Most economic research houses, government and private, projected Thailand would see GDP growth of 3.5-4% this year. Even the Joint Standing Committee of Commerce, Industry, and Banking, an organisation representing Thai business entities, supported that range.
Growth will stem from three factors: first, the recovery from two slow years of low growth; second, the reduced impact of the Omicron variant and the high vaccination rate; and finally, world economic growth. The last time the Thai economy achieved 4% growth was in 2018.
All of these projections were made before the International Monetary Fund (IMF) slashed its global economic growth outlook for 2022 from the 4.9% it predicted in October 2021 to the 4.4% it forecast last month.
That downgrading of half a percentage point was mainly due to the revised growth projections of the United States (a 1.2% cut) and China (down 0.8%).
As they are our top two trading partners, snapping up 29.1% of our exports, it is natural we should also be revised downward accordingly.
For those who may not make it to the end of this article, I'll cut to the chase: my estimation for Thailand's growth this year is much less optimistic -- not 3.5% but rather 1.6%. I have five reasons why.
No 1: High inflation rates. Consumer prices in January rose by 3.23%, up from 2.17% a month earlier. This may look tame compared to the rates of 5-7% witnessed in some other countries. But let me tell you this. The rough cycle of inflation in Thailand has just begun.
In the same month, producer prices jumped 8.7%, far higher than the inflation rate for consumer prices. A survey of CEOs by the Federation of Thai Industry indicates that manufacturers will be able to hold current product prices for 1-2 months at most. After that, this high level of inflation will be transferred to consumers. In the same survey, 35.3% of respondents think that high inflation will last three to six months, while 34.7% think high prices are here to stay for six to 12 months, and 30% believe high inflation will be with us for a year or more.
I agree with the last group. I am not being overly pessimistic. It's just that this vicious cycle of inflation has only just started. Prices rise first in the production sector and are then passed on to consumers. Consumers, who are also wage earners, will then demand higher wages to help pay for the rising cost of living. Higher wages will, in turn, push up production costs. The cycle goes on and on.
The theoretical solution is to nip this in the bud by raising interest rates and cutting government spending to suppress demand before producers' rising costs are transferred to consumers. Moral suasion (pleading) for producers to maintain their (lower) prices can never be considered a permanent solution. Inflation retards economic growth by reducing consumption. When inflation is 5%, consumers are forced to consume 5% less. If one were to achieve 3.5-4% growth under the assumption of 5% inflation, wages would have to be adjusted upward by 8.5-9.% to compensate for such price hikes.
No 2: High interest rates. Jerome Powell, the chairman of the US Federal Reserve, after realising that inflation is unlikely to be temporary, is now proposing interest rate hikes. A median forecast by American analysts indicates the Fed is likely to raise the Fed Funds Rate three times, pushing it from 0.25% now to 0.75-1% by the end of this year. The Bank of Thailand will have to follow suit in fear of capital outflow. As of end-2021, foreign investors hold 1.03 trillion baht of Thai debt instruments. This amount of money cannot be allowed to leave the country to seek higher yields elsewhere.
On the downside, higher interest rates will slow the economy due to the increased cost of borrowing. I will give you a simple rule of thumb. Every increase of 1 percentage point in the interest rate will slow the growth of GDP by 1.75%. The IMF has lowered its forecast for US economic growth by 1.2% because the agency assumes the Fed will raise interest rates by 1% this year.
No 3: Lower per-capita income. It amuses me to see economists assume that consumers will rush out to consume once the pandemic ends or is brought under control. The desire to consume is certainly there, but people's wallets are not cooperating. If we compare pre-Covid income levels (Q1 2019) to those in the third quarter of last year, we can see that Thai consumers earned 14.5% less due to economic shrinkage from the outbreak. This is calculated based on real GDP data.
With much less income to spend, how will consumers be able to resume their pre-Covid consumption levels? Higher levels of consumption can only happen under one condition -- the government kickstarting the economy this year by running a fiscal deficit larger than that seen in 2020 (1 trillion baht) and 2021 (1.5 trillion baht).
Which leads me neatly to obstacle No 4: A cash-strapped government. The good news is that the law defining the borrowing limit has been amended and the public debt ceiling has been raised to 70% of GDP. Of course, the ceiling can be raised again by re-amending the Fiscal Discipline Act. The bad news is that tight domestic liquidity will prohibit the government from borrowing as much as it wants.
In the last fiscal year, the government borrowed 1.5 trillion baht to stimulate the economy. The number for this fiscal year could be less than 1 trillion baht, which would have a considerably weaker impact. Why?
Please read obstacle No 5: Tight domestic liquidity (I've saved the best for last). The domestic money market kicked off 2021 with 658.2 billion baht of excess liquidity available for anyone to borrow. So the government borrowed and borrowed as if liquidity were inexhaustible. This demand for money, without any new inflow of capital from abroad, caused the excess liquidity to end the year at negative 329.4 billion baht on Dec 31.
Negative excess liquidity immediately triggers a liquidity crisis. It will lead to a serious crisis if the situation persists for a long period. Moreover, without excess liquidity, banks have to wait until customers repay their loans before they can re-lend that cash to the government. Economists have a technical term for this phenomenon. We call it "crowding out", and it isn't recommended because the government is taking liquidity away from the more efficient private sector. With these five obstacles in mind, it is difficult for me to foresee a prosperous year ahead. In fact, my 1.6% growth projection may even be overly optimistic.
