ASEAN ISSUE 2020-05-20
Effect of COVID-19 on Thailand’s Economy and Future Prospects
With a population of about 70 million and an annual GDP of 290 billion USD in 2019, Thailand is the second largest economy in ASEAN, and a strong manufacturing country in automobiles, electronics, and petrochemical. Thailand is one of the key partners of the Republic of Korea under the New Southern Policy (NSP), but the exchanges in economic, trade, and investment between the two countries fall short of its potential. Bilateral trade volume, Korea’s FDI in Thailand, and people to people exchanges between Thailand and Korea in 2019 were 13.1 billion USD, 93 million USD, and 2.64 million visitors respectively. In comparison with Vietnam, another key partner of the NSP, the numbers are significantly lower ? in 2019 Korea traded 70.4 billion USD with Vietnam, invested 4.5 billion USD in the country and 4.85 million people made reciprocal visits. Therefore, it is high time that Korea and Thailand come up with new and creative ways to substantially promote and further expand economic cooperation between the two countries.
Against this backdrop, this week’s ASEAN Issue will focus on the effect of COVID-19 on Thailand’s economy and the efforts by its government in response.
Bleak Prospects for Thailand’s Economy
Thailand’s economy depends heavily on its export of manufactured goods and tourism. And as these two sectors are directly affected by the spread of COVID-19, Thailand appears to be one of the hardest hit countries among the ASEAN members.
Prospects of economic growth for Thailand in 2020 varies from -6.7% to 0.5%. The 7%p gap is a result of different estimates on the impact of COVID-19. In March, growth prospects were comparatively better when the epidemic was less of a crisis. By April, as the situation evolved into a pandemic, prospects quickly took a downturn.
First, let’s take a look at the March numbers. The Kasikorn Research Center estimated a 0.5% growth base on forecasts that the number of foreign tourists will decrease significantly in 2020 (8.3 million less than previous year) due to the spread of the virus. In other words, Thailand’s economy will grow less than 1% in the first quarter and then will contract further in the second quarter resulting in a recession. Yet, even these numbers were based on the premises that the virus would be more or less contained in Italy and Korea by the second quarter and that there would be no sudden surge in the number of confirmed cases at home. At the time, Citigroup also revised its estimates from 2.2% to 0.2%, while Phatra Securities Pcl went further and projected a negative growth rate of -0.4%.
Numbers released in April drew a worse picture for Thailand’s economy. In its report titled “Thailand: It’s going to be the worst since the 1998 Asian crisis” published on April 1, ING estimated an overall negative growth of -4.3% for Thailand in 2020. The report saw the economy falling from -2% in the first quarter to -7.7% in the second quarter and then rebounding in the third and fourth quarters (-4.8% and -2.6% growth respectively).
On April 8, the Joint Standing Committee on Commerce, Industry and Banking (JSCCIB) of Thailand stated that despite the government’s large-scale stimulus efforts, recession appears unavoidable. JSCCIB said that the damage, so far, amounted to some 1.3 trillion baht (about 40 billion USD, 7.7% of Thailand’s GDP) caused by sluggish exports (approximately -8.5% ~ -10%) and revenue losses in tourism (1.1 trillion baht). JSCCIB is composed of the Federation of Thai Industries (FTI), the Thai Bankers' Association, the Thai Chamber of Commerce, and the Board of Trade of Thailand.
The Economic Intelligence Center of the Siam Commercial Bank of Thailand forecasted a 5.6% decline in growth rate amid inactive exports, a drop in foreign tourist arrivals, prolonged recovery of the tourism industry, and lockdown of cities due to the virus. With no quick recovery of the tourism industry in sight, the Standard Chartered Bank of Thailand also predicted -5% growth. The Central Bank of Thailand also joined the forecasts with an estimation of 5.3% contraction in the economy.
The Bank of Thailand and the Center for International Trade Studies at the University of the Thai Chamber of Commerce (UTCC) projected that Thailand’s exports in 2020 will contract by -7.1% if the pandemic situation does not improve by September. However, if the virus is subdued by September, decline in exports will stop at around -3.7%. Thailand’s exports had already declined by 2.7% (246.2 billion USD) in 2019.
The Center for Economic and Business Forecasting of the University of Thai Chamber of Commerce stated, on April 19, that despite the government’s stimulus measures, the economy will contract by ?3.4% ~ -4.9%, putting 10 million people out of work at the same time. But without the stimulus efforts, the economy would be in free fall showing negative growth rate of -8.8%.
