outlook - scbeic.com · economic outlook for 2014 bull - bear: oil prices in focus: demystified...
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Siam Commercial Bank, SCB Economic Intelligence Center, 9 Ratchadapisek Rd., Jatujak, Bangkok 10900, E-mail:[email protected]
EIC | Economic Intelligence Center
Overall Economic Outlook for 2014Bull - Bear: Oil pricesIn focus: Demystified Thailand’s weak export performanceSummary of main forecasts
Contributors:Sutapa Amornvivat, Ph.D.
Athiphat Muthitacharoen, Ph.D. Phacharaphot Nuntramas, Ph.D. Chinnawut Techanuvat, Ph.D.
OutlookQuarter 3/2014
Tanakorn Limvittaradol Thanapan Kriengkomol Vorada TantisunthornSivalai Khantachavana, Ph.D. Kasemsook ThaksadipongPiyakorn Chonlaworn
Economic Outlook for 2014
Bull - Bear: Oil Prices
In focus:Demystified Thailand’s weak export performance
Summary of main forecasts
4
37
40
51
Content
Disclaimer : The information contained in this report has been obtained from sources believed to be reliable. However, neither we nor any of
completeness of any of the information contained in this report, and we and each of such persons expressly disclaims any and all liability relating to or resulting from the use of this report or such information by the receipt and persons in whatever manner.
Any opinions presented herein represent the subjective views of ours and our current estimated and judgments which are based on various assumptions that may be subject to change without notice, and may not prove to be correct.
and should not be relied as such. We or any of our associates may also have an interest in the companies mentioned herein.
0505Houseview
Executive summary
Key factors that affect SMEs
Analyzing the minimum wage hike and cost pass-through
Labor productivity:the big question for Thai SMEs
How do SMEs see the future and how have they prepared?
4 - 7
8 - 10
11 -17
18 - 25
26 - 39
40 - 50
51 - 55
56 - 70
71 - 73
Changing world, changing opportunities: How can Thai SMEs capitalize on global trends?
On the road to the AEC: how can SMEs adapt and thrive?
EIC Online offers a collection of in-house macroeco-nomic and up-to-date sectorial impact analyses, which will equip you with valuable insights for effective strategic planning and business execution.
Where should SMEs target?
Conclusion
In depth analysis on business issues and implications, withmedium to long-term perspectives
Out look analysis of key macroeconomic indicatorsand business drivers
Update and analysis of current issues affecting the Thai economy and busines sectors
Short articles on topical events
Houseview analysis of monthly Thai economy
Privileges:
Access to past publications
For more information, please contact us at [email protected] or call 0 2544 2953. www.scbeic.com
Border trade: an opportunity that SMEs should not overlook
@SCB_EIC
Factors to accelerate inflation
Factors to decelerate inflation
EIC maintains its forecast GDP growth for
Thailand in 2014 of Thai Economy in
Growth during the second half will be supported by domestic demand, which will compensate for export growth that is likely to be weaker than previously expected, with positive factors:1) stability in political stance 2) faster disbursements of existing investment budget 3) policies helping farmers and SMEs business.
Quarter 3/2014
Domestic demand
Exports
EIC expects domestic demand to increase 3%in the second half of this year after declining by 5% during the first half from NCPO policies that encourage more public investment such as
Thailand’s export remains weak from the slowdown inemerging markets economy, declining agriculturalcommodities prices, and a significant share in Thailand’s electronic exports are becoming out-of-date products. EIC predicted that these factors will hinder Thailand’s export growth to 1.1% this year.
Risk from rising inflation rate associated with energy prices.
Rising crude oil price that will impact country’s energy prices.
Domestic demand recovery. Private sector sentiment that improved from political stability.
Interest rate that is lower than other ASEAN countries created a risk of capital outflow.
Accelerated disbursement of the 2014 investment budget back to historical levels of 65-70% of total budget.Regulatory changes on factory permit issuance, by shortening approval period from 90 days towithin 30 days.Financial measures helping SMEs business.
These policies further help improve private sector sentiment.
Unit: %YOY
rebound
reboundUnit: %YOY
Monitorcapital flows
Policy interest rate will remains at 2%in the second half of this year.
Inflation rate will stay at 2.5%Thai baht
The Thai baht will stay around
baht/USD at the end of 2014.
EIC analysis based on data from CEIC, NESDB, BOT and MOC
Economic Outlook for 2014
Bull - Bear: Oil Prices
In focus:Demystified Thailand’s weak export performance
Summary of main forecasts
4
37
40
51
Content
Disclaimer : The information contained in this report has been obtained from sources believed to be reliable. However, neither we nor any of
completeness of any of the information contained in this report, and we and each of such persons expressly disclaims any and all liability relating to or resulting from the use of this report or such information by the receipt and persons in whatever manner.
Any opinions presented herein represent the subjective views of ours and our current estimated and judgments which are based on various assumptions that may be subject to change without notice, and may not prove to be correct.
and should not be relied as such. We or any of our associates may also have an interest in the companies mentioned herein.
0505Houseview
Executive summary
Key factors that affect SMEs
Analyzing the minimum wage hike and cost pass-through
Labor productivity:the big question for Thai SMEs
How do SMEs see the future and how have they prepared?
4 - 7
8 - 10
11 -17
18 - 25
26 - 39
40 - 50
51 - 55
56 - 70
71 - 73
Changing world, changing opportunities: How can Thai SMEs capitalize on global trends?
On the road to the AEC: how can SMEs adapt and thrive?
EIC Online offers a collection of in-house macroeco-nomic and up-to-date sectorial impact analyses, which will equip you with valuable insights for effective strategic planning and business execution.
Where should SMEs target?
Conclusion
In depth analysis on business issues and implications, withmedium to long-term perspectives
Out look analysis of key macroeconomic indicatorsand business drivers
Update and analysis of current issues affecting the Thai economy and busines sectors
Short articles on topical events
Houseview analysis of monthly Thai economy
Privileges:
Access to past publications
For more information, please contact us at [email protected] or call 0 2544 2953. www.scbeic.com
Border trade: an opportunity that SMEs should not overlook
@SCB_EIC
Factors to accelerate inflation
Factors to decelerate inflation
EIC maintains its forecast GDP growth for
Thailand in 2014 of Thai Economy in
Growth during the second half will be supported by domestic demand, which will compensate for export growth that is likely to be weaker than previously expected, with positive factors:1) stability in political stance 2) faster disbursements of existing investment budget 3) policies helping farmers and SMEs business.
Quarter 3/2014
Domestic demand
Exports
EIC expects domestic demand to increase 3%in the second half of this year after declining by 5% during the first half from NCPO policies that encourage more public investment such as
Thailand’s export remains weak from the slowdown inemerging markets economy, declining agriculturalcommodities prices, and a significant share in Thailand’s electronic exports are becoming out-of-date products. EIC predicted that these factors will hinder Thailand’s export growth to 1.1% this year.
Risk from rising inflation rate associated with energy prices.
Rising crude oil price that will impact country’s energy prices.
Domestic demand recovery. Private sector sentiment that improved from political stability.
Interest rate that is lower than other ASEAN countries created a risk of capital outflow.
Accelerated disbursement of the 2014 investment budget back to historical levels of 65-70% of total budget.Regulatory changes on factory permit issuance, by shortening approval period from 90 days towithin 30 days.Financial measures helping SMEs business.
These policies further help improve private sector sentiment.
Unit: %YOY
rebound
reboundUnit: %YOY
Monitorcapital flows
Policy interest rate will remains at 2%in the second half of this year.
Inflation rate will stay at 2.5%Thai baht
The Thai baht will stay around
baht/USD at the end of 2014.
EIC analysis based on data from CEIC, NESDB, BOT and MOC
EIC maintains its forecast of 1.6% GDP growth for Thailand in 2014. Growth during the second half will be supported by domestic demand, which will compensate for export growth that is likely to be substantially weaker than previously expected. The main factor supporting growth is the increase in political stability since the National Council for Peace and Order (NCPO) came into power on 22 May 2014. Uncertainty regarding the direction of government policy has declined as a result. The NCPO has already implemented some measures that have strengthened private sector sentiment. Among these measures are: keeping VAT at the existing level of 7% until September 2015; sustaining last year's cut in tax rates on personal income and corporate income; and fixing prices for diesel fuel and LPG. Faster disbursements of existing investment budget will also support growth, as would any new investment in various infrastructure plans that are being prioritized for implementation. Higher personal incomes should also drive growth now that the NCPO has paid THB 90 billion due to farmers under the rice-pledging scheme. The government has also increased SMEs' access to credit. These positive growth factors, however, will be offset by disappointing exports, in which EIC has revised our forecast for export growth downward to just 1.1% for 2014. As for the Bank of Thailand's policy interest rate, EIC expects that it will be maintained at 2.0% throughout 2014. We expect that the Thai baht will weaken somewhat, trading at 33 baht/USD by the end of the year.
4
SCB Economic Intelligence Center (EIC)
Economic Outlook 2014
World economic growth should continue to improve during the second half, with the US economy being the main engine. In the U.S., growth will be supported by improving labor market conditions, which will allow the U.S. Federal Reserve Bank to taper quantitative easing according to plan. In the Eurozone, the European Central Bank’s plan to launch TLTROs in the last quarter of quarter of 2014 will help inject credit into the real economy. As for Japan, consumption will remain slow following the sales tax increase that took effect during April. It is unlikely that the Japanese government will implement any additional short-term stimulus policies as it will instead shift its efforts toward long-term economic restructuring. The economic rebound in the G3 economies will benefit exports from China as well as from other developing countries in Asia. The Chinese government also has capacity to further stimulate the domestic economy so that it reaches the growth target of 7.5%.
Global economy in the second half of 2014
5
Q3/2014
Expansion in U.S. and Europe will help global economy continue to improve during 2H-20141
Source: Forecasts by Goldman Sachs, J.P. Morgan, Deutsche Bank, Bank of America and EIC
2014 GDP Growth Forecasts for China, EU, Japan, U.S.
4.12.6
-2.9
3.4 3.2 3.3 3.2 3.1
-5.0
-3.0
-1.0
1.0
3.0
5.0Unit: % QOQ SAAR
0.1
0.3
0.2
0.30.4 0.4 0.4 0.4
0.0
0.1
0.2
0.3
0.4
0.5
1.3 0.3
6.7
-5.0
2.6 2.1 1.9 2.3
-8.0
-4.0
0.0
4.0
8.07.8 7.7
7.4 7.5 7.5 7.57.3 7.3
6.5
7.0
7.5
8.0
8.5
Actual Forecast
Unit: % YOY
Unit: % QOQ SA
Unit: % QOQ SAAR
U.S.
U.S. economic growth shrank by 2.9% QOQ, SAAR1 during the first quarter of 2014, due to adverse weather; high inventories; and a decline in healthcare spending due to the new national health insurance policy (Affordable Care Act). Bad weather hurt the economy worse than the market expected. Economic activity was further subdued by businesses opting to reduce inventories by 50% rather than expand production; a 1.4% drop in healthcare expenditures; a rise in the trade deficit; and only weak recovery in the real estate market. Fortunately, domestic consumption, which accounts for two-thirds of the U.S. economy, grew, driven especially by a 1.0% QOQ, SAAR rise in private-sector spending.
EIC expects that the U.S. economy will continue to improve during the rest of this year and next. The decline in private-sector inventories during the first quarter indicates that production will need to ramp up in order to serve growing demand. As such, U.S. economic growth results for the second quarter are likely to accelerate from the first. Recovery signals are already evident in the labor market whereby nonfarm payrolls increased by more than 200,000 persons per month for five consecutive months. Increased hiring helped reduce the unemployment rate to 6.1% in June, a rate lower than the rate Fed targeted for late 2014 (Figure 3). Furthermore, the manufacturing sector picked up speed, evident from the increase in the purchasing managers index (PMI) to 55.2 in the second quarter, up from 52.7 in the first quarter. Retail sales increased by 0.8% MOM on average during the last three months (Figure 4). These results indicate that from the second quarter onward, U.S. economic growth should increase by more than 3% quarter-on-quarter, SAAR, for total growth of 1.7% in 2014 and 3.2% in 2015.
