Thailand's economy continues to face challenges because of long-standing structural factors, including an ageing society leading to labour shortages and market limitations.
Business competitiveness has been stunted by overly rigid economic policies resulting in insufficient investment, and difficult access to credit. This vulnerability is reflected in the strengthening baht index, a credit contraction and high commercial bank interest rates.
The challenges are now even greater in light of US President Donald Trump's tariff crusade. In addition to a minimum 10% import tax on goods from around the world, he announced "reciprocal tariffs" on dozens of countries.
Asian countries that have large trade surpluses with the US have been hit hardest, with Thailand facing tariffs of 36%, which will severely impact the export sector.
Although the latter have been put on hold until early July (except for tariffs on China), the 10% base rate still applies. News that negotiations with Washington have been delayed until Thailand addresses certain "issues" raised by the US is a negative signal.
Recent developments suggest potential de-escalation of the trade tensions, however. China is now considering suspending its 125% tariff on certain US imports. This mirrors similar moves by the US, which recently excluded electronics from its 145% tariff on Chinese imports.
These reciprocal pullbacks reflect how deeply intertwined the world's two largest economies are, with key industries grinding to a halt after the trade war escalated.
For Thailand, we believe the impacts will become clear in the second half of the year, particularly in the third and fourth quarters when the economy may grow by only 0.4% and 0.2% respectively.
EXPORT CONTRACTION
Exports that expanded by more than 10% in the first quarter may contract by double digits in the fourth quarter, resulting in an annual contraction of roughly 3%. The hardest-hit industries will include computers and parts, machinery, agricultural products, gems and rubber, with problems rapidly spreading to other sectors.
The global economy is entering a period of high volatility, with growth expected to slow by at least a full percentage point to 2.5%.
Some countries have already prepared for the global power shift. China is expanding its markets abroad while strengthening internally through investment and focusing on consumption, in addition to a potential significant devaluation of the yuan.
Germany has a new chancellor who abandoned overly restrictive fiscal discipline and established a €500-billion fund for infrastructure investment. The US will also be affected, with growth potentially slowing from 1.9% to 0.9% due to increased costs.
Looking ahead, while there are signs of potential de-escalation by the US and China, significant uncertainty persists. Our main hypothesis is the US effective tariff rate will likely decline from 28% to around 15%, which would provide some relief.
The unpredictability of trade negotiations continues to weigh on global markets. If talks stall, the situation could intensify and possibly evolve into a currency war, especially if China decides to let the yuan fall.
According to Barclays Research, the yuan could depreciate by up to 20% in a worst-case scenario. Such an outcome would spread throughout the global financial system, challenging the dollar's status as the primary currency and potentially causing the global economy to fragment into multiple poles.
As a country dependent on international trade, Thailand needs to make major adjustments. The government should expedite negotiations with new partners, especially the European Union. If successful, a Thai-EU pact could increase trade value between the two markets by 15-20% over 3-5 years, and increase the trade proportion from 7% now to between 10% and 15%.
Thailand should also commit to investing up to 4 trillion baht (20% of GDP) in large-scale infrastructure, including roads, bridges, rail systems and ports. As well, it must improve institutional infrastructure by reducing redundant procedures. These investments would increase economic growth by between 1% and 1.5% in the short term.
RATE CUTS LIKELY
The Bank of Thailand may need to cut interest rates three more times this year to mitigate the impact of an economic slowdown. Low-interest loans and tax deductions for exporters could also help. In addition, Thailand should cooperate with other affected Asean nations to address the low intra-regional trade rate -- only 21% of total trade compared with 60% in Europe.
For the business sector, especially exporters, finding new markets is urgent. Domestic businesses should delay new investments in the short term. The public should prepare for the coming economic tsunami by saving more and developing new skills, particularly in technology.
Investors can expect the Stock Exchange of Thailand will fluctuate with volatility. Trading will remain cautious as investors closely monitor trade negotiations.
We recommend a "selective buy" based on two main themes:
- Stocks expected to be Thai ESGX fund targets with good profit growth, a strong financial position and consistent dividend payments. We recommend ADVANC, BBL, BDMS, CPALL, PTT, BCH and BTG.
- Fundamentally cheap stocks with SET ESG ratings of A or better, good profit growth, strong financial position and potential for regular dividend payments. We recommend BJC, CPF, AP, HMPRO and OR.
For investors who can accept high risk, we recommend stocks of firms that obtain most of their revenue at home and are less exposed to global volatility, especially if they can set prices and pass on increased costs. These are also expected to benefit from falling oil prices and interest rates, including BCH, CPALL, CPAXT, GULF, MTC, OR and TRUE.
Meanwhile, we recommend avoiding groups directly impacted by exports to the US, including electronics, automotive, rubber, agricultural products, jewellery, as well as groups indirectly affected, including industrial estates, tourism and banking.
Dr Piyasak Manason heads the Investment Strategy Department, INVX-Research Group, at InnovestX Securities
