outlook - scbeic€¦ · at a lower-than-expected rate while its labor market remained strong. in...

OutlookQuarter 4/2016

Contributors:Sutapa Amornvivat, Ph.D.Chutima Tontarawongsa, Ph.DThanapol Srithanpong, Ph.DKantima VongsthapatNatakorn VisudtikoWirunpon RochanavibhatvanichNontakorn Terdtoontaveedej

Phacharaphot Nuntramas, Ph.DKrasae RangsipolSivalai Khantachavana, Ph.DLertpong LarpchevasitPimnipa BooasangYuwanee Ouinong

Thai economic outlook for the rest of 2016 and 2017In focus: Exploring SMEs’ opportunities in the service sectorIn focus: Themes for the Global Economy in 2017Special issues:

The 2016 U.S. presidential election - a spirited race with a great policy divide Italian NPLs – a spark for the next crisis?Thailand and the transition towards a cashless society and e-Payment Example of SMEs’ service business activities

Thai economic outlook for the rest of 2016 and 2017 4

5

52

55

85

Contents

Bull - Bear: Oil prices

Global Economy toward the end of 2016 and in 2017

8

1436

The 2016 U.S. presidential election - a spirited race with a great policy divide Italian NPLs – a spark for the next crisis?Thailand and the transition towards a cashless society and E-Payment

59Example of SMEs’ service business activities

Summary of main forecasts

In focus: Exploring SMEs’ opportunities in the service sector

69In focus: Themes for the Global Economy in 2017

Hope for recovery rests on the private sector's domestic demand

EIC forecastscontinuous growth

for the Thai economy,at 3% in 2016 and

3.3% in 2017

The Thai Economy 2016-2017

Supporting factors Risk factors

Household purchasing power back after the end of first-car-program impact

Government measures supporting household purchasing power, such as subsidies for farmers, new tax deduction rates in 2017, and stimulus measures for the tourism industry

Progress on infrastructure development mega-projects after bidding, doubling disbursements

33.9 million foreign tourists in 2016, with 37.2 million in 2017 expected

Loan costs remain low, as the policy interest rate is likely to stay at 1.5% throughout 2016-2017

Underperforming labor market due to reduced employment and fewer working hours

Household income in the agricultural sector under pressure as low prices of key agricultural products, such as rice, tapioca, and rubber

Reduced economic push by the government after the accelerated disbursement phase

Stagnant international trade, affecting the export sector's recovery

Volatility in the financial market due topolitical risks and monetary policy divergence

Cost of financing through debenture issuance to increase following the US Treasury bond's interest rate

Quarter 4/2016

The Global Economy Slow recovery driven by domestic consumption and the service sector, with international trade still in slowdown

Increased political risks post-Brexit

Monetary stimulus approaching its limits

Source: EIC analysis based on data from CEIC, NESDB, BOT and MOC

www.scbeic.com

Thai economic outlook for the rest of 2016 and 2017 4

5

52

55

85

Contents

Bull - Bear: Oil prices

Global Economy toward the end of 2016 and in 2017

8

1436

The 2016 U.S. presidential election - a spirited race with a great policy divide Italian NPLs – a spark for the next crisis?Thailand and the transition towards a cashless society and E-Payment

59Example of SMEs’ service business activities


In focus: Exploring SMEs’ opportunities in the service sector

69In focus: Themes for the Global Economy in 2017

EIC revised the forecast for Thailand’s GDP growth in 2016 upward to 3.0% from the previous 2.8% due to one-off positive factors in the first half of the year. These factors include reduced real-estate transfer fees that led to accelerated private construction in the first quarter, frontloaded economic stimulus measures, and upward pressures on automotive sales. However, economic growth for the rest of this year might stall as the effects of the supporting factors in the first half were short-lived. The economy will still be affected by subdued household incomes from a stagnant labor market and private investment continues to be sluggish due to contracting exports and excess production capacity.

In 2017, EIC sees the Thai economy expanding by 3.3% driven mainly by private demand recovery. Pressure on household purchasing power will be lifted partially after loans from the first-car rebate scheme are paid off and higher household incomes due to additional deductions on personal income tax. Private investment is also likely to recover thanks to an expansion in service sector investment and clearer signals regarding public infrastructure megaprojects. The public investment and tourism sectors that have been supporting the Thai economy are also projected to continue their high growth rates. Exports will improve only slightly as exports of consumer goods pick up and export prices rise with global oil prices.

External factors continue to be the major concern for the Thai economy for the rest of the year and into 2017. The recovery of the Thai export sector is still limited by the recent pattern of global economic recovery that depends heavily on domestic consumption, while the manufacturing sector remains stagnant. Moreover, accumulating debt issues and heightened political uncertainty in leading economies continue to put downward pressure on a recovery, while monetary policy is starting to become less effective. Regarding global interest rates, EIC predicts that the Fed will raise the policy rate 2-4 times starting at the end of 2016 until the end of 2017, about a 0.5%-1% increase. Despite these external risks, Thailand’s high current account surplus and international reserves will help maintain stability against global financial volatility. EIC forecasts the Bank of Thailand will keep the policy rate at 1.5% until the end of 2017 due to gradual economic recovery and low pressure on inflation, leaving policy space in case of any future need. EIC predicts that the Thai baht will gradually depreciate to 35.5 THB/USD at the end of 2016 and 37.0 THB/USD at the end of 2017.

4

Economic Intelligence Center (EIC)

Thai economic outlook for the rest of 2016 and 2017

Global Economy toward the end of 2016 and in 2017The global economy will improve slightly toward the end of 2016 into 2017, after lower-than-expected growth in the first half of the year. Volatility from unexpected events like Brexit and the increasingly limited effects of monetary policies contributed to disappointing global growth, especially the U.S. and Japanese economies in the first half of the year, despite easing concerns over China’s hard landing. Amid stalling private investment, strongly recovered household consumption helped bolster economies in many regions, supported by increasing employment and higher wages. EIC sees household spending growth carrying its momentum with positive spillover effects into next year. As such, EIC expects that U.S. economic growth will pick up, while the Eurozone and Japanese economies will continue to be slow. Emerging economies will benefit from heightened commodity prices following the rise in global crude oil prices. In 2017, the global economy will be bolstered by higher fiscal spending amidst relaxed financial conditions. Nonetheless, uncertainties from the mounting global debt and political changes still pose key risks to the baseline scenario (See more in Focus: Themes for the Global Economy in 2017).

5

Q4/2016

The global economy will improve slightly in 20171

Source: Forecast by EIC and foreign research houses (Goldman Sachs, J.P. Morgan, Deutsche Bank, and Bank of America)

GDP Growth Forecast for 2016 and 2017

Unit: %YOY

2.4

1.5

0.7

1.5 1.6

0.6

6.6

0.8

1.4

2.0

China

6.9

6.2

JapanEurozoneU.S.

2016F2015 2017F

The U.S. Economy: lower-than-expected growth in the first half of the year

The U.S. economy in the first half of the year expanded at a lower-than-expected rate while its labor market remained strong. In 2Q2016, the U.S. economy grew only at 1.2%QOQ SAAR (Figure 2), much lower than estimated, due to decreased inventory accumulation in non-farm sectors. Consumption continued to grow on the back of a strong labor market. In July non-farm payrolls recorded 255,000 jobs, while the unemployment rate held steady below 5%, indicating a full employment level.

In the second half of the year the U.S. economy will be driven by domestic consumption. Despite lower-than-expected overall growth, consumption in the second quarter expanded substantially. A strong labor market will continue to support domestic consumption and help boost the U.S. economy in the next period. EIC forecasts that the U.S. economy will expand 1.5% this year and 2.0% in 2017, driven mainly by domestic consumption.

With better economic prospects for the next period, EIC sees the Fed raising the policy rate once in December, pushing it up to 0.50% – 0.75% by the end of 2016. The

unexpected Brexit result in June and worse-than-expected economic indicators in the first half of the year compelled the Fed to postpone its policy rate hike. In the second half of the year U.S. economic expansion is looking up. With a steadily low unemployment rate and rising inflation, an increase in the policy rate will be necessary to stabilize the economy. In 2017, EIC estimates that the Fed will hike the policy rate by 0.25% - 0.50%. (*footnote)

(*footnote) Based on the September Fed dot plot, the committee saw the policy rate hiked up 1% in 2017, while, the Fed Funds Future market predicted that the Fed would be able to adjust the rate up 0.25% in 2017.

The 2016 U.S. presidential election result in November is to be closely watched. We are approaching the end of the U.S. presidential race between Donald Trump and Hillary Clinton. The differences between each candidate’s proposed policies and approval ratings are becoming clearer. The election result on November 8 will set the direction for U.S. politics and the U.S economy for years to come. [See more in BOX: The 2016 U.S. presidential election - a spirited race with great policy divide]

6


Implications for the Thai Economy

• Thai baht is likely to depreciate as the Fed raises the policy rate and could help revive Thai exports. Key exports to the U.S. include computers and parts and rubber products.• Businesses with USD-denominated expenses should use financial tools to mitigate risks.• The divergence of the Fed’s policy from the ECB and BOJ will cause more volatility in capital flows and exchange rates, especially in developed economies.

- +

1 จาก Fed dot plot เดือนกันยายน คณะกรรมการมองว่ามีความเป็นไปได้ที่จะปรับเพิ่มดอกเบี้ยนโยบายอีก 0.5% ในปี 2017 ในขณะที่ตลาดซื้อขายอัตราดอกเบี้ยล่วงหน้า ประเมินว่า Fed จะสามารถปรับเพิ่มดอกเบี้ยนโยบาย 0.25% ในปี 2017

Unit: %QOQ SAAR Unit: Index

45

50

55

60

65

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1Q20

13

2Q20

13

3Q20

13

4Q20

13

1Q20

14

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

3Q20

16

Real GDP Growth (LHS)

Markit Composite PMI (RHS)

51.81.2

Unit: ‘000 MOM SA Unit: %

4.5

5.0

5.5

6.0

6.5

7.0

0

100

200

300

400

500

Jan-

14

Apr-14

Jul-1

4

Oct

-14

Jan-

15

Apr-15

Jul-1

5

Oct

-15

Jan-

16

Apr-16

Jul-1

6

Change in Nonfarm Payrolls (LHS)Unemployment Rate (RHS)

5%

200K

7

Q4/2016

2

Source: EIC analysis based on data from Bloomberg, CEIC, and the U.S. Commerce Department

Real GDP Growth and Markit Composite PMIChange in Nonfarm Payrolls and Unemployment Rate

Retail Sales and U. of Michigan Sentiment Index

PCE Deflator U.S. Dollar and Trade Balance

Housing Starts and New Home Sales

The U.S. economy in the first half of the year expanded at a lower-than-expected rate

1. U.S. economic growth was lower than estimated

3. Retail sales continued to improve while consumer confidence remained high.

5. Inflation was maintained on the back of strong domestic demand

2. The labor market remained strong with an unemployment rate below 5%

4. New homes sales rose substantially while home construction started to recover

6. U.S. exports remained a drag

Unit: %MOM SA 3-month MA Unit: index 1966=100 3-month MA

60

65

70

75

80

85

90

95

100

-0.8-0.6-0.4-0.20.00.20.40.60.81.01.21.4

Jan-

14

Apr-14

Jul-1

4

Oct

-14

Jan-

15

Apr-15

Jul-1

5

Oct

-15

Jan-

16

Apr-16

Jul-1

6

Retail Sales (LHS) U. of Michigan Sentiment Index (RHS)

92.7

-10

-5

0

5

10

15

20

25

30

Jan-

14

Apr-14

Jul-1

4

Oct

-14

Jan-

15

Apr-15

Jul-1

5

Oct

-15

Jan-

16

Apr-16

Jul-1

6

Housing Starts New Home Sales22.47

3.2

0.8

1.60

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep-

14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-

15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-1

6

PCE Inflation

Core PCE Inflation (exclude food and energy)

Inflation Target 2%

Unit: %YOY

-70

-60

-50

-40

-30

-20

-10

080

90

100

110

120

130

140

150

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

USD appreciation Raising trade deficit

USD Real Effective Exchange Rate (REER) (LHS)

Real trade balance (exclude oil) (RHS)Unit: Index (2010 = 100) Unit: USD bn

8


BOX: The 2016 U.S. presidential election - a spirited race with a great policy divide The 2016 U.S. presidential election on November 8 will have economic implications that will not be limited to the U.S. economy. Radical policies proposed by one of the presidential candidates reflect the growing frustration of many Americans toward the current political system and reveal social divides in an unprecedented way. The 2016 presidential debates between Republican presidential nominee Donald Trump and Democratic presidential nominee Hillary Clinton will take place from September to October and will help distinguish the differences between the two candidates’ proposed policies. Trump’s controversial rhetoric and the attempt to find fault with Clinton’s foreign policies during her time as Secretary of State have created great fluctuations in the

approval rates of both candidates. Trump is currently polling behind Clinton, but many are concerned that swing voters and independent voters could pull Trump ahead just days before the election, as happened in the case of Brexit. If this is the case and Trump's policies are actually implemented the global economy, including the Thai economy, will be greatly affected as Trump’s controversial trade policies, foreign policies, and national security policies will likely elevate geopolitical risks. Given these prospects, the 2016 US presidential election is one of the most important events to watch.

