Thai economy unlikely to rebound soon

Thai economy unlikely to rebound soon

Khaosan Road, which is usually bustling with tourists, remains empty as the pandemic strangles foreign arrivals. (Photo: Pornprom Satrabhaya)
Khaosan Road, which is usually bustling with tourists, remains empty as the pandemic strangles foreign arrivals. (Photo: Pornprom Satrabhaya)

As 44.5% of the world population has received at least one dose of Covid-19 vaccine, most economies are looking forward to a return to pre-pandemic economic levels by 2022. Thailand is certainly one of them. We beat the global average with 45.7% of our population receiving the first dose and 26.4% receiving both doses. The government set a target that by year-end, more than 70% of the population will be fully vaccinated, including third booster doses. Will we see a return to the normal economic activities of 2019 by next year? The answer is not yet, and, worse, maybe never.

Last week, the Asian Development Bank (ADB) revised the Asian economic growth outlook by taking into account the spread of the new Delta variant and the success of vaccination. Overall, the average regional economic growth for 2021 has been revised slightly downwards from 7.3% to 7.1% -- owing to the rampant Delta variant outbreak in Southeast Asian countries. But with a speedup of inoculation, economic growth is projected to be higher by one notch -- at 5.4% in 2022. All countries follow that pattern, except Thailand.

ADB has downgraded both 2021 and 2022 Thai GDP growth projections to 0.8% and 3.9% respectively. Previously (about six months ago), ADB projected the economy would grow moderately at 3% in 2021 and achieve a robust growth of 4.5% in 2022. Under the previous projection, by 2022 the economy would be fully restored to (and better than) the pre-pandemic level of 2019. But for this current revised growth projection, ADB foresees that Thailand will not be able to return to its 2019 economic level by the end 2022 as 2022 GDP will be 1.4% less than that of 2019. This conclusion is a very big deal.

It is a big deal because when businesses cannot recover within a three-year period, many of them will be forever perished. Just think of a hotel or a restaurant being deserted for three full years.

Do not blame ADB's economists for downgrading the economy. The World Bank also has a similar opinion -- having revised Thailand's 2021 GDP growth downward to 1% from 3.4% and 2022's growth downward from 3.6% from 4.7% in its October's economic growth projection.

Why such a pessimistic projection for Thailand? I can only guess because I do not know the assumptions used by ADB and World Bank. It could be from these two reasons. First, despite the global success of vaccination, international travel may not resume to its 2019 level in 2022. Countries that rely on foreign tourism income will suffer. As we all know, foreign tourism income accounted for 12% of GDP -- perhaps the highest among Asian nations. Over-reliance on foreign tourists does have a price to pay.

The second reason could be a weakening of domestic demand due to a high level of household debt. By the end of the first quarter 2021, Thai household debt stood at 90.5% of GDP -- the highest in the world for countries with similar per capita income levels. It is estimated that this ratio could rise up to 93% of GDP by year-end. When the economy fully opens up for business next year, consumers will be busy paying off their postponed debt repayments instead of going out shopping.

Next year will be a litmus test for the banking sector as well. The excuse of being affected by Covid-19 will no longer be usable and all debt repayments will resume. This fact applies to both business and individual borrowers. Of course, many debtors will not be able to do so and might have to permanently default on their debts. Therefore, it should not be surprising to see one of Thailand's largest commercial banks made an announcement to leave the troubled banking sector for the greener field of "tech" business.

In my view, 2022 will be the year when reality sinks in and serious adjustments must be made. Many fundamental economic problems are now being cloaked under the excuse of Covid-19. There are three key problems to be solved -- household debt, economic structural adjustment, and government finance.

Household debt will plague Thai economic growth for a long time. If not handled well, it could wreck the economy and put the economy in a long, deep recession period. An example could be seen in Japan where it took 17 years to resolve household debt problems. Japanese household debt peaked at 71% of GDP in 2000 after the financial crisis a few years earlier and bottomed at 57% of GDP in 2017, causing Japan to experience a long economic stagnation period known as the lost decades. With household debt at over 90% of GDP here in Thailand, adjustments will surely be more severe.

The tourism industry is no longer a secured source of income. In 2019, tourism income was 3 trillion baht, equivalent to 17.8% of GDP. One-third of that was from domestic travellers and two-thirds of income was from foreign tourists. If we should lose one-third of such income -- 1 trillion baht -- the money has to come from other sources like the manufacturing sector in order to maintain the size of the economy and Thai citizen's per capita income. Currently, the manufacturing sector generates about 4 trillion baht for GDP which means that the sector has to expand by 25% to replace the potential tourism income loss -- a monumental task for economic structural adjustment.

Government finance is not a small issue for Thailand and, in time, it will surely become a major stumbling block for economic development. A small economy cannot afford to run long-term fiscal deficit. In fiscal year 2020 and fiscal year 2021 (until July), the government borrowed over 2 trillion baht, about 13% of GDP, to cover its deficit. In fiscal year 2022, another 700 billion baht of fiscal deficit is planned. This is why the public debt to GDP level must be raised to 70% of GDP.

Many, including the Bank of Thailand, say that 70% to GDP of public debt is not high by international standards. I will not argue with them now. But when will we see a balanced budget in this country? How many more years will we have to tolerate fiscal deficit and keep adjusting the legal public debt to GDP ratio?

Know this. Ten years ago, household debt to GDP was merely 60.3% -- which was the international average. The figure has now jumped to 90.5% of GDP as of 2021. Once you start debt, you can't stop. It is more addictive than narcotics. For those looking for sunny days after the pandemic, think again.

Chartchai Parasuk

Freelance economist

Chartchai Parasuk, PhD, is a freelance economist.

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