Thailand scrambles to perk up slowing economy
When the trade war first erupted early last year, Thailand was hoping to attract more inflows of foreign direct investment as US companies relocated their factories from China. The expected inflows would have been an added boost to the increase of Thai exports that was experienced in 2018 and resulted in a decent 4.1% gross domestic product (GDP) growth that year.
However, for a number of reasons the expected inflow did not happen with many of the relocating companies moving to Vietnam. The resulting fallout has had a serious impact on the Thai economy.
The National Economic and Social Development Council, the agency responsible for the national accounts data, downgraded its full-year GDP growth forecast for 2019 to 2.7-3.2% from 3.3-3.8%. The revision was based on weak export performance that is expected to fall by 1.2% in 2019 versus an original growth forecast of 2.2%.
In a bid to address the seriousness of the situation, the Bank of Thailand (BOT) announced a 0.25% cut in policy rates from 1.75% to 1.50% in August 7, effective immediately.
The rate cut was unexpected for the BOT, which was seen as one of the more conservative central banks in the region. The last time BOT cut rates was more than four years ago. Previously, the BOT has resisted rate cuts over concerns that it may result in rising consumer debt and financial instability.
In its announcement, the BOT however admitted that a contraction in exports and an expected slowdown in GDP growth called for a more accommodative monetary policy. This is a reversal from its previous tight monetary policy designed to control inflation.
The reversal of the monetary policy has been welcomed by the market since inflation has been benign at 0.98% as of July 2019, dropping from 1.06% in 2018. The BOT has forecast headline inflation for 2019 at 1%, against its 1%-4% target range.
“A more accommodative monetary policy stance would contribute to the continuation of economic growth and should support the rise of headline inflation towards the target,” says Titanun Mallikama, secretary of the monetary policy committee of the BOT.
It remains to be seen how effective the change in monetary policy will be as the country also has to contend with, among other things, a slowdown in tourist arrivals, the impact of a worsening drought on agriculture, and the strengthening of the Thai baht.
On September 6, the government through the Board of Investment (BOI) also endorsed a package of measures designed to attract more foreign direct investment. Known as the “Thailand Plus Package” the new incentive measures are aimed at attracting more foreign businesses to relocate to Thailand.
The new tax incentives are intended to expedite large-scale investment as well as strengthen development of the workforce. The incentives would be available for projects worth 1 billion baht (US$31.2 million).
Specifically, the new incentives provide for an additional 50% reduction of corporate income tax for a period of five years for projects located outside Bangkok. Before the incentives, corporate tax in Thailand was pegged at 20%.
Investments and challenges
Giving corporates incentives to locate outside Bangkok is intended to spur more development in the countryside which has suffered from the withdrawal of several populist measures such as the controversial rice pledging scheme.
On September 20, BOI Secretary-General Duangjai Asawachintachit announced that the government has approved four investment projects from Japan, Taiwan and Singapore worth almost US$1 billion.
“Many companies that were impacted by the trade war are looking for new locations,” Asawachintachit says in published reports.
Nevertheless, despite these rate cuts and incentives, the government still faces a huge amount of work and challenges in terms of attracting foreign direct investments and perking up economic growth.
Among the major challenges are higher labour costs arising from a relatively ageing population compared to Vietnam which offers a growing pool of skilled and semi-skilled workers suitable for export-driven companies; sustaining the political stability in the long term (Thailand continues to be led by a military junta that seized power in May 2014 with no clear path towards a return to civilian rule); a lack of focus on high-technology industries that is seen as a future trend for other growing economies; and the need for more access to multilateral trade agreements.
With regards to Vietnam, a number of Thai conglomerates have in fact been opening operations in that country attracted by its huge domestic market. These include Charoen Pokphand Foods, Thai Beverage, Central Group, Boon Rawd, PTTEP Group, and Siam Cement Group.
In any case, the Thai government is hoping that the new BOI incentives may overcome some of these challenges in terms of attracting businesses relocating out of China into Thailand.
“My take is that the tax incentives which the Thai government has put in place to attract some of these outflows (from China), these might have an impact in terms of some of the decisions. Also, there are already established supply chains in Thailand for certain products. That makes it a plus point in terms of being an FDI destination,” says Vishrut Rana, economist at S&P Global Ratings.
Going forward, all eyes are now focused on how the BOT’s monetary stimulus combined with the new incentives for corporates will impact the economy in the medium to long term.
Unfortunately for Thailand, its future very much depends on factors beyond its control particularly a resolution of the trade war. Meanwhile, fingers are crossed that the new monetary policy and investment incentives will be sufficient to counter the existing challenges.