Thailand has benefitted from decades of rapid industrial development to become an upper middle-income economy, with GDP growth averaging more than 7% from the 1950s to the 1990s. However, more recent decades have been marked by an ongoing struggle to escape the middle-income trap. Growth sank in 2014 following a military coup, although political stability and solid macroeconomic fundamentals saw the country’s economic recovery continue in 2016, as GDP growth rose to a three-year high and export receipts increased for the first time since 2012.
Manufacturing remains Thailand’s economic mainstay, propelling the country to middle-income status in 2011 on the strength of its automotive, electronic and agricultural exporters. The sector is expected to face challenges in 2017, however, with external headwinds and the baht’s ongoing appreciation creating a challenging environment that could see the sector miss some key export targets.
Public investment will be the major driver of growth; government spending will experience a double-digit rise in the 2017/18 budget, with officials placing an emphasis on improving competitiveness and boosting export growth. This plays into the country’s Thailand 4.0 economic development strategy, which envisions a transition into high-level manufacturing activities, development of a digital economy, agricultural innovation and tourism-supported service sector growth. The forecast for 2017 is positive, bolstered by a growing trade surplus with the Cambodia, Laos, Myanmar and Vietnam (CLMV) market, which should help offset any potential future trade shocks following a year of geopolitical upsets. With Thailand increasingly viewed as a safe haven for capital and investment in the ASEAN region, as well as being a springboard into the CLMV market, it is well on its way towards attaining upper-income status.
At A Glance
The National Statistics Office reported that services are the largest contributor to GDP, with its “Statistical Yearbook Thailand 2016” showing that the sector generated BT5.1trn ($144.5bn), or 39% of GDP in 2014, against manufacturing at BT4.8trn ($136bn), or 36.8%, and agriculture at BT1.3trn ($36.6bn), or 10.2%. Services are dominated by wholesale and retail trade, which accounted for BT1.9trn ($50.7bn) of economic contributions in 2014, followed by financial intermediation (BT956.3bn, $26.9bn), transport (BT921.1bn, $25.9bn), renting and business activities (BT882.4, $24.8bn), and hotels (BT499.3bn, $14.0bn). Tourism is another major economic growth driver, accounting for 12% of the country’s economic output.
In the manufacturing category, manufacturing is the largest single GDP contributor, with BT3.6trn ($101.4bn) of GDP contributions in 2014, followed by mining and quarrying at BT494.3bn ($13.9bn), and utilities with BT374.7bn ($10.5bn). The Board of Investment (BOI), meanwhile, reported that services comprised 58% of GDP in 2015, followed by the industrial sector (33%) and agriculture (9%).
World Bank data shows Thailand recording strong but volatile GDP growth in recent years, recovering from a 0.74% contraction in 2009 to hit 7.51% growth in 2010, before a moderation to 0.83% in 2011, which was attributable to widescale flooding that paralysed the manufacturing and agriculture sectors. Growth rebounded to hit 7.23% in 2012, but has since trended downwards, falling to 2.7% in 2013, 0.82% in 2014 and 2.82% in 2015.
The country appeared set for a stronger than anticipated recovery in 2016, with the National Economic and Social Development Board (NESDB) reporting GDP growth of 3.2% in the first quarter, up from 2.8% in the fourth quarter of 2015. Growth was attributed to the accommodative policies of the Bank of Thailand (BOT), with the bank keeping its benchmark interest rate unchanged since April 2015 when it cut the overnight bond resale rate from 1.75% to 1.50%.
Supported by rising exports and public investment, GDP growth accelerated in the second quarter of 2016 to hit 3.5%, bringing the half-year growth rate to 3.4%. However, this rate slowed in the third quarter following the death of His Majesty King Bhumibol Adulyadej on October 13. International media reported that $514m left Thai capital markets in the same month, while a one-year mourning period following the king’s death weighed on retail and tourism. According to the NESDB, service export growth, which includes the tourism industry, slowed to 0.4% year-on-year (y-o-y) in the fourth quarter of 2016, down from 7.7% in the previous quarter. GDP growth stood at 3.2% in the third quarter and 3% in fourth quarter of 2016, with the NESDB reporting that full-year GDP growth reached 3.2% in 2016, a three-year high. Thailand’s GDP grew by a higher than expected 3.3% in the first quarter of 2017.
Despite a challenging domestic environment, GDP growth is forecast to accelerate as the government ramps up investment in infrastructure and moves to improve competitiveness.