9

ไตรมาส 4/2016

Note1: To win on January 6, 2017, a presidential candidate will need at least 270 of 538 votes from the Electoral College selected by each state’s popular vote on November 8, 2016.

The first presidential debate

The vice-presidential debate

The second presidential debate

The third presidential debate

Election day - the popular vote for each state selects electors to be in the Electoral College

Presidential inauguration

Electoral College formally votes for the President and Vice President

The Electoral votes are officially counted and announced

26 Sep

4 Oct

9 Oct

19 Oct

8 Nov

19 Dec

6 Jan

2016

2017

20 Jan

10


Donald Trump

Hillary Clinton

Economic Stimulus Plan Supports infrastructure investment without any specific details of investment plans yet.

Reduces the exemption for the estate tax to 3.5 million USD.

Invests 275 billion USD in infrastructure within a span of 5 years and 25 billion USD to launch a national infrastructure bank.

Job creation Proposes tax incentives for the manufacturing sector.

Imposes steep tariffs on imports from China and Mexico to compel US companies to invest more domestically.

Uses trade regulations and tax incentives to help the manufacturing sector.

Calls for lawmakers to close tax loopholes that give excess benefits to US companies overseas.

Income Distribution Increases the federal minimum wage to 10 USD per hour to encourage states to raise their minimum wages to match the living costs.

Cuts income taxes and eliminates estate taxes and the marriage penalty.

Increases the federal minimum wage to 15 USD per hour.

Create 4% surtax on annual income above 5 million USD by raising the top tax rate to 45%.

Immigration Immigration Proposes building a wall along the U.S.-Mexico border to prevent illegal immigration.

Endorses a bill to reduce unauthorized workers and suggests a plan to deport about 11 million illegal immigrants.

Bans Muslims for entering the U.S. to prevent terrorism until reform on immigration security is implemented

Supports immigration reform with a pathway to citizenship for immigrants.

International Trade Repeals The Trans-Pacific Partnership (TPP)

Amends The North American Free Trade Agreement (NAFTA) and the Korea-US Free Trade Deal.

Change a position to support the repeal of TPP

Supports The Trans-Atlantic Trade and Investment Partnership (TTIP) between the EU and the U.S.

*Such policies are used by presidential candidates during their campaign and these policies could either slightly or profoundly change after the election.Source: EIC analysis based on data from Bloomberg, Moody’s Analytics, Nomura, and Chatham House

11

ไตรมาส 4/2016

If Donald Trump wins, …

A victory for Donald Trump might cause short-term fluctuations in global financial markets given his radical approach and rapidly changing policy positions. But because his proposed measures are drastically different from current policies, they are less likely to be passed by Congress. Trump’s views on trade with China and Muslim and Mexican immigrants might increase political tensions that affect trade relations, and therefore might indirectly affect the Thai economy. If the anti-trade measures against China are imposed a trade war would slow down the global economy and greatly affect Asia as the global manufacturing hub with many Asian economies relying on exports. His stance against illegal immigrants will shrink the U.S. labor force and increase labor costs. Moreover, the Tax Policy Center reports that Trump’s tax policies will reduce government income by approximately 9.5 trillion USD. Overall, Trump's policies if implemented will put the recovery of the U.S. economy at risk. If Trump wins, EIC expects Thailand to be impacted by short-term fluctuations and decreased exports to the U.S. due to a decline in consumption that will follow the shrinkage of the U.S. economy. Thai exports that might be greatly affected by the slowdown of the U.S. economy are currently machinery, electronics and electronic appliances, and rubber products.

If Hillary Clinton wins, …

Hillary Clinton’s economic policies differ only slightly from Obama’s current policies and the change to a Clinton presidency would pose little risk to trade and investment. Nevertheless, Clinton is likely to face a divided government that will block the implementation of major reforms, leading to political gridlock for her administration. During her campaign Clinton is opposing the Trans-Pacific Partnership (TPP), a deal she once helped push, but it is possible that Clinton might change her position once she becomes president. Additionally, the Tax Policy Center estimates that Clinton’s tax policies will increase government income by 1.1 trillion USD over 10 years. However, higher taxes might discourage the private sector from investing and creating jobs. Her foreign policies focusing more on the rest of Asia to counterbalance China will benefit trade relations between the U.S. and the region, but it could create more political tensions further down the road.

Eurozone economy: Slow recovery amidst increasing risks after the Brexit vote

The Eurozone economy in 2Q2016 slowed down slightly from first quarter growth of 0.6%QOQ SA to expand at 0.3% QOQ SA2 (Figure 3), with only the Spanish economy growing at a higher rate. The Eurozone economy was driven by private consumption, supported partly by the ECB’s easing of monetary policy. The easing helped commercial banks give out more loans, especially to households, resulting in a 1.8%YOY expansion in household loans in July. It also encouraged commercial banks to adopt more relaxed lending measures compared to last quarter.

Consequences of Brexit on the Eurozone economy will become more apparent next year. Although recent economic indicators showed that the Brexit vote has affected the Eurozone economy less than the UK economy, the long-term effects could become more apparent after negotiations on new agreements between the EU and the UK are settled.

Moreover, anti-EU sentiments in other member states might heighten risks for the Eurozone economy going forward.

Greece’s default risks and non-performing loans in European bank books continue to be key risks next year. Even though the tension regarding Greece’s debt crisis subsided after the country received bailouts, the concern for Greek inability to service the rest of its debts could re-emerge as EUR 14 billion in debt repayment will be due in 2017, with a peak in July. Moreover, many Greeks oppose the austerity measures, making it harder for Greece to meet the reform conditions agreed to with its creditors. This in turn decreases the chance for Greece to receive the next bailout sum. Another concern for the Eurozone is that banks are under pressure from the high level of non-performing loans and falling net interest margins after a long period of low interest rates. These factors limit the ability of commercial banks to lend, rendering monetary policy less effective. (See more in Box: Italian NPLs – a spark for the next crisis?)

The Eurozone economy will slow down in 2017, with forecast growth of 1.4% lower than this year’s expected growth of 1.6%. This outlook is due to the aforementioned risks that will exacerbate next year. A high unemployment rate might also cause domestic spending to grow at a fragile rate. Moreover, concerns over Brexit and other risk factors continue to lower inflation expectations and might cause the ECB to pursue further monetary policy easing to push the inflation rate up to the target.

12


Implications for the Thai Economy• Eurozone economic growth in 2016 continued at a similar pace as last year. Thus, Thai exports to the EU will likely stay stagnant.

• Spillovers on the Thai economy from a slowdown in the UK are limited since exports to the UK account for only 2% of all Thai exports, with key products being automobiles and parts and processed chicken.

• Concerns regarding Brexit and European NPLs might cause volatility in global financial markets, affecting the THB.

- +

2 Growth in comparison to the previous quarter (seasonally adjusted)

0.1

1.8

-0.1

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Jan-

12

Apr-12

Jul-1

2

Oct

-12

Jan-

13

Apr-13

Jul-1

3

Oct

-13

Jan-

14

Apr-14

Jul-1

4

Oct

-14

Jan-

15

Apr-15

Jul-1

5

Oct

-15

Jan-

16

Apr-16

Jul-1

6

Total loansHouseholdsNon-financial corporates

TLTRO IIUnit: %YOY

ECB started QE

TLTRO

-4

5

-3-4

-7

1

-6

4

-3

-7

-2

-5

Enterprises House Purchase Consumer Credit

2015Q3 2015Q4 2016Q1 2016Q2

>0 more tightening

EasingTightening

<0 more easing

1.3

0.2

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep-

14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-

15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-1

6

5yr-5yr inflation swap Headline inflation

QE started

Cut rate to deepernegative territory,

expanded QE, TLTRO

Unit: %

TLTRO II

13

Q4/2016

3

Source: EIC analysis based on data from Bloomberg and the CEIC.

GDP Growth of Core CountriesReal GDP and Purchasing Manager Index of the Euro Area

Credit Standard of Eurozone’s Commercial Banks

Headline inflation and inflation expectationLoan Demand in Eurozone

Lending Growth of Financial Institutions

Slow recovery amidst increasing risks after the Brexit vote

1. The Eurozone economy slowed down slightly in the second quarter.

3. Household loans remained high, reflecting a healthy expansion in private consumption.

5. Growth in some economies helped bolster loan demand in the Eurozone

2. Growth in key Eurozone economies decelerated, except for Spain’s economy that was able to sustain robust growth.

4. Credit standards for business, housing, and consumption loans relaxed in the second quarter.

6. Deflation risks and lower than expected inflation may pressure the ECB to pursue further easing.

Unit: %QOQ SA Unit: Index

0.30.4

0.6

40

45

50

55

60

-0.7

-0.5

-0.3

-0.1

0.1

0.3

0.5

0.7

1Q20

12

2Q20

12

3Q20

12

4Q20

12

1Q20

13

2Q20

13

3Q20

13

4Q20

13

1Q20

14

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

Real GDP Growth (LHS)

Composite Purchasing Manager Index (RHS)

0.30.4

0.2

0.8

0.30.4

0.2

0.8

0.7 0.7

0.3

0.8

0.4

0.0 0.0

0.8

Germany France Italy Spain

3Q2015 4Q2015 1Q2016 2Q2016

Unit: %YOY

16

33

19

27 29

2117

32

1616

30

21

Enterprises House Purchase Consumer Credit

2015Q3 2015Q4 2016Q1 2016Q2

Increasing demand

>0 increasing demand <0 decreasing demand

14


BOX: Italian NPLs – a spark for the next crisis?Low interest rates for an extended period of time and an ailing post-crisis recovery, in which several economies still struggle, have weakened Europe’s banking sector, making it sensitive to unexpected shocks. The Brexit vote outcome on June 23, 2016 drove the STOXX Europe 600 Banks to drop as much as 14% in one day. This was exacerbated by the results of the European-wide bank stress test at the end of July3. The high level of non-performing loans (NPL), especially in Italy, and low stock prices reflected the poor

Italy’s GDP growth and change in NPL ratio

Source: the World Bank

4 The high level of NPLs has been partly driven by several episodes of recession in the past decade

outlook investors had on the banking sector. This situation creates concerns for the ability of banks to raise capital to cover potential losses from this level of NPLs. A series of bank failures could spark the next crisis in Europe.

