Thailand has a strong banking system, inflation well under control and a recovering foreign tourism industry which is keeping the economy on course this year for between 3% and 4% growth. However, with reduced factory output confirmed for February, Thai planners are rightly looking at the kingdom’s export markets and new challenges being faced in a very troubled world environment with rising and sharper geopolitical tensions and a more risk-averse banking system after recent scares in the United States and Switzerland.
The Thai central bank raised interest rates on Wednesday even with inflation coming in at only 3.8% for February. The country’s economic ministries, in the meantime, have prioritised the promotion of Thai exports against a backdrop of a more risk-averse world banking system, higher borrowing rates and reduced demand. Thai exports are also facing challenges in China and Europe due to local regulations and what a legal expert has described as the ‘regulatory imperialism’ of the European Union.
On Tuesday, it was announced that the Fiscal Policy Office has been tasked with closely monitoring trends and potential impediments in the export sector as the ministry acknowledged that economic growth in 2023 was now dependent on foreign tourism and an uptick in domestic spending.
Caretaker Minister of Finance Arkhom Termpittayapaisith is adopting a cautious stance on the economy as Thai exports have slowed continuously since the end of last year.
Bank of Thailand Monetary Policy Committee unanimously raises interest rates to 1.75% with inflation falling and a foreign tourism recovery
It comes as, on Wednesday, the Monetary Policy Committee of the Bank of Thailand announced another 25-point rise in Thai interest rates to keep inflation moving downwards in a unanimous decision which leaves Thai borrowing rates at 1.75% which is well below US Federal Reserve rates which have now risen to between 4.75% and 5% and are expected to go at least 25 basis points higher this year with inflation not yet tamed in the United States.
The Thai government, on Wednesday, confirmed 6.15 million foreign tourists had entered the country from January 1st to March 27th with the Tourism Authority of Thailand (TAT) raising its projections for arrivals from China this year to at least 7 million visitors and overall, suggesting that Thailand will see between 27 million and 30 million foreign tourists entering the kingdom this year bringing with them a ฿1.5 trillion financial boost to GDP.
Rising geo-political tensions between China and United States which are creating a bi-polar world economy which since 2019 has not benefited Thailand
The Ministry of Finance is cautious however given the uncertain external climate against a backdrop of rising and sharpening geopolitical tensions, particularly between China and the United States as well as heightened risks to the world’s financial system given recent bank failures in the United States and Europe.
‘Economic growth in the country is a result of the recovery of the tourism and service sectors. Foreign tourists are coming to visit Thailand continuously, so the service of tourists must not be interrupted. The service at the airport must be especially convenient for tourists. This year, 27.5 million foreign tourists are expected to visit Thailand,’ Mr Arkhom said on Tuesday.
Threatened banking crisis in western countries following Credit Suisse merger has led to a concern about AT1 capital with Asian banks being scrutinised
There are fears about the uncertainty created as western banks face challenges posed by rising interest rates in the financial system that has grown used to unlimited and cheap money.
This has exposed weaknesses in the balance sheets of key institutions including America’s 16th largest bank Silicon Valley Bank and the giant Swiss bank Credit Suisse, which ran a substantial operation in Bangkok catering for wealthy Thai investors.
The iconic bank was merged in recent weeks with Switzerland’s UBS Bank in what some analysts described as a shotgun wedding to prevent its collapse.
During that merger or, in fact, takeover by UBS Bank which created a banking giant with $5 trillion in assets, Swiss regulators made the shock decision to burn or wipe out $17.35 billion worth of AT1 bonds including some held by Thai and Asian investors.
The move has reportedly led to Asian investors preparing to sue Swiss regulators but, more widely, it has led to greater caution going forward concerning the bond market and more particularly AT1 bonds which were, up to that point, extensively used by established Asian firms and institutions, particularly banks.
Thai banks report a very small exposure to AT1 bonds at only 3% of Tier 1 and are very well capitalised
However, analysts in Asia and particularly Thailand are not overly concerned as banks are the issuers of these bonds and as they generally represent a small proportion of tier-one capital.
Kasikorn Securities in Bangkok estimates that Thai banks, which have strong Tier 1 capital positions, have only 3% of their capital in AT1 bonds.
On the other hand, the AT1 bond debacle in Switzerland last Monday led to banks in Tokyo and Hong Kong being impacted while US banks were unscathed.
‘This hits Asia quite a lot, in Singapore and Hong Kong, pretty hard,’ explained one German banker based in Singapore to Nikkei Asia last week.
However, in the aftermath of the Credit Suisse takeover and the loss to AT1 bondholders, analysts are scouring bank balance sheets across the world trying to identify any potential weaknesses.
Shanghai issued $42 billion in AT1 bonds in Chinese banks to offshore buyers in 18 months as foreign investment in China last year plummeted by 73%
It has emerged that Shanghai, over the past 18 months, had become a key market for AT1 bonds with $42 billion sold in Chinese banks to offshore buyers as foreign investment in China tumbles.
In the last 6 months of 2022, foreign investment in China fell to $42.5 billion, the lowest in 18 years and a 73% drop.
This week, as western markets recovered with fears for Germany’s giant Deutsche Bank receding as US and European central banks, signalled confidence by continuing to raise interest rates, there were growing fears of a widening rift worldwide with China through its active attempts to harness its alliance with BRIC countries including Russia and its efforts with Saudi Arabia to promote the renminbi as a new reserve currency to rival the US dollar.