But U.S. growth will be challenged as monetary policy returns to normal. The Fed might increase policy interest rates (the Federal funds rate) at a pace faster than previously warned, because the unemployment rate dropped sooner than expected and inflation is rising toward the targeted rate of 2%. The Fed funds rate hike might come as early as during the first half of 2015. Another factor to monitor is how the Fed manages its balance sheet. Throughout the three periods of quantitative easing implemented since 2009, the Fed has accumulated assets that now total $4.3 trillion, compared to $870 billion in 2009. As such, a change in Fed’s monetary policy stance toward contraction, such as by increasing interest rates or tapering asset purchases, will push up interest rates in the future, including mortgage rates (Figure 5). Higher mortgage rates will slow the recovery of the real estate market, which is anemic despite today's low interest rates (Figure 6)
1 Quarter-on-quarter seasonally adjusted (annualized)6
SCB Economic Intelligence Center (EIC)
7
Q3/2014
2 3
4 5
6 7
Source: EIC analysis based on data from CEIC and Bloomberg
GDP Growth and ISM Manufacturing Index Change in Nonfarm Payrolls and Unemployment
Retail Sales and Consumer Sentiment Index 10-Year Treasury Yields and 30-Year Fixed Mortgage Rates
Housing Starts and Sales of New Homes Inflation Rate and Unemployment Rate
Retail sales growth during the latest 3 months increased by an average of 0.8 %MOM
Interest rates should rise, pushing upfixed mortgage rates
U.S. GDP shrank by 2.9% during the first quarter
Nonfarm payrolls increased by over 200,000 persons per month for 5 straight months
Real estate market recovery has slowed despite low interest rates
Unemployment has fallen dramatically, while inflation rose toward the Fed’s target
Unit: % QOQ SAAR Unit: Index
-2.9
0
10
20
30
40
50
60
70
80
-10
-8
-6
-4
-2
0
2
4
6
Jan-
08
May
-08
Sep-
08
Jan-
09
May
-09
Sep-
09
Jan-
10
May
-10
Sep-
10
Jan-
11
May
-11
Sep-
11
Jan-
12
May
-12
Sep-
12
Jan-
13
May
-13
Sep-
13
Jan-
14
May
-14
GDP growth (LHS)
ISM manufacturing index (RHS)
Unit: 1,000 person (MOM SA) Unit: %
222203
304
224
288
6.1
5.0
5.5
6.0
6.5
7.0
7.5
8.0
0
50
100
150
200
250
300
350 Change in nonfarm payrolls (LHS)
Unemployment rate (RHS)
Unit: % MOM SA Unit: Index 1966=100
65
70
75
80
85
90
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Jan-
12
Mar
-12
May
-12
Jul-1
2
Sep-
12
Nov
-12
Jan-
13
Mar
-13
May
-13
Jul-1
3
Sep-
13
Nov
-13
Jan-
14
Mar
-14
May
-14
Retail sales (LHS)Consumer sentiment index (RHS)
Harsh weather
Avg. 0.8% MOM
-10-505
10152025303540
Housing startsSales of new homes
Unit: % YOY (3-month MA)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
0.00.51.01.52.02.53.03.54.04.55.0
Unit: %30-Year Fixed Mortgage Rates (RHS)
10-Year Treasury Yields (LHS)
Unit: %
Unit: % Unit: %
6.1
1.8
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jan-
12
Mar
-12
May
-12
Jul-1
2
Sep-
12
Nov
-12
Jan-
13
Mar
-13
May
-13
Jul-1
3
Sep-
13
Nov
-13
Jan-
14
Mar
-14
May
-14
4.0
5.0
6.0
7.0
8.0
9.0Unemployment rate (RHS)Inflation rate (LHS)
Fed’s inflation target = 2.0%
Eurozone
The euro economy has expanded for four consecutive quarters despite the ongoing challenge of deflation. The economy has steadily improved thanks to a recovery in consumption, which is reflected in the rise in the retail sales index to a six-year high since the crisis began in 2008 (Figure 9). This rise corresponds to improvements in the consumer sentiment index as well. During the first quarter, the euro economy grew by 0.2% QOQ SA, driven by solid growth in several large economies, such as Germany, up 0.8% QOQ SA, and Spain, up 0.4% QOQ SA. On the other hand, the growth of a few major economies like France improved only slightly and will remain subdued in the short-run. Better economic conditions in the euro area have not reduced the risk of deflation, evident from the low rate of inflation and weak commercial bank lending. Inflation in the Eurozone fell to 0.5% in May, while commercial bank loans shrank by 3.4%.
As such, the European Central Bank (ECB) announced three measures during June 2014 to resolve the ongoing problems: 1. Lowering the policy interest rate (refinancing rate) to 0.15% 2. Lowering interest rates on commercial bank deposits with ECB (deposit facility rate) to -0.10% 3. Issuing low-interest, long-term loans to financial institutions, aimed at boosting lending to households and credit-starved businesses (targeted longer-term refinancing operations: TLTROs. See Box: What is TLTRO?)
EIC forecasts that Eurozone GDP will expand by 1.1% in 2014. The new ECB measures should help sustain momentum. The TLTRO program, for example, should do more to boost the real economy via bank lending to consumers and businesses than the previous measure, the LTRO, which ended up just pumped money into the government bond market. The main difference is that the yields on sovereign bonds right now are quite low relative to the returns on business lending, making lending more attractive. For example, yields on 2-year Spain and Italy government bonds are 0.6% whereas the return on new business lending is 3.8% in Spain and 3.7% in Italy, respectively, meaning that the returns on lending is around 3%2 higher . This is in contrast with the situation in mid-2012 when the returns on new business lending was 1% lower than the bond yield in Spain, and just 1% higher than bond yield in Italy.
Other factors to monitor are possible new ECB measures as well as likely upward pressures on energy prices. The ECB has indicated that it is preparing to buy asset backed securities (ABS), i.e., to implement quantitative easing, if the TLTRO program alone does not increase the inflation rate in the euro area. If the ABS program is implemented, the euro might depreciate because the money supply will increase. As for energy prices, these include Brent crude oil prices, which have spiked from unrest in Iraq, and higher gas prices due to Russia's suspension of gas deliveries to Ukraine in June. In the short-term, conditions should not be severe, since gas storage facilities in Europe hold reserves as high as 65% of a year's needs. Moreover, demand for gas will remain low through the end of summer. But if geopolitical turmoil is prolonged, the euro area will need to import other types of energy to replace natural gas from Russia, which will significantly increase energy prices.
8
SCB Economic Intelligence Center (EIC)
2Spain and Italy New Business Lending – 2Y Sov. Debt Spread from Bloomberg.
9
Q3/2014
8 9
10 11
12 13
Source: EIC analysis based on data from CEIC and Bloomberg
GDP Growth and Purchasing Managers Index (PMI) Retail Sales Index Growth and Consumer Confidence Index
GDP Growth inside Eurozone Inflation Rates in Eurozone
Loans by Commercial Banks Export Growth Inside and Beyond Euro Area
Economy grew only slightly in France
Eurozone inflation remains low
Eurozone growth rose for 4 consecutive quarters
Consumption has grown steadily in the euro area
Commercial bank credit keeps shrinking
Exports beyond the euro area fell, amid slower world growth
Unit: % QOQ SA Unit: Index
30
35
40
45
50
55
60
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
1Q20
082Q
2008
3Q20
084Q
2008
1Q20
092Q
2009
3Q20
094Q
2009
1Q20
102Q
2010
3Q20
104Q
2010
1Q20
112Q
2011
3Q20
114Q
2011
1Q20
122Q
2012
3Q20
124Q
2012
1Q20
132Q
2013
3Q20
134Q
2013
1Q20
142Q
2014
GDP growth (LHS) PMI (RHS)
Unit: % YOY SA (3-month MA) Unit: Index SA (3-month MA)
-45-40-35-30-25-20-15-10-505101520
-9.0-8.0-7.0-6.0-5.0-4.0-3.0-2.0-1.00.01.02.03.04.0
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
May
-09
Sep-
09
Jan-
10
May
-10
Sep-
10
Jan-
11
May
-11
Sep-
11
Jan-
12
May
-12
Sep-
12
Jan-
13
May
-13
Sep-
13
Jan-
14
May
-14
Retail sales index: volume (LHS)Consumer confidence index: economic viewpoint in the next 12 months (RHS)
Long-term average consumer confidence = -15
Unit: % YOY
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
2009
2010
2011
2012
Jan-
13
Feb-
13
Mar
-13
Apr-13
May
-13
Jun-
13
Jul-1
3
Aug-
13
Sep-
13
Oct
-13
Nov
-13
Dec-
13
Jan-
14
Feb-
14
Mar
-14
Apr-14
May
-14
Private companiesHouseholdsTotal
Start of European sovereign debt crisis
Unit: % YOY SA
-6.0-4.0-2.00.02.04.06.08.0
10.012.014.016.0
Exports outside euro zoneExports inside euro zone
-0.2
0.0 0.0
-0.6
-0.3
0.3
0.70.6
-0.3
-0.1
0.1
0.3
-0.1-0.1
0.1
0.30.4
0.2 0.1 0.20.2
0.8
0.0
-0.1
0.4
Eurozone Germany France Italy Spain
1Q-2013 2Q-2013 3Q-2013 4Q-2013 1Q-2014
Unit: % QOQ SA Unit: % YOY
8.08.59.09.510.010.511.011.512.012.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Jan-
11
Mar
-11
May
-11
Jul-1
1
Sep-
11
Nov
-11
Jan-
12
Mar
-12
May
-12
Jul-1
2
Sep-
12
Nov
-12
Jan-
13
Mar
-13
May
-13
Jul-1
3
Sep-
13
Nov
-13
Jan-
14
Mar
-14
May
-14
Inflation rate (LHS) Unemployment rate (RHS)
Unit: %
BOX: What is TLTRO?
The ECB's latest credit expansion program, announced in June, is called a targeted longer-term refinancing operation, or TLTRO, which is an open market operation that allows commercial banks to borrow money at low fixed interest rates in order to provide new loans to households, excluding home loans, and businesses, excluding interbank loans. The rates will be equal to the Eurosystem’s main refinancing operations (MROs) indexed rate, or the ECB benchmark rate plus 10 basis points. Initially, the ECB will provide banks credit equal to 7% of their total loans to households and businesses outstanding on 30 April 2014, with the first two operations set to launch in September and December 2014.
Additional TLTRO tenders will be administered quarterly from March 2015 through June 2016. The additional amounts banks can borrow is up to three times their increase in net lending of eligible loans, and the reference period is between May 2013 to April 2014. Once the borrowing reaches a two-year period, banks have the option to repay loans to ECB either on a semi-annual basis or as a lump sum when the program ends in September 2018. Hence financial institutions can enjoy low-interest loans under the TLTRO program for as long as four years, for a loan taken in the first TLTRO allotment.
What is the difference between the newly issued TLTROs and the previous LTROs?
The difference between the two programs concerns what type of loans banks will be allowed to offer, according to four characteristics:
1. Financial institutions taking loans via TLTROs will be required to lend the funds on to households and businesses in order to stimulate real spending and investment. During the LTRO implementation, however, financial institutions could lend the borrowed money to other financial institutions or use it to buy government bonds and other financial assets in order to gain returns from the so-called "carry trade," which does not benefit the real sector.
2. Financial institutions taking TLTRO loans will be incentivized to lend to the real sector on an expedited basis. Banks are more likely to lend this time because the TLTROs will be implemented after banks are reviewed for asset quality, which should be completed by 3Q-2014. Moreover, during May 2014 to April 2016, financial institutions that have net lending lower than the benchmark will need to repay all that is borrowed from ECB by September 2016.