-2

-1

0

1

2

3

4-6

-5

-4

-3

-2

-1

0

1

2

32005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GDP Growth (LHS, in reverse)

Change in NPL ratio (RHS)Unit: %YOY Unit: %

15

Q4/2016

Q: Why are banks in Italy worse than their peers?A: Currently the level of NPLs in Italy is as high as 360 billion euros or 18% of the country’s total debt4. This is close to the highest level in Europe, but the case of Italy is particularly concerning because it is the third largest economy in the EU (excluding the UK). A banking crisis in such a large economy poses a higher risk of contagion. Italy has also experienced several episodes of recession in the past decade (Figure 4). Moreover, Italy suffers from a structural problem in terms of NPL management. Generally, banks can retrieve some of their NPLs via liquidation and the sale of NPLs at a price lower than the initial face value. However, due to legal processes in Italy, NPL liquidation takes an average of 8 years to complete, much slower than in other countries5. As a result, there is a disincentive for Italian banks to clean up NPLs on their balance sheets, leading to an accumulation of NPLs.

Q: How does such a problem lead to an economic crisis?A: According to the latest stress test, the Monte dei Paschi di Siena (MPS), the third largest bank in Italy, faced a very high risk of bankruptcy, especially with the current level of NPL, which accounted for as much as 34% of all their debts. The bank could fail without proper recapitalization. In such case, owners of the bank’s debt, including retail investors, will be affected and the damage could be widespread. The fall of a bank of this size could spark a crisis of confidence, leading to a bank run which will jeopardize Italy’s economy.

Q: How can Italy’s government help?A: When faced with this kind of situation, governments can usually step in to help banks recapitalize, or provide a “bail out” as in the case of the U.S. after the subprime crisis. Spain and Ireland also resorted to bail outs after the European sovereign debt crisis in 2011. However, Italy’s government can no longer resort to such measure due

to new laws imposed by the EU6 requiring stockholders and owners of banks’ creditors to absorb at least 8% of a bank’s liabilities before the government can step in with state funds. This process has been dubbed “bailing in.” In general, the stakeholders are large institutional investors. However, unlike other countries, the majority of the bond investors in Italy are retail investors. A bail-in could create widespread loss among ordinary Italians and thus frustration against the government. Amid political sensitivity, such sentiment could mean a victory of the Five Star Movement Party, which wants to hold a Brexit-like referendum in Italy.

Q: Has the situation been resolved? What do we need to monitor?A: The situation has eased after MPS received a private bail-out from a group of international banks, led by JP Morgan, Goldman Sachs, and Credit Suisse. The package was under the condition that MPS must sell its NPLs worth 27.7 million euros at 9.2 million euro, or 33% of the initial value. This is higher than what MPS would have received from private equity firms that offered only 20-25% of the initial value. Under the new scheme, NPLs will be transferred to and managed by a newly formed special-purpose vehicle that will securitize NPLs to sell to investors; for which NPLs with higher quality will receive price guarantees from Italy’s government.

Even though the private bailout helped avoid an immediate calamity, NPLs in Italy remain high, and will remain a long-term challenge for the economy as the lending ability of banks is impaired. Furthermore, other Italian banks are at risk of being put in a similar position as MPS earlier this year. Any solution must address the structural issues by enhancing the efficiency of the banking sector through mergers and acquisitions, corporate governance improvement, and reform of bankruptcy laws to accelerate the process.

3 Stress test outcomes on all the European banks by the European Banking Authority (EBA) were announced on July 29, 2016.4 Data from IMF as of the end of 2015.5 Jose Garrido, Kopp, Emanuel, and Weber, Anke (2016). Cleaning-up Bank Balance Sheets: Economic, Legal, and Supervisory Measures for Italy. IMF Working Paper WP/16/135.6 Banking Recovery and Resolution (BRRD) effective in January 2016.

Japan’s economy: Slower-than-expected growth due to shrinking private consumption and exports.

Japan’s economy expanded only slightly in the second quarter, following better-than-expected growth in the first quarter. In the second quarter, Japan’s GDP grew only 0.7%QOQ SAAR (Figure 5), with public investment as the key driver. However, other factors remained fragile. Particularly, private consumption has yet to show signs of recovery. Private investment and exports also remained stagnant due to the sluggish global economy and strengthening yen since the beginning of the year. In July, the manufacturing PMI indicated a contraction of the manufacturing sector that has not yet recovered. The index remained at 49.3, while the service PMI fell close to the contraction level at 50.4. The consumer confidence index has also shown no clear sign of recovery. Overall, private consumption shrank in every category. In addition, machinery and equipment orders, which can somewhat indicate private investment, picked up slightly, but there is no significant private investment. Furthermore, merchandise exports returned to negative territory at 5.8%QOQ SAAR due to the stronger than expected yen hurting price competitiveness.

Deflation persisted while the BOJ held its policy interest rate steady but increased the purchases of Exchange Traded Fund (ETF) in the meeting on July 29, and introduced a new monetary framework of “yield curve control” in which the BOJ will control short-term and long-term interest rates. Headline inflation and core inflation (excluding fresh food) in the second quarter entered negative territory, averaging

-0.4%YOY. The stronger-than-expected yen as a result of Brexit also prompted the BOJ to ease their monetary policy slightly to boost the economy. ETF purchases increased from the previous 3.3 trillion yen per year to 6.0 trillion yen per year, and the BOJ will purchase Japanese government bonds so that long-term yield (10 year) will remain at around zero percent, while the policy interest rate is maintained at -0.1%. The disappointing BOJ easing move and rising demand to hold the yen as a safe asset contributed to the appreciation of the currency.

EIC expects Japan’s economy to grow approximately 0.6% in 2016 and 0.8% in 2017, receiving support from the government’s fiscal stimulus package worth 28 trillion yen. The recently announced stimulus packages focus on infrastructure projects, earthquake relief, and measures to help businesses affected by Brexit. Of total budget announced, new additions from the existing plan amount to only 13.5 trillion yen. However, only 4.6 trillion yen of the budget will be disbursed in fiscal year 2016 (ending in March 2017) as the government wants to maintain its fiscal discipline. This is expected to provide an additional boost of only 0.1-0.2% to the economy. Moreover, there are two major risk factors to the economy: continual appreciation of the yen and stagnant private investment.

16


Implications for the Thai Economy

• Overall Japan’s economy remains weak. This affected Thai exports to Japan in 1H2016, which accounted for 10% of total Thai export value. From the beginning of the year, Thai exports to Japan contracted by 2%YOY.• The chance that Japan will enter recession looms, and may result in a slowdown of foreign direct investment (FDI) from Japan to Thailand. Recent Japanese investments have been concentrated in the SME sector rather than large corporates. Therefore, the FDI slowdown may be even more severe if Japan’s economy does not improve.• In the long run, the yen should depreciate following the BOJ’s negative interest rate policy. However, the recent spike in the yen of around 15% raised concerns about its volatility. Thus, businesses dealing with yen-denominated transactions should consider financial tools to mitigate this risk.

- +

17

Q4/2016

5

Source: EIC analysis based on data from Bloomberg and CEIC

Manufacturing and Service Purchasing Manager Indexes and Consumer Confidence Index

Various Consumer Sale Indicators and Commercial Sales

Real GDP, private consumption, gross fixed capital formation and exports and imports

Japan’s Inflation - Headline, Core and Core Core Inflation

Machinery Orders and Machine Tool Orders

Fiscal stimulus includes 13.5 trillion yen of fiscal measures (included in the total of 28 trillion yen)

Japan’s economy: Slower than expected growth due to shrinking private consumption and exports.

1. Japan’s economy decelerated in the second quarter due to weak domestic demand and shrinking exports.

3. Private consumption remained weak and contracted in almost all sectors, except for convenient stores.

5. The inflation rate is pressured by low commodity prices and weak domestic demand.

2. PMI, in both manufacturing and service sectors, and consumer confidence index have not fully recovered.

4. Machinery and equipment purchase orders have picked up slightly, but overall private investment remains flat.

6. Fiscal stimulus packages – 7.5 trillion yen in new spending and 6 trillion yen in low-cost loans

0.6

3.7

-5.8

-0.3

4.9

-1.7

2.0

-1.7

2.10.7

-20

-15

-10

-5

0

5

10

15

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

Private consumptionGross fixed capital formationExportsImportsReal GDP

Unit: %QOQ SAAR

4.9

-1.7

2.0 2.10.7

-1.7

49.3

50.4

41.3

30

35

40

45

50

55

60

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep-

14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-

15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-1

6

Manufacturing PMIService PMIConsumer Confidence (Household)

Unit: Index (> 50 = expansion)

-1.3

-3.5

0.8

95.4

93

94

95

96

97

98

99

100

101

102

-6

-4

-2

0

2

4

6

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr-16

May

-16

Jun-

16

Retail SalesDepartment Store SalesConvenience Same Store SalesCommercial Sales (RHS)

Unit: %YOY Unit: Index Unit: %YOY SA

-0.9

-19.9

-40

-30

-20

-10

0

10

20

30

40

50

60

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep-

14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-

15

Nov

-15

Jan-

16

Mar

-16

May

-16

Machinery Orders (exclude volatile orders)Machine Tool Orders

0.5

-0.4

-2

-1

0

1

2

3

4

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep-

14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-

15

Nov

-15

Jan-

16

Mar

-16

May

-16

Headline CPI (nationwide)Core Core CPI (ex. food & energy)Core CPI (ex. fresh food)

Unit: %YOY

6.2

3.4

1.3

2.7

Amount of money (trillion)

Infrastructure Projects

Demographics

Brexit, SMEs

Disaster Relief

China’s economy: driven by the service sector and consumption in the midst of mounting debts

The Chinese economy in the first half of the year continued to expand by 6.7% as ongoing reforms shifted the economy towards the service sector and consumption. In the second quarter, the service sector boasted 7.5%YOY growth. Consumption as reflected by retail sales also continued to expand by 10.3%YOY. However, China still relied on investment. Despite the drop in fixed-asset investment in the second quarter, investment by state-owned enterprises (SOEs) grew as much as 20%YOY. The sustaining level of investment by SOEs may exacerbate the debt situation in the future. At present, China’s debt level has reached 244% of GDP; 51% of which was incurred by the corporate sector. Moreover, 60% of total non-performing loans (NPL) in the bank system belongs to SOEs. In addition to this concern, China’s imports and exports contracted by 10.5%YOY and 7.4%YOY, respectively. This is due to a slowdown in China’s major trader partners, including Europe and Japan.

Financial stability poses a key risk that may prompt large and continuous capital outflows. Since the beginning of 2016 the yuan has weakened by 5%YOY, increasing volatility in the global financial markets. As foreign investors lose confidence and fear future intervention by the Chinese government they choose to invest in other areas that offer market stability and similarly high yields. Due to the economic slowdown, Chinese investors as well have looked for investment opportunities abroad. At present, the value of China’s outward direct investment (ODI) exceeds that of foreign direct investment (FDI) coming into the country. Capital will likely continue to flow out despite the government’s capital control measures and liquidity injection. This is reflected in China’s international reserves that fell by 13% from its highest peak in 2014.

EIC expects the Chinese economy to expand 6.6% in 2016, mainly boosted by growth in consumption of the expanding middle class. Rapid urbanization in China has led to an increase in household expenditures in both rural and urban areas. Household consumption will likely grow due to rising purchasing power among those with upper-middle incomes. In particular, there is a trend of new generations of consumers ramping up their online purchases (e-commerce). Nonetheless, the Chinese government is still faced with a mounting debt problem that may jeopardize their financial stability and lead to a slowdown in economic growth. EIC expects China to grow by only 6.2% in 2017, lower than the government’s targeted rate of 6.5-7%.

18


Implications for the Thai Economy• China’s economic reforms contributed to strong growth in household consumption. This created business opportunities for Thai exporters, especially online sellers. Thai consumer good exports include cosmetics, baby formula, medical equipment, and health products; all of which still receive tariff privileges until May 11, 2017. (footnote7: Thailand’s Ministry of Finance implemented the Circular on Tax Policies for Retail Import in Cross-Border E-Commerce since April 8, 2016.)• In terms of tourism, Chinese tourists, especially from the middle-income group, will continue to rise. The Tourism Authority of Thailand forecasts that Chinese tourists’ expenditure per head will rise to 5,000 baht per day, or 50,000 baht per trip.• In the past several years direct investment from China to Thailand grew by approximately 25% annually, particularly in the rubber and plastic products manufacturing, real estate, construction, insurance, and renewal energy sectors.