The country’s 2017 budget forecasts a 21-22% spending increase following the approval of a BT190bn ($5.4bn) supplementary budget. This will be almost entirely channelled into the development of provincial clusters under the BOI’s Cluster Policy, which targets expansion of high-value manufacturing in dedicated special economic zones (SEZs) by offering considerable investor incentives.
The earlier budget bill set spending at BT2.73trn ($76.91bn), a similar amount to 2016. Capital expenditure, which comprises 21.7% of the total, was set to fall by 2.7% to BT1.2trn ($33.8bn), with the government introducing a new spending framework emphasising strategy over tasks. The original budget bill included 45 strategies divided into seven categories, with the competitiveness category receiving the majority of capital expenditure, at BT323.7bn ($9.1bn), or 13.8% of total spending.
Under new competitiveness mandates the government plans to develop target industries, promote small and medium-sized enterprises (SMEs), expand its SEZ network, improve infrastructure and logistics networks, advance digital economic development, promote research and development (R&D), support tourism growth, and increase innovation and value addition in the service, trade and investment sectors.
The spending surge comes as the government rolls out new economic growth strategies aimed at helping Thailand escape the middle-income trap – an event that sees a country’s GDP growth ease after it reaches middle-income status. Thailand attained upper middle-income status – where GNI per capita averages between $4036 and $12,475 annually – in 2011 when GNI reached $4210. But the BOI reported that Thailand has stagnated in the middle-income trap over the past two decades. Although GDP growth averaged between 7% and 8% from 1957 to 1993, and surged between 2010 and 2012, it has averaged between 3% and 5% since 1994.
According to the BOI, Thailand 4.0 is a continuation of the Thailand 1.0, 2.0 and 3.0 economic models. Thailand 1.0 focused on the agricultural sector and industrialisation, Thailand 2.0 emphasised labour-intensive manufacturing and domestic production, while Thailand 3.0 prioritised the development of complex industries to attract foreign investment.
The Thailand 4.0 strategy focuses on transforming Thailand into a value-based, innovation-driven economy by shifting export production from commodities and labour-intensive manufacturing to innovative products. It emphasises technological uptake and innovation in high-priority industries, as well as a shift from a production-based to service-based economy.
This strategy aims to boost GDP growth to higher levels than the 2.39% average experienced between 2013 and 2016. The approach is also supported by a planned BT1.41trn ($39.7bn) in infrastructure investment to 2022, which will be used to fund major projects such as rail and airport upgrades, the construction of a new high-speed rail line and new highways, as well as the development of the Eastern Economic Corridor (EEC).
The EEC project involves building and enhancing new manufacturing and industrial clusters along the eastern seaboard, which includes the provinces of Rayong, Chonburi and Chachoengsao, and spans a total area of 13,285 sq km. According to law firm Pugnatorious, the EEC is set to benefit from $43bn worth of investments between 2017 and 2022, mainly through foreign direct investment (FDI), which authorities hope will create 100,000 jobs in the manufacturing and service sectors by 2020.
The government is adjusting its corporate tax policy to attract new investors into the EEC. Although a dedicated piece of legislation, the Eastern Special Economic Zone Act (EEC Act), has not yet been enacted, it is expected to introduce a new “super benefit” package for EEC investors.
The Investment Promotion Act of 1977 (BOI Act) was amended in January 2017 to offer extended corporate tax holidays – up to 13 years, from the previous limit of eight – and import duty exemption for investors in any R&D or innovation-focused activities slated for development within the EEC.
Perhaps more significantly, the National Competitive Enhancement Act for Targeted Industries came into effect on February 14, 2017, increasing corporate tax holidays for investors in priority sectors to a maximum of 15 years, in addition to establishing a new seed fund offering grants to high-tech investors (see Trade & Investment chapter).
EEC development will also benefit from major planned infrastructure investments, including the construction of a high-speed rail line connecting Bangkok’s Suvarnabhumi and Don Mueang International Airports to the U-Tapao International Airport in the Rayong Province.
Although international media reported in September 2016 that less than 1% of the planned BT1.41trn ($39.7bn) in infrastructure spending had been realised, several major projects are moving forward in 2017, particularly in the EEC. The 2017/18 budget includes BT443.7m ($12.5m) of spending for the construction of a new airport in Betong, BT720m ($20.3m) for improvements at border airports and BT1.08bn ($30.4m) to the Department of Rural Roads for road upgrades. The State Railway of Thailand was also allocated BT3.3bn ($92.9m) for projects including the construction of new double-track lines connecting Thailand’s industrial zones with the Laem Chabang, Map Ta Phut and Sattahip deepwater ports.