3. The amount of lending a financial institution can extend will be limited and depends on its ability to meet the ECB’s lending objectives. This rule will give financial institutions more incentive to extend loans than they had under the LTROs, which did not restrict the amount and purpose of loans extended. Furthermore, under the TLTRO, the cost of borrowing will be the same for all financial institutions, because the ECB will offer uniform rates. Under the LTRO program, the cost of borrowing of each institution differed because each had to bid for loans.
10
SCB Economic Intelligence Center (EIC)
3 The amount of lending a financial institution can extend will be limited and depends on its ability to meet the ECB’s lending objectives. This rule will give financial institutions more incentive to extend loans than they had under the LTROs, which did not restrict the amount and purpose of loans extended. Furthermore, under the TLTRO, the cost of borrowing will be the same for all financial institutions, because the ECB will offer uniform rates. Under the LTRO program, the cost of borrowing of each institution differed because each had to bid for loans. 4. The TLTRO transactions have a defined time frame, which will help financial institutions plan their operations. Banks can plan their credit limit allowance and time their TLTRO borrowing so that it aligns with client demand. Furthermore, financial institutions can manage their cost of borrowing so that it aligns with the indexed interest rate, which is likely to increase throughout the period of the TLTRO program. In contrast, under the LTRO program, the timing of transactions was dependent on the ECB’s judgment, which generated uncertainty, which probably limited the effectiveness of the program.
To what extent will the TLTROs stimulate the Eurozone economy?It is estimated that the TLTRO program will inject approximately EUR 950-1,150 billion into the economy during the four years of its implementation. This amount would be equivalent to roughly 18% of total referenced loans outstanding as of April. This figure is substantially larger than the EUR 700 billion injected during the three-year LTRO program. In GDP terms, the TLTROs are expected to stimulate economic growth in Italy by 0.17 percentage point per year and Spain by 0.20 percentage point per year throughout 2015-2017. Large economies like Germany and France will hardly benefit from the program since the lending rate in these countries is lower than in Italy and Spain. Thus Italy and Spain will gain more from the arbitrage because their banks will have greater incentives to extend loans to the private sector. Moreover, financial institutions in Italy and Spain will enjoy a greater drop in borrowing costs than will those in Germany and France. But the ECB might introduce additional measures, because it is unlikely that the TLTROs alone will succeed in to increasing the Eurozone’s inflation rates to the targeted 2% by 20173.
What measures will the ECB implement next if the TLTRO results are insufficient?The next measure the ECB is likely to undertake beyond the TLTRO program is to buy assets that are backed by private collateral, a move similar to the quantitative easing (QE) program of the U.S. and Japan’s quantitative and qualitative easing (QQE) program. Indeed, the ECB revealed its future asset-buying plan immediately after the announcing the TLTRO. This announcement was probably intended as a type of forward guidance meant to increase the effectiveness of the TLTRO. Such guidance is likely to improve sentiment in the financial sector and private sector, thereby facilitating lending. If asset-buying measures are imposed, it should be during early 2015, because the ECB will already be able to assess the results of the first phase of TLTROs done in September and December 2014. If the results are weak, the ECB is likely to follow the example of other large economies and implement asset-buying measures.
11
Q3/2014
3According to Deutsche Bank.
Japan
Household consumption slowed in Japan after the sales tax increase took effect in April; meanwhile exports showed no signs of recovery. Households accelerated spending before the sales tax was hiked to 8%, from 5% previously, after which consumption slowed. Retail sales immediately dropped by 13.6% MOM SA (Figure 15), especially of durable goods such as electrical appliances which dropped by 10% YOY during April-May, after growing by 20% in the first quarter. Meanwhile, Japanese exports in the second quarter were flat in value terms from the year prior. Slow exports reflected the yen's appreciation due to improving economic fundamentals at home, amid weak confidence regarding global economic recovery. As such, export growth has slowed since late 2014 in yen terms, although it has increased in USD terms (Figure 16).
EIC expects Japan’s economy will be driven by private investment in 2014. During the first half, private investment growth figures were stronger than expected, and momentum should continue throughout the year. The soar in nonresidential investment drove Japan’s growth in the first quarter. Moreover, core machinery orders increased to a six-year peak, which was the highest level since the subprime crisis, reflecting higher potential investment in the future. Business sentiment regarding economic growth also improved (Figure 17). Furthermore, Japan may trim corporate tax rates from 2015 onward, which should stimulate additional investment in 2014 due to anticipation of higher profits. EIC therefore expects that investment will climb in 2014, which will allow Japan’s economic growth to reach 1.5% for the year. EIC also believes that the BOJ might ease its monetary conditions further in late 2014, if economic figures do not meet expectations, especially regarding inflation. The BOJ expects that inflation will increase during the last quarter4 , so that core inflation rates will reach the 2% target by the end of fiscal 20145 (Figure 18). Going forward, the government plan for structural reforms and revival of household spending should be monitored. Long-awaited structural and regulatory reforms, the so-called "third arrow" of Abenomics, were announced during late June. The reforms aim to fix fundamental problems that are obstructing Japan’s long-term economic growth, via three measures: 1. Enhancing businesses by cutting corporate income taxes from 35.6% to below 30% within the next few years. In addition, there are plans to establish special economic zones offering tax benefits. 2. Resolving labor shortages by allowing more women into the workforce and adjusting laws to allow more foreign workers into Japan. 3. Pushing to complete free trade area (FTA) deals with foreign countries, and reforming the agricultural sector, which is the main obstacle to completing FTA negotiations.
These measures will have a significant economic impact in the medium-to-long term.Another factor to watch is how long it will take for household consumption to recover. The key issue is spending on durable goods such as autos and electrical appliances, which should take longer to recover than non-durable goods. If the recovery period is prolonged, Japan’s economic growth could be lower than previously forecast. However, if the recovery is fast, private consumption will be another factor that will drive economic growth, supplementing private investment
12
SCB Economic Intelligence Center (EIC)
4Sayuri Shirai, Member of the Policy Board of Bank of Japan. “Japan’s Economic Activity, Prices and Monetary Policy: Relationships between the Output Gap, Prices and Wages”. Speech at a Meeting with Business Leaders in Okinawa.5The core inflation rate BOJ will consider is calculated from the rate that excludes the effects on price rise that directly results from sales tax increase.
13
Q3/2014
14 15
16 17
18 19
Source: EIC analysis based on data from CEIC and Bloomberg
GDP Growth and Purchasing Managers Index (PMI) Retail sales and consumer confidence index
Exports in JPY and USDOrders for Machinery Excluding Ship Components and Electricity Manufactures
Core Inflation Nominal & Real Wages
Stronger yen slowed exports
Machinery orders show rising business sentiment
Japan's growth under Abenomics (2013) has not changed much from 2012.
April sales tax hike sank household consumption
Core inflation should be stable throughout mid-2014
Household income growth lags rising prices
4.1
-2.5 -3.0
0.2
5.3
2.91.3
0.3
6.7
40
42
44
46
48
50
52
54
56
58
60
-15
-10
-5
0
5
10
15
1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014
GDP growth (LHS) PMI (RHS)
Unit: % QOQ SAAR Unit: Index
+1.4% YOY(2012)
+1.5% YOY(2013)
+3.0% YTD(2014)
Unit: 2010=100 SA Unit: SA
Announcement of sales tax hike
35
37
39
41
43
45
47
49
85
90
95
100
105
110
115
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14
Retail sales index (LHS)
Consumer confidence index (RHS)
Sales tax hike enforcement
Unit: % YOY
90
92
94
96
98
100
102
104
106
108
110
-25
-20
-15
-10
-5
0
5
10
15
20
25
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14
Exports in JPY (LHS)Exports in USD (LHS)JPY (RHS)
Exports dropped in JPY but rose in USD
Unit: Yen/U.S. dollar
-40
-30
-20
-10
0
10
20
30
Jan-
08
Apr-0
8
Jul-0
8
Oct
-08
Jan-
09
Apr-0
9
Jul-0
9
Oct
-09
Jan-
10
Apr-1
0
Jul-1
0
Oct
-10
Jan-
11
Apr-1
1
Jul-1
1
Oct
-11
Jan-
12
Apr-1
2
Jul-1
2
Oct
-12
Jan-
13
Apr-1
3
Jul-1
3
Oct
-13
Jan-
14
Apr-1
4
Unit: % YOY (6-month MA)
Unit: % YOY
3.40
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14
BOJ targets core inflation of 2% by end of fiscal 2014
May’s core inflation at 1.4% YOY
Unit: % YOY
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14
Nominal wages Real wages
China
China’s growth rate rebounded in the second quarter from the first. Growth in the second quarter was 7.5%YOY, up from 7.4%YOY in the first quarter, thanks to faster exports, which grew 4.9% YOY in the second quarter, up from the 3.5% YOY contraction in the first quarter. Global economic recovery pushed up purchasing orders far enough to overcome last year's high base effect caused by China over-reporting export numbers in 2013 (Figure 22 and 23). Furthermore, China’s own industrial sector improved, evident in the rise in the purchasing managers index (PMI) from 50.3 in the first quarter to 51.0 in the second quarter. Meanwhile, retail sales grew 12.5% YOY in May, up from 11.9% YOY in April, while fixed asset investment (FAI) grew 16.9% YOY in May, up slightly from 16.6% YOY in April. These month-on-month climbs reversed a five-month falling trend. Conditions have improved as various short-term economic stimulus policies launched by the government since late March have trickled down in the real sector.
EIC expects that China’s economic growth will reach the government's 2014 target of 7.5%. Growth is being driven by three factors: 1. Exports. Chinese exports are gradually improving on the back of economic recovery around the world. Exports figures for the second half should be higher than the first. 2. Monetary stimulus. The People’s Bank of China (PBOC) might implement further monetary stimulus measures, probably by reducing reserve requirement ratios (RRRs) for commercial banks. In the past, PBOC reduced the RRR rate down by 0.5% for two-thirds of municipal banks, and for 80% of rural banks to help the agricultural sector and local SMEs. The PBOC could further reduce RRR for other state-owned banks in order to aid the real estate sector and sustain economic growth momentum, while also helping to limit financial system risk by curtailing growth in the shadow banking system. Moreover, the PBOC is still obliged to ensure adequate liquidity for economic growth and credit growth, so that the liquidity problems seen in June 2013 do not recur (Figure 24). 3. Fiscal stimulus. If economic growth slows, the government could still implement additional stimulus measures, such as accelerated infrastructure investment that might involve projects like constructing affordable homes for low-income households and building rural rail transportation systems.
The real estate market and the financial sector still pose risks. The government has tried to reform the economy by curbing real estate market growth, which threatens property market stability, and reducing the role of shadow banking, which poses risks to the financial system. During the first five months of 2014, home sales dropped by approximately 10.2%, and house prices in large cities also fell. These declines continued even though the PBOC has recently eased mortgage conditions and pushed large banks to lend more to first-home buyers. This indicates that the real estate market is depressed (Figure 25). Efforts to curtail shadow banking could cause a rash of NPLs and bankruptcies, which would undermine confidence and economic recovery prospects. These factors have potential to drag China’s economic growth down to rates below the targeted 7.5%.
