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Economists have come out to caution the recent exuberance in the markets and overall sentiments saying that the global factors such has the slowing Chinese economy could take a toll on the optimism that is shaping up in Thailand.
Thailand’s equity markets have seen a surge in the recent weeks and the key indicator has been the surge in the Stock Exchange of Thailand (SET) Index, which ended on September 6, 2024 at 1,427.64 points, a rise from 1,289.84 points or a rise of 137.80 points or 10.68% since August 16th when Paetongtarn Shinawatra was put in place as Thailand’s 31st Prime Minister.
The exuberance on Friday was so much so that foreign investors were net buyers of nearly 11 billion Baht of shares, among the highest seen in nearly a decade for a single day trade.
Adding to the positive momentum was the data released by the Bank of Thailand at the end of August which showed that the Thai economy was moving towards a recovery phase but economists say that such optimism needs to have a bit more of reality check as there are risks ahead from both internal and external factors.
“The economic numbers this month exceeded our expectations, particularly for exports which showed a sign of positive development. However, we remain cautious about whether this improvement would be sustainable,” said Pipat Luengnaruemitchai, economist at Kiatnakin Phatra Securities.
He said that his key concerns were
- The consumption of credit-dependent durable goods, as banks continue to tighten their lending standards
- Despite improvements in production, some products are facing structural competitiveness issues. If the positive trends in exports and manufacturing continue, there could be upside potential for our GDP forecast
Pipat was not alone in issuing a cautious remark, Watcharaporn Kantaphayao, economist at Bualuang Securities, came out to say that the strengthening Thai Baht coupled with other external factors could put a dampener on the ongoing enthusiasm.
“We forecast Q3 2024 GDP growth of 3.4% year-on-year (YoY) from a relatively low Q3 2023 base, supported by accelerating export expansion enabled by fair to good economic growth in major markets—the US, China, and ASEAN nations. But looking to Q4 2024, we see risks to the sustainability of export growth. A major risk factor is that the Baht is strengthening against the US dollar,” he said.
Thai Baht has strengthened from 35.26 Baht to the US Dollar just about a month ago to about 33.74 Baht to the greenback, or about 4.3% in just 1 month.
Watcharaporn added that the US Federal Reserve is likely to soon start cutting its policy interest rate, which may push up the Baht further. Another risk is slowing economies in major export markets.
Bualuang says that the Bank of Thailand’s Monetary Policy Committee (MPC) will probably maintain its One-day Repurchase Rate at 2.50% at its next meeting in October 2024. But the US Federal Reserve looks very likely to cut its Federal Funds Rate at its next Open Market Committee in September, which may precipitate the Baht strengthening further against the US dollar.
The Baht appreciation could squeeze Thai exports. Historical data show that when the Baht appreciated significantly against the US dollar in 2007, Thai exports as a share of regional exports declined by 1%; when the Baht appreciated against the dollar in 2019, exports as a share of regional exports dipped by 0.6%.
The Baht has strengthened more than 8% YTD, the second-fastest appreciation against the dollar in ASEAN. Other risks include slowing economies among major trading partners, especially the US and China. Therefore, we anticipate that the MPC will decide to cut its policy interest rate in December 2024 and on 2 more occasions in 2025 in order to ease Baht appreciation.
Pipat of Phatra also says that he expects BoT to keep the REPO rates at 2.5% until at least its December meeting then may look to cut.
Exports of goods excluding gold improved in July, rising by 2.8% month-on-month and 11% YoY, driven by strong performance in various sectors. Electronics exports to Malaysia and Taiwan, rubber exports to China, canned food exports to Japan and the USA, and chemicals and petrochemicals benefited from increased demand and the expansion of Thai businesses into India.
However, automotive exports remained weak. Meanwhile, the current account surplus fell to US$0.3bn from US$2.0 billion last month, primarily due to a lower trade balance, while the services balance remained largely unchanged
China Pain but some Optimism in Q4
Phatra says that its macroeconomics team has cut its forecast for China GDP growth from 5.0% to 4.8% this year and from 4.7% to 4.5% next year. This they say will have some implications for companies listed on the SET.
The brokerage says that slower China growth would hit Thailand’s macro picture on several fronts. Slower income growth could hurt tourism. Higher excess capacity could lead to increased dumping into the Thai domestic market and intensified competition in export markets. A weaker CNY would likely drag the Baht with it.
Phatra says that they consider tourism, packaging, energy and petrochemicals the most sensitive sectors.
In tourism, Phatra says that Airports of Thailand Plc (AOT) would be most negatively impacted, with an estimated 20% of 8 months of 2024 revenues coming from Chinese tourists.
“We estimate 15-16% of revenues from Chinese tourists for Minor International Plc (MINT), Asset World Corp Plc (AWC) and Erawan Group Plc (ERW) in H1 2024 but only 8% for Central Plaza Hotels Plc (CENTEL) due to its big food business,” Phatra said.
As China accounts for a majority of global olefin demand growth, petrochemical firms could suffer from a worsened supply/demand balance.
SCGP has 6% direct sales exposure to China, and weak Chinese demand could affect regional paper spreads and pulp prices.
In food, China contributes about 12% of pre-tax profit for Charoen Pokphand Food Plc (CPF), excluding equity income contributions from CP All Plc (CPALL) and CP Axtra Plc (CPAXT), but Phatra says it does not consider GDP growth a strong driver of meat margins.
In retail, we estimate only low-single-digit exposure for Central Retail Corp Plc (CRC) and CPALL and insignificant exposure for others.
The few potential beneficiaries of slower China growth are the big consumers of gas—PTT Plc (PTT), utilities and Osotspa Plc (OSP).
China is the world’s biggest buyer of LNG, and LNG contributes 15% of Thai gas supply. In theory, slower Chinese growth could also pressure oil prices, but as other factors—geopolitics, US demand, OPEC+ supply adjustments—affect crude, it is hard to say that slower China growth would necessarily lower oil prices.
But Bualuang’s Watcharaporn says that he believes that Thai tourism high season starts in the fourth quarter and we expect govt stimulus, especially the first tranche of the 10,000 Baht Digital Wallet (145 billion Baht to 14.50 million people categorized as vulnerable) to boost private consumption, adding 0.1-0.2% to Q4 2024 YoY GDP growth. For 2024 as a whole, Bualuang assume 34-36 million inbound tourists. Hence, its 2024 Thai GDP growth forecast is 2.6% YoY.