- +

7 The Ministry of Commerce, the General Administration of Customs and the State Administration of Taxation, recently released "the Circular on Tax Policies for Retail Import in Cross-Border E-Commerce", which has been implemented since 8 April 2016.

19

Q4/2016

Source: EIC analysis based on data from Bloomberg, CEIC and NBS.

6

Gross domestic product (GDP) growth rate

Fixed-asset investment, private investment, and investment by state-owned entreprises Imports, exports, and trade balance

Manufacturing PMI and non-manufacturing PMI

Changes in ODI,FDI and foreign reservesHousehold consumption

China’s economy is fueled by the service sector and domestic consumption amidst NPL problems.

1. The Chinese economy expanded 6.7% in the second quarter, the same level as the first quarter, lining up with this year’s target of 6.5-7%.

3. China’s fixed-asset investment and private investment continued to contract, while investment by state-owned enterprises remained high.

5. Household consumptions in rural and urban areas both soared.

2. The manufacturing PMI stayed stagnant, while the non-manufacturing PMI to rise.

4. China’s imports and exports continuously dropped amidst weak global demand.

6. ODI overflowed abroad, while FDI decelerated, resulting in changes in international reserves.

Unit: %YOY และ %QOQ

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

compared to the same quarter last year(YOY') compared to the previous quarter (QOQ)

Unit: Index

Unit: %YOY

0

5

10

15

20

25

Mar

-16

Apr-16

May

-16

Jun-

16

Jul-1

6

Investment by SOEs Private investment Fixed-asset investment

Unit: %YOY

-150

-100

-50

0

50

100

-30

-25

-20

-15

-10

-5

0

5

10

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr-16

May

-16

Jun-

16

Jul-1

6

Export Import Trade balance

Unit: CNY

0

5,000

10,000

15,000

20,000

25,000

30,000

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Household consumption in urban areas Household consumption in rural areas

Average household consumption

Unit: ODI และ FDI (billions), Foreign reserve (trillions)

3.17

3.18

3.19

3.20

3.21

3.22

3.23

3.24

0.00010.00020.00030.00040.00050.00060.00070.00080.00090.000

100.000

Jan-

16

Feb-

16

Mar

-16

Apr-16

May

-16

Jun-

16

Outward direct investment Foreign direct invesment Foreign reserves (RHS)

ASEAN Economy: the CLMV economy receives support from strong domestic demand, while the economies of Singapore and Malaysia remain sluggish.

The CLMV economy (Cambodia, Laos, Myanmar, and Vietnam) continues to sustain a high growth rate. The IMF forecasts that the CLMV’s economy will expand by more than 6%YOY in 2016, supported by domestic demand. Specifically, consumption and loans in the CLMV economy showed robust growth in the first 5 months of this year. Also, retail sales in Vietnam increased by 9.1%YOY. The outlook for investment, which accounts for 20% of GDP, is also positive. Investment growth in the CLMV will likely continue its momentum, making overall domestic demand grow strongly. Moreover, the World Bank has just re-categorized Cambodia as a lower-middle-income country in July (changed from a lower-income country), due to their rising economic growth and higher income per capita. Nonetheless, Cambodia will still receive tax and trading privileges from the U.S., the EU, and Japan.

Exports from the CLMV countries still expanded substantially, but the trade balance worsened due to more imports as a result of urbanization. Exports from Cambodia, Myanmar, and Vietnam have continued to grow rapidly, while export growth from Laos was more moderate. This is because a large majority of Laos’ exports are commodities. Also, their imports expanded well in line with rising public and private investment, leading to a widening deficit in the trade balance.

Economic stimulus policies in the CLMV countries began to take shape with increasing collaboration across borders. For instance, in July Myanmar announced its 12-point economic policy, emphasizing resolving fiscal deficits, monetary and banking

development, and domestic infrastructure development. Furthermore, Myanmar is discussing cooperation with Vietnam on monetary and financial markets and banking regulations..EIC expects the CLMV economy to continue its rapid expansion, while the economies of Singapore and Malaysia remain weak. EIC forecasts that the CLMV economy will continue having strong growth in 2017 driven by domestic demand. Indonesia and the Philippines will also be able to sustain strong growth, benefiting from the governments’ economic reforms. Meanwhile, the economies of Singapore and Malaysia may slow down as the export sectors have not recovered. Malaysia is still faced with declining prices for palm oil and natural gas exports, while Singapore’s exports declined in almost all sectors due to slow exports to China and the U.S.

20


Imp l i cat ions for the Tha i Economy• Despite a slowdown in Thai exports to the CLMV in 1H2016 to only 3.8%YOY due to the drop in oil prices, exports still expanded strongly, especially for consumer goods such as food and beverages and air conditioners.• Border trading between Thailand, Cambodia, Laos and Myanmar grew 2.2% in the first 7 months of this year, while border trading between Thailand and Vietnam expanded 10.6%, showing the potential of Thailand as the trade hub of the region.• Economic reforms in the CLMV countries, including border development and infrastructure network development, wil l enhance tourism and border crossings. This will also benefit related business in logistics, transport, and trains.

- +

21

Q4/2016

Source: EIC forecasts based on data from the IMF, Bloomberg, and CEIC.

7Real gross domestic products (GDP)

Gross domestic product (constant prices)

GDP per Capita (current prices)

Retail sales in Vietnam

Growth in imports and exports

Thailand’s exports to CLMV in the first half of the year

ASEAN economy: the CLMV economy receives a boost from strong domestic demand, while the economies of Singapore and Malaysia remain sluggish.

1. Growth of CLMV’s economy prevailed in comparison to the global average.

3. Income per capita in the CLMV countries rose steadily.

5. Indonesia and the Philippines will continue to grow at a respectable rate, while Singapore and Malaysia are expected to slow.

2. Retail sales in Vietnam grew continuously, reflecting higher demand for consumption.

4. Exports of goods and services grew robustly despite weak global demand.

6. Border-trades between Thailand and the CLMV only grew slightly with an exception of a strong growth of border-trades between Thailand and Vietnam.

Unit: %YOY

0

1

2

3

4

5

6

7

8

9

10

Cambodia Lao P.D.R. Myanmar Vietnam World

2014 2015 2016

Unit: %YOY

0

2

4

6

8

10

12

14

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16

Unit: USD

0

500

1000

1500

2000

2500

2011 2012 2013 2014 2015 2016

Cambodia Lao P.D.R. Myanmar VietnamUnit: %YOY

02468

101214161820

Cambodia Lao P.D.R. Myanmar Vietnam

Import Export

Unit: % YOY

0

1

2

3

4

5

6

7

Indonesia Malaysia Philippines Singapore World

2015 2016

Unit: million bath

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16

Cambodia Laos Vietnam Myanmar

Thai economy at the end of 2016 and in 2017

Thailand’s economy in the first half of the year grew more than expected, supported by public investment expansion, strong tourism, and soaring car sales. Public investment continued its growth trajectory, led by investment in small public projects. Meanwhile, tourism also benefited largely from growth in the number of international tourists that reached 12%YOY in the first 7 months, especially tourists from China. Furthermore, private consumption recovered in the second quarter, boosted by a spike in car sales due to new car model launch and sales promotions. Nonetheless, private investment remained sluggish and exports continued to contract.

EIC revised Thailand’s GDP forecast in 2016 to 3.0%, up from the previous 2.8%, based on a better-than-expected performance in the first half of the year, and strong tourism growth that will likely be sustained throughout the rest of the year. The Thai economy will slow down the rest of the year as the transitory supporting factors start to taper off. Particularly, the reduction of real-estate transfer fees has ended, and the budget allocated for stimulus programs has shrunk. Moreover, a boost to car sales as seen recently will likely be temporary. We expect private consumption to continue to recover from the second quarter, albeit slowly, as household income remains under pressure from a weak labor market. Private investment also remains fragile as the goods export sector continues to contract and there is leftover production capacity.

In 2017, EIC forecasts that Thailand’s economy will accelerate to 3.3% driven by the recovery of private-sector spending. Constraints on household purchasing power will ease after the repayment of car loans once the first car rebate program ends. Middle-to-high-income households will also benefit from additional deductions for personal income that will be effective in 2017. Meanwhile, private investment will be supported by investment from the service sector and from government infrastructure projects that will become more materialized. The tourism sector, the key growth engine for the Thai economy, remains robust, despite a slight slowdown after a continued period of high growth. The Thai exports sector is expected to recover moderately from growth in consumer products exports and rising prices of export goods. However, overall exports are still hampered by a slowdown in the global manufacturing sector and shortening global supply chains.

22


23

Q4/2016

8The Thai economy sustained robust growth, boosted by public spending, tourism, and private consumption recovery.

The Thai economy sustained robust growth, boosted by public spending, tourism, and private consumption recovery.

*Export value in USDSource: EIC forecast

Unit: %YOY

2.8 2.1

-2.0

-5.8

3.0 2.6 1.8

-2.1

11.2

3.3 2.7 3.31.5

10.1 10.4

Tourist arrivals

13.2

Private ConsumptionGDP

21.2

Public Investment

29.8

Export of goods*Private Investment

2017F2015 2016F

Private Consumption

Private consumption grew markedly at a rate of 3.8%YOY in 2Q2016, an increase from a rate of 2.3%YOY during the preceding quarter. The rise was caused by a boost in durable goods spending, in particular growth in car purchases that turned positive for the first time in 3 years at 13.1%YOY this quarter, after having contracted by 2.4%YOY in 1Q2016. This is in part due to the release of new car models, sales promotions, and low comparison base in car purchases during the same period in the previous year. Spending on furniture, household appliances, and maintenance services also picked up pace as construction and transfers of property accelerated during the initial 4 months of this year. Nevertheless, growth in non-durable goods spending, especially food and non-alcoholic drinks that constitute up to 19% of total household spending, grew slower at 2.0%YOY, compared to the 2.8%YOY rate during the first quarter (Figure 9).

24


9Private Consumption Growth

Private consumption grew markedly during 2Q2016 from growth in durable goods spending, despite a slowdown in non-durable goods consumption.

Source: EIC analysis based on data from the NESDB.

Unit: %YOY

1.2

-14.3

1.2 0.82.3

-2.4

0.42.83.8

13.1

3.92.0

2013-2015 1Q2016 2Q2016

Share: 6% Share: 6% Share: 19%

Private Consumption VehiclesFurnishings and

Household Equipment

Food and

Non-alcoholic

Household purchasing power is still under pressure as household income remains stagnant and debt stays at high levels. Household income is expected to remain subdued as working hours and average wages in multiple industries fall. Particularly, in 2Q2016, the number of workers that worked overtime (working over 50 hours per week) dropped by 11%YOY, a lower rate than in the previous quarter. This resulted from contraction in core industries, where the agricultural and construction sectors fell hardest at 27%YOY and 18%YOY, respectively (Figure 10). The decline was caused by the drought situation as well as slower growth in total average wage of a mere 1.4%YOY, in comparison to the 3 year average growth rate of 7.6%YOY (Figure 11). Average wages will also likely climb at a slower pace across all sectors compared to the same period last year, as a slowdown in both domestic and global economies and various industries drag down domestic hiring, which will be a key risk to private consumption this year. Household debt, which remains high, will also be another factor suppressing private consumption, in particular among lower income earning households. Household debt increased to 11.24 trillion baht or 81.3% of GDP during 2Q2016.

