The Thai government, businesses, and citizens are cherishing the news of returning Chinese tourists with the first group of 286 passengers who arrived on Monday. The Tourism Authority of Thailand estimates that 5 million Chinese tourists will visit our country this year, bringing with them 250 billion baht in spending money. I have two comments on this joyful news. Firstly, the ban on the sale of outbound group and package travel imposed by China's Ministry of Culture and Tourism on Jan 27, 2020, is still in effect. There is no telling when this ban will be relaxed or lifted. Second, the mass arrival of Chinese tourists was already factored into the World Bank's GDP growth projections. The Bank projected that the Thai economy would grow by 3.6% in 2023. To achieve such growth, the arrival of 22.4 million foreign tourists, with 6.2 million from China, was assumed.
Despite the bright outlook for the tourism sector, which accounted for 12% of Thai GDP in 2019, our domestic economy is deteriorating fast and started doing so in the final quarter of last year. The sector of concern is the manufacturing sector. The manufacturing sector is the largest economic sector, with a share of 27.4% of GDP in 2019. The second-largest sector is wholesale and retail trade, with a GDP share of 17.3%. The two sectors, accounting for almost half the Thai economy, are inter-connected as wages earned from the manufacturing sector would be used in purchasing goods from wholesalers and retailers.
In the first three quarters of 2022, the Manufacturing Production Index (Bank of Thailand's statistics) grew 1.6%, -0.8%, and 8.1% respectively. But in the first two months of the fourth quarter, the index contracted at an alarming rate of 4.8%. The trend is likely to continue throughout 2023.
The culprit is export-oriented industries such as petroleum, hard disk drives, chemicals, rubber, and textiles. In October and November of 2022, export values declined by 3.6% and 5.5%, respectively -- a stark contrast from an average increase of 10.3% during the first nine months of 2022. As I told readers before, exports of goods account for more than 60% of the Thai economy. (China's exports of goods sector has less than a 20% share of its economy.) If this sector has a problem, then the entire Thai economy has a problem. It will not be long before problems in the export sector affect domestic demand. The output of the food and beverage industry also shrunk by 1.0% in November.
In light of the shrinking manufacturing sector, GDP growth in the fourth quarter of 2022 could be less than 2.5%, not 4.2% as many expected, despite higher tourism income.
Another indicator of a weakening Thai economy is money supply growth. All economic activities are done through monetary transactions. The Thai economy is far too advanced to be a "barter" economy whereby "goods A" are exchanged directly with goods B. Higher levels of economic activity, thus, can be measured by the amount of money transacted. In November 2022, money supply growth (broad money) expanded by 4.8% -- lower than the inflation rate of 5.6%, indicating that a lesser quantity of goods was exchanged. With slowing economic activity, private credit growth in November declined to 4.7% accordingly.
What I have described so far already happened in 2022. Will 2023 be better, especially with the booming tourism sector?
Readers need to get the facts straight and not be hyped up by proclamations that things are returning to normal. Thailand's tourism sector is still far from "normal". Although the number of foreign tourists in November 2022 last year rose, it was merely 51.6% of the same month in 2019. The outlook of the global tourism industry for 2023 is projected to be much gloomier than that of 2019. On Jan 10, the World Bank almost halved its 2023 global GDP growth projection from 3.0% (projected six months ago) to 1.7%. Even China's 2023 GDP growth forecast was cut by 0.9% to 4.3%. For your information, China's GDP growth was 6.0% in 2019. Thailand would be lucky to get 22.4 million tourists this year.
More bad news. Despite the gloomy economic prospects, Goldman Sachs predicts that world oil prices will exceed 100 dollars per barrel in the fourth quarter of this year due to a demand-supply mismatch, particularly with the rise of demand from China. World oil demand is projected to increase by 2.7 million barrels per day.
A sharp drop in Thai exports has taken everybody by surprise. The Thai government is prepared to accept a slowdown in export growth from 2.7% in 2022 to around 0 to -1% in 2023. However, a 5.5% reduction in export value in November 2022, after a 3.6% reduction in October, was beyond anyone's expectation, particularly when the reduction came in the third quarter of 2022 rather than the first quarter of this year. As explained in my previous article, more than 20% of the Thai manufacturing sector comprise "pure" exporters. A contraction in the export sector will certainly result in more unemployment and a reduction in wage income. This will, in turn, affect domestic purchasing power.
Liquidity is still a major problem for the Thai economy. Despite some capital inflows in November 2022, excess liquidity is still at 408 billion baht in the red, with 16 consecutive months of negative excess liquidity. Not surprisingly, private credit growth dropped 4.7% in November. Without proper loan growth, it is difficult to foresee the Thai economy moving forward. I am certain that inadequate liquidity, coupled with rising non-performing loans, will be an important obstacle to Thai economic growth throughout 2023.
One more economic issue to warn about in 2023 is inflation. The whole world could see a steady decline in inflation rates, but Thailand could be a different story. The reason is that Thai "real" inflation has been suppressed through government control and subsidies. A case in point is energy prices. Energy price subsidies of gasoline and electricity are extremely costly to the government. The Thai Fuel Fund currently has 154 billion baht of debt, and the Thai government owes the Electricity Generating Authority more than 100 billion baht. Sooner (not later) domestic energy prices will have to be adjusted upward to reflect their true costs. The Thai economy is practically a sitting duck with defenceless capability for three main reasons. First, Thai consumers are overwhelmed with debt and have little ability to expand consumption. Second, the Thai government's fiscal position is too weak to support the economy. Third, the Thai economy is over-exposed to a world economy that we have no control over. Good luck to all readers for a turbulent 2023.
