.3% in July as the country’s current account deficit also widened to $4.1 billion despite over 1.2 million foreign tourists being recorded as part of the steady but slow recovery of the sector.
The key reason for the reduction in what was robust export growth was the disruption caused by supply chain problems in China and demand from the world’s second-largest economy.
The reason for this was primarily disruption caused by shutdowns in China due to Beijing’s increasingly authoritarian response to the virus emergency which is ongoing and has seen critical areas of economic activity and production being shut down in rolling waves.
Jury out on the projected course of the United States economy which has been remarkably resilient with economists saying any recession will be ‘shallow’
As analysts debate whether the United States economy which has shown impressive resilience to rising interest rates creating a stronger dollar driven by a determined and hawkish Federal Reserve, will enter recession or if so, whether the recession will be a shallow or deep one, the focus is shifting nearer to home.
It is becoming increasingly obvious that the real problem facing the kingdom’s economic recovery right now is what is happening in the world’s second-largest economy, China.
A recent report from Maybank in Singapore suggests that if the United States does fall into recession later this year or early next year, it is ‘likely to be shallow rather than deep’ despite warnings from the Federal Reserve that it will not flinch in raising the borrowing rate of money until inflation is brought finally to heel stateside.
Strong foreign exchange reserves insulate Thai economy but they have fallen this year and are off by $40 billion, still in a very comfortable position
In the meantime, the Thai economy can be viewed as a ship making its way or chugging along in troubled waters with a strong foreign exchange reserve position insulating it from the troubles experienced by other less well-off economies in Asia although that position has fallen this year from $256 billion to $216 billion on the 2nd September last.
The country is still left in a very comfortable situation although the loss of foreign exchange cannot be ignored.
Thailand’s level of inflation for August was 7.86% but there was some good news for consumers as the Ministry of Commerce still insists that inflation for the year will come in at 6% with a dial back expected in the fourth quarter of the year.
Inflation in Thailand appears to be coming under control and is expected to taper off at the end of 2022
Ronnarong Phoolpipat, the Director-general of the Trade Policy and Strategy Office, in a briefing to the media this week, gave details of the current trend in prices and highlighted that a key driver behind Thai inflation right now is rising consumer demand and consumption with Thai households regaining confidence from last year despite a darker external environment.
An example of this can be seen with a 15% rise in the purchase of cars from last year while the import of capital goods fell back by 5.1% on the year before.
However, rising energy prices, a factor for countries the world over, accounted for the biggest impact with a 30.5% rise in costs driving up the cost of living in the kingdom.
Ministry of Commerce expects that inflation to taper off in the last quarter even with minimum wage increases of 5% from October 1st scheduled to kick in
Mr Ronnarong said that the ministry expects that inflation in the fourth quarter will hover between 5% and 6.5% leaving the kingdom with an annual inflation rate of 6%.
In the meantime, a rise in the minimum wage is expected to kick in from October 1st with variable rate rises across the country, province to province, to average out at 5.02%.
It will be the first rise agreed upon since 2019.
The Thai economy is a relatively open one within Southeast Asia dependent on exports and foreign tourism as opposed to relying on a strong domestic economy such as seen in Indonesia and the Philippines.
This can be seen in the country’s trade-to-GDP ratio which rose in 2021 to 116.68% as the economy began to grow again albeit at a low rate of 1.6% driven by exports having fallen to 97.82% in 2020, the year it contracted by 6.1%.
However, in 2018 it was 120.84% when it grew by 4.2% which indicates that the country’s economic growth is rooted in exports and trade.
Hard-earned economic growth of 3% to 3.5% this year with concerns over lower tourism per capita earnings amid dangerous geopolitical tensions
Currently, the kingdom is on track for a 3% to 3.2% growth rate for the year.
This is being hard fought for with growing concerns about a slowdown in exports to China and lower expenditure per capita by foreign tourists, which according to Tourism Authority of Thailand (TAT) figures for this year, has fallen from ฿50,251 in 2019 to ฿44,286 so far in 2022 or a fall of nearly 12% while other government data suggests an even lower figure for tourist spending at ฿31,735.
At the end of August, Wuttipong Jittungsakul of the Fiscal Policy Office at the Ministry of Finance identified geopolitical tensions in the world caused by the Russia-Ukraine war and disturbing tensions between the United States supported by other western allies and China over Taiwan as a factor that is increasingly impacting the kingdom’s economic outlook.
He pointed out to reporters that Thailand was also increasingly reliant on Asian countries for its incoming arrivals, suggesting that most tourists were, in the first seven months of 2022, coming from Malaysia, India, Vietnam and South Korea.
