Macroeconomic recovery in Thailand gained momentum in 2017, with GDP growth hitting a five-year high on the back of positive performance in exports, tourism and financial services, as well as a moderate uptick in private consumption. Although non-performing loans (NPLs) remain a concern for the banking sector, lending growth accelerated in 2017. Meanwhile, the main index of the Stock Exchange of Thailand (SET) hit an all-time high on the first day of trading in 2018, returning to levels not seen since the 1997-98 Asian financial crisis. Under the auspices of new economic development strategies such as Thailand 4.0 and the Eastern Economic Corridor (EEC), infrastructure investment should further support expansion in 2018, with public spending on key transport projects set to surge, even as the government seeks private partners to help deliver billions of dollars of planned initiatives.

However, structural weaknesses are weighing on the outlook somewhat. Efforts to escape the middle-income trap have also not yet been successful, with rising wages, a shrinking workforce and low levels of skilled labour standing as obstacles to a transformation into a digital economy. Nonetheless, economic recovery is expected to continue in 2018, bolstered by renewed global growth, strong export demand and investor-friendly reforms such as the EEC Act to support rising investment in next-generation industries.

Economic Shift

The economy underwent a structural transformation in the 1980s, with rapid economic growth and liberalisation supported by a shift from agricultural dominance to manufacturing and services. GDP growth averaged 6% annually over the 1980-2015 period, and incomes and purchasing power rose rapidly, with the World Bank reporting that GNI per capita in current US dollars jumped from $710 in 1980 to $2950 in 1996, recovering from the 1997-98 Asian financial crisis to $3100 in 2006. This continued to increase, allowing the country to reach middle-income status with GNI per capita of $4950 in 2011. While the metric’s growth stalled somewhat after peaking at $5760 in 2014, easing to $5710 and $5700 in 2015 and 2016, respectively, it reached another high of $5960 in 2017.

Although it remains a major regional and global agriculture power – Thailand is the world’s largest producer and exporter of natural rubber, second-largest rice exporter and third-largest seafood exporter – the economy is dominated by manufacturing and services, exports of which are the largest drivers of GDP growth.

The World Bank reports that goods and services exports as a percentage of GDP have risen sharply over the past three decades, from 24.11% in 1980 to 34.13% in 1990, 64.84% in 2000, 66.49% in 2010 and 68.9% in 2016, the most recent year for which statistics are available. Agriculture accounted for just 6.3% of GDP in 2017, against manufacturing, the largest contributor, at 27.7%, retail and wholesale trade (15.2%), transport and communications (10.3%), real estate (8.2%) and financial intermediation (7.1%).

Middle-income Trap

However, economic transformation has stalled in recent years, as policyholders grapple with the so-called middle-income trap, which occurs when a country attains middle-income status but is unable to become an upper-income nation. Economic inequality is very high: according to Credit Suisse’s “Global Wealth Databook 2017”, while Thailand did not have the highest inequality metrics in the world, its wealth distribution was the most unequal among the report’s 39 selected economies in 2017. That year 56.2% of wealth was controlled by the most-affluent 1% of people, putting the country ahead of Russia – which had 56% of its wealth controlled by the top 1% – as well as the global distribution of assets (50.1%).

GDP growth and foreign direct investment (FDI) inflows moderated after a military-led government assumed power in May 2014, ushering in the 12th prime minister since the turn of the century. Investor and business confidence were already affected by flooding in 2011, which caused $46.5bn of damage and a 10.7% quarter-on-quarter GDP contraction during the third quarter of that year. This weighed on manufacturing output, pushing GDP growth to less than 1% for the year.

In October 2017 regional press reported that manufacturing FDI had declined in recent years and failed to recover to levels seen before the floods. Indeed, the UN Conference on Trade and Development reports that Thailand attracted $1.55bn of FDI inflows in 2016, compared to $12.6bn in Vietnam, $9.9bn in Malaysia and $7.9bn in the Philippines, with Thailand’s FDI inflows dropping off significantly in the 2010s, from $15.49bn in 2013 to $4.81bn in 2014 and $5.7bn in 2015.

