Putting a dampener on Thai recovery
published : 26 Jan 2023 at 05:00
newspaper section: Oped
After three years in which the economy suffered from Covid effects, I am sorry to say that 2023 will not be the year of economic recovery as everyone had hoped. The global economy will still be plagued by inflation threats and several adverse factors such as excessive debt and the Russia-Ukraine war. These negative factors prompted the World Bank to revise its global economic growth prospects downward from 3.0% to 1.7% for 2023. The key point is a marked slowdown from 2.9% growth in 2022.
The GDP growth projection for advanced economies is severely trimmed from 2.2% to 0.5%. China's GDP growth is also lowered from 5.2% to 4.3%. Thailand, whose economy is highly dependent on the world economy, cannot escape this global slowdown and our GDP growth rate projection for 2023 is cut from 4.3% to 3.6%.
I am now working on Thai economic prospects for 2023 for a private research house and my view on the Thai economy is more negative than that of the World Bank, based on weakening domestic purchasing power amid dwindling world demand. However, the 2023 economic picture is not the story for this article. I would rather leave that for another occasion.
While waiting for the main course, may I offer interesting appetisers by way of the three most asked questions from my friends? They are: (1) the direction of the Thai baht, (2) world oil price trends and (3) global and domestic interest movements.
Let me take the second and third questions first as they are easy to answer and I have almost no chance of making mistakes.
World oil prices in 2023 will only go up and up, as supply falls short of demand. Global oil output is projected by the International Energy Agency (IEA), the most authoritative source on energy issues, to increase by 1 million barrels per day.
Last year, the Opec+ group increased members' production output by 4.7 million barrels per day, leaving little room for an increase this year. Furthermore, 0.87 million barrels per day would be cut from Russia's oil supply due to tighter sanctions.
On the other hand, the IEA projects that global oil demand would rise by 1.9 million barrels per day, half of which would come from China. By the holy law of demand and supply, the answer is clear. Some 1,000 energy professionals surveyed by Reuters concur that the oil price for 2023 would average at US$90 (2,957 baht) per barrel. Goldman Sachs came out with a more pessimistic view of 105 dollars per barrel as the research house predicted a 2.3 million barrels per day demand rise.
At the time of writing, world crude is $80.5 per barrel. There is a long way to go for world oil prices to reach $90-100 per barrel. My own instinct tells me that oil price could rise fast in the first half of 2023 after 1.4 billion Chinese citizens have waited three years to travel, and then fall in the second half as major world economies slip in to recession.
Inflation is directly impacted by energy prices. The dip in oil price, from over $100 per barrel in July 2022 to $70 a barrel in December 2022, helped bring down world inflation rates. US inflation dropped from 9.1% in June to 6.5% in December. In response to lower inflation, major central banks decelerated policy interest rate hikes. But in 2023, inflation trends, impacted by rising crude prices, will reverse.
Lawrence Summers, ex-US secretary of the Treasury and ex-World Bank chief economist, warns all central banks against easing up on action to cut inflation. Speaking at the World Economic Forum in Davos, he said the 2% inflation target must be adhered to avoid a larger and more serious recession later.
As of December 2022, US core inflation is 5.71% while the EU's core inflation is 6.18%. If central bank governors agree with Mr Summers, there would be many more rounds of interest rate hikes. I would say that raising the Fed Funds Rate from the current level of 4.5% to 6% is very possible.
Readers should not be surprised if the Thai Monetary Policy Committee raises its 1-day Repo Rate from 1.25% to 1.5% at yesterday's meeting and keeps raising the policy rate for another 50 basis points for the remaining of the year.
So far, two pieces of bad news -- rising energy prices and rising interest rates. How about the Thai baht? Last year, analysts said the baht could reach 40 baht per dollar by end-2022. As of Jan 24, the baht is 32.75 baht per dollar or a 17% appreciation from the lowest point of 38.31 baht per dollar on Oct 19, 2022.
There are two reasons for this appreciation. The first one is the depreciation of US dollars. The US dollar, using the dollar index as representative, depreciated 11% during that time. The second reason is capital inflows which have caused another 6% appreciation of the Thai baht.
Tourism income plays a minor part in baht appreciation. On the assumption of 2 million foreign visitors a month, tourism income would be $675 million a week. But in the second week of January, there was a $5 billion increase in foreign reserves.
The main factor must be none other than capital inflow. Without solid evidence, I can only guess why capital flows into Thailand. My guess is that because international investors have reduced their dollar depreciation risk by moving their money into other currencies, the Thai baht being one of them.
However, this capital inflow trend, in my view, is temporary for three reasons. First, demand for US dollars will rise to pay for the higher cost of crude oil. Second, the Fed will aggressively raise interest rates again causing money to flow back to the US. Third, Thailand is likely to have trade deficits which tourism income may or may not be able to compensate for the trade loss. Even with 1.75 million tourists in November 2022, Thailand registered a $445 million current account deficit. The 14.6% decline in export value for the month of December 2022 is not encouraging news.
Weighing negative forces of re-appreciation of the US dollar against world currencies and the positive force of higher tourism income, the verdict is the Thai baht will depreciate. I am not fully confident about the baht's direction but the chance of baht's depreciation is far higher than an appreciation of the baht, or the baht maintaining its value. But I am fully confident about rising oil prices and interest rates.
Chartchai Parasuk, PhD, is a freelance economist.
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