SINGAPORE, December 3, 2021 – Thailand’s economy is expected to recover gradually — although unevenly across sectors — with growth likely to recover to 0.8 percent in 2021 before rebounding to 5.8 percent in 2022. These conclusions were highlighted in the 2021 Annual Consultation Report on Thailand published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was produced based on AMRO’s Virtual Annual Consultation Visit to Thailand, and data and information available up to October 5, 2021.

Recent developments and outlook

Thailand’s economy was affected by the COVID-19 pandemic, contracting sharply by -12.1 percent year-on-year in Q2 2020, before gradually improving to -5.3 percent in H2 2020 and 2.0 percent in H1 2021. Economic performance varied considerably across sectors because tourism and other close contact sectors are still depressed, while manufacturing export sectors are rebounding from strong external demand.

Domestic demand will likely remain weak, while exports and public sector expenditures are expected to be the main drivers of growth until herd immunity is achieved from nationwide immunization and international travel fully reopens. Inflationary pressure remains subdued, with headline inflation likely to average slightly less than 1 percent, the lower bound of the Bank of Thailand’s (BOT) inflation target band of 1 to 3 percent in 2021.

Despite the weakening of the current account balance, the external position remains strong, underpinned by substantial international reserves. In the first eight months of 2021, imports recovered faster than exports, reducing the trade balance, while tourist arrivals fell further, resulting in a deficit in both the current account and the overall balance of payments. Fiscal policy has become highly expansionary to support the economy, with a significant increase in both budget and off-budget expenditures. As a result of the large fiscal packages, Thailand’s public debt has increased from 41.2 percent of GDP in December 2019 to 57.0 percent in August 2021, which is  nevertheless still below the self-imposed ceiling.

Risks and vulnerabilities

Downside risks to growth stem mainly from uncertainties due to possible recurrent waves of COVID-19 infections and the pace of vaccination. A longer than anticipated third wave of COVID-19 infections or a new wave of infections, could result in the continuance of containment measures and a slower return of international tourists, as well as lower domestic tourism activity and consumer confidence.

Risks to financial stability remain contained thus far, although they require vigilant monitoring going forward. Overall, the banking system’s non-performing loan (NPL) ratio has been broadly stable, helped by the BOT’s debt relief programs and regulatory relief. Although credit risk in the banking system warrants close monitoring, commercial banks remain sound, with strong buffers from capital and loan-loss reserves. The NPL ratio — particularly of loans to small and medium enterprises (SMEs) and other vulnerable sectors, as well as loans issued by specialized financial institutions — requires close monitoring with the termination of debt relief programs. Household debt-to-GDP, which is high when compared to regional peers, has increased even further due to the pandemic.

The economic scarring from the pandemic could weaken the recovery. There is a risk that the need by corporates to repair their balance sheets may cause the recovery to take longer than expected. In particular, the ability of corporates and households to repay their loans may be impaired, in turn weakening financial sector lending, particularly for banks more exposed to the tourism, SME and household sectors.

Policy recommendations

Expansionary fiscal policy is needed to finance COVID-related expenses, support vulnerable sectors, minimize scarring effects, and sustain the recovery momentum. Going forward, targeted supports to vulnerable groups and affected sectors should continue and greater priority should be given to the vaccination campaign. An effective and strengthened vaccination campaign is necessary for a durable end to the pandemic, and should be frontloaded in efforts to re-open borders to international tourists and re-start the tourism industry. Once the pandemic is contained, the authorities can focus on boosting infrastructure investment, while facilitating structural reforms to enhance growth potential. Post-pandemic, the authorities should rebuild the country’s fiscal buffers to ensure fiscal sustainability in the medium term.

While monetary policy is appropriately accommodative, the authorities should be ready to act if the current or a new wave of infections causes the economy to weaken further. The central bank has been focusing on policies to enhance the distribution of liquidity. While the policy rate can be cut further, should the need arises, it is not needed at the moment because monetary conditions are sufficiently accommodative, and SMEs and other affected sectors are more constrained by access to credit than interest cost. To support the rehabilitation as well as cover a wider group of SMEs, the government has announced the Special Loan facility amounting to THB250 billion. An asset warehousing program was also aptly introduced. Effective and timely implementation will mitigate the impairment of SME balance sheets so that they do not become a drag on economic recovery. To boost the effectiveness of the soft loans program, the government should consider providing guarantees for a higher share of loans to reduce the banks’ credit risks and lower their aversion to loan risk.

Post-pandemic, economic restructuring should be stepped up for the economy to adjust to the new normal. In particular, digitalization, climate change and other structural issues should be taken into consideration to better adjust to the post-pandemic environment.

About AMRO

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute towards securing macroeconomic and financial stability of the ASEAN+3 region, comprising 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangement, the Chiang Mai Initiative Multilateralisation (CMIM), and provide technical assistance to members.

About AMRO’s Annual Consultation Report

The Annual Consultation Report was prepared in fulfillment of AMRO’s mandate. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. AMRO also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.