25

Q4/2016

10 The number of workers working over 50 hours per week fell across all core industries.

Source: EIC analysis based on data from the Bank of Thailand

Share and growth of workers working over 50 hours per week

20%

10%

18%

26%

33%

34%

34%

Total

Agriculture

Construction

Manufacturing

Wholesale & retail

Transport & logistics

Hotel & restaurant

-27%

% of OT employees in total employees in 2Q2016 Change from 2Q2016Unit: %YOY

-18%

-6%

-6%

-7%

-1%

-11%

Private consumption is expected to pick up gradually in the last quarter of 2016. Given the aforementioned factors, private consumption will recover only gradually, different from the second quarter where the spurt in durable and non-durable goods consumption was boosted by transitory factors. Despite the slow recovery of agricultural product prices in the last quarter of this year, farm income will benefit from multiple support measures such as a rubber farmers support project (direct subsidy of 1,500 baht per rai) and competitiveness enhancement programs for the agricultural sector by the Bank of Agriculture and Agricultural Cooperatives. The total disbursements from these measures are expected to be around 30 billion baht during the second half of the year, which should prop up income and consumption of the agricultural sector going forward. In light of these factors, EIC expects private consumption in 2016 to grow by 2.6%YOY.

26


11Growth of average wages

Growth of average wage rates fell among most industries.

Source: EIC analysis based on data from the Bank of Thailand.

Unit: %YOY

7.6

5.6

8.26.6

5.57.2

9.2

1.0

-1.5

2.6

-1.2

0.6

15.8

-0.1

1.4

-2.7

0.62.0

3.4

9.5

-3.9Total Agriculture Construction Manufacturing Wholesale & retail Transport &

logisticsHotel & restaurant

2013-2015 1Q2016 2Q2016

In 2017, household spending will likely strengthen on the back of two key drivers. These include, firstly, the ending of the first–car incentive scheme and, secondly, adjustments to the personal income tax rate. Under the first-car scheme initiated by the government in 2011 with a total of 1.26 million car purchases, the 5-year ownership condition will come to an end in the last quarter of this year. This in turn will raise demand for passenger cars from those wishing to change cars. At the same time, many participants will have finished paying loan installments that tie them down by 6,000-10,000 baht per month. This will allow them to spend more on other goods and services (Figure 12). Furthermore, the latest adjustments to personal income tax structure that will become effective in the 2017 tax year will add larger tax exemptions to multiple entries. The adjustments will also shift the level of minimum earnings required to pay tax to 26,000 baht per month from the previous 20,000 baht per month. Those who earn between 4-5 million baht a year will receive a lower tax rate of 30% from 35% under the old scheme. In sum, the changes to the personal tax structure will allow consumers to have higher spending power, boosting private consumption. To illustrate this, a single person earning 30,000 baht per month will be able to deduct up to 160,000 baht under the new tax scheme, compared to 90,000 baht under the previous scheme, lowering the person’s tax expense by 3,500 baht per year. As for a person whose earnings are higher than 4 million baht a year, he/she will be paying 50,000 baht less in tax. EIC predicts that the two factors mentioned above will support private consumption in growing continually throughout 2017 at a rate of 2.7%YOY.

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

01/

2011

07/

2011

01/

2012

07/

2012

01/

2013

07/

2013

01/

2014

07/

2014

01/

2015

07/

2015

01/

2016

07/

2016

01/

2017

07/

2017

1. 5-year ownership

condition will end.

Demand for new cars

2. Finish installments payment of

6,000-10,000 baht per month

Purchasing power &

consumption

September 2016 onward

1.26 million car purchased

during the first-car scheme

- Passenger cars = 740 billion

- Single cab pickup = 260 billion

- Double cab pickup = 260 billion

27

Q4/2016

12Domestic sales of passenger cars

The end of the first-car incentive scheme will benefit consumer purchasing power and the car market.

Source: EIC analysis based on data from the Office of Industrial Economics and Excise Department

Unit: number of car

Private investment has not recovered. Private investment in 2016Q2 grew only slightly by 0.1%YOY, compared to 2.1%YOY in the previous quarter (Figure 13). Investment stalled in all sectors, particularly the construction of residential units and the construction of office buildings and factories, which have fallen by 0.5%YOY and 8.8%YOY, respectively (Figure 14). Construction of new residential units stalled after the government’s real estate measure reducing ownership transfer fees expired. Meanwhile, factory construction contracted because factories with BOI approval have frontloaded construction in order to be completed, start operations, and generate income by 2017, following the requirements of the investment stimulation measure. Such an investment climate shows that the spike in private investment earlier this year was mainly a result of temporary factors and frontloaded disbursements. Without government stimulus packages, the outlook for overall demand for investment remains subdued.

Private Investment

28


13Private investment growth

Private investment has not recovered.

Source: EIC analysis based on data from NESDB

Unit: %

0.1

-4.3

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

2Q20

13

3Q20

13

4Q20

13

1Q20

14

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

Compared to the same quarter last year

Compared to the previous quarter (seasonally adjusted)

EIC projects that private investment will grow by 1.8%YOY in 2016 and 3.3%YOY in 2017, mainly thanks to a recovery in the service sector. Led by construction, tourism, and retail and wholesale trading, the service sector expanded by 5.2%YOY over the first half of 2016. Therefore, investment in the service sector is expected to increase, as suggested by the upward trend in capital expenditure (CAPEX) among listed companies on the Stock Exchange of Thailand (SET), particularly those in real estate, retail and wholesale trading, and hotels and restaurants (Figure 15). Similarly, foreign direct investment in these sectors has been on the rise (Figure 16). Going forward, more clarity regarding the progress of the government’s large-scale infrastructure projects in the provinces will help support sustained investment growth. However, investment in the manufacturing sector has remained at a low level in line with delayed recovery in both domestic and foreign demand. Large new investments are not expected this year given sufficient production capacity. Capital utilization of the manufacturing sector recorded 64.9% in June, a level below the historical average (Figure 17). The persistent collapse in imports of capital goods over the past period also confirms the delay in new investment in manufacturing. Nevertheless, a rebound in demand and exports in 2017 will lead to a gradual recovery in the manufacturing sector.

29

Q4/2016

14Growth of components of private investment

Private investment stalled after a boost by government stimulus measures in the previous period.

Source: EIC analysis based on data from the NESDB

Unit: %YOY

-0.5

-8.8

5.9

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2Q20

14

3Q20

14

4Q20

14

1Q20

15

2Q20

15

3Q20

15

4Q20

15

1Q20

16

2Q20

16

Constructions of residentsConstructions of office buildings and factoriesPurchases of machinery

30


15

16

Capital expenditure to depreciation ratio

Accumulated foreign direct investment

Investment in the service sector is on the rise.

Foreign direct investment in the service sector has increased.

Source: EIC analysis based on data from Bloomberg.

Source: EIC analysis based on data from the Bank of Thailand.

Unit: times

Unit: million USD

0

0.5

1

1.5

2

2.5

3

3.5

2009 2012 2016 2009 2012 2016 2009 2012 2016 2009 2012 20162009 2012 2016

Retail and wholesaleReal estate Hotels and Restaurants Industrial products Resources

55

1,267

718

536 543409

1,374

83

345

182

0

200

400

600

800

1000

1200

1400

1600

Hotels andrestaurants

Real estate Automotivemanufacturing

Rubber and plasticmanufacturing

Chemical productsmanufacturing

May 2014-15 May 2015-16

31

Q4/2016

17Capacity utilization and growth of imports of capital goods

Production capacity in the manufacturing sector is sufficient, so investment in capacity expansion is not expected.

Source: EIC analysis based on data from the Office of Industrial Economics and the Bank of Thailand.

64.9

-4.0-0.4

-2.4 -3.1

-20

-15

-10

-5

0

5

63

64

65

66

67

68

69

Jun-

14

Aug-

14

Oct

-14

Dec

-14

Feb-

15

Apr-15

Jun-

15

Aug-

15

Oct

-15

Dec

-15

Feb-

16

Apr-16

Jun-

16

Capacity utilization Imports of capital goods (RHS)Unit: % SA Unit: %YOY

Persistent collapse in imports of capital goods

Average capacity utilization

Government PolicyGovernment disbursement remains the core driver for the Thai economy this year. Disbursements of government budget for the 2016 fiscal year has maintained good progress with the rate of disbursements in the initial 10 months of this fiscal year accumulating to 80.2%, closing the gap with the target rate of 96% (Figure 18). Meanwhile, 56% of the total investment budget has been disbursed, which is higher than last year’s rate of 52%. Most of these investments have been channeled towards ongoing projects to develop water management systems, urgent road transportation system projects, and investment by state owned enterprises. On the other hand, increases in disbursements from large government investment projects have not increased much.

Support from government stimulus policies will likely slow down after having accelerated earlier this year. Since September 2015, the government has released a total of 20 stimulus measures, including direct subsidies, investment projects, and soft loans. Out of the total value of 670 billion baht, 450 billion baht has already been disbursed, with a remaining 100 billion baht expected to be released within the latter half of this year (Figure 19). Most of these measures are short term, so they will have a limited crowding effect on private investment.

32


18Disbursement of total budget Disbursement of investment budget

Government sector disbursements maintain good progress.

Source: EIC analysis based on data from the Ministry of Finance.

Unit: % of the total budget Unit: % of total investment budget

80.1 80.2

0

10

20

30

40

50

60

70

80

90

100

Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Fiscal year 2015 Fiscal year 2016

This year target = 96%

52.2 56.1

0

10

20

30

40

50

60

70

80

90

100

Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Fiscal year 2015 Fiscal year 2016

This year target = 87%

19Disbursement of government’s short-term stimulus policies

Support from government stimulus policies will likely slow down after having accelerated earlier this year.

Source: EIC analysis based on data from NESDB.

33

Q4/2016

Unit: million THB

95,986

76,342

29,680

14,991

30,997

25,956

28,910

26,115

0 20000 40000 60000 80000 100000 120000 140000

To support SMEs

For low-income &small investments

For farmers

For real estatesector

Disbursed in 1H16 Expected in 2H16

Nevertheless, the government will continue to push forward more stimulus measures. Although the majority of funds deriving from the government’s stimulus measures have already been used, the government plans to continue to accelerate disbursements and initiate additional stimulus measures to support the Thai economy. On August 23, 2016 the cabinet approved 3 key measures to expedite government disbursements during the last quarter of 2016, as follows.

These three measures will help speed up disbursements of current budget and in turn support growth of the economy during the end of 2016, however; government spending during 2017 may fall.

Measures Details Implementation period

Amount (million baht)

1. Front loading disbursements of government budget for 2017 fiscal year

Current Expenditure - Accelerate disbursements of current

expenditures up to 33%. - Accelerate training budget up to 50%.

- 1Q/FY2017

31,500 Investment Expenditure - Accelerate disbursements of projects valued

below 2 million baht. - Accelerate signing contracts of projects

valued between 2 million - 1 billion baht. - Accelerate signing contracts of projects

valued over 1 billion baht.

- 1Q/FY2017

- 1Q/FY2017

- 2Q/FY2017

2. Capacity building measures

- Government offices will be allowed to spend unused budget from FY2016 on organization and personnel development.

- December, 31st 2016 -

3. Measures to encourage small government investment projects

- Government offices, state owned enterprises and other government agencies each to spend up to 2 million baht on investment projects.

- Example investment projects are: computer procurement projects, construction of buildings to be used for training, improvement of pedestrian ways, and improvement of custom offices.