In the two decades since the 1997-98 Asian financial crisis, Thailand’s competitive edge has been eroded to an extent, with GDP growth averaging 3.5% between 2013 and 2017, a situation exacerbated by rising costs of labour and a persistent shortage of skilled labour. “Labour costs are getting higher, and we rely a lot on workers from Indochina,” Tipp Dalal, CEO of Triple I, told OBG. “Many people are concerned about the education level in the country. If this system is not improved, we will be stuck in the middle-income trap.”

Employment & Wages

Wages in Thailand are elevated compared to the region. The Philippines National Wages and Productivity Commission reports that the monthly minimum wage in Thailand averaged between $288 and $296 in January 2018, compared to $158-346 in China, $171-299 in the Philippines and $236-257 in Malaysia. This discrepancy is even greater between Thailand and its immediate neighbours, Vietnam ($ 147-165), Cambodia ($140) and Myanmar ($82). In January 2018 the Central Wage Committee recommended raising the minimum wage in Chonburi and Rayong – the most industrialised provinces – by 7% to BT330 ($9.55) per day and by 5-22% across the remainder of the country. Bangkok and its surrounding six provinces would receive a 4.8% wage increase to BT325 ($9.41) per day.

A demographic imbalance has resulted in a scarcity of labour, with the Bank of Thailand (BoT) reporting that the unemployment rate has fallen from 1.18% in 2011 to 0.99% in 2012, 0.88% in 2013, 0.72% in 2015 and 0.68% in 2017, while the number of people in the labour force has decreased from a peak of 40.1m in 2012 to 39.1m in 2017 (see analysis).

Next Transformation

The government has recognised the challenges of remaining regionally and internationally competitive. In response to this, it launched a series of development policies to transform the economy with an emphasis on innovation, high-tech industries and value-added production.

In July 2016 the government launched Thailand 4.0, a 20-year economic strategy to move the country towards high-tech, innovative and digital industrial development that is less labour intensive. The initiative highlights 10 industries as having the potential to promote development. Five of these are so-called First S-Curve industries, identified as sectors that have a solid base, including next-generation automotive manufacturing, smart electronics, affluent medical and wellness tourism, agriculture and biotechnology, and food for the future. Automation and robotics, aviation and logistics, biofuels and biochemicals, medical hub, and digital economy have been highlighted as New S-Curve industries and alternative growth drivers. More broadly, the strategy focuses on supporting small and medium-sized enterprises (SMEs), improving the ease of doing business, bolstering skills development, reforming the tax structure and state-owned enterprises, and developing infrastructure as well as a digital economy. Pursuit of the latter target is evidenced by the establishment of supporting government bodies: the Digital Economy Promotion Agency, Digital Government Development Agency and Electronic Transactions Development Agency (see Trade & Investment chapter).

Macro Recovery

In its April 2018 Economic Monitor for Thailand, the World Bank reported that GDP growth accelerated to 3.9% in 2017, from 0.91% in 2014, 2.94% in 2015 and 3.23% in 2016. This was the fastest expansion since the 7.24% recorded in 2012, which was driven by strong global growth supporting increased export revenue and a modest recovery in private consumption. Thailand’s exports also picked up pace in the second half of 2017 to exceed market expectations, with gross exports rising by 7.5%, the largest expansion recorded since 2011, supported by rising services exports in tourism, which accounts for 12% of GDP.

Some key players speculated that the death of King Bhumibol Adulyadej in October 2016 – which sparked a year-long period of public mourning – would weigh on tourism. On the contrary, tourist arrivals rose by 8.8% in 2017 to 35.4m, while sector revenue increased by 12% to BT1.8trn ($52.1bn). Growth continued into 2018, with the BOT reporting a 16.3% year-on-year (y-o-y) surge in visitors in the first quarter of the year.

Agriculture Boost

Agriculture, which recovered from severe droughts in 2015 to register a 6.2% increase in output in 2017, also contributed to economic recovery. Although agricultural prices fell by 6.1% as global rubber and palm oil prices contracted, rice paddy production and exports jumped, with the BOT reporting that rice exports rose by 17.5% to a record high of 11.6m tonnes in 2017, while export receipts grew by 12.8% to BT175bn ($1.5bn), from BT155bn ($4.5bn) in 2016.