Government spokesperson insists economic recovery on track with growth of up to 3.5% projected for 2022
Figures later released by the Ministry of Tourism and Sports showed 1.07 million foreign tourists in July followed by 1.2 million in August when arrivals surged beyond 4.3 million foreign tourists.
More foreign tourists arriving from Asian countries dominate the mix with less than 10% of visitors from the US and UK in the first seven months of 2022
However, the top three countries in the opening seven months of the year when 3.15 million visitors were welcomed were revealed as Malaysia, India and Singapore which accounted for 30% of all passengers entering the kingdom while British visitors accounted for 5.1% at 161,780 holidaymakers and Americans came in at 146,891 or 4.66%.
There is increasing concern that an unprecedented cost of living crisis in western countries, driven by surging energy prices, may impact the numbers visiting Thailand between now and the rest of the year when the kingdom hopes to receive 6 million more visitors bringing the total for the year to 10 million or 25% of that seen in 2019.
Threat to Thailand’s economic recovery comes from a potential downturn or even a ‘shock wave’ from China
However, the biggest threat to the Thai economy right now is the slowdown and emerging crisis that is being yet only glimpsed at in China which some economists are predicting could lead to a further ‘shock wave’ to the world economy as the year moves forward.
China is the second biggest export market for Thailand’s products and services but perhaps its single most important trade partner as it is significantly intertwined with the kingdom’s economy as many Chinese firms have links with the country.
Rising inflation in western countries and the soaring cost of energy have led already to western households causing back and a chill on Chinese imports.
‘As rising energy prices and monetary policy tightening hit US and Western European households, demand for Chinese manufacturing exports is cooling,’ explained Rajiv Biswas this week, a senior economist at S&P Global.
Nomura sees Chinese economic growth of only 2.7%
On Tuesday, the key Japanese investment bank group, Nomura lowered its projected economic growth rate for China’s economy in 2022 to 2.7%.
That is lower than Thailand, in what is a deteriorating situation across the board in the Communist country which is facing a multitude of crises at the same time.
Chief among them is what could become a collapse of the Chinese property market increasingly seen by analysts as a giant-size investment scheme with accumulated assets valued at twice the national debt of the United States at up to $60 trillion.
Despite efforts by Beijing to bolster confidence in this sector by lowering interest rates, firms are increasingly going to the wall with a cascade of problems due to a lack of liquidity as foreign investment and funding have been switched off.
This has resulted in mortgage boycotts, the failure of banks at a local level and the suspensions of building sites across China with 115 cities impacted by mid-August.
Fears for the Chinese property sector valued at $60 trillion with opaque reporting on a potential time bomb for the world economy except for glimpses
Officially, the Communist party and analysts talk of a crackdown on the sector by the central government in Beijing which was announced after increasingly sceptical international investors began to question Chinese economic fundamentals at the start of the US-China trade war and certainly after the virus crisis.
Problems within the property sector including falling prices, delays in construction and the finishing of projects are leading to mortgage holders refusing to make payments and a crisis for smaller banks due to a lack of liquidity.
In addition to this, many municipal authorities in China are facing bankruptcy as fees from the sale of property dry up.
The opaque nature of Chinese media reporting which openly admits the extent of the problem and state censorship has meant that a full and thorough picture of the crisis is not being seen with occasional deeper glimpses coming from investigative news reports and western media news crews on the ground.
Communist Party leadership triggered the current crisis to deal with millions of uninhabited homes, empty mega cities and roads to nowhere in China
The beginning of this crisis was when the Communist Party itself and the central government tightened lending to rein in what was portrayed as a runaway property sector which has traditionally accounted for 25% of China’s recorded economic growth and development over the past two decades or so.
The result has been millions of unfinished, unsold as well as unlivable apartments and homes with gigantic and empty concept cities together with roads that go nowhere.
Sensitive nature of the Taiwan Strait makes this a global security and economic challenge and comes with erratic Chinese behaviour since the virus crisis
In addition to this, the country’s powerful export sector, referred to by one leading Thai industrialist, Kriengkrai Thiennukul, the Chairman of the Federation of Thai Industries, this year as the ‘factory of the world’ indicating its significance, has been suffering shutdowns partly attributed to a heatwave this summer but at other times due to power stations not having sufficient fuel to meet demands.
Factories without power to supply export markets while large industrial zones are closed down arbitrarily due to the country’s strict lockdown rules
Why this has been allowed to happen nobody fully understands, it is just another disturbing circumstance and an alarming indicator of China’s economy and the country’s parlous situation.