- 1Q/FY2017

23,000

34


EIC believes that government policies will be the main supporting factor for the Thai economy during the last quarter up until 2017. The annual budget for fiscal year 2017, which will come into effect during the last quarter of this year, includes a total expenditure of 2.73 trillion baht, an increase of 0.5%YOY from the previous fiscal year. This implies a budget deficit of 390 billion baht and an investment budget that accounts for 20% of the total budget. Although the acceleration of budget disbursements during the last quarter of 2016 may cause government expenditure to slow next year, more government investment in megaprojects will likely provide an additional boost to government spending. Disbursements are expected from on-going construction of large infrastructure projects, such as the State Railway of Thailand Red Line, the Mass Rapid Transit Green rail line and the Pattaya-Mataphut motorway. Projects that have completed bidding processes during the first half of 2016, such as the Laem Chabang port, the Bang pa-in – Nakhon Ratchasima motorway, as well as projects expected to complete the bidding process in 2016, such as the three yellow, orange and pink Mass Rapid Transit rail lines. Those projects account for over 80 billion baht investment value in 2017. Construction of such large transportation infrastructure projects should take up to 4-7 years, which will in turn provide additional cash injections from government spending of approximately 100-200 billion baht per year (Figure 20). Given such factors, EIC expects public investment to grow at a rate of 11.2%YOY in 2016. The momentum will likely continue into 2017 to reach 10.1%YOY growth.

20Projection of investment in megaprojects*

Government investment spending projection

*The projection excludes high-speed railway projectsEIC analysis based on data from the Ministry of Transport.

35

Q4/2016

Unit: billion THB

50

39

47

2021

124

79

25

182

2020

187

86

55

37

9

32

41

34

2019

172

79

42

36

16

2018

131

77

23

16

2022

1

2017

82

52

15

109 2

2016

9

Metro railDual-track train

MotorwayAirportSeaport

36


BOX: Thailand and the transition towards a cash-less society and E-Payment

The move towards a cashless society around world has taken a leap forward in the past 10 years. Sweden, one of the most advanced economies, has made a nearly full transition into a cashless society, having removed cash deposit and withdrawal services in more than half of all bank branches in the country. In fact, a subway-train ticket in Stockholm can no longer be bought using cash. Meanwhile innovations like Apple Pay and Bitcoin are another reminder of how cash is quickly becoming obsolete.

Cashless societies will raise the efficiency and capacity of an economy via cost reductions due to cashless transactions and the increased transparency of financial service system. The hidden costs in managing cash are, for example, the cost of transportation, storage, and production. The Thai Bankers Association has estimated the total savings from moving to an e-payment system would be approximately 100 billion baht per year. A cashless society can also increase the efficiency of government tax collection as financial systems become more transparent. This is because all e-payment transactions will be recorded in the system, allowing government officers to track

irregularities. This can help prevent tax avoidance, corruption, and money laundering within the country.

The latest studies from Moody’s Analytics shows that e-payment systems will have a positive impact on economic growth, particularly on GDP and consumption spending. Use of e-payment systems and various electronic payment cards will increase GDP by 3.18 billion US dollar during 2011-2015, which is equivalent to an average increase in employment of 75,000 people per year. In terms of consumption, e-payments will support businesses in expanding their customer base. The Moody's study forecasts that every 1% increase in credit or debit card use will increase consumption around the world an average of 104 billion US dollars per year.

To maximize the benefits of a cashless society, Thailand needs to resolve 2 main issues, the reforming of related infrastructure and increasing the use of e-payment systems in Thailand. A study by Tufts University and MasterCard Worldwide ranks countries by the Digital Evolution Index (DEI), an indicator of readiness for a transition towards a cashless society. The study shows that Singapore is ranked first out of 50 countries, while Thailand ranks

37

Q4/2016

35th. The low ranking indicates that Thailand is unprepared in terms of the infrastructure required for a cashless society and emphasize the need for a financial payment system overhaul in Thailand that will increase efficiency and reduce resistance to the move to a cashless society. Electronic networks will support increased e-payment use and in turn have a positive influence on GDP. Furthermore, the countries that are most prepared for the transition are those that will benefit most from such a move. The Thai government has therefore initiated reforms of related infrastructure, starting with the introduction of a new cash transfer system called PromptPay. The project is one out of five project collaborations between the Bank of Thailand and the Ministry of Finance aimed at modernizing payment systems. Another upcoming project is to expand the use of payment machines. The project is currently in the planning phase, with implementation expected in the near future. Nevertheless, increased usage and acceptance of e-payments may be limited by 2 factors. The first is currency-specific characteristics. A government may have difficulty ending the use of notes and coins if its currency is highly valued by a large group of people due to its credibility in retaining currency value. A good example is the U.S. dollar, which is used globally. As a result, in the U.S. the share of non-cash payments accounts for only 45% of all transactions. The number is low when taking into account the country’s advancement in payment technology, as reflected by its DEI ranking of 6th place and a score of 51.79. In contrast, France, which is ranked 19th at a score of 44.07, has a 14% higher share of non-cash payments than the U.S. Moreover, the U.S. currency is a safe haven for investors and ordinary people in during times of strong economic growth and turbulence. Thus

various countries, such Ecuador and the Bahamas, have chosen the U.S. dollar as their main currency. In Zimbabwe during the hyperinflation period, many people exchanged holdings of the local currency for the U.S. dollar. According to a forecast by Ruth Judson of the Federal Reserve, the use of U.S. currency is so widespread across the globe that approximately 50% of all US currency is circulating outside of the country. This in turn indicates that even though the US may be able to successfully transition into a cashless society within the country, a large number of U.S. bank notes and coins will still remain circulating outside its borders. Therefore, given its specific characteristics, it may be difficult for the U.S. to reduce the amount of U.S. currency circulating in the financial system.

In contrast, the Thai baht is not a significant currency in the global market and therefore it should be easier for the Thai government to overcome this issue. However, a possible concern for the government would be the use of baht in facilitating cross-border trade between neighboring countries like Cambodia, Laos, and Myanmar, which accounted for 500 billion baht in trade during 2015. It is likely that cross-border traders in these countries will be reluctant to stop using the Thai baht as it will limit the

38


trading capacity of Thai traders and importantly, Cambodia, Laos, and Myanmar have yet to develop the infrastructures required to support e-payment or non-cash payments. Therefore, as Thailand moves towards becoming a cashless society these operators will continue to use the Thai baht in facilitating cross-border trade. The demand for the use of baht cash in cross-border trade may therefore become an obstacle in the transition towards a cashless society in Thailand. The second limitation is the demand to use cash in daily life. A social impediment has risen as people are still concerned over the possibility of personal information leaks and the general safety of e-payment. Meanwhile, some people refuse to use credit or debit cards for payment because they are more comfortable with using cash. There is also more privacy as cash transactions are not recorded and therefore untraceable by government officers. In the U.S. cash is commonly used in the underground economy to avoid government inspection, which accounts for some 10% of GDP. Given such concerns over safety and the loss of privacy, many people are reluctant to abandon the use of cash.

According to a Mastercard forecast, shares of non-cash payments in Thailand and Taiwan in 2013 were

2% and 6% of total payments, respectively. In Thailand, promotion of e-payment and reduction of cash usage in daily life can be achieved by educating the public in how the system works and its benefits. Also, security standards need to be upgraded, and the government can use incentive schemes to promote e-payment, such as applying a VAT rate that is higher than 7% on cash purchases, the reduction of transfer fees through PromptPay, and lower tax rates for users of e-payment.

Thailand can also adopt various measures used in other countries. An example is US e-payment company PayPal spending 10 million USD to buy a commercial time slot during the Super Bowl 2016, the biggest sporting event in North America, to promote its “There’s a New Money in Town” commercials. The ads aimed to project a negative image on cash as old and outdated and paint a more positive view of non-cash payment or e-payment as modern, safe, and inclusive. Another example is JP Morgan Chase Bank in the U.S., which forbids the storage of notes and coins in the bank’s safes. That bank also does not allow credit cards, house loan, or car loan payments to be repaid in cash in order to reduce the use of cash in the system and increase e-payment transactions. In the UK, many leading banks are supporting the use of contactless credit and debit cards. These cards are more convenient than traditional credit and debit cards that require swiping and signature authentication when making a payment. The use of contactless cards has been increasing, especially for smaller transactions, making them more likely to be able to replace the use of cash as cash is most frequently used in smaller transactions. Banks like Barclays, for example, will automatically issue contactless cards that cannot be canceled or changed into a different type of card. Other banks, such as the Royal Bank of Scotland and Lloyds, have adopted

39

Q4/2016

similar policies but allow their customers to exchange their contactless card for a traditional card that requires swiping and signing, if requested.

Apart from the aforementioned policies, the Thai government may use legal measures to enforce changes. An example is in the UK during 2009, when the Payment Council proposed terminating the use of checks in the country by 2018. While in Denmark during 2015, a law that will allow business owners to deny cash payment for the purchases of goods and services was proposed by the Chamber of Commerce to the parliament for approval. This law will make Denmark the first country to have cashless stores once it comes into effect.

In sum, EIC believes that in order the prepare the country to move towards a cashless society, the Thai government not only needs to upgrade related infrastructure to reduce cost and increase capacity, but also needs to address social limitations that are obstructing an efficient transition. Such limitations can hinder developments despite having equipped the country with modern infrastructures. Therefore, to retrieve the most benefit of a cashless society Thailand needs to resolve both infrastructure and social issues at the same time.

The value of Thai exports in the first eight months of 2016 contracted by 1.2%YOY. Excluding gold, exports further contracted by 3.5%YOY, reflecting a weak outlook for Thai exports. The main downward pressure still came from the slow recovery of the global economy and the manufacturing sector. As a result, demand for industrial products such as machinery and equipment, manufacturing parts and raw materials have significantly contracted. Moreover, the value of exports is still pressured by low oil prices, affecting oil-related products such as chemicals, plastics, and refined fuel products (Figure 21). On the other hand, some consumer goods such as canned fruits, shrimp, and passenger cars have expanded in this period. These consumer products still benefit from continually growing private consumption in other countries.

EIC predicts a contraction of 2.1%YOY in Thai exports in 2016. Exports continue to be pressured by a fragile recovery of the global economy, structural shifts in international trade, a stalling manufacturing sector worldwide and a shortening supply chain. These factors will restrict world trade volume growth to a slower pace than in the past (Figure 22). In addition, many Thai exports fail to meet current demand, especially electronics products. However, EIC predicts that Thai exports will expand by 1.5%YOY in 2017, supported by higher oil prices, a recovering drought situation, and increasing demand for consumer products from neighboring countries.

EIC expects imports to shrink by 6.2%YOY in 2016. Imports in the first eight months of 2016 shrank by 8.8%YOY. Imported capital goods, excluding aircraft and ships, still contracted as domestic investment continued to stall. EIC expects that imports of capital goods are still pressured by the weak recovery of private investment and likely delays to large public infrastructure projects. Moreover, low oil prices will continue to pressure fuel imports to drop further after having contracted by 31%YOY during the first eight months. Nonetheless, the initial recovery of consumption by domestic households will support further growth in consumer goods imports (Figure 23). In 2017, EIC expects the value of imports to improve and expand by 6.1%YOY. The expected higher oil prices should raise the value of fuel imports, which account for 12% of total imports. In addition, private consumption and private investment are expected to recover in 2017 and lead to higher imports next year.

Export-Import

40


21

22

Thailand’s Export Growth by Products

Global import volume of goods compared to Thailand’s export value

Value of Thai exports during the first eight months of 2016 contracted by 1.2%. Excluding gold, exports contracted by 3.5%YOY.

Global import volume of goods has not shown a clear sign of recovery.

Source: EIC analysis based on data from the Ministry of Commerce

Source: EIC analysis based on data from IMF and the Ministry of Commerce

Unit: %YOY

Unit: %YOY

Factors Affected items

Low oil prices from oversupply problems Refined fuel

Chemical and plastics

-40%

-8%

Outdated products and shifts in production

bases

Electronics

Appliances

-3%

-5%

Lower price and quantity of agricultural exports Rice

Rubber

Cassava

-6%

-21%

-22%

Expansion of overall automotive industry Car and parts 5%

Increasing demand of consumer products Processed fruit

Processed chicken

11%

3%

Recovery of seafood products Processed shrimp 20%

Temporary expansion of gold export Gold 124%

-

-

-

+

+

++

-15

-10

-5

0

5

10

15

20

25

30

Total Import volume of goods: World Total Export value of goods: Thailand

Average growth of global import volume During 2000-2015 = 5.1%YOY

Average growth of global import volume During 2016F-F2021F = 4.1%YOY

41

Q4/2016

23Thailand’s Import Growth by Products

Value of Thai imports during the first eight months of 2016 contracted by 8.8%YOY.

