The Thai economy is at a crossroads, Prime Minister Srettha Thavisin continues to clash with the Central Bank as the country’s industrial base erodes. A resurgent foreign tourism sector is now supporting the economy. Future GDP growth in substantial terms requires hard decisions and long-term initiatives.

The Thai economy is not expected to grow in the first quarter of 2024. At the same time, its manufacturing base continues to decline. This week saw more evidence of tension between Bank of Thailand Governor Sethaput Suthiwartnarueput and Prime Minister Srettha Thavisin. It comes as the latter resurrects his already controversial and short-term Digital Wallet plan. Despite this, the country’s foreign tourism sector continues to advance. It was a major contributor to a $2 billion current account surplus revealed on Friday.

On Friday, Prime Minister Srettha Thavisin again called for the Bank of Thailand to lower its base interest rate. It came in the same week as he appeared to resurrect his short-term Digital Wallet policy. The government leader’s emphasis on populist economics conflicts with the message from the central bank. It warns that the only way for Thailand to resume substantial GDP growth is to address the country’s multitude of structural problems. At length, this also now includes an increasingly obsolete manufacturing base.

However, Thailand is now at a tipping point as its industrial base becomes eroded. This is happening due to technical challenges and intense competition from regional peers.

Securing the country’s economic future urgently requires the government to confront chronic long-term problems. It needs the right answers and it needs them fast. Anything less than this will see Thailand become a tourist haven with an enlarged casual economy and permanently stunted growth prospects.

In the meantime, tensions continue to rise between Prime Minister Srettha Thavisin and the Bank of Thailand Governor Sethaput Suthiwartnarueput.

It comes as the Thai economy shows troubling signs of an erosion of its industrial base. At the same time, these structural factors are significantly impeding economic performance. 

Concern about the Digital Wallet scheme. The government has already been warned about potential shortfalls of the plan in key advices from state bodies

At meetings this week Mr Srettha appeared to resurrect his controversial Digital Wallet stimulus plan. 

The ฿10,000 digital giveaway to most Thai adults has been opposed by the Bank of Thailand boss. However, this week, the PM suggested that all economic players were in agreement with it.

This comes despite cautious warnings from both the Council of State and the National Anti-Corruption Commission (NACC). These advisories to the government were far from positive. Certainly, based on these opinions, many analysts still feel the project is a non-runner. 

The concerns relate to possible abuse of the scheme and corruption.

Comparisons have been made with Pheu Thai’s rice-pledging scheme introduced after the 2011 General Election. That short-lived initiative was designed to underpin rice prices for farmers.

It ultimately collapsed amid huge losses to the state. Afterwards, senior officials including Prime Minister Yingluck Shinawatra and cabinet ministers were exposed to criminal prosecution.

Digital Wallet plan is not popular as opinion polls show. Nearly 66% say it should be scrapped or reconsidered as PM Srettha insists on pursuing the idea

In truth, the plan is seen as a dangerous legal minefield which could backfire on all ministers linked with it. This includes key members of Mr Srettha’s cabinet.

Neither is it popular or supported by the majority of the public despite Mr Srettha’s claims that it is called for in rural Thailand. This has been borne out in repeated opinion polls.

In October 2023 a National Institute of Development Administration (NIDA) poll showed only 28.47% of people supported it. 65.95% expressed concerns about the plan and either said it should be scrapped or reconsidered. Indeed, 13.51% of people said they would refuse to accept the ฿10,000 credit.

At a meeting at Government House, on Thursday, Mr Sethaput declined to comment when asked about it by reporters.

He was there to meet Deputy Prime Minister and Minister of Foreign Affairs Parnpree Bahiddha-Nu-Kara to discuss Board of Investment (BOI) activities.

Thailand’s new Foreign Minister is tasked with playing a key role in generating badly needed inward investment.

Foreign tourism is now propping up the country’s economy and in particular the country’s huge casual or informal sector, the grassroots economy

Despite the country’s structural problems and a rising level of private sector debt, the economy, in particular the country’s informal and grassroots sector, is being buoyed by foreign tourism. It comes with the latest figures up to March 24 this month just revealed.

They show the kingdom is on target for 40 million foreign tourists this year. Certainly, this would be a record.

However, the same data shows tumbling government receipts and factory output. All this, in addition to rising debt levels, is leading to concern for the country’s financial system.

This is the real battleground between the Bank of Thailand and the government over the kingdom’s interest rate policy.

Bank of Thailand’s dovish interest rate policy under scrutiny following sharp fall in the baht’s value

Some analysts also fear the extended period which has seen Thai interest rates significantly lower than those in the United States.

The thinking is that this has finally begun to impact capital outflows. Undoubtedly, the conflict between the central bank is also undermining market confidence.