International organizations, too, were not optimistic about Thailand’s economy among the 10 ASEAN countries. The Asian Development Outlook, released by ADB on April 3, forecasted Thailand's growth rate for this year at ?4.8%, lowest among the 10 ASEAN countries. According to the report, in case of Thailand where tourism contributes a large part of national income, more than 1.8 million people?one out of four in the hospitality sector, and one out of six in the transportation sector?will face job losses within the next six months.
IMF was even more pessimistic. In its report “World Economic Outlook: The Great Lockdown” dated April 15, IMF predicted the coming of the worst global recession since the Great Depression in 1929 and forecast a 6.7% shrink in Thailand’s economy, by far the worst in Southeast Asia.
Bloomberg’s survey also ranked Thailand top among the 10 ASEAN countries in terms of its vulnerability to COVID-19. According to Bloomberg’s survey on countries in the Asia-Pacific region that are likely to enter into a recession within the next 12 months, Thailand came in second (30%) after Japan (57.5%), followed by Korea (25%), China (20%), Australia (20%), Singapore (15%), and Indonesia (3%).
[ Outlook on Thailand’s Economy in 2020 ]
|Kasikorn Research Center||0.5||premise that situation will improve in the 2nd quarter|
|Phatra Securities Pcl||- 0.4|
|ING||-4.3||Lowest in 2nd quarter|
|Siam Commercial Bank||-5.6||drop in export and tourist arrivals|
|Standard Chartered Bank||-5||slow recovery of tourism industry|
|Central Bank of Thailand||-5.3|
|Center for Economic and Business Forecasting||-3.4 ~ -4.9||provided that stimulus measures are implemented|
|IMF||-6.7||rebound to 6.1% in 2021|
|ADB||-4.8||impact on tourism as the main factor|
* Source: internal research
The Impact of COVID-19 on Thailand’s Major Industries
(Tourism Industry, Hardest Hit by COVID-19)
Thailand has been full of tourists in past years even when there were natural disasters, coups, and mass protests happening in the country. In 2019, over 39.8 million tourists travelled across major sites in Thailand. But as the entire world began to shut down to stop the spread of the coronavirus, the “Land of Smiles” is not smiling anymore. Travel and tourism, which make up 21% of Thailand’s GDP, is one of the main sources of its national income. Many people depend their livelihoods working in the tourism and hospitality sector. In 2019, foreign travelers’ expenditures in Thailand accounted for 11% of the country’s total GDP.
The number of foreign tourists visiting Thailand decreased by 42.8% in February 2020, and then dropped further in March by 76.4% to 820,000 people. In particular, the number of Chinese tourists decreased by 94.2% as China prohibited overseas travel groups. Thailand’s government estimates that the revenue from tourism will drop by more than 60% this year. Thai Bankers’ Association (TBA) stated that the economic damage from COVID-19 amounts to some 1.3 trillion baht?7.7% of GDP. Losses from tourism takes up the largest portion with a total of 1.1 trillion baht. Worse still, these numbers are expected to grow unless the situation improves in the 2nd quarter.
JSCCIB predicted that 7 million people would lose their jobs by the end of June?4.2 million in retailing, 1 million in construction, 978,000 in hotels, 250,000 in restaurants, 200,000 in spa and massage services, 200,000 in textiles and garment industries?with low-income workers being the most vulnerable. The hardest hit jobs will be those in the hospitality sector such as jobs in hotels, restaurants, spa and massage parlors and nightclubs. Nightlife industry contributes 5 billion USD to Thailand’s economy every year. Thailand has a total workforce of 38 million.
There is, however, a silver lining to the crisis in Thailand’s tourism industry. In mid-April 2020, China’s C9 Hotelworks and Delivering Asia Communications conducted a survey (The China Thailand Travel Sentiment Survey 2020) on 1,000 Chinese residents in China’s first-tier cities. According to the survey, 53% of the respondents had plans to travel abroad in August, October, and December, of which 71% expressed preferences for Thailand.
83% preferred traveling individually than in groups. As overseas group travel is prohibited by the Chinese government, ‘individual travelers’ aged between 20 to 40 are driving the new trend of overseas travelling in China. Thailand will remain a popular destination for Chinese tourists, and for these young ‘individual travelers’ well-known cities such as Bangkok, Phuket, Chiang Mai, Koh Samui, and Pattaya are considered much more attractive than hidden second-destinations in Thailand. Meanwhile, 11 million Chinese visited Thailand in 2019 making up 25% of total foreign tourists.
