Economic Outlook 2019: The Thai Economy is Not as Easy as It Seems!!!

Many questions arose in 2019 about whether this year would mark the beginning of an economic recession in 2020. This concern stems from the ongoing trade war between China and the United States, which remains unresolved, and the lackluster performance of the Chinese economy, which has shown a sharper and faster slowdown than expected towards the end of last year, affecting the purchasing power of Chinese consumers.

How will the trade war progress?

According to Mr. Patcharapoj Nantharamas, Senior Director of Global Business Development and Strategy at Krung Thai Bank, the impact of the trade war began to be felt broadly in the last four months of 2018 (after September 2018) due to the U.S. imposing a 10% import tariff on over $200 billion worth of Chinese goods. This has created pressure that is expected to affect the entire year and could intensify, as the tariff rate may rise to 25% if the U.S. and China cannot reach an agreement by March. However, if negotiations are successful, the situation may ease in the latter half of the year, and it is not expected to lead to a recession in the global economy in 2020.

2019: The Global Economy is in a Late Cycle Recovery Rather than a Recession

The global economic growth rate is expected to decline, with the International Monetary Fund (IMF) predicting a growth rate of 3.7% for 2019, stabilizing at the same level in 2020. This is due to the gradual winding down of U.S. economic stimulus policies in 2019, while interest rates are on the rise, exposing the global economy to future risks.

Analysts at Krung Thai Bank forecast that from 2019 to 2020, the global economy will be in a Late Cycle Recovery, which is the tail end of the recovery from the major economic crisis that occurred a decade ago. As various economic stimulus policies in the U.S. and Eurozone are set to expire, growth will not accelerate beyond potential as seen in the past 1-2 years, and there will likely be increased volatility in financial markets, capital markets, and exchange rates.

Watch for Economic Risks from China Directly Affecting Thailand

One key area to monitor is the Chinese economy, which may impact Thailand more significantly, as China is Thailand's number one export market, accounting for 12% of total exports, and the largest source of tourists, making up 28% of all foreign visitors. In the latter half of 2018, both exports and the number of tourists from China noticeably declined.

Several indicators suggest that in the last four months of 2018, the Chinese economy slowed down more rapidly and severely than anticipated, particularly with a 11.7% drop in automobile sales in October, as Chinese consumers postponed luxury purchases. The manufacturing sector also experienced a slowdown, especially in new export orders, due to the U.S. beginning to impose tariffs on $200 billion worth of Chinese goods. It is expected that the Chinese manufacturing sector will continue to slow down at least until the first quarter.

Thailand is expected to be affected by the slowdown in the Chinese economy, particularly in sectors such as cosmetics, jewelry, and exports in automotive and sports goods, which may also see declines.

The Thai Economy in a Rising Interest Rate Environment

The Global Business Development and Strategy division of Krung Thai Bank has revised its GDP growth forecast down to 4.1% from an earlier estimate of 4.3%, reflecting the slowdown in the global economy, which is directly impacted by the trade war. The driving forces for Thailand's economy this year are expected to come from public investment, projected to grow by 7.2%, and private investment, expected to grow by 5.5%, while private consumption remains stable at 4.3%, the same as last year.

For Thai exports this year, the forecast has been adjusted to 4% from an earlier expectation of 7-8% growth, while the tourism sector is expected to grow by 4.5%. Close attention must be paid to whether the number of Chinese tourists will pick up in the latter half of 2019.

The GDP estimate is based on the assumption that elections will occur in the first half of the year, which would facilitate the timely execution of large-scale projects and bolster investor confidence, allowing the Thai economy to grow as targeted.

As for interest rates, having passed their lowest point and now on the rise, Mr. Kittipong Ruenthip, Deputy Director of Global Business Development and Strategy at Krung Thai Bank, predicts that the Bank of Thailand (BOT) will raise the domestic policy interest rate to 2% in the second half of 2019, after maintaining it at 1.5% for nearly four years.

This increase to 2% is considered low compared to the U.S. Federal Reserve's expected rate of 3% this year. In the long term, the BOT's policy interest rate is expected to reach 3% in 2020-2021, but this should not be a cause for concern as this cycle's rates are much lower than in previous cycles from 2004-2021.

**According to a study by the BOT, if the policy interest rate changes by 1%, the MLR interest rate will change by an average of 0.33-0.48%.**

Monitoring Real Estate Risks Amid BOT's LTV Measures

The Bank of Thailand (BOT) has implemented additional regulations on housing loans effective April 1, 2019, setting a ceiling on loans relative to collateral value, not to exceed 100%, known as the Loan-to-Value Limit (LTV). Buyers seeking to purchase a second home or properties valued over 10 million baht will see reduced borrowing capacity and must adhere to down payment requirements set by the BOT.

This new criterion is expected to absorb about 9% of excess credit in the real estate sector and control new loans by approximately 15 billion baht.

The LTV is anticipated to affect homebuyers in three scenarios:

1. Borrowing the same amount at the same price: Buyers who are financially ready will not see an impact on units sold or home prices, but new loan amounts may decrease by 4%, valued at 13.243 billion baht.

2. Borrowing the same amount at a reduced price: Buyers who need to purchase will see home prices drop, and new loan amounts may decrease by 9%, valued at 26.390 billion baht.

3. Delaying home purchases: Buyers lacking financial readiness or purchasing for investment will lead to reduced units sold and home prices, with new loan amounts decreasing by 22%, valued at 65.733 billion baht.

To mitigate impacts, businesses should diversify their target groups, including first-time home buyers, and foster growth in new markets, increasing the proportion of rental office space and expanding into industrial estates.