Five double-track projects with an estimated budget of BT99bn ($2.8bn) were expected to move forward in 2017, however the government halted the selection of pre-qualified bidders in March 2017 following concerns and complaints about a lack of transparency in the bidding process.
Plans are also underway to build a high-speed pan-Asia rail link connecting Singapore to China, which would also run through Malaysia, Thailand, Myanmar, Cambodia, Vietnam and Laos. In December 2015 Thailand and China signed an agreement to build an 873-km route connecting China to Thailand’s east coast, via Laos. Meanwhile, in September of the same year authorities came to an agreement on the cost of the project’s first phase, a 3.5-km stretch between Bangkok and Pak Chong, which forms part of a 271. 5-km link between Bangkok and Nakhon Ratchasima.
Construction is scheduled to first start on the Bangkok-Nakhon Ratchasima section, followed by a 355-km link between Nakhon Ratchasima and the Nong Khai Province on the Laos border, and a 246.5-km section running between the provinces of Saraburi and Rayong. According to the Ministry of Transport, the project’s first phase will cost BT179bn ($5bn), with China providing funding for technical assistance and Thailand covering construction costs.
Rail development received another boost in February 2017, when the Nikkei Asian Review reported that Thailand and Malaysia were set to begin talks on the construction of a 1500-km high-speed railway between Bangkok and Kuala Lumpur.
Innovation In Manufacturing
With improved transportation networks set to significantly reduce travel times and shipping costs, Thailand 4.0 has identified 10 targeted industries to be developed across the EEC. Priority sectors are split into two segments. The first group of existing industrial sectors will be transformed through technological uptake to improve value addition, which is hoped will support next-generation automotive manufacturing, electronics, high-income tourism and medical tourism, agriculture and biotechnology, and food innovation.
The second segment includes nascent high-tech industries expected to be critical to future growth, including automation and robotics, aerospace, bio-energy and biochemicals, digital development and the medical and health care industries. In addition to highlighting these priority areas, Prime Minister Prayut Chan-o-cha signed an executive order in January 2016 to clear environmental and regulatory hurdles relating to a planned network of SEZs, which are expected to play a critical role in supporting key targets in the Thailand 4.0 strategy.
The Thailand 4.0 strategy dovetails the BOI’s existing EEC development agenda, as well as the Cluster-based Special Economic Development Zones Policy, also known as the Cluster Policy, which was officially adopted in September 2015.
Like Thailand 4.0, the Cluster Policy emphasises the development of high-tech and value-added manufacturing activities at hubs spread across Thailand’s provinces. The government is investing significantly in cluster development, with provincial clusters allocated BT115bn ($3.2bn) of a BT190bn ($5.4bn) supplementary budget for FY 2017/18.
Somkid Jatusripitak, Thailand’s deputy prime minister and one of the main architects of the Cluster Policy, also announced plans to begin the development of a “bio-economy” as part of a BT400bn ($11.3bn) state initiative to improve value addition in the production of cash crops such as cassava, tapioca and sugar cane, with the goal of moving into biofuel, biochemical and biopharmaceutical production. The plan envisions the creation of a series of new “bio-cities” across Thailand’s provinces over the next 10 years, attracting critical private investment into the country’s agricultural sector.
These initiatives should provide significant assistance for the troubled manufacturing and export sectors, which have struggled against weakening global demand, currency volatility and falling levels of competitiveness.
The Asia Times reported that factory usage rates were at the low rate of just 63.3% in February 2017, reflecting stalled export growth and low domestic consumption. According to BOT data, annual export revenues rose by 93.2% between 2005 and 2015 to reach $214.38bn; however, 2015 marked the third consecutive year of decline, with revenues standing at $229.11bn in 2012, before falling to $228.5bn and $227.52bn in 2013 and 2014, respectively.
The sector has been affected by falling global commodity prices, natural disasters and political uncertainty; however, eroding competitiveness has also been highlighted by the BOT as a factor behind sinking export revenues. In June 2014 the bank reported that Thailand was losing its export competitiveness in hard disk drive manufacturing, with companies failing to adjust production schedules in anticipation of shifting consumer preferences, resulting in Thailand falling behind ASEAN manufacturing competitors such as Singapore, Malaysia and Indonesia.
Nearly half of Thailand’s industrial capacity is export oriented, and export values are worth an estimated 70% of GDP, making improvements to competitiveness critical for the country as it seeks to maintain a recent resurgence in export receipts.