14
SCB Economic Intelligence Center (EIC)
1 Exports in January and February, as the Chinese New Year festival, declined 1.7% YOY
15
Q3/2014
Source: EIC analysis based on data from CEIC and Bloomberg
20 21
22 23
24 25
GDP Growth Rate and Purchasing Managers Index Growth of Fixed Asset Investment by Sector
Export Growth in 2014 (by Product) Export Growth in 2014 (by Country)
Interbank Rates (7 days) Growth of Housing Prices in Biggest Cities
Exports have recovered since March
Exports have recovered since March
China’s growth rate reboundedin the second quarter
China’s fiscal stimulus measures focus on infrastructure investment
Commercial bank liquidity is at normal levels
House prices in large cities continued to drop
8.1 7.6 7.4 7.9 7.7 7.5 7.8 7.7 7.4 7.5
45.0
46.0
47.0
48.0
49.0
50.0
51.0
52.0
53.0
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014
GDP growth (LHS) PMI (RHS)
Unit: % YOY Unit: Index Unit: % YOY
-20
-10
0
10
20
30
40
50
1Q-2012 2Q-2012 3Q-2012 4Q-2012 1Q-2013 2Q-2013 3Q-2013 4Q-2013 1Q-2014 2Q-2014
Total TransportationUtilities Real EstatesChemicals
Supported by government
economic stimulus
-50
-40
-30
-20
-10
0
10
20
Jan-14 Feb-14 Mar-14 Apr-14 May-14
Textiles Computers Communication devicesElectrical machines Apparels
Unit: % YOY
-50
-40
-30
-20
-10
0
10
20
30
Jan-14 Feb-14 Mar-14 Apr-14 May-14
Hong Kong Japan Korea Germany US
Unit: % YOY
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Jan-
13
Feb-
13
Mar
-13
Apr-13
May
-13
Jun-
13
Jul-1
3
Aug-
13
Sep-
13
Oct
-13
Nov
-13
Dec-
13
Jan-
14
Feb-
14
Mar
-14
Apr-14
May
-14
Jun-
14
Unit: %Commercial
banks’ liquidity tightened in mid-
2013
Unit: % YOY
-5
0
5
10
15
20
25 Beijing Shanghai Chongqing Shenzhen Guangzhou
ASEAN-4 and Indochina
Overall economic growth of the ASEAN-4 slowed during the first quarter, despite rising in Malaysia. Growth slowed in Indonesia and Philippines in the first three months, while in Singapore it stabilized from the quarter earlier. Malaysia's GDP rose by 6.2%YOY, the highest rate in the ASEAN-4 (Figure 26).
Different factors affected growth in each of the four countries. In Indonesia, exports were hampered by trade restrictions, while in the Philippines, the construction sector grew by rates lower than expected previously, when analysts foresaw rapid infrastructure investments to repair damage from the Haiyan typhoon of November 2013. In Singapore, public investment fell by 10% in the first quarter, contrasting sharply to the 12.9% growth in the previous quarter. Malaysia’s economic growth was supported by strong export growth.
Exports from the ASEAN-4 were solid overall during the first half, due to increasing demand from developed economies (Figure 27). Export growth was especially high in the Philippines, at 12.6%, significantly higher than the 3.2% growth during the final quarter of 2013 (Figure 28). Indonesia was the only country where exports were lackluster, having shrunk by 0.8% during the first quarter after the growth of 7.4% during the last three months of 2013. This slowdown resulted from a new ban on exports of mineral ore, a major export commodity.
EIC expects that the central banks of the Philippines and Malaysia will increase interest rates. Interest rates are likely to rise around the world as U.S. Federal Reserve hints on the possible rise in its key rate. Moreover, oil prices are likely to increase due to unrest in Iraq, which could impact the price of energy imports and hence inflation. Furthermore, central banks in various ASEAN countries have other incentives to increase interest rates in the latter half of 2014. For example, the central bank of the Philippines is pressured by exceedingly rapid growth in mortgage lending, and inflation that remains high despite seven months having passed since the typhoon (Figure 29). The central bank of Malaysia needs to respond to high household indebtedness, which stands at almost 90% of GDP and is likely to rise further due to continuing growth in consumer loans. As such, it is most likely that both central banks will tighten monetary policy by increasing interest rates.
The central bank of Indonesia, on the other hand, will hold interest rates steady despite sustained high inflation resulting from cancellation of domestic fuel subsidies. This is because the country’s current account deficit to GDP ratio is high at 3%, while the ratio of foreign reserves to short-term foreign debt is only at 2 times. As such, the Indonesian economy is still vulnerable due to its balance of payments conditions.
Economic policies of the new Indonesian government should be monitored. Whether Joko Widodo or Prabowo Subianto wins the July election, stimulus policies are likely to be implemented because the economy has slowed since the beginning of the year from weak exports. Policies on foreign direct investment (FDI) should also be monitored. Even though both parties support value-added investments that benefit economic growth, their campaigns relied on populist promises that increase the likelihood of government interventions in the economy, which could negatively impact the investment climate. For example, measures to protect certain domestic industries, limit foreign holdings in banks, or intervene in sectors that impact large groups of people could hinder foreign investment growth in the medium- to long- term.
16
SCB Economic Intelligence Center (EIC)
Vietnam's frictions with China should have little impact on its economy. The World Bank continues to forecast that Vietnam’s GDP will grow by approximately 5.5% in 2014, despite the territorial dispute. This is because exports, which are Vietnam’s main economic driver, should continue to rise from increasing global demand, especially from the U.S., Vietnam’s main export market, which accounts for 17% of total exports. Meanwhile, Vietnam’s domestic manufacturing industry continues to improve, reflected in the rise of the PMI index to 52.6 in the second quarter, up from 51.5 in the first quarter (Figure 30). However, the tourism sector might be severely hampered in the short run. If the conflict with China persists, arrivals from China, Hong Kong and Taiwan will decline, and these account for more than 30% of the foreign tourists visiting Vietnam. Moreover, Vietnam's exports to these countries might also be impacted, and they account for 16% of exports.
17
Q3/2014
18
SCB Economic Intelligence Center (EIC)
26 27
28 29
30 31
Real GDP Growth of ASEAN4 Growth in ASEAN-4 Exports to Major Markets in 2013 and 2014
Growth in ASEAN-4 Exports in 4Q-2013 and 1Q-2014 Inflation in ASEAN-4
Vietnam Purchasing Managers Index Exchange Rate Trends, ASEAN-4 and Singapore, since 3Q-2013
The Philippines' export growth was highest among the ASEAN-4
High inflation menaces Philippines 6 months after Typhoon Haiyan
Malaysia’s GDP growth was highest among the ASEAN-4 during 1Q-2014
ASEAN-4 exports to the main industrial countries should continue to improve from growing demand
Rising PMI shows that Vietnam’s economy should continue to grow
Indonesian rupiah weakened, whereas other regional currencies strengthened
Source: EIC analysis based on data from Bloomberg
Unit: %YOY
-30
-20
-10
0
10
20
30
40
Jan-
13
Feb-
13
Mar
-13
Apr-13
May
-13
Jun-
13
Jul-1
3
Aug-
13
Sep-
13
Oct
-13
Nov
-13
Dec-
13
Jan-
14
Feb-
14
Mar
-14
Apr-14
US EU Japan China ASEAN
Unit: % YOY
7.4
5.7
3.2
6.0
-0.8
7.9
12.6
6.8
2013Q42014Q1
Indonesia Malaysia Philippines Singapore
Unit: % YOY
Philippines suffered from Haiyan5.4
8.0 8.2 7.9 7.9 8.1 8.1 8.27.7
7.3 7.3 7.36.7
3.3
4.1 4.2 4.1 3.9 4.14.5 4.4
0
1
2
3
4
5
6
7
8
9
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14
Indonesia
Malaysia
Philippines
Singapore
Indonesian government cancels oil price
subsidies
Unit: Index
42
44
46
48
50
52
54
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14
Unit: % YOY
5.75.1
6.3
4.95.2
6.25.7
4.9
4Q-2013
1Q-2014
Indonesia Malaysia Philippines Singapore
-10
-5
0
5
10
15
20
Local currency
Real effective exchange rates
Indonesia Malaysia Philippines Singapore Thailand
Depreciation
Q3 Q4Q1Q2 Q3 Q4Q1Q2 Q3 Q4Q1Q2 Q3 Q4Q1Q2 Q3 Q4Q1Q2
Thai economy
EIC forecasts that Thailand’s GDP will expand by 1.6% in 2014. Factors that will drive the economy's growth are: 1. Increased political stability after the National Council for Peace and Order (NCPO) came into power on 22 May 2014. Policy uncertainty has declined as NCPO has already undertaken measures that have helped to strengthen private sector sentiment, such as maintaining the VAT rate at 7%, endorsing the reduction in tax rates on personal income and corporate income; and fixing prices for diesel fuel and LPG. 2. Higher incomes resulting from the NCPO's move to pay farmers some THB 90 billion due under the rice-pledging scheme and from measures to encourage commercial banks to increase credit to SMEs. 3. Speeding up disbursements of investment budget while prioritizing stalled plans for investment in key infrastructure projects.
However, disappointing export growth will be a drag on these economic drivers.
19
Q3/2014
32Forecast for GDP Growth and Its Components in 2014
GDP growth forecast and its components in 2014
* In USD terms Source: EIC analysis
Unit: %YOYUnit: % YOY
GDP Private consumption
Private investment
Public consumption
Public investment Export*
1.6
-0.5
-2.8
2.1
-6.6
4.0
1.6
0.1
-0.5
4.0
1.5 1.1
Q2 estimates Q3 estimates
Private consumption
Although alleviation of the protracted political turmoil has improved sentiment, several factors will hinder speedy recovery in private consumption. EIC expects that private consumption figures will pick up after dropping by 3.0% during the first quarter, for a slight rise of 0.1% in 2014. One constraint will be growth in sales of durable goods such as electrical appliances and automobiles. Car sales are likely to drop because car demand was exhausted from the first-car buyer scheme in the prior period. The scheme also caused a rise in household debt. Even if sentiment has finally started to improve, there are no factors that will greatly increase incomes on a lasting basis. The rise in incomes resulting from overdue payments under the rice-pledging scheme is only a temporary bump. Lower prices for agricultural commodities and the slow recovery in exports mean that farm income growth outlook is dim. As such, this year's consumption recovery will be limited to non-durable items such as food and necessities. A rebound in sales of such durable goods as electrical appliances and cars is unlikely because households are facing spending constraints due to increased debt burden. High household debt and doubts over the quality of consumer loans amid rising NPLs (Figure 33) are generating caution among both borrowers and banks.
20
SCB Economic Intelligence Center (EIC)
33Non-Performing Loans
NPLs are increasing
Source: EIC analysis based on data from Bank of Thailand
2.4
3.3
2.6
2.2
2.3
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1Q-2013 2Q-2013 3Q-2013 4Q-2013 1Q-2014
Credit card
Personal
Residential
Total
Automobiles
Unit: % of consumer loansUnit: % of consumer loans
EIC forecasts that private investment growth in 2014 will be better than prior estimates. Private investment growth now appears likely to gain momentum from the improvement in business sentiment related to a cooling political climate and from greater clarity regarding public investment in infrastructure. Moreover, regulatory changes on factory permit issuance, as reflected in the shortening of approval period from 90 days to within 30 days and the permit exemption for solar rooftop projects smaller than 1 megawatt, will give a boost to investor confidence. Yet the overall manufacturing sector’s capacity utilization rate remains low, limiting the potential near-term upside for investment (Figure 34). Moreover, SMEs are still strapped for credit. All in all, EIC expects that the improving conditions will improve private investment figures to reach only -0.5% growth.
In the short term, businesses that are most likely to invest are ones that will benefit from the factory-permit rule adjustments, or that received investment incentives in the prior year, or that are related to public investment. Energy investments will benefit from the factory permit rule adjustment, and capital spending in the solar rooftop business could be as high as THB 12 billion. Other industries that will benefit from the rule change include power generation, sugar and waste management. Meanwhile, automotives and electronics factories are likely to expand because these sectors won special investment incentives in the prior year. And investment in the construction sector and building materials industry will rise from higher capital spending on public infrastructure projects. Going forward, the Board of Investment will accelerate approvals for pending projects worth THB 700 billion, which will help restore private investment. This move should especially benefit the automotives industry, via projects under phase II of the government's eco-car manufacturing incentives. Bear in mind, however, that not all investments will take place right away because projects that receive BOI approvals are not required to invest within the year of approval, and instead are allowed an additional three years to evaluate conditions before implementation. (Figure 35)
Private investment
21
Q3/2014
34Capacity Utilization Rate
Capacity utilization of manufacturing industries remains low
Source: EIC analysis based on data from OIE
Unit: % SA (3-month MA) Unit: % SA (3-month MA)
66.763.1
60.4
107.9
80.8
71.5
61.5
59.2
65.0
57.0
48.8 48.845
55
65
75
85
95
105
115
Jan-
13
Feb-
13
Mar
-13
Apr
-13
May
-13
Jun-
13
Jul-1
3
Aug
-13
Sep-
13
Oct
-13
Nov
-13
Dec
-13
Jan-
14
Feb-
14
Mar
-14
Apr
-14
May
-14
Political turmoil 2013-2014
All industries
Electronics and electrical appliances
Food and drinks
Automobiles and parts
Public Consumption
Government consumption rose by 4.5% during the first four months of calendar 2014. During the first seven months of its fiscal year, from October 2013 to April 2014, the government spent THB 1.2 trillion into the economy, worth 5% of GDP. The government disbursed the operating budget at rates similar to the previous fiscal year, at 60% of total operating budget. EIC expects that operating-budget disbursements in 2014 should be at a rate similar to the prior year, or 95%. This is because the former cabinet had already approved that budget before Parliament was dissolved, so unlike the investment budget, there was no hindrance on disbursements.