Source: EIC analysis based on data from the Ministry of Commerce

Unit: %YOY

Factors Affected items

Low oil prices from oversupply problems Fuel lubricants -31%

Slowdown of domestic investment Capital goods (excluding airplane and ships) -2%

Slowdown of manufacturing production Raw materials and semi-manufactured goods. -8%

Recovery of domestic consumption Consumer goods 3%

-

+

--

42


Unit: Index 3mm SA (Jan 14= 100)

Tourism

The number of foreign tourist arrivals during the first seven months of 2016 continually expanded. The number totaled 19.5 million for January to July, a 12.0%YOY increase. Accounting for 55% of total tourists, tourists from China and ASEAN continued to be an important driver of Thailand’s tourism sector and expanded by 21%YOY and 9.7%YOY, respectively. Moreover, the number of Russian tourists signaled a better outlook as it grew by 18.5%YOY following improved global oil prices. Tourism receipts during the first six months of the year totaled 0.83 trillion baht, a 17.0%YOY increase, mainly due to spending by Chinese tourists.

EIC expects the number of tourists to continue showing high growth despite a slower rate predicted for next year. We expect the number of foreign tourist arrivals to be at 33.9 million, or a 13.2%YOY increase this year. In 2017, EIC expects the number of international arrivals to register high growth, with a total number of 37.2 million or a 10.4%YOY increase. The slower growth rate is due to declining growth in outbound Chinese tourists. Nevertheless, the tourism sector will benefit from the expansion of three airports—Don Mueang, Phuket and U-Tapao—which are all expected to fully operate within 2016 and accommodate 17.4 million additional passengers per year. Moreover, route expansions by low-cost airlines to neighboring countries and China will help attract more tourists. However, the tourism sector is subject a new short-term risk from the attacks in major tourist destinations in Southern Thailand and concrete measures on zero-dollar tour operations, which warrant a closer watch.

24Number of tourist arrivals

The number of foreign tourist arrivals during the first seven months of this year grew by 12.0%YOY.

Source: EIC analysis based on data from the Ministry of Tourism and Sports.

0

50

100

150

200

250 Total China Russia ASEAN Europe excl. Russia

43

Q4/2016

25

26

Current Account Balance

Current Account to GDP (2015)

The current account will likely post a large surplus.

Thailand’s current account to GDP ratio is relatively high, compared to other emerging economies.


Source: EIC analysis based on data from CEIC

The current account will likely post a high surplus. In 2016 the current account is expected to register a surplus of 39.9 billion USD, an increase from 32.0 billion USD the previous year. In 2017 the current account will likely show a large surplus of around 27 billion USD (Figure 25). Current account surplus trends are due to a large contraction in imports in accordance with low global oil prices and subdued domestic private investment. Moreover, the surplus is driven by an increased surplus in the service balance as the number of tourists continues to expand.

The large current account surplus allows Thailand to withstand capital outflows risks and provides stability for the baht. The current account surplus plays a part in raising Thailand’s international reserves. This allows Thailand to withstand capital outflow risks well, especially during periods with higher volatility in financial markets and huge capital inflows to emerging markets. Thailand’s current account to GDP is considered very high compared to other emerging economies (Figure 26). EIC expects that this large ratio will be maintained through 2016 and 2017 at around 10.1% and 6.6% of GDP, respectively.

Current Account

Unit: USD bn

Unit: % of GDP

2016F20152014

26.7

Net income and transfers

Trade balance

Service balance

3.8 8.1 10.1 % of GDP

2017F

-11.3 -12.7 -18.9-29.3

2.110.1 17.7 22.224.6

34.6

41.2 34.1

6.6

15.4

32.0

39.9 27.0

8.1

3.0 2.9

-2.1

Thailand Malaysia Philippines Indonesia

44


Recent positive headline inflation rate was driven by transitory factors and did not signal a clear recovery in domestic demand. The headline inflation rate in July fell to 0.10%YOY from 0.38%YOY the previous month (Figure 27). The positive headline inflation rate was due to higher crude oil prices and fresh food prices that rose following a drought. In particular, the price of vegetables and fruits rose by more than 10%YOY during May-June. However, the increase slowed down in July as the impact from the drought subsided. Meanwhile, prices of other goods remained flat. However, headline inflation is likely to pick up in the remaining months of the year in accordance with higher oil prices. Therefore, EIC expects the headline inflation rate in 2016 to be 0.4%YOY.

Core inflation declined, reflecting weak domestic consumption. Prices of consumer products have not increased much. The core inflation rate in July fell to 0.76%YOY from 0.80%YOY the previous month. Non-food prices remained unchanged, while prices of some products fell, especially those of housing and furnishings, which account for 24% of the core inflation basket. Moreover, the 7%YOY reduction in the electricity surcharge continued to be one of the factors pressuring core inflation to stay low. In the second half of 2016 private consumption may not recover quickly due to concerns about purchasing power. Therefore, businesses cannot adjust prices upwards. This will result in a core inflation rate of 0.8%YOY in 2016.

EIC expects inflation to accelerate in 2017. Going forward, higher oil prices at around 52 USD/barrel (Brent), stronger domestic consumption, and a weaker baht should allow both headline inflation and core inflation to accelerate next year. EIC expects headline inflation in 2017 to be 2.6%YOY and core inflation at 1.2%YOY.

Inflation

27Headline and core inflation

The headline inflation rate slowed after the impact of the drought subsided.

Source: EIC analysis based on data from the Bureau of Trade and Economic Indices, Ministry of Commerce

Unit: YOY

0.76%

0.10%

-2%

-1%

0%

1%

2%

3%

4%

5%

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec

-15

Jan-

16

Feb-

16

Mar

-16

Apr-16

May

-16

Jun-

16

Jul-1

6

Core inflation Headline inflation

Headline inflation target by the Bank of Thailand 2.5% 1.5%

45

Q4/2016

Source: EIC analysis based on data from BOT

0

1

2

3

4

5Domestic Economy

Foreign Economy

Inflation

Capital Flow andExchange Rate

2Q 2016

3Q 2016

The Monetary Policy Committee (MPC) unanimously voted to maintain the policy rate at 1.5% at its September meeting. The MPC saw the Thai economy continuing its recovery at a gradual pace while monetary conditions remained accommodative and conducive to economic recovery. Inflation tends to reach the policy target range by the end of this year. However, risks increased from uncertainties about global economic recovery. The MPC gave significant consideration to a fragile global economic recovery and uncertainties on the monetary policy direction of major advanced economies and financial stability.

The EIC predicts that the MPC will hold the policy rate at 1.5% throughout 2016. The reasons for maintaining the rate are as follows: 1) the Thai economy is gradually recovering and there is no need to further lower the policy rate to boost the economy; 2) the need to preserve policy space is pertinent, especially when downside risks from the global economy significantly increased; and 3) search-for-yield behaviors and risks to financial stability may result from a ‘low for long’ environment. Any further rate cuts, therefore, must take into account such factors. After the Brexit vote, the MPC addressed concerns that the appreciation of the baht would not be beneficial to the Thai economy. However, the EIC assesses that the stronger baht will only lasting in the short term following capital inflows. A rate cut is therefore not necessary during this time.

Policy interest rate

46


28Four dimensions of economic risks

Risks on Thai economy in 4 dimensions Q2 and Q3 2016.

Source: EIC analysis based on data from Bloomberg

Source: EIC analysis based on data from Bloomberg, SETSMART and ThaiBMA

Unit: %

Throughout 2017, the EIC sees the MPC maintaining the policy rate at 1.50% to support economic recovery. In 2017 the economy will still be in a recovery mode despite slight improvement. The inflation rate will be higher at 2.6%, but still within the target band of 1%-4%. Risks of slower-than-expected growth remain. Holding the policy rate 1.5% is therefore beneficial to economic recovery and helps preserve policy space in cases of unexpectedly changing conditions.

47

Q4/2016

29

30

Currencies appreciation after Brexit

Thai Baht and Capital Flow

The decision to leave the Eurozone led to lower government bond yields.

The USD significantly strengthened after Brexit.

0

2

4

6

Thailand Malaysia Indonesia Philippines China South Korea

Unit: hundred billion THB

34.0

34.5

35.0

35.5

-2

0

2

4

6

10-J

un

17-J

un

24-J

un

1-Ju

l

8-Ju

l

15-J

ul

22-J

ul

29-J

ul

5-Au

g

12-A

ug

19-A

ug

26-A

ug

Equity LT BondST Bond USDTHB

Unit: Baht/USD

Brexit Vote

Source: EIC analysis based on data from Bloomberg Source: EIC analysis based on data from Bloomberg

31 32Brexit vote brought about global stock index drop, especially in UK and EU.

Brexit vote led to government bond yield drop.

Stock Index Advanced Economies Government Bond Yield

Unit: Index June 2015 = 100

85

95

105

115

1-Ju

n

8-Ju

n

15-J

un

22-J

un

29-J

un

6-Ju

l

13-J

ul

20-J

ul

27-J

ul

3-Au

g

10-A

ug

17-A

ug

24-A

ug

UK

EU

US

Brexit Vote

Unit: %

-1

0

1

2

1-Ju

n

8-Ju

n

15-J

un

22-J

un

29-J

un

6-Ju

l

13-J

ul

20-J

ul

27-J

ul

3-Au

g

10-A

ug

17-A

ug

24-A

ug

US UK GM JP

Brexit Vote

The result of the referendum on the UK leaving the European Union (Brexit) was largely unexpected and therefore resulted in financial market volatility in late June. The vote to leave the EU was beyond market expectations and had short-term effects in financial markets. Global stock markets, especially in the UK and Europe, dropped significantly. Government bond yields in developed economies, such as the U.S., Germany and the UK, declined. The USD strengthened significantly. The consequences of the Brexit referendum demonstrate the potential economic impact from geopolitical risks. In 2017 such risks loom large (read more in In Focus: Themes for the Global Economy 2017). These events may bring about financial market volatility in a similar fashion as Brexit.

In addition to geopolitical risks, monetary policy divergence will remain a source of financial market volatility throughout this year and 2017. While the U.S. is tightening its monetary policy, Europe and Japan are easing due to significantly different paces in economic recovery. Opposite stances on monetary policy can heighten financial market volatility. Especially in 2017, a stronger U.S. economic recovery that takes a different path than other economies will require a tighter monetary policy stance than before. Monetary policy divergence will be more apparent.

In the remainder of 2016, a rate hike by the Fed will be an important determinant of exchange rate movements. As compared to the end of 2015, the market has significantly lowered the expected number of rate hikes by the Fed in 2016. As of now, market expectations show that the Fed will increase the policy rate no more than once this year, resulting in a policy rate of 0.50%-0.75% at the end of the year. A clear sign of a rate hike this year will strengthen the dollar at the end of this year. In 2017 the dollar will tend to appreciate further following a U.S. economic recovery, while monetary policies ease in other countries.

Exchange rates

48


Source: EIC analysis based on data from BOT


Source: EIC analysis based on data from SETSMART

33

35

34Foreign investors hold a significant amount of short-term maturity Bank of Thailand bonds.

The Thai baht gained due to short-term inflows.

Foreign investors continue to invest in Thai equities, with a large inflow after Brexit.

Non-Resident ST Bond Holdings

Thai Baht

Accumulated Non-Resident Equity Net Position Year-to-date

EIC expects that the Thai baht will weaken and face high volatility. In earlier periods the Thai baht persistently strengthened due to capital inflows by foreign investors. Thousands of billions of baht were invested in Bank of Thailand bonds, which feature short-term maturities, and some thousand billion baht were invested in stocks. The interest rate differential between Thailand and the U.S. will narrow, leading to capital outflows from short-term funds, especially Bank of Thailand bonds. By end of 2016 the EIC expects the Thai baht to weaken to 35.5 baht per USD and continue to fall in 2017 to reach 37.0 at the end of the year.