Exports edged towards recovery in 2016, rising by 10.20% and 6.23% y-o-y in November and December 2016, respectively, to end the year at $215.32bn. This helped boost Thailand’s full-year growth to 0.45%, resulting in a $20.7bn trade surplus, the country’s second consecutive surplus following five years of deficit.
Thailand benefits from its proximity to the high-growth CLMV market, and has seen trade volumes with its neighbours expand rapidly in recent years. According to Ministry of Commerce (MoC) figures, trade volumes between Thailand and the CLMV region rose from just BT375.75bn ($10.6bn) in 2006 to hit BT1.12trn ($31.6bn) in 2016. Thailand’s trade surplus with the group has widened consistently over the previous decade, from BT87.2bn ($2.5bn) in 2006 to a record BT439.57bn ($12.4bn) in 2016. This trend is expected to continue into 2017, offsetting any potential trade shocks as the UK’s formal Brexit negotiations progress and US President Donald Trump moves to implement an agenda of economic nationalism, which has sparked concern about a potential trade war with China.
Export revenues maintained a strong growth trajectory at the opening of 2017, and the BOT reported that export revenues rose by 8.5% y-o-y in January 2017, or 6.2% when excluding gold, with the bank forecasting that export recovery would continue into the second quarter of 2017 as commodity prices and global demand gradually rise. In February 2017 the MoC revised its 2017 export revenue growth target from 3% to 5%, although the NESDB expects exports to rise by a more moderate 2.9% (see Trade & Investment chapter). The MoC’s forecast assumes an average global oil price of between $50 to $60 per barrel, and an average foreign exchange rate of between BT35-37.5 against the US dollar.
Concerns remain over currency markets’ impact on exporters, with the baht’s ongoing appreciation against the US dollar expected to weigh on export receipts in 2017.
The US Federal Reserve underwent an unprecedented programme of qualitative easing following the 2008/09 global financial crisis, however the programme wrapped up in 2014, prompting mass capital outflows from emerging market economies.
Although Thailand felt the effects, the country appeared to be bucking the trend in early 2017, as an influx of foreign capital into its bond market strengthened the baht, leading it to become one of the best-performing currencies regionally.
According to the BOT, Thailand recorded almost $24bn in capital outflows in 2016, easily surpassing $5.4bn of outflows in 2015, although this was largely from investments made overseas. Indeed, the only major incidence of capital outflows from the Thai bourse occurred in October 2016 when $514m exited Thai capital markets. This was attributed to the death of the revered King Bhumibol Adulyadej, long seen as a source of political stability. However, the markets bounced back quickly, despite another moderate shock in November following the surprise victory of Donald Trump in the US presidential election.
Foreign funds added a net $3.3bn to Thai stocks between January and November 2016, pushing the Stock Exchange of Thailand (SET) Index’s price-toearnings ratio to a high of 16.7 in August. At the end of February 2017 the SET’s price-to-earnings ratio was 18.1, well above the 10-year average of 12.8. The sovereign bond market has also benefitted from Thailand’s rising reputation as a safe haven from foreign currency risks, with $2.2bn of capital inflows reported during the first six weeks of 2017 alone.
Two rate hikes from the US Federal Reserve in March and June 2017 has led to speculation the situation could reverse itself, however, with Maybank Kim Eng Securities Thailand reporting in March that capital outflows from the short-term bond market had surged, weakening the baht and reversing its previous appreciation against the US dollar. The US Federal Reserve increased its base rate to 1.25% in June 2017, a move expected to trigger fresh outflows from emerging markets.
Prior to the rate rise, the baht had in early 2017 appreciated by between 2-3% against the US dollar, according to Maybank, making it one of the top five best-performing currencies in Asia. The firm reported that baht appreciation has been caused by hot money and speculation in short-term Thai government bonds, projecting that outflows would increase, potentially sparking a downwards trend that would take the baht to 36.5 against the dollar by the end of 2017, a 4.5% to 5% drop on levels during March, which stood at 35 baht to the dollar.
This is unlikely to make a serious impact on the financial services sector, however. The Thai government has significantly reduced its exposure to foreign currency markets following the major role such exposure played in inflating the country’s economic losses during the Asian financial crisis of 1997. According to the Thai Bond Market Association, the proportion of foreign currency debt to total government debt fell from 85.34% in 1997 to just 2.12% by November 2016. Of this, slightly more than half is unhedged foreign currency debt, representing a relatively low foreign exchange risk.
