Thailand: US, EU exposures amid slowing global growth

Thailand’s economic recovery is supported by reopening tailwinds, but external headwinds are rising, amid growing recession fears.
Group Research, Chua Han Teng13 Jul 2022
  • Thailand’s economic growth cycle has been largely synchronised with the advanced economies
  • Goods trade remains linked with advanced economies’ prospects, notably US, despite China’s rise
  • Thailand is more exposed to weaker US and European consumer demand than investment
  • Thailand’s portfolio investment position is vulnerable to US financial market risk-off
  • Net foreign direct investment inflows to face headwinds from global economic weakness
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Thailand’s economy is starting to recover after suffering from the COVID-19 pandemic for around two years. We expect the Thai economy, notably services, to benefit from a shift to endemic and the return of foreign tourists. Thai goods exports were the bright spot during the crisis, as they benefitted from the strong recovery in advanced economies, especially the US and Europe. However, this narrative is starting to shift negatively.

External headwinds are rising. There is a strong consensus that the US and the European economies are slowing, with rising recession fears. The slowdown is driven by a combination of aggressive Fed tightening to tackle high inflation in the US and the geopolitical conflict in Europe. Thailand, a relatively open economy, is likely to be hurt by the negative developments in advanced economies. For e.g., Thai goods export growth has moderated, even though it has remained above pre-pandemic trends. In this note, we explore Thailand’s direct exposures and possible spill-overs.

Trade channels are still exposed to advanced economies despite China’s rise

Thailand’s goods trade fortunes remain highly intertwined with advanced economies’ prospects, despite China’s rising influence. Thai goods exports to the US still accounted for ~15% of total overseas shipments in 2021, even though their share fell steadily from more than 20% in 2000. The rise of China’s export share, however, has been spectacular, as China evolved to become a key node within global and regional supply chains. China rose to similar levels as the US in 2021, from just below 5% in 2000. EU27 and Japan have steadily dropped in Thailand’s export composition, but still accounted for almost 10% each in 2021 vs close to 15% in 2000.

Our calculations using OECD-TIVA (2021) data show that the final demand exposures from these key export markets in terms of goods and services paint a similar trend as the goods export dynamics. US and China accounted for almost 5% of Thailand’s GDP each. EU27 and Japan were slightly lower at ~3% of GDP. In total, the US and EU27 accounted for ~8% of Thailand’s GDP.

Thailand is likely to be more impacted by weaker consumption demand in both the US and Europe than slowing investment activity. US consumption demand accounted for above 3% of Thailand’s GDP, slightly more than twice of investment demand. The sharp deterioration in US consumer sentiment amid the highest inflation in four decades does not bode well for Thailand. Thailand’s relative exposure to European consumption is even larger. Europe’s consumption accounted for 2.7% of Thailand’s GDP, almost 2.5x larger than investment.

Weakness through financial linkages

A slowdown in advanced economies’ growth can also impact Thailand through direct financial linkages. These would feed through from portfolio and foreign direct investment (FDI) exposures.

Regarding portfolio investment, Thailand recorded an overall net negative position in 2021, which has narrowed over the years. According to the IMF’s breakdown by economy, Thailand registered a net positive US portfolio investment position to the tune of ~1% of GDP in 2021, which was much higher than other major economies. This was possibly due to the combination of increasing US asset values (both equities and bonds) and rising Thai resident outward portfolio investments over the past few years. Heightened recession fears in the US, accompanied by US financial market risk-off and volatility, would weaken this support.

On outstanding FDI in Thailand, Japan clearly dominates as Thailand’s largest foreign investor (32% of the total), which has been a consistent trend for years. EU27 comes in as the third biggest (11%), behind the 10-economies of ASEAN (21%), while the US lags. Looking at net FDI flows into Thailand, Thailand is likely to be impacted by weak EU27 flows than the US during an economic downturn. Even though EU27 is Thailand’s third largest investor, EU27 inward flows into Thailand, on a four-quarter rolling sum, have been rather weak and volatile over the past decade. They dipped into negative territory in three periods over the past 10 years. US business investments into Thailand would also weaken significantly in the event of a recession, but they encouragingly stayed positive even during the pandemic.

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Chua Han Teng, CFA

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