Current account still healthy

Current account still healthy

Tourism collapse has hit Thailand's services account hard, but recovery seen in 2021. By Fitch Solutions

Thailand's current account surplus is set to shrink in 2020 before recovering gradually through 2021. In the period from January to August, the cumulative current account balance shrank by 38.2% year-on-year as the services account proved a more significant drag than we had anticipated.

Indeed, our downward forecast revision for a shallower current account surplus from 6% to 4.6% of GDP in 2020 can be largely attributed to an expected bigger contraction in services export growth. Goods exports in the first half of the year were down by 8.2% year-on-year, but services export value fell 44.7%, reflecting the collapse in tourism amid border restrictions, with arrivals down 79.5% year-on-year in the period from January to October.

We believe there will be only a minimal recovery in tourist arrivals through the fourth quarter of 2020. As well, recovering demand in China, which accounts for 11-12% of Thailand's goods exports, will be offset by continued weakness in the European Union (accounting for 8-9% of goods exports). As such, we have revised down our current account surplus forecast for 2020, from 6% of GDP to 4.6%.

That said, we expect a combination of a gradual recovery in external demand and subdued domestic demand for imports to drive a recovery in the current account surplus to 5.8% of GDP in 2021. Economic recoveries in the euro zone, the US, Japan and across Asia will all buoy demand for the country's goods exports. With Thailand running a trade surplus, it is likely to benefit from a recovery in global trade and demand in 2021.

We also anticipate a tentative recovery in tourism, particularly through the first half of 2021, as the distribution of a Covid-19 vaccine picks up. We also believe the domestic demand outlook will remain sluggish, which will curb import demand. Indeed, policymakers have faced challenges encouraging domestic investment and boosting household incomes in 2020, given that both have been hit hard because of lost tourism revenues.

In particular, household employment has suffered because tourism and travel account for around one in five jobs, with a large share of employment in the "grey" economy. Given the uncertainty around the recovery in tourism, we expect savings rates to remain high and the investment rate to lag through 2021, bolstering the current account surplus.

The widening of the current account surplus in 2021, combined with strong external fundamentals, means the narrowing of the surplus in 2020 will be of limited risk to Thailand's external position.

Indeed, despite the decline in the current account surplus, foreign exchange reserves have risen 12.6% for the year to Nov 20. We forecast import coverage to stand at 13.1 months by the end of 2020, well above the figure for many other emerging markets. Indeed, reserve assets more than cover "hot money" liabilities -- Thailand is a net creditor, with a net international investment position of $42.4 billion as of June 30 this year.

Similarly, the country's gross external debt poses low risks, as only 36% of it is short term in maturity and this is more than covered by the country's reserves (see chart). Some businesses with high external debt burdens are likely to face tougher financing conditions, particularly if revenues have plunged, but we highlight that the Bank of Thailand has provided liquidity to bond markets and through banks to ease financial conditions.

This commentary by Fitch Solutions is not a comment on Fitch Ratings' credit ratings. Fitch Ratings analysts do not share data or information with Fitch Solutions Macro Research.

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