This has been exacerbated by unprecedented shutdowns of key manufacturing areas in the country which are ongoing and being attributed to China’s strict and difficult-to-comprehend insistence on what is called the zero Covid approach.
The emerging situation in China has become so severe that many reasonable commentators are now saying that a perilous juncture has been reached for the Communist Party leadership itself in Beijing as it prepares to reelect President Xi Jinping for an unprecedented third term making him, in effect, the unquestioned ruler of China.
Feared property sector collapse in China could be a shockwave of unprecedented proportions and it is only one of Beijing’s economic headaches right now
The scale of the property sector crisis in China is such that if it develops into a full-scale crash, as is now unfolding, with property prices already down by 40% this year, it will be the biggest such crash the world has ever seen, an economic shockwave of unprecedented proportions.
Even while dealing with this, David Llewellyn-Smith of the Australian asset management firm Nucleus Wealth in Melbourne, Victoria sees the current energy crisis in the West as ‘the next shoe to drop’ for Beijing which is already faltering under a wave of simultaneous crises including climate change causing heatwaves which have impacted food supplies, the rolling Covid lockdowns and most serious of all, the cascading effects of the property sector and some parts of the banking system, collapsing.
All this is currently in motion.
Reduced export demand as western countries continue to decouple economic links and supply chains with China across the board for a wide variety of reasons
This will now be aggravated by reduced export demand coming as a result of ongoing decoupling activity being driven from the top by the leadership of western economies.
This movement began during the US-China trade war in 2018 and is linked to issues such as egregious human rights abuses, rising tensions between China and the West and a lack of transparency and overall trust in China.
The communist country’s response however to the virus crisis was and continues to be a major impetus to the shift away from China which has left its economy reeling.
‘The private sector is being hammered by Omicron, the external sector hammered by global weakness, and the public sector doing what it can to pick up the slack but it faces various inhibitions on fiscal policy. It’s a very toxic combo for China. Very difficult to manage,’ Mr Llewellyn-Smith says. ‘A Chinese recession is absolutely in the frame over next year. That’s going to have incredible implications for global markets of all kinds.’
Property market in China has the hallmarks of a giant bubble which could be ready to burst but is already deflating as the artificial market unravels
The Chinese property market represents asset holdings of somewhere between $55 trillion and $60 trillion.
The scale of a threatened collapse to this market, already off by 40%, can be seen from the fact that it exceeds the total value of the US stock market and is nearly twice the size of the US national debt.
As the price of homes fall, building work is suspended and irate consumers organise boycotts in repayments to lenders, the Communist Party politburo is faced with a stark choice of trying to reverse policy and even so, this may simply be impossible to do as confidence in the market has been irreparably damaged or weathering the storm.
This may well be a giant-sized bubble fronted by select ordinary Chinese citizens who could afford to make monthly payments for overvalued property up to this point.
Decisive moment for China’s ruling party facing a total collapse of confidence in its property market
Gabriel Wildau works with Teneo, a global consulting firm based in New York and is an expert on China.
He says the Communist Party is facing a decisive moment.
‘The government faces a hard choice. But it’s like zero-Covid. They have come so far they can’t turn back because then it looks like a misjudgment or policy error,’ he explains. ‘This is where the rubber hits the road. They want more hi-tech growth and they don’t want as much real estate, but what replaces that? There’s been a total collapse of confidence in the housing market. No industry can survive that.’
At the end of August, the Chief Executive Officer of Chinese firm Huawei, Ren Zhengfei warned senior company staff in a leaked memo to prepare to move to ‘survival mode’ as he talked about ‘no bright spot in the world’ and predicted an economic downturn that would be ‘felt by everyone’ over the next three to five years or even the decade to come, in what he described as a ‘very painful period’ for the global economy.
Warning from Huawei boss about a ‘painful period’ over the next decade, the question is does it extend beyond China? What it means for Asia and the West?
For those in Thailand and western countries it can only be hoped that by global, he meant the Chinese economy which created globalised supply chains.
Economists studying the situation in China are struck by the lack of access by average Chinese households to cash at this time and suggest that this may be because of the continued dominance of key party figures, centralised business enterprises controlled by the government and the power of local administrations.
Most commentators have been busily engaged in trying to understand the country’s destructive and increasingly bizarre lockdown policies and this is also being seen as a failure of the Communist system of government and a growing realisation that a capitalist system must be balanced by political freedom and ultimately the liberty of the individual who underpins it.