22
SCB Economic Intelligence Center (EIC)
35 BOI will accelerate approvals for pending projects worth THB 700 billion
Source: Bangkok Business News based on data from BOI
Light industry
Services and infrastructure
2,899
Ceramics and minerals 28,473
Chemicals, paper and plastic 34,957
Agriculture and agricultural production 47,966
Electronics and electrical appliances 67,926
Metal products, machinery and transport equipment 250,451
296,329
Applications for investment privileges (by business)
Unit: THB million
Number of projects
239
54
11
18
13
65
7
Public Investment
Various NCPO measures will help sustain government investment. The NCPO-approved measures will accelerate disbursement of the 2014 investment budget back to historical levels of 65-70% of total budget, from the May 2014 amount of 44.4%. Moreover, the NCPO will expedite completion of the 2015 budget plan to finish before the start of the next fiscal year in October 2014, so that investment will hit the deck running in 4Q-2014. Nevertheless, some public investment projects could face a delay as the Budget Oversight Committee was set up to examine previously approved projects valued at more than 1 billion baht and the new SOE ‘Superboard’ is tasked to approve state-owned enterprises’ projects valued at more than 100 million baht. All things considered, EIC expects that government investment will grow by 1.5% in the 2014 calendar year.
The NCPO is giving high priority to certain key infrastructure projects, which will benefit government investment from calendar 2015 onwards. Infrastructure projects that are ready for investment include the green line BTS Skytrain extension (Mo Chit – Saphan Mai – Khu Khot) valued at THB 58.59 billion and the dual-track rail project (Chachoengsao – Klong 19 – Kaeng Khoi) valued at THB 11.35 billion. These two major projects have been shown to be feasible, have conducted environmental impact assessments (EIAs), and are currently in the tender and procurement stage. Three other big projects on the verge of approval are Suvarnabhumi Airport Phase 2, the Bang Pa-In–Nakhon Ratchasima Motorway, and the Rama 3–Dao Khanong–Outer Ring Road expressway.
23
Q3/2014
36 37Cumulative Disbursement Rate of Investment Budget Cumulative Disbursement Rate
Investment budget disbursement rate is similar to the previous year
Total budget disbursement during Q2-2014 went according to plan
*Disbursement rate at end of quarter Source: EIC analysis based on data from FPO
Unit: % of investment budget Unit: % budget
0
10
20
30
40
50
60
70
80
90
100
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
Fiscal year 2013 Fiscal year 2014
4Q-FY2014 82%*
2Q-FY2014 35%*
1Q-FY2014 15%*
3Q-FY2014 70%*
48.8
49.4
0
10
20
30
40
50
60
70
80
90
100
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
Fiscal year 2013 Fiscal year 2014 4Q-FY2014 95%*
2Q-FY2014 46%*
1Q-FY2014 22%*
3Q-FY2014 70%*
68.1
69.3
Exports
EIC forecasts that Thailand's exports will grow by only 1.1% in 2014. During the year's first five months, exports shrank by 1.2%YOY due to weakening demand from China and ASEAN. Exports to China dropped by 5.6% during that period, and to ASEAN by 3.5%, as a result of slower economic activity in those markets.
Agricultural product exports still face issues. During the first five months of 2014, rubber exports showed no signs of recovery, dropping by 18.8% in value due to slumping global prices. The value of Thai sugar exports dropped by 29.3% because oversupply dragged down export prices. Shrimps were hit by the early mortality syndrome (EMS), pulling down its exports by 22.7% in value.
Automotives exports were eroded by weak demand in its major markets like Australia and Indonesia. Exports to those two countries fell by approximately 23%. Moreover , exports of electronics and electrical appliances, previously expected to drive export growth in 2014, underperformed. During the first five months of 2014, export growth of electronics was just 4.9%, electrical appliances 2.8%, and computers & parts only 1.6%.
Although the global economic recovery might improve Thailand's export growth prospects during the second half, various threats remain. For example, many of the electronics and electrical appliance products that Thailand exports no longer meet with high demand because they are outdated (see In Focus: Demystified Thailand’s weak export performance). Furthermore, The United States has downgraded Thailand’s ranking to Tier 3 in its Trafficking in Persons (TIPs) report, which might lead to trade penalties within 90 days. The European Union has suspended cooperation with the Thai government, delaying Thai-EU negotiations on free trade agreements (see Box: E.U. and U.S. government actions put Thai exports at risk).
24
SCB Economic Intelligence Center (EIC)
Unit: %YOY
25
Q3/2014
39 Exports to China and ASEAN continued to drop
Growth of Exports to Major Markets
Source: EIC analysis based on data from MOC
Unit: USD billion
38 Thai exports shrank by 1.2% in value during the first 5 months
Thailand’s Exports by Value
Source: EIC analysis based on data from MOC
17.0
17.5
18.0
18.5
19.0
19.5
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Average monthly cumulative exports 2013
Average monthly cumulative exports 2014
Growth during first 5 months = -1.2%
-0.3
5.0
1.3
2.7
0.8
-5.2
-1.2
-3.5
1.1
-1.8
2013 2014 YTD
Japan (10%)
Europe (10%)
U.S. (10%)
China (12%)
ASEAN (25%)
Total exports
-5.6
Unit: %YOY
Unit: USD million
-8,000
-6,000
-4,000
-2,000
0
2,000
4,000
6,000Current Account Trade Balance
26
SCB Economic Intelligence Center (EIC)
40 Agricultural exports deteriorated
Growth of Exports by Product Category
Source: EIC analysis based on data from MOC
41 The current account and trade balance
Current Account Balance and Trade Balance
Source: EIC analysis based on data from MOC
-0.3
-5.9
-0.8
-20.0
-27.6
6.5
0.9
-6.3
1.2
-1.2
-18.8
-12.8
-22.7
-0.1
2.8
1.6
4.9
-8.5
Tuna (1%)
Shrimp (1%)
Sugar (2%)
Rubber (4%)
Rubber products (4%)
Total
Autos and parts (10%)
Electrical appliances (10%)
Computers and parts (8%)
Circuit boards (3%)
2013 2014 YTD
-29.3
7.9
BOX: EU and U.S. government actions put Thai exports at risk
The European Union halted cooperation with Thailand. On 23 June 2014, the European Union announced that it would not sign the Partnership and Cooperation Agreement with Thailand, and suspend official contacts with Thailand until the government has a credible roadmap to return to constitutional rule and hold elections.
The halt in Thai-EU cooperation will delay conclusion of a deal for a bilateral free trade area. The Thai government has lacked full authority to ratify a deal since late 2013 due to political instability, although negotiations continued. It appears unlikely that Thai-EU FTA negotiations will be concluded by January 1 2015, which means that Thailand will lose tax privileges under the Generalized System of Preferences (GSP), based on country graduation criteria.
EIC estimates that losing GSP privileges will cost Thai exporters at least $47 million via higher tariffs. Countries eligible for the GSP are those not ranked as high-income or upper-middle income for three consecutive years. But the World Bank has now ranked Thailand as an upper-middle income country from 2011 through 2013. That means Thailand will lose GSP privileges starting in early 2015, affecting 723 products. As a result, exporters will likely have to absorb the higher costs. Products that will thus be at a competitive disadvantage include frozen shrimp, motorcycles, shoes, apparel, tires and canned tuna. These products rely heavily on the European market and depend greatly on the GSP advantage. EIC estimates that the damage to the Thai economy will be at least $47 million. This will be significant for many individual companies, but in terms of the nation's overall exports the impact will be relatively minor, at just 0.5% of total exports.
Thailand's exposure to higher trade tariffs will inevitably lower the nation's price-competitiveness. Furthermore, rival countries with similar export-market structures that continue to receive GSP and FTA benefits, such as Indonesia, Vietnam, Malaysia, and Mexico, will make inroads into Thailand's existing markets.
Unfortunately, Thai seafood exporters were further hampered when Thailand was downgraded in the U.S. Trafficking in Persons (TIPs) report. On 20 June 2014, the U.S. Department of State released its 2014 TIPs report, which downgraded Thailand’s rank in human trafficking from the Tier 2 Watch List to Tier 3, which indicates countries with the worst problems. The downgrade resulted from claims that Thailand’s labor conditions do not meet U.S. standards and that during the past year Thailand has not made serious efforts to alleviate the problem. The U.S. will decide whether to sanction Thai products within 90 days after publication of the report.
27
Q3/2014
42 Thai-EU FTA negotiation schedule
This downgrade has eroded Thailand's reputation regarding business practices, especially in the fisheries sector. Such major Thai exports as frozen shrimp, canned tuna, and other processed and frozen seafood could decline because retailers and wholesalers might ban them. Moreover, there might be public campaigns to boycott these products. The human rights controversy is likely to have a business impact similar to that of the loss of GSP status. Hence, both government and companies should prepare to address concerns by consumers in the U.S. and other nations. Exporters should emphasize the protection of human rights and the environment throughout the manufacturing supply chain, because these issues are becoming more and more important in world trade.
Source: EIC analysis based on data from The Permanent Mission of Thailand to the World Trade Organization and Trademap
Thailand-EU Free Trade Area (FTA)
2014
Latest status: negotiations on the 7-11th of April ended in disagreement due toThailand’s inability to form government
Fifth round of negotiations in June
Sixth round of negotiations
in September
Final round of negotiations
in December
2015
Thailand-EU’s GSPprivilege is set to end on January 1, 2015
28
SCB Economic Intelligence Center (EIC)
43 Thailand's impact after GSP privileges cut
Source: EIC analysis based on data from The Permanent Mission of Thailand to the World Trade Organization and Trademap
05
101520253035404550556065707580859095
100
50 1009525 55504540353020 901510
share of exports to EU (%)
Other vehicle parts
Other pretroleum products
Sweater and cardigan
Vehicle parts
GSP
util
izat
ion
(%)
Refrigerator compressor
Other cooking electrical appliances
Sewing machine
Canned Tuna
Tires
Crude Palm oil
Ball bearing
Other rubber products
TextilePrimary plastic
SquidMotorcycleShoes
Bicycle
Frozen shrimp
Electrical motor
High impact
Low impact
Circle size = share to total Thailand’s exports
Weighted average = 42.6%
Weighted average = 8.6%
29
Q3/2014
Energy prices pushed inflation up for five straight months. Headline inflation rose from 1.9% in January to 2.6% in May, while core inflation climbed from 1.0% in January to 1.8% in May. Various energy prices are the culprit: 1. Household LPG price increases of 50 satang per month, starting in September last year, have caused prepared food prices to rise by approximately 5%. 2. During April through June 2013, crude oil prices fell temporarily due to weak global demand and rising supply from non-OPEC producers. The low base caused the energy price component used in the inflation calculation to spike during the same period in 2014. 3. The fuel adjustment cost (Ft), a component of electricity prices, increased by 10 satang from May to August 2014. EIC sees some inflation risk in the second half of 2014. Specifically, two risk factors should be monitored: 1. Whether energy prices will be reformed to reflect actual production costs, as in the case of electricity tariffs. 2. Whether unrest in Iraq will push up crude oil prices so much that costs pass through to headline inflation rates. Meanwhile, the government's move to fix the price of household LPG at 22.6 baht/kilogram and diesel at 30 baht/liter has eased short-term inflation expectations. Furthermore, demand will remain subdued because the economic recovery has not yet gained speed. Therefore, EIC estimates that average headline inflation will be at 2.5% in 2014 and core inflation at 1.6%.
