Thailand: Covid-19 rebound and extended tourism crisis weigh on Thailand’s short-term outlook

10/05/2021

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Covid-19 surge and slow vaccination will affect the recovery

The Covid-19 shock continues to affect Thailand. Although the country more or less managed to control it last year, the economy – which had already suffered from the China-US trade war and a harsh drought in 2019 – has been severely impacted, particularly because of Thailand’s international attractiveness as a top tourism destination and its reliance on exports. As tourism highly contributes to Thailand’s GDP (about 20%) and total current account receipts (more than 17% in 2019), the global tourism crisis triggered by the Covid-19 pandemic partly explains why Thailand’s economy was among the most affected in South-East Asia in 2020. Combined with tumbled tourism receipts, strict lockdown measures in the first months of the pandemic, declining investments, domestic and external demand led to Thailand’s deepest recession (-6.1%) since the 1997-98 Asian crisis. The ongoing recovery, expected to be supported by government stimuli and rebounded external demand, will be at best subdued this year (+2.6%, i.e. one of the weakest rates in the region), due to the persisting impact of Covid-19 on tourism, private consumption and business activity. 

Indeed, after facing a second wave in January, Thailand has been dealing with a third one since April. With over 2,000 daily infections, the country has been confronted with its worst Covid-19 surge since the beginning of the pandemic. As a result, extended local lockdown measures and renewed travel restrictions will probably delay the reopening of tourism hotspots to international travellers. Crucially, the slow vaccination process (with only 1.6% of the population vaccinated at the end of April), which is notably due to lacking vaccine supplies, as well as the potentially longer duration of the vaccination process worldwide and in countries which many tourists come from will also continue to significantly harm the tourism industry. In an optimistic scenario, mass immunisation could be reached by the end of 2022. Risks for the tourism sector could be mitigated by accelerated global vaccination (e.g. in China) and an increase in vaccine supplies. All in all, as the context promises to remain uncertain and difficult with the risk of new Covid-19 waves clouding the outlook, the economic recovery and a return to pre-pandemic activity levels are unlikely to take place before 2022.

Policy buffers and support to cope with the economic shock

Although the Covid-19 crisis has strongly affected Thailand’s performances, policy buffers have allowed to prevent an even worse contraction in activity. Indeed, the authorities launched massive fiscal stimuli and took monetary easing measures – including the setting of the central bank’s interest rate at a historic low of 0.5% – to contain the shock for companies and incomes and to support infrastructure investments and the financial sector. Government fiscal support and an accommodative monetary policy will continue to a lower extent for most of this year. As a result, public finances will further deteriorate. The fiscal deficit widened to 4.7% of GDP in 2020 and is expected to reach 4.9% this year before returning to low levels. As a result, the public debt, which had been largely stable over the past decade and predominantly domestic, abruptly increased – it could go from from 41% of GDP in 2019 to 55.9% this year. This means that, with that level, Thailand will have the second highest public debt among the five largest emerging economies of the ASEAN (behind Malaysia).

Externally, Thailand kept its sound position with the current account remaining in surplus. Nevertheless, the current account is expected to continue to narrow considerably, from 7% of GDP in 2019 (3.3% in 2020) to 0.4% this year. This is explained by a sharper decline of exports in 2020 and an expected weaker recovery in 2021 vis-à-vis imports. In 2021, Thailand could suffer from a full year of depressed tourism but also from a strong baht affecting the competitiveness of Thai exports. While China’s quick and strong recovery has supported Thai electronics exports, the outlook is stronger as from 2022, on the back of continuing recovery in global demand and gradual revival of tourism. 

The Covid-19 crisis has also led to an increase in Thailand’s external debt ratios. Still, they remain moderate (below 40% of GDP) and could stabilise beyond 2021. As a result, Thailand is likely to keep a manageable external debt service in the MLT. Thailand’s weaknesses are more of a structural nature as the country will continue to face risks stemming from its ageing population, high and rising household debt, education gaps and intensifying natural disasters (droughts and floods). 

Youth protests against the king and military rule 

Rare protests, led primarily by the youth and targeting the monarchy and the military-led government, have fuelled political instability some time before and during the Covid-19 crisis. By calling for more democracy amid wide inequalities, those protests have targeted Thailand’s two leading institutions at a time of rising social discontent and economic crisis. On the one hand, despite severe lèse-majesté laws, the protesters have dared to criticise the revered king’s role and his luxury way of living in a context of sharp recession. On the other hand, they have demanded the resignation of the government and a change in the constitution that currently favours the army. The latter ruled the country from 2014 to 2019 and has been leading a civilian government since the elections of March 2019. So far, the government of PM and general Prayut Chan-o-cha has resisted a reshuffle. Meanwhile, the parliament, which includes many representatives of the army, recently rejected a proposal aimed at starting a project of constitutional amendments. Although protests have abated over the past months, they remain an instability risk for the future, notably considering the negative impact of the pandemic on the labour market, poverty and already high inequalities. In the meantime, the government has cracked down against protesters by imposing heavy prison sentences for a few democracy activists and has tightened its control of the media. Besides those domestic developments, the authorities could have to deal with an external flow of thousands of Burmese refugees as the political crisis in neighbouring Myanmar does not seem about to improve. 

Stable political risk ratings, higher commercial risk 

The Covid-19 pandemic has strongly affected Thailand’s commercial risk through a steep recession in 2020. Hence, amid the economic crisis, Credendo downgraded the country twice, from A/C to C/C. On the other hand, Thailand’s political risk ratings have remained unchanged since the beginning of the pandemic. Although the risk outlook remains negative this year, Thailand is likely to maintain its ST rating in category 2/7, due to comfortable liquidity, and its MLT rating in 3/7, due to good fundamentals (in spite of weakened public finances).

Analyst: Raphaël Cecchi – r.cecchi@credendo.com

10/05/2021

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