Manufacturing also recorded a strong performance in 2017, with growth accelerating to 2.5%, according to the World Bank. Manufacturing exports, which account for 88.1% of the total export base, rebounded from a 1.2% contraction in 2016 to expand by 10.3% the following year. Automotives and electronics tied as the biggest export earners in 2017: the former rose by 2.6% and the latter by 10%, with both hitting $35.6bn.

Rubber and seafood, agricultural and manufacturing mainstays, also improved: raw rubber export receipts grew by 31.5% to BT205bn ($5.9bn), while manufactured rubber product exports expanded by 36.3% to BT186bn ($5.4bn). Canned fish and crustacean exports increased from BT125.8bn ($3.64bn) in 2016 to BT126.2bn ($3.65bn) in 2017, and raw crustacean export values and volumes rose by 3.2% and 4.3%, respectively, to BT39bn ($1.1bn) and 134,400 tonnes. Although the trade surplus moderated from BT663bn ($19.2bn) in 2016, it remained healthy in 2017 at BT378bn ($10.9bn), as imports grew by 10.7% to BT7.63trn ($221bn).

Retail & Finance

The year 2017 also marked a turnaround for retail and financial services. The wholesale and retail sector grew by 6.3% in 2017, its fastest rate since 2012, supported by a modest uptick in private consumption and higher tourism numbers.

In January 2018 Thailand’s consumer confidence index rose from 79.2 the previous month to 80 – its highest level in 36 months – with the University of the Thai Chamber of Commerce reporting that confidence is supported by optimistic GDP, exports and the tourism outlook. Although households remain highly leveraged, which could weigh on retail growth and private consumption in 2018, the central bank has been working to tighten consumer lending. This should lead to further improvements in the asset quality of the banking sector after a mixed but broadly positive performance in 2017 (see analysis). Indeed, banking has also benefitted from macroeconomic recovery, with sector assets rising to BT18.8trn ($544bn) as of January 2018, up 5.26% y-o-y, while lending growth accelerated to 4.4% in 2017, up from 2% in 2016 and 4.3% in 2015.

Meanwhile, the SET Index increased by 13.66% y-o-y to 1753.21 and closed at an all-time high of 1778.53 points on the first day of trading in 2018. Brokers project that the market could reach 1900-2000 points in 2018, as authorities move to establish Thailand as a regional capital markets centre, supported by moves to shorten SET’s settlement cycle, promote sustainability among listed companies and regulate the nascent cryptocurrency industry (see Capital Markets chapter).

Debt Risks

Although the value of NPLs rose by BT43.4bn ($1.3bn) and the NPL ratio grew from 2.83% in 2016 to 2.91% in 2017, this was much slower expansion than seen in previous years. Meanwhile, the ratio of special-mention, or distressed, loans eased from 2.63% in 2016 to 2.55% in 2017. Consumer debt also improved, with the debt-to-GDP ratio abating from 79% in 2016 to 77.5% in 2017. Consumers remain highly leveraged, however, with small business defaults and unsecured lending weighing on consumption growth (see analysis).

Despite the increase, stakeholders including the BOT have reported that this number likely peaked in 2017, and the banking sector remains stable and well placed to manage potential external volatility. The World Bank reported that the external debt-to-GDP ratio in Thailand was lower than in the rest of the region in 2017, though the ratio of capital to risk-weighted assets remained above BOT requirements (see Banking chapter).

Inflation & Interest

Headline inflation remains stubbornly low, at 0.7% in 2017, which is below the BOT’s target of 1-4%. The consumer price index shows subdued inflation in recent years, falling from 2.2% in 2013 to 1.9% in 2014, before 2015 saw 0.9% deflation and 2016 recorded a moderate rebound to 0.2% inflation.