Inflation
Source: EIC analysis based on data from MOC
Unit: %YOY
30
SCB Economic Intelligence Center (EIC)
44 Headline inflation rates increased continuously during the first 5 months, pushed by household LPG price increments, which increased prepared food prices
Contribution to Inflation Rate
Unit: %YOY
0.0
0.5
1.0
1.5
2.0
Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14
Food Non-food
0.0
1.0
2.0
3.0 Fresh food Energy Core inflationHeadline Inflation
Core Inflation
EIC expects that the Bank of Thailand's Monetary Policy Committee (MPC) will hold the policy interest rate at 2.0% throughout the second half of 2014. Private investor sentiment has improved following the alleviation of domestic political turmoil. Consumption deferred by households and businesses during the period of unrest will rebound during the latter half of 2014. Furthermore, the risk to economic stability is rising due to higher inflation rates and the risk of capital outflows, because Thailand’s interest rate is lower than regional peers. For these reasons, the MPC is likely to maintain the policy rate at 2.0% until late 2014 in order to support growth and financial stability.
Policy Interest Rate
31
Q3/2014
Source: EIC analysis based on data from Bloomberg
45 During the first half of 2014, the baht fluctuated within the 32-33 baht per USD range
Thai Baht
Depreciation
33.1 THB/USD Jan 6, 2014
Fed first tapered QE on Dec 17-18, 2013
32.19 THB/USD on Jul 17, 2014
Coup on May 22, 2014
29.5
30.0
30.5
31.0
31.5
32.0
32.5
33.0
33.5
Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14
EIC forecasts that the baht will depreciate slightly during the remainder of 2014. After the coup d'etat, the baht depreciated to 32.8 per USD by May 28, 2014. But as the political situation eased, and as the ECB cut interest rates, while the Fed signaled it would hold interest rates at low levels, foreign capital flooded into Thailand’s capital market, especially the bond market. This strengthened the baht to 32.5 per USD. EIC expects that the baht will depreciate slightly to 33 baht per USD in the second half due to: 1. A rise in global crude oil prices and slow Thai export recovery, which together will pressure the trade balance in the second half and cause the baht to depreciate. 2. Potential concern by investors that the Fed will increase the policy interest rate faster than expected, causing them to close their carry trade positions and sell baht assets to buy USD assets.
Thai Baht
`
Unit: USD-THB
32
SCB Economic Intelligence Center (EIC)
*as of 17 July 2014Sources : EIC analysis based on data from Bloomberg
46 Foreign capital inflows entered Thailand’s bond market in June
Net Trading by Foreign Investors in Thai Bond and Stock Markets
-60,000
-40,000
-20,000
0
20,000
40,000
60,000
80,000
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14
Thai bond Thai stock
*
THB million
Unit: THB million
33
Q3/2014
Source: EIC analysis based on data from Bloomberg
47 The euro slightly depreciated against the USD after ECB imposed policies
Euro Currency
Appreciation
At 1.393 USD/EUR on Mar 18, 2014, highest in 2 years
1.35 USD/EUR on Jul 17, 2014
35
37
39
41
43
45
47
49
51
53
55
1.20
1.25
1.30
1.35
1.40
1.45
1.50
Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14
EURUSD (LHS) EURTHB (RHS)
EIC expects the euro to depreciate against the U.S. dollar in the second half. The ECB has pursued an accommodative policy since 5 June 2014 because Eurozone inflation has been below desirable levels and the euro has appreciated to levels that hinder economic recovery. The more accommodative stance has caused the euro to depreciate slightly to 1.35-1.36 euro per USD. EIC believes that the ECB views 1.35 EURUSD as a critical level. As long as the rate stands above 1.35, the ECB will be under pressure to impose additional easing measures to combat deflation and stimulate economic activity. Hence, EIC views that by 2014 year-end the EURUSD rate will be at 1.30-1.35.
The Euro
Unit: EUR-USD Unit: EUR-THB
34
SCB Economic Intelligence Center (EIC)
Source: EIC analysis based on data from Bloomberg
48 The yen could further depreciate against the USD, if BOJ decides to expand the QQE asset purchase program
Japan Yen
A key factor that will determine the value of the yen is whether the BOJ will expand its QQE program. Although the BOJ has implemented QQE since 2013, the yen has not depreciated to desired levels. This is because Japan's economic conditions have improved, whereas global economic appears tentative. EIC believes that the BOJ might expand its QQE asset purchase program during late 2014 if inflation does not reach the targeted rate. If QQE expands, the yen could depreciate to 104-108 yen per USD by year-end.
Japanese Yen
2.9
3
3.1
3.2
3.3
3.4
3.5
3.6
3.7
90
95
100
105
110
Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14
THB-JPYUSD-JPY
USD-JPY
THB-JPY
Depreciation
101.4 JPY/USD on Jul 17, 2014
Unit: USD-JPY Unit: THB-JPY
35
Q3/2014
Global economic growth should continue to improve in 2015. The main driver will still be the U.S., where the economy is projected to grow by 3.2% in 2015, well above the 1.7% rate expected in 2014, thanks to recovery in the jobs market. The U.S. economy's turning point will be whenever the Fed adjusts monetary policy and interest rates after the end of QE. EIC expects the U.S. will increase policy interest rates in line with GDP growth that looks increasingly solid. As for the Eurozone, economic growth should slightly improve from 1.1% in 2014 to 1.7% in 2015. Factors to monitor are whether ECB policy actually succeeds in increasing inflation and stimulating commercial banks to extend loans. EIC believes that ECB’s decision to inject capital into the economy via TLTROs and purchases of ABS should keep short-term and long-term interest rates low in the Eurozone, and lower the chance that the euro will appreciate. Meanwhile, growth in major economies in Asia such as Japan and China in 2015 should be at rates similar to 2014, at 1.5% for Japan and 7.5% for China. Both economies are currently implementing long-term economic reforms. EIC believes that China’s reform plan to balance investment and consumption and to curtail shadow banking will pose more threat to its economic growth than the "third arrow" of Abenomics reform will threaten growth in Japan.
As for Thailand, EIC foresees improved economic conditions in 2015. Supporting factors are:
1. Continuous strengthening of private sector sentiment following stabliziation of the political situation. The improved sentiment will drive private consumption and investment to expand by 3.6% and 13%, respectively. 2. Improving efficiency of government’s investment budget disbursement and increasing state-owned enterprises spending on infrastructure investment will result in public investment growing by 16.5%. 3. Stronger global demand and a rebound in foreign tourist confidence in Thailand should help merchandize export to grow by 4%, while tourist arrivals should increase by 10%.
EIC therefore forecasts that the Thai economy will grow by 4.7% in 2015. The brighter economic growth is one of the reasons that will lead to the rise in domestic interest rates.
Yet amid this improved economic outlook remain various risks to the Thai economy. One is the end of GSP privileges, hindering exports to Europe in 2015. Hence, Thailand needs to prioritize reaching trade agreements that will benefit key exports by ensuring price-competitiveness against rival countries that still receive privileges. Moreover, Thailand needs to reassure global consumers regarding its measures against human trafficking, which impacts the reputation and competitiveness of Thai products.
Global economy in 2015
36
SCB Economic Intelligence Center (EIC)
Bull - Bear: Oil prices
38
SCB Economic Intelligence Center (EIC)
BULL-BEAR: Oil Prices
BULLs: Oil prices are likely to increase • Turmoil in Iraq, the second largest oil-producing country in OPEC, caused oil prices to spike to a nine-month high in 2Q-2014. The WTI price reached $107 and Brent crude oil price hit $115 per barrel after ISIL militants took control of the Baiji refinery located north of Baghdad, which has oil production capacity of 300,000 barrels per day. If the rebels manage to take control of cities in the south, where Iraq’s most important refineries and ports are situated, oil supplies are sure to tighten, which may push Brent crude price to $125 per barrel.
• The political situation in the Ukraine continues worries the oil market, as Russia threatens to cut off gas supplies there if half of debts are not settled. Ukraine’s total gas debt to Russia amounts to $4 billion. Although Russia continues to supply gas to Europe via Ukraine pipelines, the conflict might lead to a shutdown via that route, which would cause energy shortages in Europe. This risk is psychological factor nudging oil prices higher.
• During 3Q-2014, oil demand should increase, as various refineries resume normal operations after shutting down for annual maintenance during 2Q-2014. Furthermore, China’s demand for crude oil imports should increase because its refining capacity will increase by 250,000 barrels per day within 2H-2014.
Source: EIC analysis based on data from leading global houses (as of 1 July 2014)
Crude oil price (USD/Barrel)
2012 2015F
(Average) Average Q1 Q2 Q3 Q4 Average Q1 Q2 Q3F Q4F Average High Low Average
WTI 94 94 94 106 97 98 99 103 104 101 102 106 97 98
Brent 112 113 103 110 109 109 108 110 111 108 109 115 106 105
2013 2014F
39
Q3/2014
BEARs: Oil prices are likely to decrease or stabilize• Global over supplies of crude oil continue to put downward pressure on prices. The U.S. Energy Information Administration (EIA) forecasts that crude oil supply will increase to 92.45 million barrels per day during 3Q-2014, an amount exceeding demand by 20,000 barrels per day. Most of the increase will come from U.S., which will produce approximately 13.63 million barrels of crude oil per day during 3Q-2014, up 9% YOY.
• The oil inventory at the Cushing Hub, the giant storage facility in Oklahoma, U.S., where NYMEX crude oil contracts are delivered, should increase from 21.4 million barrels of 2Q-2014 level. This increase will put downward pressure on the WTI crude oil price. A factor behind this increase is the expected completion during 3Q-2014 of the Pony Express Pipeline, which will be able to transport crude oil from the Bakken shale area to Cushing, with a capacity as high as 320,000 barrels per day.
• Political situations have improved in Libya, which is able to resume operations of its Zueitina and Hariga oil ports after the government approved salary increases for protesting workers there. This should let Libya export an additional 200,000 barrels of oil per day and also stimulate higher production of oil. For now, Libya is able to produce only 250,000 barrels of oil per day, a rate lower than during past times of stability, when production was at almost 1.5 million barrels per day.
EIC’s view : BULL Crude oil prices during 3Q-2014 should increase due to higher risk premium resulting from geopolitical turmoil. The main factor to watch is the situation in Iraq, which could worsen if the ISIL rebels are able to take over refineries and oil ports in the south. Furthermore, oil demand will increase, especially from refineries after yearly maintenance during 2Q-2014. However, various other conditions could slow oil price increases, such as the continuing oversupply factor. Moreover, if supplies tighten due to the situation in Iraq, OPEC producers might decide to increase output.
40
SCB Economic Intelligence Center (EIC)
In focus:
Thailand’s exports shrank 1.2%YOY during the first five months of 2014, a performance that was unexpectedly weak. Part of the problem is due to the slowdown in global trade, especially from emerging markets (EM). However, the slackening global trade could not fully explain the weak performance. In fact, there are two other factors contributing to this underperformance. Firstly, a decline in prices for agricultural commodities, mainly rubber, one of Thailand's key products. Secondly, a significant share of Thai electronics products exported is becoming out of date.
Demystified Thailand’s weak export performance
Demystified Thailand’s weak export performance
%YOY Export Growth 2012
+3.0 -0.3 -1.22013 Jan-May 2014
Thailand export value shrank 1.2% in the
first 5 months
Slowdown trade in Emerging Markets (EM)1
Declining agricultural commodities price2
Thailand exports of obsolete technology products in electronics sector 3
Export of out-of-date products in electronics sector during Jan-May 2014
Export value
Share to total export
During Jan-May 2014 many agricultural commodities suffered from declining prices
Lower import growth from emerging markets impactThailand’s export performance.
