Thailand: Trade and growth jitters
- Trade will remain a drag in 2019, with sub-4% GDP growth likely
- Weak exports also suggest slower accumulation in the current account surplus…
- … restraining further appreciation in the THB
- Softer growth and weak inflation lower the scope of follow-up hikes by the BOT
Despite this late-year improvement in the trade balance, the Thai trade sector faced a challenging 2018. Export growth (customs) moderated to 6.9% YoY from 10% year before. Three sectors emerged as the key drags - electronics halved to 7% in Jan-Nov18 vs 14% in 2017 and slower agro shipments (7% vs 12.5%) – which cumulatively make a third of total exports. Automobile shipments kickstarted the year on a strong note with 1H rise at 15%, but slowed to 1H rise to 2% in 2H, reflecting the broader slowdown in the sector in the regional sales.
Imports was relatively steady at 13% in 2018 vs 2017’s 14% in 2017. Making half of Thai purchases, raw material and intermediate goods imports accelerated to 21% YoY, along with a strong pick-up in consumer goods. This saw the trade balance narrow sharply to USD2.4bn down from USD15bn year before, posing a worry for the current account dynamics.
Three reasons are behind the underperformance in Thai external sector, which we suspect will spill over into 2019 as well. First, despite positive newsbytes from the US-China trade negotiations, a downturn in regional PMIs since mid-2018 year set the stage for a weak final quarter trade performance in the region. 4Q18 exports data from South Korea, Taiwan, Singapore, China, Indonesia etc. have disappointed. 2019 is also off to a sluggish start as South Korea’s exports dropped 14.6% YoY in the first 20 days of January. This essentially reflects caution amongst regional manufacturers over pipeline export orders, even as lower oil lifts pressure on the input costs and profit margins. Add to this, high-frequency data continues to point towards slower growth in China, with the latter amongst the top export destinations for Thailand. Thai exports to China are already moderating, up 3.2% YoY in January-November 2018, vs 25% rise in 2017. Our China team expects further slowdown in China’s growth this year. A pick-up in export demand from Asean9 were insufficient to compensate for a slowdown in purchases from the US and China last year (see chart).
Second, part of the slowdown in regional exports reflects a tech-driven downturn, due to a maturing electronics cycle. This applies for North Asian economies and other regional players entrenched in the global supply chain, including Thailand. Recent profit warnings from Apple, Samsung and Foxconn herald tough times, highlighted by price cuts and slower capex plans. Absence of new product lines and inventory overhang have hurt the consumer electronics sector, particularly mobile phones and computers. The slump is likely to extend this year in the absence of fresh catalysts, before the broader 5G network rollout revives activity towards late-2019. While this sector has not yet fallen under the scrutiny of the China-US trade dispute, any deterioration in the bilateral talks or widening of the targeted product net will be a fresh blow for regional trade.
Finally, THB outperformance might hurt trade competitiveness at the margin. Fortunately, the baht drew the brakes on its rally towards late 2018, leaving the currency flat on the year. On relative basis i.e. effective exchange rate, the currency was up 3.6% on nominal basis and 2.1% on real basis last year. Into 2019, strong portfolio inflows have hoisted the baht back as the outperformer, up 2.2% vs USD. Another bout of appreciation on NEER/REER basis will be an additional headwind for exporters.
Risks to growth and current account
Real GDP growth slowed to 3.3% YoY in 3Q18 from a high of 4.8% in 1Q18. Apart from weaker trade data, sentiment indices softened towards late-2018, even as higher fixed asset investments led by public sector participation is set to improve, helped by pre-election and broader infrastructure boost. Nonetheless, incoming data has increased the scope of a sub-4% GDP growth number in 4Q18. Considering evolving risks, we maintain our conservative growth forecast of 3.8% for 2019, factoring in the likelihood that might slow as the short-term lift to investments passes after the elections and manufacturing slows due to weaker exports. Tourism earnings have also been weaker, with focus on recent measures to boost travel earnings.
At the same time, CPI inflation has fallen below 1% YoY for the second straight month in December while core inflation inched lower to 0.7% in December from 0.8% in June. A pullback in global oil prices also point to an absence in supply-side pressures, reinforcing our expectations of a pause in policy rates this year.
A narrower current account surplus is in the offing. As the chart below highlights, the Thai goods and services primarily drives the current account balance. Following the sharp correction in the 2018 trade surplus, the current account balance is also likely to moderate to ~7-7.5% of GDP from 11% in 2017.
Despite this sharp narrowing, this external balance is still relatively stronger than few of the regional peers, which partly explains the THB’s recent outperformance. However, given the risks to the external sector and headwinds to the tourism sector due to a slowing global demand, suggest that the current account balance will moderate further this year, potentially within 6.0-6.5% of GDP range. This and rates on pause, we suspect, will restrain the Thai baht’s ability to appreciate further this year.
The Thai Royal decree was issued yesterday to authorise the elections in 2019, which was followed shortly by a confirmation by the Election Commission. Elections will be held on March 24, for the first time since a coup was announced in 2014. Separately, as the ASEAN chair, Thailand will hold the summit in mid-2019, just after the incoming government assumes office.
To read the full report, click here to Download the PDF.
The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.
DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422.