Household debt continues to rise. At ฿16.4 trillion, there are still large amounts being processed through the legal system in addition to informal debt

For Instance, Thailand’s household debt climbed to 91.3% of GDP by the end of 2023. In brief, this signals a slight increase from the previous quarter, according to data released by the Bank of Thailand. 

This debt level came to ฿16.4 trillion. Certainly, this highlights the challenge facing the economy amidst a period of decelerated growth.

These figures may also underestimate the true extent of the problem. The National Credit Bureau (NCB) has recently estimated that there are trillions in unrecovered debt within Thailand’s legal process. At the same time, the level of informal debt is thought to be ฿3.95 trillion.

Despite the uptick in tourist arrivals and service sector growth, Thailand’s economy in the first quarter of 2024 still struggled. It failed to gain momentum.

At length, the economy shrank by 0.6% in the last quarter of 2023.

Good news on foreign tourism helping to push the current account in February to a surplus of $2 billion

The Bank of Thailand published figures on Friday which confirmed the strength of foreign tourist arrivals. Significantly also, it showed the country’s current account recorded a surplus of $2 billion in February. This was in contrast to a $200 million deficit in January 2024.

However, Ms Chayawadee Chai-Anant, a central bank assistant governor, underlined the need to carefully monitor manufacturing output and a fragile export recovery.

Thailand’s Manufacturing Production Index (MPI), at this time, has fallen now for 17 consecutive months. Undoubtedly this is disturbing.

The data for February was confirmed by Ms Worawan Chittarun, Director of the Office of Industrial Economics (OIE).

One of the biggest drivers of the erosion of factory output is the decline of Thailand’s traditional automotive industry.

Cratering of the country’s traditional auto sector

This is coming for two main reasons.

One of them is that the credit market for new cars is being strangled by stringent lending criteria. The other is competition from electric vehicles or EVs. 

While some of these EVs are made in Thailand, many are also imported from China. At the same time, those manufactured here do not contribute as significantly to the local economy.

‘The MPI Index Contracted for the 17th consecutive month due to the main industry that continues to shrink and is heavily weighted in the calculation of the Industrial Production Index, namely the automotive industry. Overall production in February 2024 decreased from the same period last year by 19.28% for the 7th consecutive month, mainly due to production for domestic sales. The production amount was 46,928 cars, a decrease of 26.37% from last year’s production of 63,732 cars, while production for export was 86,762 cars, a decrease of 9.25% from last year’s production of 95,612 cars,’ Ms Worawan disclosed.

Across the industrial base, Thai firms are facing changes due to technological advancement. Furthermore, the kingdom is failing to attract new-age industrial plants as it loses out to regional peers such as Vietnam and Indonesia.

PM Srettha reiterated his demand for a lower interest rate on Friday. He said the economy needed a shot in the arm as first-quarter GDP data is awaited

Nevertheless, on Friday in Bangkok, Prime Minister Srettha Thavisin again urged the central bank to cut the benchmark interest rate. Mr Srettha highlighted that the current rate is a decade-high of 2.50%.

Speaking at a business event, Mr Srettha emphasised the necessity of lower borrowing costs to provide a much-needed economic impetus.

However, the Bank of Thailand has been cautious in its approach. It still cites structural issues within the economy as the reason for the lack of growth. Its view is that this cannot be solely addressed through interest rate adjustments.

Governor Sethaput Suthiwartnarueput has underlined the need for comprehensive solutions to tackle the underlying challenges hindering economic progress.

It comes as the government now awaits first-quarter GDP data.

Earlier this week Mr Sethaput warned GDP growth for the first quarter of 2024 was ‘not likely to look pretty.’

Nonetheless, he suggested that conditions look likely to improve as the year progresses.

Disbursement of the government’s capital budget will be slowed this year due to legal appeals by unsuccessful bidders for state funded projects

One of the reasons for this is the disbursement of the government’s capital and development budget. In short, this was approved last week by parliament. 

However, last year, the government only disbursed 77% of its allocated budget while this year, Director-General of the Comptroller-General’s Department, Patricia Mongkhonvanit says it may only be 75%. Basically, this is understood to be linked to legal appeals by unsuccessful project bidders.

It has become common practice among competing firms to launch such proceedings. Afterwards, they negotiate an agreement with the successful contractors to ‘ease’ their concerns. 

The 2024 budget is for ฿3.48 trillion. This week Ms Patricia confirmed that ฿1.35 trillion had already been spent. The figures set aside for capital, stimulus, development or investment is ฿717 billion.

Fears of an over-dependence on foreign tourism. In the long run, this is not a high-growth strategy for the kingdom. Fundamental questions to be answered

The $2 billion current account surplus recorded in February is unquestionably a positive sign amidst economic uncertainties. 

However, this was primarily driven by the surge in foreign tourist arrivals, particularly from China.

The government’s target of attracting 40 million foreign visitors this year is on track. At the same time, it reflects a dangerous overreliance on tourism as the key driver of economic growth.