Subdued inflation with no clear indication of imminent change caused the BOT to keep accommodative policies, according to the World Bank. In May 2018 the BOT’s Monetary Policy Committee decided to maintain the policy rate at 1.5%, which has not changed since April 2015. A rate increase is unlikely to occur in 2018 despite the baht’s 10.1% appreciation against the US dollar in 2017, closing the year at BT32.54:$1. The value of the baht increased by a further 4% between January and mid-March 2018 to BT31.10:$1, a four-year high.

This puts Thailand at heightened risk of external volatility and US trade protectionism, as it is among the 16 countries identified by the US as having an excessive trade surplus. The country remains at risk of being added to a watch list for currency manipulators, despite BOT assertions that Thailand does not make foreign exchange interventions to bolster trade competitiveness (see Trade & Investment chapter).

Infrastructure Agenda

Although the country will likely remain dependent on exports to drive growth, medium-term expansion should benefit from an anticipated surge in infrastructure spending. In January 2017 the government announced plans to develop $20bn of new infrastructure projects, unveiling seven big-ticket programmes, each worth more than $1bn.

Most of these will be developed through public-private partnerships (PPPs), including the $4.3bn highspeed rail line connecting Bangkok to Rayong in the EEC, a $2.3bn highway connecting Bangkok to Hua Hin in the Gulf of Thailand and three integrated light rail projects in Bangkok worth a combined $9.1bn. An additional railway worth $1.2bn will extend Bangkok’s rail network to its primary international hub, the Suvarnabhumi International Airport. The airport is also slated for upgrades: the government awarded a $332m contract to a joint venture between Thailand’s Power Line Engineering and China Construction Engineering Corporation with the aim of boosting annual passenger arrivals from 48m in 2016 to 60m by 2019 (see Transport chapter).

EEC Priorities

Non-PPP projects include a highspeed rail line connecting Bangkok to China’s Yunnan Province via Laos, which received Cabinet approval in July 2017. The plan’s first $5.5bn phase will reach the north-eastern province of Nakhon Ratchasima, set for operation by 2021. There will also be a $5.7bn non-PPP upgrade and expansion of the U-Tapao airport, serving Pattaya and Rayong. This and broader short-term infrastructure projects are part of plans for BT1.5trn ($43.4bn) of public and private investment into developing the EEC, highlighted by the government’s February 2018 EEC Act, which envisions transforming the heartland of Thailand’s existing automotive and chemicals industries into an advanced, high-tech manufacturing centre. Industrial and aviation investment in the EEC have largely contributed to the resurgence in FDI commitments in 2017 (see Trade & Investment chapter).

Public Spending

Thailand maintained expansionary policy in 2017 as the budget deficit reached 2.8% of GDP, its highest level since 2009. Public revenue as a share of GDP eased from 19.4% in 2016 to 18.1% in 2017, as the government rolled out corporate taxes and incentives to promote retail and private consumption.

Public expenditure as a share of GDP also moderated from 22.1% in 2016 to 21% in 2017, while plans to significantly increase capital expenditure did not materialise: it grew by 2.9% to represent 6.5% of GDP. This performance was partly attributed to lower disbursement of the investment budget, particularly on large projects, resulting from delays in procurement and approvals. Similarly, the Thailand Development and Research Institute highlighted in May 2018 that BT1.6trn ($46.3bn) was expected to be disbursed between April and September that year, with one-third going towards investment. The institute forecast an increase in public investment of 8% in 2018 after a 1.2% contraction in 2017.

Thailand has room for more fiscal stimulus, according to the World Bank, as the public debt-to-GDP ratio increased only marginally to 46% in 2017, far lower than the government’s threshold of 60%. The cost of debt financing has also remained low, with interest payments comprising 1.2% of GDP and less than 5% of total spending in 2017. With the country’s debt-toGDP ratio expected to remain stable – even as planned stimulus measures have amounted to 1-1.5% of GDP between 2017 and 2019 – Thailand has an opportunity to increase public investment in large-scale projects that will be critical for long-term economic growth.

However, disbursement and public financial management remain challenges. Although the authorities plan to boost capital spending by 15% during FY 2017/18, which ends in September, disbursement in the third quarter of 2017 was 13.2% of total budgeted expenditure, well below the government target of 21.1%.