Overall Decline in Production, Domestic Demand, and Export of Automobiles
The automobile industry in Thailand is the largest in ASEAN. Together with tourism, it is a major driver of Thailand’s economy. The Federation of Thai Industries (FTI) stated on April 23 that the number of automobile production in 2020 is expected to shrink by 30% to 13.3 million units (of which 665,000 are for export). If the COVID-19 situation does not improve by the end of the second quarter, FTI saw production taking a 50% plunge from the previous year, to about 1 million units. FTI revised its earlier estimates on Thailand's automobile production from 2 million units to 1.9 million in March.
As a matter of fact, Thailand's automobile production in the first quarter recorded a mere 453,682 units, which is a 19.2% decrease from the previous year. In March, production fell 26.2% (146,812 units) while sales plummeted by 41.7% (60,105 units). Exports of automobiles declined by 16.4% in the first quarter (253,904 units) and in March the number further tumbled 17.8% to 85,376 units. The scope of decline in production, sales, and export seems to getter bigger every month.
Global automakers in Thailand such as Toyota, Honda, Mitsubishi, Ford, and Mazda have shut down their production lines in March and April partly due to drop in sales and also due to Thailand’s social distancing measures that required people to telework. Thailand's automobile and parts industry employs about 750,000 workers. While working hours have been reduced, so far, no one has been laid off.
Government’s Countermeasures to fight COVID-19
In an effort to minimize the adverse effects of COVID-19 on its economy, the government of Thailand has, so far, issued three stimulus packages. On March 10, the first of these packages, worth 12.7 billion USD (25% of Thailand’s GDP), was announced. Specifically, it includes the following measures:
- making a total of 150 billion baht available for low interest loans (at 2% interest for a period of two years, for not over 20 million baht per customer)
- suspending payments of principal
- reducing interest rates for debts owed to the Government Savings Bank and Government Housing Bank
- easing of central bank’s rules on loans by commercial banks.
- making a total of 30 billion-baht Social Security Fund available for low interest loans (at 3% interest for a period of three years)
- reducing withholding tax from 3% to 1.5%
- allowing SMEs a tax deduction equal to 1.5 times their interest expenses incurred on loans obtained under the government's low interest soft loan initiative (occurring between April 1 and December 31)
- allowing SMEs to deduct, for corporate income tax purposes, three times the salary expenses paid from April 2020 to July 2020 to employees (who receive wages of not more than 15,000 baht per person per month)
- acceleration of VAT refunds (within 15 days after on-line filing)
- refunding the deposit for electricity usage
- reducing rental fees on state properties.
The second package was announced on March 24. The central bank cut the policy rate from 1.00% to 0.75%. To support businesses, following measures were presented:
- 3% interest on loans up to 3 million baht for the first 2 years for SMEs
- tariff exemption on products and raw materials related to the treatment and prevention of COVID-19 (before September)
- VAT exemption on imported raw materials related to countering COVID-19 (March 1~February 28, 2021)
- tax exemption (income tax, VAT, registration tax) on debt restructuring carried out by creditors such as leasing and credit card companies
For individuals the government will support:
- 5,000 baht per month for 3 months to workers without social security
- payment of unemployment compensation up to 50% of monthly salary for workers with social security
- unsecured emergency loans at 0.1% interest for up to 10,000 baht per person, and at 0.35% for up to 50,000 baht per person
- lifting deduction threshold for health insurance premiums to 25,000 baht from 15,000 baht.
The third package, released on April 7, is worth 1.9 trillion baht, equivalent to 10% of GDP (16 trillion 880 billion baht in 2019). 1 trillion baht is provided through bond issuance and 900 billion baht from the central bank.
Out of the 1 trillion baht funded by issuing bonds, 600 billion baht will be used for public healthcare services and remaining 400 billion baht for economic recovery and local infrastructure. Of the 900 billion baht from by the central bank, 500 billion baht will be spent for long-term low-interest loans (loans not exceeding 500 million baht for SMEs at an interest rate of 2% per annum and interest-free for the first six months), and 400 billion baht for creating a Corporate Bond Stabilization Fund which will be used to provide bridge financing to high-quality firms with bonds maturing in 2020-2021.
