Logically, one would imagine that 2023 would be a much better year than 2022. Covid is over in every corner of the earth and economic activities resume. The world oil price is below US$80 (2,677 baht) per barrel and inflation is coming down. At the first meeting of 2023, the Fed raises interest rates to merely 25 basis points as opposed to the 50-75 basis points for each meeting in 2022.
Best news of all, China, the world's second largest economy, abolishes its zero-Covid policy and opens its economy for free consumption and travel. Even without Chinese tourists, there were 2.24 million tourists spending money in Thailand in December 2022. With Chinese tourists, the economy will be rolling in tourist money.
Sound good? With all these positive factors, what would stand in the way of the economy prospering in 2023? The answer is "a lot of things". What the world saw in 2022 was not a returning to normal after Covid, but post-Covid pent-up demand which proved to be short-term.
Global pent-up demand gave a big boost to the Thai export sector. Thai exports of goods (in value) grew 14.4%, 9.7%, and 6.7% in Q1, Q2, and Q3 2022 respectively. Then, the export value of goods plunged by 7.5% in the last quarter of 2022. Could the 4th quarter's figures be the real picture of world demand after Covid's damage, not pumped-up demand after two years of consumption constraints?
Unfortunately, this is a serious issue for the economy as exports of goods account for more than 60% of GDP. In terms of the global average, exports of goods and services account for 28.3% of GDP, but for the Thai economy, this ratio is 71.2%.
Lower global demand for our products means fewer manufacturing activities are needed. Consequently, the manufacturing production index shrank 5.8% in Q4 2022. This particular index expanded 3% in the first three quarters of the year. Coincidentally, Thai GDP growth averaged 3.1% during the period.
It is not only the production sector and export sector that slowed down in Q4 2022; consumption also slowed. The Private Consumption Indicator (PCI) growth rate dropped from almost 10% in the first three quarters to 5.5% in the final quarter of 2022. The PCI index growth rate was only 2.7% in the month of December. This is an important point.
Despite 2.24 million foreign tourists arriving in December and spending some 100 billion baht, Thais had to curb their consumption as factories reduced work hours due to low demand for products. The point is the economy cannot survive on tourism money alone; we need our manufacturing sector.
Most economic research houses, the World Bank included, projected Thai Q4 2022 growth would be 4.2%, taking GDP growth for the whole year to 3.4%.
With the Bank of Thailand's data for the 4th quarter of 2022, particularly the month of December, I estimated that final quarter 2022 GDP growth would be 2.5% and annual GDP growth to be 2.9%. A disappointing performance in the last quarter of 2022 raises doubts about the prospects of Thai economic health in 2023, particularly in goods exports and domestic consumption.
One of the most disturbing lead indicators is the import of raw materials and intermediate goods, which accounts for 64.4% of total imports. For Q4 2022, the import of raw and intermediate goods shrank 3.9% (and 14.7% in December). This type of import precedes manufacturing activities. For comparison, imports of raw material and intermediate goods grew 36.2% in 2021 and 25.6% in the first thre quarters of 2022.
Moreover, it is not only imports of raw and intermediate goods that were cut in the 4th quarter. Imports of capital goods (in value) were also 6.2% less compared to the year before. In light of slowing global demand and weakening domestic consumption, I projected that 2023 annual GDP growth to be 2.6% for the "base case scenario" and 1.3% for the "worst case scenario". An average WTI crude price of $80 per barrel is assumed for the base case and average crude price of $90 dollars is assumed for the worst case.
The higher oil price assumption results in (1) Thai exports contracting further from 3.5% under the "base case scenario" to 4.2% under the "worst case scenario" and (2) private consumption growth declining 0.8% in the "worst case scenario", compared to a small growth of 0.7% under the "base case scenario".
However, regardless of world oil prices, the tourism industry would be booming and income doubling, causing income for export of services to rise 46.0% in all scenarios.
This means the number of foreign tourists would double from 11.8 million in 2022 to 23.6 million in 2023. Although I am not entirely comfortable the tourism industry will keep thriving amid a slowing world economy, I will go along with others such as the Bank of Thailand who "believe" the number of foreign tourists visiting Thailand in 2023 will be 25.5 million.
In my view, what we are seeing now in the Thai tourism sector is no different from the "post-Covid pent-up demand" which hit our exports in 2022. Inflation rates are 9.2% in the UK and 8.5% in the EU and their economies are likely to enter a recession this year. Why would they be spending money travelling the world rather than saving money for consumable products? China's GDP growth for 2022 was only 3% compared to its usual growth rates of 6% plus. The Chinese surely will be eager to travel but they might need to pay their bills first.
A prime example of the dangers of over-relying on Chinese tourists is Hong Kong. After the border between Hong Kong and mainland China opened recently, Hong Kong was ready to welcome a flood of Chinese tourists; at their peak more than 100,000 Chinese used to visit the island per day.
Some 50,000 Chinese visitors daily were expected initially. But only 13,450 visitors or about 8.3% of the 2019 volumes came. Several excuses were offered such as the lifting of travel ban was too abrupt, or the Chinese prefer to spend time with their families during the Chinese New Year holidays.
However, the disappointing outcome prompted industry experts to believe that it might take a minimum of one year for the Hong Kong tourism industry to return to normal.
In the meantime, Hong Kong is giving out 500,000 air tickets to lure visitors. Hope is good, but being realistic is more important.