%YOY growth of world import
2.8 3.2
-0.4
2.1
6.2
4.4
Price 28.8 43.2 12.7
18.8 8.8 29.3%%
RiceRubber Sugar
Export Value
Global G3 EM
Source: EIC analysis based on data from CPB CEIC Bloomberg and Trademap
91 %YOY %YOY
% %
22 31.1
Floppy disk Optical disk drives
DRAM Digital camera
Fax, telephone and parts
1.6 0.9 0.7 0.829 7
PC/laptop Appliances
2013 Jan-May 2014
-2%
41
Q3/2014Demystified Thailand’s weak export performance
%YOY Export Growth 2012
+3.0 -0.3 -1.22013 Jan-May 2014
Thailand export value shrank 1.2% in the
first 5 months
Slowdown trade in Emerging Markets (EM)1
Declining agricultural commodities price2
Thailand exports of obsolete technology products in electronics sector 3
Export of out-of-date products in electronics sector during Jan-May 2014
Export value
Share to total export
During Jan-May 2014 many agricultural commodities suffered from declining prices
Lower import growth from emerging markets impactThailand’s export performance.
%YOY growth of world import
2.8 3.2
-0.4
2.1
6.2
4.4
Price 28.8 43.2 12.7
18.8 8.8 29.3%%
RiceRubber Sugar
Export Value
Global G3 EM
Source: EIC analysis based on data from CPB CEIC Bloomberg and Trademap
91 %YOY %YOY
% %
22 31.1
Floppy disk Optical disk drives
DRAM Digital camera
Fax, telephone and parts
1.6 0.9 0.7 0.829 7
PC/laptop Appliances
2013 Jan-May 2014
-2%
Looking at export destinations, the 1.2%YOY decline in Thailand’s exports value during Jan-May 2014 reflects weaker demand among major trading partners in Asia. Our exports to ASEAN (25% of total Thai exports) decreased by 3.5%YOY while exports to China (12% of total Thai exports) fell by 5.6%YOY. Exports to Japan dropped 1.8%YOY due to lower demand linked to the hike in the consumption tax implemented in April. However, other big markets demand rebounded: exports to the United States and the European Union (both with 10% shares to total Thai export) grew 1.1%YOY and 6.3%YOY, respectively (Figure 49).
42
SCB Economic Intelligence Center (EIC)
Thai exports fell 1.2%, dragged down by slower demand in ASEAN and China. 49
Source: EIC analysis based on data from MOC
Thailand’s exports to major markets (% YOY)
Unit: %YOY
-5.2
0.8
2.7
1.3
5.0
-0.3
-1.80
1.10
6.30
-5.60
-3.50
-1.20
Japan (10%)
US (10%)
EU (10%)
China (12%)
ASEAN (25%)
Total Exports2014 (Jan-May)2013
A decline in EM trade is one of the factors affecting the Thailand’s export. World imports increased just 3.2%YOY during the first quarter of 2014, a rate lower than expected reflecting a slower momentum in emerging markets, especially in China. EM imports grew just 4.4%YOY in the first quarter, down from 6.2%YOY in 2013. Weak emerging market demand offset the recovery of G3 countries (the U.S. E.U. and Japan), which saw a 2.1%YOY growth in imports (Figure 50).
43
Q3/2014
Weak demand in emerging markets slowed global trade in Q150
Source: EIC analysis based on data from CPB
Imports by G3 and emerging markets (% YOY)
Unit :%YOY
6.2
1.92.8 3.23.6
-0.3
2.1
9.2
4.5
6.2
4.4
201320122011 2014Q1
EM (56%)Global G3 (44%)
China’s economic slowdown has offset the recovery of G3.
Numbers in parentheses indicate share of total global imports.
-0.4
However, sluggish global demand does not fully explain Thailand’s poor export performance. A final demand analysis by the OECD shows that the final destinations for 44% of Thailand’s export goods goes to G3 countries, 10% goes to ASEAN and 9% goes to China, similarly to Malaysia's figures (Figure 51). Therefore, if global demand had actually been the main problem, then Thailand's export results would not have diverged so greatly from those of Malaysia, where exports grew 6.2%YOY during the same period (Figure 52). This suggests that Thailand’s weak export performance has more to do with factors involving the products structure themselves, rather than markets.
44
SCB Economic Intelligence Center (EIC)
Final destinations of export for Thailandand Malaysia are quite similar51
Source: EIC analysis based on data from OECD
2013 export shares (Actual vs final destinations estimate)
ASEAN
China
G3
Other
21%
11%
33%
35%
ASEANChina
G3
Other
10%9%
44%
36%
ASEAN
China
G3
Other
26%
12%
32%
30%
ASEANChina
G3
Other
10%10%
44%
36%
Actual exportOECD’s final destinations
estimate taking into account re-export
2013 Export shares (Actual vs. Final destinations estimate)
Unit: percentage point
Thai export products structure responsible for the weak performance. 53
Composition of exports,2013 Growth of key export products (Jan-May 2014)
45
Q3/2014
Malaysia's exports far outpaced Thailand's 52
Source: EIC analysis based on data from MOC and CEIC
Source: EIC analysis based on data from MOC
Export growth
Unit: %YOY
Unit: Share of total exports, million USD Unit: %YOY
-0.3
0.3
-1.2
6.2
Thailand Malaysia
2013
2014 (Jan-May)
-5.0
-0.1
2.84.9
1.6
Refined fuel
-10.2
ICsElectrical appliances
Autos & parts
Agricultural products
Computers & parts
Outmoded Thai-made products see low demand
Weak demand from trading partners
Exposure to volatile farm commodity prices
1 2
Refinery under maintenance
100%
Others
Refined fuel
Autos & parts
Integrated circuits
Electrical appliances
Computers & parts
Agricultural products
Thailand
228,730
44%
6%
11%
3%
10%
8%
17%
Looking at Thailand’s export product structure, the information shows 2 important factors:
1) Heavy reliance on agricultural commodities, which their price had declined drastically. Agricultural products is affected by the volatile price factors, making its export value to decreased by 5%YOY in Jan-May 2014. Thailand’s main agricultural product is rubber, which accounted for 20.6% of total agricultural products export, or around 4% of Thailand’s total export (Figure 54). Rubber price has declined around 27% compared to its highest in 2011 (Figure 55), the declining price has lowered rubber export value, causing rubber value to contribute around -0.75 percentage point (pp) to the total -1.2% export growth in Jan-May 2014 (Figure 56). When comparing to Malaysia, which able to achieve higher export growth than Thailand, its main agricultural products is palm oil (accounted for 49% of total agricultural product export), while rubber accounted for just 8.6%, or 1% of Malaysia's total exports by value (Figure 54). As a result, Malaysia felt far less impact than Thailand did from the drop in rubber prices.
2) Thailand export contains significant shares of out-of-date technology products which can be seen in PCs/laptops and certain appliances chain. (Figure 57).
Thailand's obsolete products in the PC/laptop supply chain are mainly floppy disk, optical disk drives, and DRAMs. Exports of floppy disk, which account for 1.1% of total exports, declined 42%YOY in 2013 and 91%YOY in Jan.-May of 2014. Optical drives, like DVD read/write drives used in PCs and laptops, also show declining export growth: -8%YOY in 2013 and -22%YOY in 2014 Jan.-May. Optical drives (1.6% of total exports) are likely to become out-of-date in the near future because they are not used in today's popular "ultrabook" computers, like Apple's MacBook Air, that are displacing laptops and PCs. Likewise DRAMs (dynamic random-access memory) chips, have long been used in PCs and laptops but are now being replaced by more efficient flash memory chips like NANDs (negated AND or NOT AND gates), often used in PCs, ultrabooks and smart phones. Exports of DRAMs, which accounted for 0.9% of total exports, fell 1%YOY in 2013 and grew just 3%YOY in 2014 Jan.-May (Figure 57).
Thailand's out-of-date electrical appliances include digital cameras and conventional telephones. Digital camera export growth fell by 12% in 2013, and 29% in the first five months of 2014, a trend attributable to consumers' increasing tendency to take pictures with smart phones rather than digital cameras. Mobile phones are likewise replacing conventional telephones for both personal use and business. Thus, exports of fax, "wired" or landline phones and parts fell 13% in 2013, and 7% during Jan.-May 2014 (Figure 57).
These obsolete products in the electrical appliances chain and PC/laptop chain account for 5.1% of Thailand’s total exports during Jan.-May 2014, and these obsolete products’ declining growth contributed around -1.43 pp to Thailand total export growth of -1.2% in the first five months of 2014. Malaysia, however, contained smaller amount of out-of-date technology products when compared to Thailand (Figure 58).
Together, the declining agricultural price and significant shares of obsolete product in Thailand’s export contribute around -2.18 pp to Thailand's export contraction of -1.2% during Jan-May 2014.
46
SCB Economic Intelligence Center (EIC)
Thai farm exports are weighted heavily toward rubber, with sinking prices, whereas Malaysia ships mostly palm oil54
Source: EIC analysis based on data from MOC, CEIC, and Bloomberg
Composition of agricultural export products
Unit: %
Rubber prices fell 27% comparing to 201155
Source: EIC analysis based on data from MOC and CEIC
Monthly rubber price STR20
Unit: Baht/kg
Others
12.1%
49.0%
Processed seafood
Sugar7.3%
Rice11.0%
Rubber
20.6%
Others 36.8%
Coffee,Tea, Cocoa,& Spices
6.0%
Rubber
8.6%
Palm oil48.7%
020406080
100120140160180200
Jan-
11
Apr-
11
Jul-1
1
Oct
-11
Jan-
12
Apr-
12
Jul-1
2
Oct
-12
Jan-
13
Apr-
13
Jul-1
3
Oct
-13
Jan-
14
Apr-
14
STR 20 rubber price
CAGR -27%
47
Q3/2014
Decline in value of rubber exports subtracted 0.75 p.p. from total exports, Jan.-May 2014
Technological obsolescence is sapping supply chains for PCs/laptops and some consumer electronics
56
57
Source: EIC analysis based on data from MOC and Bloomberg
Source: EIC analysis based on data from CEIC and Trademap
PC/Laptops
• Floppy disk drives (1.1%)
• Optical drives (1.6%)
• DRAMs (0.9%)
Consumer electronics
• Digital cameras (0.7%)
• Faxes, telephones and parts (0.8%)
-42
-8 -1-22
3
Optical disk drives
Floppy disk drives
-91Memory chips (DRAMs etc.)
2014 (Jan-May)2013
-12 -13 -7
Faxes, phones & parts
Digital cameras
Demand is dropping fast (% YOY)Key products
(% of total exports)
1
2
-29
Share of total exports Jan-May 2014 (%YOY) CTG of total exports
Thailand 4% -19% -0.75%
Malaysia 1% -21% -0.21%
48
SCB Economic Intelligence Center (EIC)
In conclusion, these trends reveal ongoing structural changes in Thailand's export landscape. During 1990-1995, Thailand positioned itself in labor-intensive industries, with textiles as the main export product, at 16% in 1990 and 11% in 1995. As time progressed, electronics and electrical appliances became more important. During 2000-2005, key foreign producers chose Thailand as major production base. Composition of our exports shifted from textiles to electronics products. In 2005, computers and parts accounted for about 11% of total exports, while electrical appliances were 12%. But since 2010, autos and parts have become our main manufactured exports, while electronics and appliances are fading. This raises an important question of which products would be affected by the changing in Thailand export landscape in the future.
Outmoded products eroded 1.43 pp. from total decline exports in Jan-May 201458
Source: EIC analysis based on data from MOC, CEIC, and Trademap
Share of total exports
Jan-May 2014 (%YOY)
CTG of total exports
Thailand 5.1% -28% -1.43%
Malaysia 2.2% -10% -0.22%
But Thailand still relies heavily on these exports
49
Q3/2014
Thailand’s changing export landscape: electronics and electricals lose share59
Source: EIC analysis based on data from MOC
Composition of Thailand’s exports
Unit: % of total exports
16%11%
8% 6% 4% 3%
6%10%
11% 12%11% 10%
7% 9% 13%11%
10%8%
3% 7%9%
11%30%
35%
100%
25%
5%
15%
10%
20%
0%Textiles
Electrical appliances
Computers & parts
Autos and parts
Others
20132010200520001995
1%
1990
1%
Major export products were textiles
due to cheap, abundant labor.