Previously the Thai government cut its defense budget by 7.8% from 231 billion baht to 2,137 baht to finance some of the above stimulus measures. Changes in defense expenditure plans were made which included suspension of procurement of two T-50 Golden Eagle lead-in fighter trainers (LIFTs) from Korea Aerospace Industries, and two diesel submarines from China according to media reports from Thailand.
Also, as part of its second stimulus package, the Thai government decided to create a 1 trillion baht fund for emergency disaster relief assistance. The government will provide 5,000 baht per person per month for three months to 6 million people who do have social security plans including temporary workers, taxi drivers, and those who are self-employed. For those in the agriculture sector, 15,000 baht (5,000 baht for three months starting from May) will be provided in cash handouts. Under this scheme, recipients of the emergency disaster relief assistance will increase to approximately 16 million. Securing of the budget will be crucial for the plan’s success.
Prime Minister Prayut Chan-o-cha has also reached out to the private sector for assistance. On April 22, he sent letters to the 20 richest people in Thailand asking for voluntary assistance to help affected communities in Thailand. In response, some agreed to provide consultation services on economic issues, others promised to retain their employees and help those who have been laid off to find new jobs.
■ Future of Thailand’s Economy-Whither to?
In its April 2nd article entitled "Thailand's economy was suffering before the virus,” the Economist made the following analysis of Thailand’s economy:
“[Thailand’s economy] grew by just 2.4% last year, the slowest pace since 2014….From 2009 to 2019, Thailand’s growth rate (3.6% on average) lagged behind poorer neighbours like Vietnam (6.5%) and the Philippines (6.3%), and even richer ones such as Malaysia (5.3%)…”
The first reason for this slow growth is because a small number of huge firms, family-owned businesses and state-owned enterprises dominate the economy, they face little pressure from competitors to innovate.
Second, Thailand's labor productivity is rarely improving. According to the OECD, Thailand’s labor productivity between 2011 to 2016 was 3.2%, which is lower than that of China (7.6%), Vietnam (4.7%), Indonesia (3.9%), and the Philippines (3.9%). It is notable that while a third of Thailand's workforce is engaged in agriculture, the industry only accounts for 10% of the total GDP.
Third, Thailand's demography is also no longer attractive to investors. In 2018, 11.9% of its population was older than 65. This is one of the higher proportions among ASEAN countries and moreover, the population is aging rapidly.
Fourth, many global automobile, steel, and home appliance companies previously built factories in Thailand because of its low labor costs. As a result, Thailand today is the largest automobile manufacturer in ASEAN. However, with the rise of its minimum wage (313-336 baht/day), competitiveness as a manufacturing base is weakening. Consequently, Mazda, a Japanese carmaker, shifted production of its CX-3 (SUV) (25,000 units per year) to Japan in 2019. GM also pulled out of Thailand in February.
Surely, this does not mean there is no hope in the future of Thailand’s economy. The following are some of the strengths that were demonstrated as the country effectively responded to COVID-19:
- Thailand’s universal national health insurance system allowed its people to have better access to medical services compared to other developing countries
- Thailand’s welfare system allowed the country to effectively distribute cash handouts to the people in times of crisis
- the government and the business community are making joint efforts to respond effectively to the current situation.
On April 21, Moody's Investors Service lowered Thailand’s long-term rating to Baa1 (medium level with speculative factors and moderate credit risks) and short-term rating to Prime-2 (high short-term debt repayment capacity). These changes were made based on the analyses that the coronavirus has brought about a sharp decline in tourist arrivals, reduction in exports and overall contraction in economic activity. Also, it was viewed that as the government focuses its energy on responding to COVID-19, large-scale infrastructure projects that are essential for improving the mid to long-term national competitiveness will inevitably be delayed. At the same time, Moody's evaluated that Thailand, based on its sound financial structure, will be able to overcome the adverse impact and recover its economy.
Whether Thailand, as one of the hardest hit economies from COVID-19, will succeed in overcoming the current difficulties and achieve a swift rebound towards a 6.1% growth, as forecasted by IMF, will be important for both the country and the region.
[References]ASEAN Development Outlook 2020, ADBWorld Economic Outlook, The great lockdown, IMF(2020.4)Multi-dimensional Review of Thailand: Volume 1. Initial Assessment, OECD (2018), Thailand Investment Review, Thailand Board of Investment(2020.1)
[News Articles] Thailand’s economy was suffering before the virus, The Economist(2020.4.2.)Thailand unveils $17 billion stimulus package to ease coronavirus impact, The Strait Times(2020.3.10.)