Thailand faces constraints as domestic and global factors hinder economic growth
In the first quarter of this year, the country's GDP grew faster than expected, but this is not enough to raise forecasts for GDP growth for the full year to 3.2%. Despite the increase in private consumption, there are restrictions in private investment, public spending and exports.
Political uncertainty after the elections also has a negative impact on the economy. A bank spokesman said that despite the clarity of the election results, the formation of a government coalition is not happening immediately, which could slow growth. The Bank of Thailand also raised interest rates last week, raising them by 25 basis points to 2%, signaling the risk of inflation and a possible further rate hike.
Worldwide restrictions also have a significant impact on the Thai economy. A significant slowdown in the global economy is expected, and possibly even a recession, especially in Western countries. This will reduce demand for Thailand's exports and may even reduce the number of tourists visiting the country. The United States and the European Union may enter a period of sustained rate hikes in an attempt to balance inflation risks in a strong labor market. In addition, banks in the US and Europe tightened lending as a result of the collapse of several banks.
The bank spokesman noted that the manufacturing sector in the US and the EU is shrinking, while the service sector is expanding, which creates difficulties for the formation of the economy. The US Federal Reserve and the European Central Bank will be forced to maintain or raise interest rates for an extended period to manage inflation risks and strong labor markets.
Developing countries, including China, are also seeing a slowdown in growth, which strengthens the US dollar and weakens other currencies, leading to capital outflows. A slowdown in the global economy will have a long-term impact on Thailand's exports and could result in fewer than expected tourist numbers.
Political Uncertainty and Risk of Delays
Political uncertainty is also affecting Thailand's fiscal policy. Lack of clarity regarding the formation of a new government creates the risk of contingencies. The high number of contested seats in the House of Representatives and complaints filed with the electoral commission, which can be referred to the Constitutional Court for decision, are risk factors to watch out for. A bank spokesman noted that a new government may not be formed until August, which would slow down the budgeting process and affect government spending. All this can lead to delays in the signing of new public spending contracts for six to nine months.
Moreover, government agencies and ministries may be slower while awaiting approval from the new government for major projects. This can lead to delays in planned projects, including budgeting for both current expenditures and investments. This will have a cascading effect on the procurement process and other government processes.
Impact of interest rate hikes on the Thai economy
The increase in interest rates has also already begun to have a significant impact on the Thai economy. The bank representative noted that the interest rate of the Bank of Thailand increased by 150 basis points over the past year (from 0.5% to 2.0%), which led to a 160 basis points increase in the base interest rate of banks (from 5.25% to 6 .85%). As a result of higher interest rates, there is a reduction in credit growth, which fell from an annual rate of 8.9% in October 2021 to 2.3% in March 2023. The slowdown in credit growth affects investment activity, especially in the real estate sector.
Business lending and private sector investment are expected to decline further as interest rates continue to rise.
Drought risk in Thailand
Another issue to pay attention to is the risk of drought. A bank spokesman said that he is closely monitoring the southern oscillation index, which is used as an indicator of the possible consequences of the El Niño phenomenon. If the index moves into the negative zone, this indicates problematic weather conditions and the possible onset of the El Niño phenomenon within the next three to six months. This climatic situation could seriously damage Thailand's agriculture and lead to a crisis in the agricultural industry.
All these factors create a difficult economic situation for Thailand. The country will have to cope with the challenges of the global economy, political uncertainty, rising interest rates and the risk of drought. It must actively look for ways to sustainable development in these conditions, carefully analyze the consequences and take the necessary measures to minimize risks and ensure economic stability.