Now autos & parts are the major exports while electronics & appliances
are declining
Electronics & appliances gained
importance as foreign producers entered.
50
SCB Economic Intelligence Center (EIC)
Summary of main forecasts
Q3/2
014
For
14Q2
, act
uals a
re r
epor
ted
for
Key
rate
s, E
xpor
t, Im
port
and
Oil
prices
. So
urce
s: E
IC for
ecas
ts, A
sia
Pacific
Con
sens
us F
orec
asts
(Ju
n 20
14),
June
201
4 Ba
nk o
f Th
aila
nd’s M
onet
ary
Polic
y Re
port
, and
For
eign
res
earc
h ho
uses
.
Key
indica
tors
2013
Un
it Ac
tual
EIC fo
reca
st Co
nsen
sus
BOT
Shar
e (%
) 20
13
13Q
4 14
Q1
14Q
2 14
Q3
14Q
4 20
14
2015
20
14
2014
Re
al GD
P gr
owth
%
YOY
2.9%
0.
6%
-0.6
% -0
.2%
2.3%
4.
9%
1.6%
4.
7%
1.3%
1.
5%
Dema
nd-si
de
Priva
te co
nsum
ption
50
.7%
% YO
Y 0.2
% -4
.1%
-3.0%
-1
.4%
1.2%
3.7%
0.1%
3.6%
-0.1%
0.2
% Pu
blic
cons
umpti
on
10.3%
%
YOY
4.9%
0.8%
2.9%
4.0%
4.0%
5.0%
4.0%
2.5%
3.5
% Inv
estm
ent (
GFC
F) 21
.7%
% YO
Y -1
.9%
-11.4
% -9
.8%
-8.1%
2.8
% 17
.3%
-0.1%
13
.8%
-3.4%
Priv
ate in
vestm
ent
17.0%
%
YOY
-2.8%
-1
3.2%
-7.3%
-8
.9%
0.3%
16.5%
-0
.5%
13.0%
-2.6%
P
ublic
inve
stmen
t 4.7
% %
YOY
1.3%
-4.7%
-1
9.3%
- 5.3%
11
.5%
20.2%
1.5
% 16
.5%
1.1
% Su
pply-
side
Ag
ricult
ure
8.3%
% YO
Y 1.4
% 2.1
% 0.8
% 3.0
% 3.3
% 4.0
% 2.8
% 3.1
%
M
anufa
cturin
g 38
.1%
% YO
Y 0.1
% -2
.8%
-2.7%
-1
.8%
1.2%
1.6%
-0.4%
4.1
%
Se
rvice
s 53
.6%
% YO
Y 5.2
% 3.0
% 0.8
% 0.5
% 2.9
% 7.6
% 3.0
% 5.5
%
Ex
terna
l sec
tor
Expo
rt of
Goo
ds (U
SD)
%
YOY
-0.3%
-1
.0%
-1.0%
-0
.3%
-0.8%
6.6
% 1.1
% 4.0
% 2.5
% 3.0
% Im
port
of G
oods
(USD
)
% YO
Y 0.3
% -7
.9%
-15.4
% -7
.9%
3.9%
10.8%
-2
.6%
7.3%
-0.5%
-3
.6%
Curre
nt ac
coun
t
USD
bln
-2.8
3.0
8.2
-2
.5
-1.1
2.3
6.9
2.5
6.5
11
.7
Key
rates
He
adlin
e inf
lation
% YO
Y 2.2
% 1.7
% 2.0
% 2.5
% 2.6
% 2.8
% 2.5
% 2.6
% 2.4
% 2.6
% Co
re inf
lation
% YO
Y 1.0
% 0.8
% 1.2
% 1.7
% 1.8
% 1.8
% 1.6
% 1.7
%
1.7%
Polic
y ra
te (RP
-1D)
(end
peri
od)
%
p.a.
2.25%
2.2
5%
2.00%
2.0
0%
2.00%
2.0
0%
2.00%
2.5
0%
THB/
USD
(end
perio
d)
TH
B/US
D 32
.7
31.7
32
.6
32.4
33
.0
33.0
33
.0
33.0
O
il pr
ices –
Bren
t (pe
riod
avg.)
USD/
bbl
109
109
108
110
111
108
109
105
As o
f Jun
-14
As o
f Jun
-14
EIC
summ
ary
of m
ain
fore
casts
ContributorsSutapa is Chief Economist and First Executive Vice President at Siam Commercial Bank (SCB), where she leads the Economic Intelligence Center (EIC). She previously served as Head of Credit Risk Analytics Division under Risk Management Group.
Before SCB, Sutapa set up and headed the Risk Analytics and Research Group at TMB Bank during her secondment from ING Group. Prior to joining the banking industry, Sutapa was Economist (EP) at the International Monetary Fund (IMF) in Washington, DC. She had also served as Advisor to the Thai Senate Committee on the Economy, Commerce, and Industry, as well as Director of Macroeconomic Analysis Section at the Thai Ministry of Finance.
Sutapa holds an undergraduate degree in Applied Mathematics from Harvard Univers ity and a doctorate degree in Economics , Management, and Pol icy from Massachusetts Institute of Technology (MIT). She was a recipient of Thailand’s most prestigious King’s Scholarship. In 2007, Sutapa was honored by the Asia Society as Asia 21 Young Leaders Fellow, selected among a diverse group of professionals under 40 from the Asia-Pacific region.
Sutapa Amornvivat, Ph.D.Chief Economist and FEVP
Chinnawut Techanuvat, Ph.D.Senior Economist
Dr. Chinnawut was the Contributor on Thai economy and politics for Oxford Analytica and has researched in the fields of experimental economics, sociology and education, modelling principally on socioeconomic data. He has his prior training at the Bank of Thailand and Citigroup London (Canary Wharf).
Dr. Chinnawut received his bachelor's degree (First Class Honors with Gold Medal Award) in economics from Thammasat University. A Citibank/FCO Chevening scholar, he completed his master's degree and a doctorate degree from the University of Oxford with his thesis on Thai education and societal changes in the twentieth century.
Athiphat is an economist with broad experiences in the macroeconomic policy area. He has over 4 years of experience working as a senior economist at the U.S. Congressional Budget Office (CBO) in Washington DC. At CBO, his responsibilities include analyzing the impact of macroeconomic policies on the economic and budget outlook of the United States. He also conducted the economic study on the behavioral responses of investors to changes in the tax policy.
Athiphat received a Bachelor of Arts in Economics (First class honors with Gold Medal Award) and a Master of Arts in International Economics and Finance from Chulalongkorn University. He later completed his doctorate degree in Economics from Rice University (USA).
Athiphat Muthitacharoen, Ph.D.Senior Economist
Piyakorn has extensive experiences in the financial industry. Before joining EIC, he worked in private wealth at a leading securities firm in Thailand, where he provided advisory in asset allocation, derivatives, and structured products investment. In addition, he was a member of the pioneer team to establish the first financial futures exchange in Thailand.
Piyakorn received his bachelor's degree in Industrial Engineering from Chulalongkorn University and obtained a Master of Science in Financial Engineering from Columbia University. He is also professionally qualified as a Financial Risk Manager (FRM) and a Chartered Financial Analyst (CFA). Besides his role at SCB, Piyakorn serves as a member of the Board of Directors of CFA Society Thailand.
Piyakorn Chonlaworn Senior Analyst
Contributors
Sivalai has prior work experience in conducting research and analysis in economic, monetary, and fiscal policies as well as transport infrastructure at the Ministry of Finance, NESDB and Department of Highways. She was also an advisory staff member for the Minister of Transport. Her research interests include entrepreneurship and financial market risks.
Sivalai received her Bachelor of Economics (First Class Honors) from Chulalongkorn University. She was awarded the Royal Thai Government Scholarship to pursue MSc program in Policy Economics at the University of Illinois at Urbana-Champaign, and the World Bank Graduate Scholarship to pursue MSc program in Economics at the London School of Economics. She completed her doctorate degree in Applied Economics and Management at Cornell University.
Sivalai Khantachavana, Ph.D.Senior AnalysisAreas in Charge: Petroleum and Energy,Transport and Infrastructure
Phacharaphot Nuntramas, Ph.D.Senior Economist
Phacharaphot joined Siam Commercial Bank in the Credit Risk Analytics Division in the Risk Management Group. Previously, he was Assistant Professor of Economics at San Diego State University, USA and his research was published in the Journal of International Money and Finance. He was also an intern at the Board of Governors of the Federal Reserve System.
Phacharaphot received a Bachelor of Arts (First Class Honors) in Economics from Thammasat University and a doctorate degree in Economics from the University of Michigan, Ann Arbor, USA.
Thanapan Kriengkomol Finance Management Trainee
Vorada Tantisunthorn Analyst
Thanapan received her Bachelor of Business Administration in Banking and Finance (First Class Honors) from Chulalongkorn university.
Vorada received her Bachelor degree in Economics at Chulalongkorn University (EBA program) with first class honour and Master degree in Finance and Risk at University of Bath with distinction.
Contributors
Kasemsook ThaksadipongAnalyst ์
Kasemsook received a Bachelor of Arts in Economics (First class honors) from Thammasat University.
Tanakorn LimvittaradolAnalyst
Tanakorn received a Bachelor of Arts in Economics (First class honors) from Thammasat University.
Sutapa Amornvivat, Ph.D.Chief Economist and [email protected]
Macroeconomics
Athiphat Muthitacharoen, Ph.D. [email protected]
Chinnawut Techanuvat, Ph.D. [email protected]
Chutima [email protected]
Phacharaphot Nuntramas, Ph.D. [email protected]
Kasemsook Thaksadipong [email protected]
Khemarat [email protected]
Tanakorn Limvittaradol [email protected]
Knowledge Management & Networking
Anyarat Boonnithivorakul, Ph.D. SVP, Head of Knowledge Management & Networking [email protected]
Alan [email protected]
Atchara Glinprakod [email protected]
Ekarat [email protected]
Napat Srichamorn [email protected]
Vipasara Arpaskundait [email protected]
Wanitcha Nateesuwan [email protected]
Strategy and Advisory
Teerin Ratanapinyowong FSVP, Head of Sectorial Strategy [email protected]
Chotika Chummee [email protected]
Nitnara Mintarkhin [email protected]
Piyakorn [email protected]
Pranida Syamananda [email protected]
Sivalai Khantachavana, [email protected]
Srinarin Poudpongpaiboon [email protected]
Supree [email protected]
Tubkwan Homchampa [email protected]
Vithan Charoenphon [email protected]
Alisa Tamprasirt [email protected]
Kaittisak Kumse [email protected]
Kaweepol [email protected]
Nutchaya Arakvichanun [email protected]
Pakanee [email protected]
Pann [email protected]
Therdtum [email protected]
Vorada [email protected]
Wisuta [email protected]
SCB Economic Intelligence Center (EIC)E-mail : [email protected] Tel : +662 544 2953
Economic Outlook for 2014
Bull - Bear: Oil Prices
In focus:Demystified Thailand’s weak export performance
Summary of main forecasts
4
37
40
51
Content
Disclaimer : The information contained in this report has been obtained from sources believed to be reliable. However, neither we nor any of
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Economic Intelligence Center
Overall Economic Outlook for 2013Bull - Bear: Oil Prices
In focus: Capital inflows…consequences and countermeasures
In focus: New wave of FDI from Japan… implications for Thai economy
Summary of main forecastsContributors:Dr. Sutapa AmornvivatDr. Sivalai Khantachavana
Dr. Phacharaphot Nuntramas Kasemsook Thaksadipong
Dr. Chinnawut Techanuvat Tanakorn Limvittaradol
Dr. Athiphat MuthitacharoenSophon Vijitmethavanich
OutlookQuarter 1/2013
Siam Commercial Bank, SCB Economic Intelligence Center, 9 Ratchadapisek Rd., Jatujak, Bangkok 10900, E-mail:[email protected]