Banking & Capital Markets
Highly leveraged households and rising defaults in loans and bond markets present more of a risk to the country’s financial and capital markets. Lending growth at Thai banks slowed to its lowest level in seven years in 2016, with commercial lending rising by just 2%, down from 3.2% growth in 2015. Rising levels of non-performing loans (NPLs), particularly in the SME segment, have seen some banks tighten loan underwriting, which supported a return to profitability in 2016 following 2015’s one-off contraction. To support banking growth the government is actively launching new initiatives aimed at providing finance channels for SMEs, while large corporations are expected to return to conventional bank financing over increasingly favoured bond markets, leading to an optimistic growth outlook in 2017.
The Ministry of Finance (MoF) and the BOT both expect lending growth to rise above 2016 levels while the sector remains liquid and stable, further bolstering its mid-term forecast. Consumers are also set to benefit from the implementation of the government’s National E-Payment Strategy, which seeks to transform Thailand into a digital economy by improving banking and credit access for a larger portion of the population, improving data and tax collection practises, and improving efficiency across the sector (see Banking chapter).
In capital markets, the SET was named the best-performing stock market in the Asia-Pacific region in 2016 after the SET50 Index recorded 18.8% returns between February 2016 and February 2017. SET expansion is set to continue in 2017 on the back of new initial public offerings and anticipated double-digit bond market growth; however, rising defaults in the short-term bond market remain a cause for concern (see Capital Markets chapter).
Domestic Consumption Challenge
Although financial intermediation remains set for a year of steady expansion, high levels of household debt are beginning to weigh on consumption, and could pose a serious challenge should NPLs continue to rise. Household debt is high in Thailand, totalling 81% of GDP in 2015. It then rose by another 20.2% – the highest growth rate in nine years – during the first nine months of 2016 to reach BT298,000 ($8170).
The BOT reported that private consumption slowed in January 2017, growing by 1.3% y-o-y, down 2.9% growth in December 2016. Public consumption has wavered in recent years, according to the IMF, which stated that consumption-driven GDP growth fell from a high of 6.7% in 2012 to 1.4% in 2013, dropping again to 0.9% in 2014, followed by projected growth of 2.1% and 2.4% in 2015 and 2016, respectively. The BOT warned in February that public consumption would require close monitoring as it is expected to remain weak throughout 2017.
There are nonetheless indications that consumption could improve in the short to medium term. DBS Bank reported in February 2017 that it expects private consumption to pick up in 2017, reporting that the level of imported consumer goods had grown by 8% during the second half of 2016, the strongest six-month period since the first half of 2013.
Combined with rising imports and consumption, inflation growth could affect Thailand’s accommodative monetary policy, although the BOT is not widely expected to hike interest rates in 2017.
The central bank has kept its key policy rate at 1.50% since April 2015, with the IMF reporting that headline consumer price index (CPI) inflation fell from 3.60% in 2012 to 1.70% in 2013, plunging to just 0.60% in 2014 and -0.90% in 2015. Inflation has picked up since, however, reaching a projected 1.60% in 2016. And while headline consumer prices fell by 0.04% in May 2017, this followed 13 consecutive months of growth. Thailand’s CPI was forecast to rise by 1.57% y-o-y in February, well within the BOT’s 1-4% target range for 2017. The previous month saw CPI record its largest annual increase in more than two years of 1.55%. Core inflation of energy and food rose by 0.70% in February, compared to 0.75% in January.
Maybank reported that the BOT could raise rates later in 2017, should the US Federal Reserve move more aggressively than expected and inflation continue to rise. However, BOT officials have voiced support for monitoring capital outflows rather than moving to counter them, which would in turn support baht depreciation and boost exports. As such, interest rates are unlikely to increase, even in the event that inflation surges towards the upper range of central bank targets. The BOT forecasts GDP growth will hit 3.4% in 2017, while the MoF’s Fiscal Policy Office expects 3.6% growth. The NESDB forecasts GDP growth to reach between 3% and 4%.
Despite considerable geopolitical volatility, Thailand’s economy remains well diversified, stable and poised for expansion in 2017.
Stability remains a key competitive strength, both politically and economically. Thailand’s currency and financial markets have benefitted from rising capital inflows in early 2017, and remain profitable and attractive to investment, while export growth will be supported by the expansion of CLMV and ASEAN trade, despite the risk of shocks as the US and UK look to alter long-standing trade arrangements. Ongoing efforts to improve technology adoption and boost value-added manufacturing should pay long-term dividends, while the services sector should continue to support economic recovery, with lending growth and tourism revenues both set to increase in 2017.
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