While tourism may provide a temporary boost to the economy, it is not a healthy situation. Nor is it one that can cater to Thailand’s goal of becoming a high-income country. 

Notwithstanding this, there is a fundamental question here. As Thailand seeks to join the Organisation for Economic Co-operation and Development (OECD), does it really wish to become a highly developed economy? Is this in line with the ‘sufficiency’ economic thinking of King Bhumibol Adulyadej?

Country’s hard-won industrial base built up over 70 years is being severely challenged in a world of changing technology and shifting market conditions

Similarly, there is rising unease at the sluggish performance of key sectors such as exports and industrial manufacturing.

Moreover, the country appears challenged in its export-oriented industries. For instance, electronic parts and circuit board production are witnessing a significant decline due to subdued global demand. 

Even more disturbing is a lack of investment in new plants with Thailand now producing obsolete goods. For instance hard drives instead of solid state versions.

At the same time, the recent drought further compounded the situation. It led to a 27.2% drop in palm oil production.

Despite these challenges, there are pockets of resilience. Oil production has seen a notable uptick, driven by increased demand fueled by bustling tourism activities.

Similarly, chemical fertilisers and nitrogen compound manufacturing have experienced growth, buoyed by strategic marketing initiatives and favourable market conditions.

Short-term prospects for 2024 look better but Thailand’s top markets such as Japan and China are in the doldrums while output to the United States is up

Looking ahead, officials are cautiously optimistic about the shorter-term prospects of the Thai economy. At the same time, the shift in emphasis away from the country’s manufacturing and export base remains a cause of concern

The gradual release of the state budgets, coupled with anticipated improvements in global demand, is expected to bolster economic performance in the second quarter.

However, matters are uncertain and fragile, with ongoing concerns over geopolitical risks. In addition, there are exchange rate fluctuations and the slow recovery of major trading partner economies.

Exports from Thailand to China and Japan fell by 5.4 and 5.7% respectively in February. Meanwhile, output to the United States jumped by 15.5%.

Thailand also enjoyed stronger demand from both the European Union and Saudi Arabia last month.

Tumbling tax receipts and the fate of Thailand’s largest construction firm send a strong message to the government that all is not right with the economy

The latest economic indicators show an urgent need to confront the country’s underlying structural issues. They are impeding Thailand’s GDP growth prospects and eroding its industrial base.

In short, the kingdom’s lack of dynamism. In effect, it is being strangled by debt. At the same time, this is producing inertia and undermining confidence. In turn, this may lead to a crisis of confidence and even a financial emergency if not remedied.

Undoubtedly, the Ministry of Finance has been put on notice about the trend.

Government revenue targets for the first four months of the fiscal year beginning on October 1st 2023 were off by 11%.

Thailand’s official economy is being pulled apart by the private sector debt crisis. This can be seen clearly from the story of the country’s largest construction firm, the Italian-Thai Development Corporation Plc. 

Giant Italian-Thai behemoth fights for survival and to pay wages as fears rise about the wider economy

The venerable firm, now nearly 70 years old, has built Thailand’s infrastructure.

In short, its story is Thailand’s economic story. It was restructured in 1997 at the same time as the kingdom’s financial crisis and the intervention of the International Monetary Fund (IMF).

Presently, it is labouring under huge financial debt. Much of it is owed to large Thai banks and bondholders.

In recent weeks, the government played its part in securing the firm a lifeline to pay some outstanding wages.

Another short-term facility is to be put in place to bring wages up to date by the end of April 2024.

Cutting interest rates is not the answer to the kingdom’s economic problems. Thailand’s economy is at a crossroad, the right path is one of hard choices

At the Ministry of Finance and Prime Minister’s Office, the view is that an interest rate reduction will help struggling borrowers. This includes firms and households. Officials argue that lower interest rates will boost purchasing power. 

In brief, putting money in people’s pockets. They point to a current trend in negative monthly inflation figures with the headline rate at just 1%. This is at the lower end of the Bank of Thailand’s targeted spectrum.

Faced with enormous pressure to cut rates, analysts in Bangkok are now predicting either a 25-point or 50-point reduction this year. This is supposed to come in one or two moves from April by the central bank’s Monetary Policy Committee.

However, economists at the Bank of Thailand including its Governor, Sethaput Suthiwartnarueput, see this thinking as wishful. Nothing short of tough decisions and similar action will remedy the decline in Thailand’s official economy. In particular, its eroding industrial base.

The alternative is to let the casual or grassroots economy grow and take over.

In short, let Thailand become a tourist-dependent economy. In effect, it would produce an economy that would work quite well for the casual sector.

However, not so for the kingdom’s increasingly educated young population seeking economic opportunity. This group, the future of the country, will continue to be sold short if the hard choices are not made and long-term initiatives fail to be undertaken.

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