Innovation Paradox

Innovation and productivity gains in manufacturing and services are critical for strong, sustainable economic growth. However, the World Bank reported in its “Thailand Economic Monitor” for April 2018 that outside of tourism and health, services productivity has stagnated. Furthermore, the country has had low levels of so-called creative destruction – turnover that enables productive and innovative firms to enter the market and thrive. Productivity remains highest in manufacturing, which accounts for 15% of the 39m-strong workforce. However, technological transformation, rising connectivity, an ageing population and a scarcity of high-tech skills pose a threat to competitiveness.

Indeed, Thailand faces an innovation paradox: while returns on research and development (R&D) are high, actual investment in R&D is relatively low compared to the region. Past policies to boost R&D have yielded limited results, with domestic spending, patents, and the number of science and technology professionals falling behind that of Malaysia and China. Thailand ranked 51st out of 128 countries on the Global Innovation Index in 2017, and firms often cite difficulties finding skilled labour – including IT professionals and English speakers – as key obstacles to productivity growth.

Thailand 4.0

In response to these challenges, Thailand 4.0 outlines a number of strategies to boost R&D expenditure to 4% of GDP per year, increase GDP growth to 5-6% by the year 2021 and bring per capita income up to $15,000 by 2032. Under its social well-being pillar, the initiative intends to reduce social disparity by nearly 25% by 2032, transform at least 20,000 households into smart farms by 2021 and boost Thailand’s score on the human development index from 0.72 to 0.8, putting it within the top 50 countries globally, by the mid-2020s. The plan also sets goals for educational reform, calling for five Thai universities to rank among the world’s top-100 higher education institutions by the mid-2030s.

In addition to the aims of Thailand 4.0, the World Bank recommends further reforms, such as strengthening competition policy, liberalising services, establishing a national data strategy, improving intellectual property rights, and investing in training and skills development.

2018 Projections

In May 2018 a Reuters poll found that macroeconomic growth maintained momentum in the first quarter of 2018, with the median estimate for quarterly growth at 4%, or a seasonally adjusted 1.05% ranging from 0.7% to 1.4%. If accurate, this would be the fastest pace in three quarters. This forecast is supported by the BOT, which reported that merchandise exports rose by 6.3% y-o-y in the first quarter of 2018, and 6.7% excluding the value of gold, supported by rising external demand for chemical products, automobiles and parts, and electronics including air conditioners, mobile phones and integrated circuits.

First quarter 2018 results surprised many stakeholders, with the National Economic and Social Development Board (NESDB) reporting GDP growth hit 4.8% y-o-y, its highest level in five years. Meanwhile, exports, consumption and government spending increased by 6%, 3.6% and 1.9%, respectively. Merchandise exports grew by 6.7% over the period, supported by value-added tech manufacturing: capacity expansion among hard drive manufacturers was an important driver of this, while demand for mobile phones and integrated circuits also contributed to positive performance.

On the back of these positive results, the World Bank adjusted Thailand’s GDP growth outlook upward in April 2018, increasing its August 2017 projection of 3.6% for 2018 to 4.1%. Reuters reported in the same month that a group of Thai business associations had raised their GDP forecasts for the year, from 3.8-4.5% to 4-4.5%, and the NESDB followed suit, increasing its annual growth forecast from 3.6-4.6% to 4.2-4.7%. In January 2018 the Ministry of Finance announced that it also adjusted this from 3.8% to 4.2%, supported by rising exports and higher public expenditure, with significant investment being channelled into the EEC, putting it on track to meet its Thailand 4.0 development targets.


External volatility and a potential US-China trade war could put both exports and global growth at risk in the near to medium term, and the second wave of a potential trade war could slow Thailand’s exports and increase inflation as supply chains are disrupted. Thailand’s medium- and long-term economic outlook remains bright, as exports adjust and investment continues to rise. Growth in the sector is expected to be supported by regulatory reforms including the EEC Act, which was laid out in February 2018 and established a set of attractive investor incentives for EEC projects.