The US dollar is still the dominant reserve currency with 60% of the world’s foreign debt issued in greenbacks while it accounts for up to 59% of the world’s banking reserves.
China works to undermine the US dollar as the world’s reserve currency as the global economy appears to diverge into two blocs over Russia Ukraine War
There is an acceptance, however, perhaps premature, that the currency is in decline.
China, certainly, is working hard to hasten this trend and in July 2022, a Renminbi Liquidity Arrangement was established by it through the Bank for International Settlements.
The project was coordinated by The People’s Bank of China and saw five countries including China, Indonesia, Malaysia, Hong Kong, Singapore and Chile contribute $2.2 billion each.
The Russian-Ukraine War, which triggered crippling US sanctions on Russia and its trade, has led to the Chinese yuan becoming the new reserve currency for Russian firms, so much so that 17% of foreign reserves now held in Russia are denominated in yuan.
A potential deal with Saudi Arabia to price some of its oil sales in the Chinese currency is also, reportedly in the pipeline with Beijing as the world appears to move towards a bipolar economy in contrast to the unipolar world dominated by the United States.
Thailand’s economy has fared badly since the US-China trade war opened up in 2019 as this struggle also involves Japan, South Korea and Taiwan
Despite predictions by economic theorists and academics, all the indicators since 2019 and the deepening US-China trade war, have shown that this does not augur well for the Thai economy which is evenly balanced between the United States and China although China is now the kingdom’s largest trading partner.
Thailand is also, in economic terms, very much linked to key US allies such as Japan, Taiwan and South Korea which are embroiled in this struggle between the two powers which is increasingly becoming a battle between two blocs of countries including Russia, Saudi Arabia, China and Iran, on one hand, which tend towards illiberal authoritarianism and countries aligned with the United States where democracy is the order of the day.
On Wednesday, the Bank of Thailand set its projected GDP growth rate at 3.6% in 2023 and 3.7% next year dependent on inflation continuing its downward trajectory from 5.9% in December 2022, 5% in January 2023 and 3.8% in February.
This trend is encouraging and by the second half of the year, it should be well within the targeted range of 1% to 3%.
Thai trade missions tasked with exploring export prospects for the kingdom up to the end of 2023, the European Union’s ‘Green Deal’ poses a new challenge
In the meantime, Thai planners, through the Ministry of Commerce have given instructions to its trade missions and embassies worldwide to promote and report back on trade prospects for the rest of the year.
It specifically requires officers to identify trade impediments faced by the kingdom concerning regulatory hurdles caused by legislation in the United States and European Union and local regulations in China.
A key challenge for exports to the European Union going forward is the difficulties the kingdom’s exporters may face meeting new Green circular economy requirements under the much-vaunted European Green Deal while in China, the kingdom faces local regulations issued willy nilly to do with the export of food products to the middle kingdom.
The European Union’s green agenda has already drawn the ire of other ASEAN countries such as Malaysia which has threatened to suspend the export of palm oil to the 28-member state bloc over new European Union regulations on deforestation.
Indonesia’s President Joko Widodo calls out European Union leaders about assuming ‘my standards are better than yours’ and rejects coercion
The demanding ‘Green Deal’ is all part of the bloc’s aim to become ‘climate neutral’ by 2050 but has been identified by many of its partners as blatant trade protectionism dressed up in green.
The plan, first presented in 2019 and approved by the European Union in 2020, was described by European Union Commission President Ursula von der Leyen, in office since 2019, as ‘Europe’s man on the moon moment’ when approved in 2020 and sets out to wean the European economy off fossil fuels.
The rules being imposed by Brussels are increasingly drawing fire from world leaders including Indonesian President Joko Widodo, in power since 2014, who in December 2022 told European leaders directly: ‘There must be no coercion, no more parties who always dictate and assume that my standards are better than yours.’
A legal expert, Philippe De Baer of the firm Van Bael & Bellis recently accused the European Union of becoming ‘drunk on its success’ and exporting its environmental creed to other countries.
‘We see a regulatory imperialism by the EU whereby Brussels sees itself as an exporter of rules to third countries — as the legislators of the world,’ Mr De Baere declared.
Thailand has recently announced the opening of negotiations with the European Union for a long sought-after free trade deal which the bloc has described, in advance, as ‘ambitious’ and one which puts ‘sustainability’ at its core.
Thailand’s economy has shown resilience and is well-placed as the world navigates a new, more uncertain economic era with lower-than-average growth rates
Thai officials have repeatedly emphasised the financial stability of the Thai banking system as the short-term threat of a world banking crisis has receded, for now.
However, the new reality of rising interest rates is driving all banks to look again at their balance sheets in a new more risk-averse era.
This was referred to by the International Monetary Fund (IMF) Managing Director Kristalina Georgieva this week in Beijing who noted that the outlook for the world economy has dimmed substantially but still raised projected growth in 2023 to 2.9%, an improvement on an earlier forecast taking into account China’s faster than expected emergence from the pandemic.
She also underlined nervousness about the world’s banking systems as she called for vigilance.
The growth rate is well below the average 3.8% figure required to keep the world economy on track. The top official agreed, at the same time, that the key imperative for government economic agencies now was to rein in inflation.
She was speaking at the China Development Forum in Beijing.
Meanwhile, on Wednesday, Thailand confirmed that factory output dropped by 2.71% as slowing world trade impacted exports with the trend continuing into March.
This was an improvement on a 4.5% contraction in January and is understandable given that 80% of Thai exports are industrial, manufactured goods.