International headwinds reverse gains for Thai economy

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Despite rapidly rising inflation driven largely by food and energy costs, some economic research houses have recently revised up or at least maintained their economic growth projections for Thailand for the year.

Siam Commercial Bank’s Economic Intelligence Center (EIC) recently revised its forecast for economic growth to 2.9% this year, up slightly from the previous projection of 2.7%, citing a recovery of tourism and services.

The Kasikorn Research Center maintains its economic growth projection of 2.5-2.9%, citing the positive impact of the country’s full reopening to foreign travelers from June 1.

tailwind: tourism

The almost consensual view among economists is that the country should gain from reopening its doors to tourists. The COVID-19 quarantine and related visa application rules have been removed.

The number of tourist arrivals has so far grown faster than expected by many observers.

“We expect Thailand to welcome 7.4 million foreign tourists this year, up from a previous estimate of 5.7 million,” said Somprawin Manprasert, chief economist at EIC.

As popular tourist destinations, such as Bangkok and Pattaya, relax face mask rules, the bustling nightlife of the past has started to return.

The removal of cannabis from the list of narcotics has, arguably, contributed in part to accelerating the recovery of the tourism industry. Although the government has announced that marijuana will be restricted to medical and not recreational use, authorities are apparently turning a blind eye to local stores and entertainment venues selling recreational marijuana.

Many are still cautious about the economic impact of decriminalizing cannabis, despite Public Health Minister Anutin Charnvirakul, who led efforts to remove cannabis from the narcotics list, saying it would boost the local economy.

“I don’t see it as a cash crop, but it’s just an alternative and only big companies will benefit from this business,” said Somporn Isvilanonda, senior researcher at the Knowledge Network Institute of Thailand.

He warned that if the Thai government allowed widespread marijuana use, trading partners unconvinced of its safety could retaliate against Thailand.

Critics say the cost of treating those who might suffer from cannabis use could outweigh the gains from cannabis use. There are also fears that crimes or car accidents related to cannabis use could cost society dearly.

Tailwind: export of food products

Many countries are suffering from the global food crisis caused largely by Russia’s invasion of Ukraine, although Thailand is fortunate to be one of the major food exporters.

“Thai exporters stand to gain from exporting processed foods,” Somporn said.

Many countries have banned food exports as they try to calm hot domestic prices.

Malaysia recently banned live chicken exports to Singapore, prompting importers to buy more frozen chicken from Thailand. India has restricted its wheat exports and Indonesia had previously banned the export of cooking palm oil.

Market watchers are now wondering if the price of rice will skyrocket like wheat, as rice could become a grain substitute for wheat or other high-priced grains. So far, the price of Thai rice has not changed much in the world market compared to last year. Due to abundant global supplies, the price of rice remains low.

“Importers bought more Indian rice because of its much lower price than Thai rice,” Somporn said.

Thai farmers could benefit from food prices if they can cut costs amid rising fertilizer and feed prices. Russia and Belarus are the main exporters of fertilizers, but the ongoing war and economic sanctions imposed on them have disrupted the supply of fertilizers needed to increase crop yields and the grains needed to produce food. for animals.

Inflation hits food makers and sellers hard

Headwind: high energy prices

Rising energy prices have affected manufacturers, exporters, farmers and consumers.

The government subsidized energy prices to keep diesel and cooking gas prices below market prices, resulting in a deficit of almost 100 billion baht for the Petroleum Fund of the State. The government is committed to keeping the price of diesel at a maximum of 35 baht per liter until the end of this month and may later allow it to reach the next ceiling target of 38 baht.

The government has tried to seek the cooperation of oil and gas refineries as it lacks cash. The government has argued that companies make high profits from their refining operations so they can contribute part of their earnings to the Oil Fuel Fund, which is a way to keep prices low.

But such a decision is likely to have a negative impact on investor confidence, as listed companies are required by law to protect the interests of shareholders. The government is trying to strike a balance between market stability and investor confidence.

The Thai government is not alone in facing such a dilemma. The US government is also asking for contributions from energy and oil companies.

High inflation fueled by energy and food prices is pinching both businesses and consumers.

The situation is also superimposed on the weakening of the baht against the US dollar. The baht recently dipped to around 35.5 on the dollar from 32 to 33.

A weaker baht will make oil and gas imports more expensive, putting more pressure on inflation that has already been high for 13 years.

Rapidly rising interest rates in the United States also led to capital outflows as investors opted to sell Thai stocks and bonds.

The US Federal Reserve raised its benchmark rate from 1.5% to 1.75% after aggressively raising rates by 75 basis points on June 15.

The widening of the gap between US and Thai interest rates, after the Bank of Thailand (BOT) maintained its policy rate at 0.5%, contributed to capital outflows from Thailand and, in turn , further weakened the baht.

In this context, the BOT is expected to raise rates at the next meeting of the Monetary Policy Committee in August.

The BOT faces a difficult juggling task, as on the one hand it has to keep the interest rate low to accommodate economic growth, which has not fully recovered from the fallout from COVID-19, but on the other hand, it has to deal with rising inflation and a weakening exchange rate.

Headwind: external factors

As a net energy importer, Thailand has less leeway on oil, gas and electricity prices to reduce costs for manufacturers and consumers.

Many countries are waiting to see how the war in Ukraine will develop. If the two conflicting parties settle their disputes quickly, it would be good for the global and local economies, otherwise, they would have to endure a long period of hardship.

The COVID-19 pandemic could still pose a threat as lockdowns are relaxed, face masks are no longer required in public places, and large public gatherings are permitted. Economists and business leaders still view COVID-19 as a threat to economic recovery.

“A slowdown in the global economy will start to hurt Thai exports. The global economy is facing headwinds from the war in Ukraine, worries about shortages of food and basic commodities, high inflation, rate hikes, supply chain disruption in the manufacturing sector and the slowdown in the Chinese economy,” said Sanan Angubolkul, President of the Thai Chamber of Commerce.

By Thai PBS World’s Business Desk

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