The Thai baht

Unit: Baht/USD

0.0

0.5

1.0

1.5

Jan-

15

Apr-15

Jul-1

5

Oct

-15

Jan-

16

Apr-16

Jul-1

6

Unit: ’000 bn THB

-0.5

-

0.5

1.0

1.5Ja

n-16

Feb-

16

Mar

-16

Apr-16

May

-16

Jun-

16

Jul-1

6

Aug-

16

Unit: ‘000 bn. THB

Brexit Vote

32

33

34

35

36

37

Jan-

15

Apr-15

Jul-1

5

Oct

-15

Jan-

16

Apr-16

Jul-1

6

THB depreciated

THB appreciated

49

Q4/2016


36 The Japanese yen gained due to the increased risk-off sentiment in global financial markets and expectations of further monetary policy easing by the BOJ in April.

Yen

EIC assesses sees the Japanese yen possibly weakening. Japan’s ailing economy, negative inflation rate, and strong yen will likely pressure the BOJ to pursue further monetary policy easing. In EIC’s view, the small-scale easing in July by the BOJ was a wait and see move to assess the impact of the Japanese government’s fiscal policy, which was implemented in the same period, before taking any further monetary policy actions. This was aimed at allowing both policy tools to fully accommodate economic recovery. By the end of 2016 EIC expects the Japanese yen to weaken to around 107 yen per USD. In 2017, we assess that risk-off sentiment in the global financial market should ease, resulting in a weakening yen at 110 yen per USD at the end of 2017.

Japanese Yen

2.5

2.9

3.3

3.7

100

110

120

130

Jan-

15

Apr-15

Jul-1

5

Oct

-15

Jan-

16

Apr-16

Jul-1

6

USD - JPY THB - JPY (RHS)

Yen depreciated

Unit JPY/USD Unit: JPY/THB

Yen appreciated

50



37 The euro strengthened when compared to post-Brexit.

EURO

EIC expects the euro to weaken. Uncertainties surrounding the global economy make it possible for the ECB to extend the repurchasing of government bonds which are currently due in March, 2017. At the same time, the possibility of a rate hike by the Fed this year pressures the euro to weaken. EIC assesses forecasts the euro falling to around 1.08 USD per euro at the end of 2016 and stabilizing at 1.09 USD per euro at the end of 2017.

The Euro

Unit: THB/EURUnit: USD/EUR

32

34

36

38

40

42

1

1.1

1.2

1.3

1.4

Jan-

15

Apr-15

Jul-1

5

Oct

-15

Jan-

16

Apr-16

Jul-1

6

EUR - USD EUR - THB (RHS)Euro appreciated

Euro depreciated

51

Q4/2016

Bull - Bear: Oil Prices

Crude oil price (USD/Barrel) 2014 2017F

(Average) Average Q1 Q2 Q3 Q4 Average Q1 Q2 Q3 Q4F Average Max* Min* Average

WTI 93 48 58 46 42 49 33 46 45 47 43 47 38 50Brent 99 54 62 50 43 52 35 46 46 48 44 48 39 52

2015 2016F

53

Q4/2016

BULL-BEAR: Oil prices

BULLs: • Global demand for oil will likely rise in the fourth quarter

as the winter season begins. The US Energy Information

Administration (EIA) sees global demand for oil expanding

2%YOY in the fourth quarter of 2016 to 95.98 million barrels

per day, with the highest growth in Asia at 6%YOY. In

particular, demand from China, the world’s second largest

oil consumer, will rise by 4%YOY to reach 11.77 million barrels

per day.

• After the International Energy Forum (IEF) in Algiers,

Algeria on September 28, 2016, OPEC reached an agreement

to cut production to 32.5-33 million barrels per day, from

the previous level of 33.4 million barrels per day. The

production cut was OPEC’s first agreement in 8 years since

the oil price crisis in 2008.

• According to the EIA, US oil production will drop in the

fourth quarter in 2016 to 14.6 million barrels per day, or

a 3%YOY contraction. The US rig count declined to 406 in

August 2016 from 675 during the same period last year,

or a 40%YOY contraction.

*Data from Leading global houses (as of Sep 30, 2016)Source: EIC analysis

BEARs: • There remains excess supply in the oil market, which puts downward pressure on crude oil prices. According to the EIA, global oil supply in the fourth quarter will reach 96.74 million barrels per day, while daily demand will only stand at 95.98 million barrels per day, resulting in an excess supply of 0.8 million barrels per day. Supply from OPEC will rise by as much as 3%YOY to 39.66 million barrels per day. However, non-OPEC producers are expected to lower production to 57.08 million barrels per day, a 1%YOY contraction.

• The Fed may increase the policy rate once in December, resulting in a Fed fund rate of 0.50%-0.75% at the end of 2016. This will prompt capital outflows from the oil market to the US financial market, exerting downward pressure on oil prices.

• In the next OPEC meeting in November 2016 some countries may be spared from cutting production. For example, Iran, the third largest producer in OPEC, aims to maintain production at 4 million barrels per day, a level similar to that prior to the nuclear sanctions by the P5+1. Currently, Iran is pumping around 3.6 million barrels per day.

54


54

Crude oil prices in the fourth quarter of 2016 will increase slightly but remain low due to an excess supply of around 0.8 million barrels per day. Despite the agreement reached by OPEC to cut production, some countries may be exempted, such as Iran. As a result, the agreement will not have a significant impact on reducing the oil supply. Moreover, a possible rate hike by the Fed in late 2016 may be another factor in pressing oil prices downward. However, higher demand for oil in winter should push prices up in the fourth quarter.

EIC’s view: Bear

Q4/2016

55

Q4/2016

In focus:

As the global economy has increasingly shifted away from the manufacturing sector towards the service sector, Thailand too is experiencing such transition in recent years. The impact of such structural change will be inevitable especially for Small and Medium Enterprises (SMEs). Therefore, businesses in Thailand should gear up to embrace the trend. But, given a wide variety of businesses in the service sector, what are segments with high growth potentials for SMEs, taking into account advantages of each region in Thailand?

Exploring SMEs’ opportunities in the service sector

% of service-related SMEs are Retail and wholesale trading

sales growth than other service-related businesses

Lower

High sales growthLow volatilityA lot of investment required for hotel and restaurant businessesSkilled talent needed for healthcare

Very high sales growthHigh volatilitySensitive to overall economic conditionsReal estate businesses require high level of investment and high-skilled labor.

to each region's income level

Very sensitive 2468

101214

Average

Sales growth of SMEs**

*Excluding agriculture **Compound annual growth rate (CAGR) 2011-2014Business size is classified based on BOT’s criteria.Source: EIC analysis on October 1, 2016 based on data from the Business Online PCL and OSMEP

www.scbeic.com

More than

50%

EIC recommends

Exploring

opportunities in the service sector

SMEs’

5 alternative service-related opportunities for SMEs

Balancing Risk and Return

Why service sector?

Constructions High growth following urbanizationSimilar profit margins in all regions

EastBMA

East North

EastBMA

BMA

North

High growth, but also high volatilityProfit margin boosted by tourism

Good growth rates in all regionsLess volatility than other sectors

High growth in tourist destinations High level of investment in fixed assets

Similar profit margins in all regionsGrowth in industrial and commercial areas

Real estates

Healthcare

Hotels and restaurants

Transportation and logistic

Highlights Where?

SMEs' GDP structure

2006 2014

Manufacturing

Unit: %

Other services

Retail and wholesale trading 29 28

41 48

30 24

Thailand is moving away from manufacturing and towards service sector.

EIC’s view

Healthcare andHotels and restaurants

Constructions and Real estates

Medium Risk Medium Return High Risk High Return

Source: EIC analysis based on data from the NESDB

*Compound annual growth rate (CAGR) 2011-2014Source: EIC analysis based on data from the NESDB

38

39

The service sector has been the main economic growth driver in recent years.

Service sector growth beat overall growth in all regions.

Contribution to growth of Thailand’s GDP

Growth of gross regional product (GRP)

Unit: %YOY

Unit: %YOY

The pattern of Thai economic growth in recent periods has shown that Thailand is moving gradually away from manufacturing and towards the service sector. Thailand’s GDP growth figure reflects a persistent outperformance of service sector growth compared to that of the manufacturing and agricultural sectors (Figure 38). Particularly for export figures in recent years, while Thai goods exports have been in a persistent decline, exports of services have emerged as a major growth engine for the economy. Likewise, domestically various industries in the service sector are contributing an ever-larger share of growth, including tourism related industries, restaurants, healthcare services, constructions, transportations, and retail and wholesale trading. What’s more, these developments are taking place in all regions of the country (Figure 39).

% of service-related SMEs are Retail and wholesale trading

sales growth than other service-related businesses

Lower

High sales growthLow volatilityA lot of investment required for hotel and restaurant businessesSkilled talent needed for healthcare

Very high sales growthHigh volatilitySensitive to overall economic conditionsReal estate businesses require high level of investment and high-skilled labor.

to each region's income level

Very sensitive 2468

101214

Average

Sales growth of SMEs**

*Excluding agriculture **Compound annual growth rate (CAGR) 2011-2014Business size is classified based on BOT’s criteria.Source: EIC analysis on October 1, 2016 based on data from the Business Online PCL and OSMEP

www.scbeic.com

More than

50%

EIC recommends

Exploring

opportunities in the service sector

SMEs’

5 alternative service-related opportunities for SMEs

Balancing Risk and Return

Why service sector?

Constructions High growth following urbanizationSimilar profit margins in all regions

EastBMA

East North

EastBMA

BMA

North

High growth, but also high volatilityProfit margin boosted by tourism

Good growth rates in all regionsLess volatility than other sectors

High growth in tourist destinations High level of investment in fixed assets

Similar profit margins in all regionsGrowth in industrial and commercial areas

Real estates

Healthcare


Transportation and logistic

Highlights Where?

SMEs' GDP structure

2006 2014

Manufacturing

Unit: %

Other services

Retail and wholesale trading 29 28

41 48

30 24

Thailand is moving away from manufacturing and towards service sector.

EIC’s view

Healthcare andHotels and restaurants

Constructions and Real estates

Medium Risk Medium Return High Risk High Return

57

Q4/2016

-4

-2

0

2

4

6

8

10

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2Q2016

Agricultural sector Manufacturing sector

Service sector GDP

-4

-2

0

2

4

6

8

10

All BMA Central North North-East East West South

Total GRP GRP in service sector

Average

*Exclude agricultural sectorSource: EIC analysis based on data from the Office of SMEs Promotion

40 SMEs in the service sector recorded higher growth than those in manufacturing, and contributed to a higher share of GDP.

Compound annual growth rate of SME GDP* Structure of SME GDP

Thai small and medium-sized enterprises (SMEs) are also migrating into services. SMEs in services have registered higher growth than those in manufacturing, and also contributed to a larger share of SME GDP (Figure 40). This development suggests that amidst the changes that the economy is undergoing, SMEs are inevitably forced to adapt to the new global economic trend.

Thailand’s service SMEs are concentrated in retail and wholesale trading, which accounts for more than 50% of total service SMEs (Figure 41). This pattern can be partly explained by the traditional small business nature of retail and wholesale trading. That is, trading only requires the sale and purchase of goods, and inventory management, without the need to invest in fixed assets, such as buildings or structures, unlike hotels, restaurants, or healthcare services. Given the predominance of trading SMEs, other high-growth industries have not yet gained a significant share in the service sector.

Source: EIC analysis based on data from the Office of SMEs Promotion

41 Retail and wholesale trading accounts for more than 50% of service SMEs.

Share of SMEs in service sector

Unit: %

02468

10121416

0 1 2 3 4 5 6 7 8

Other services

Retail and wholesale

Manufacturing

CAGR 10/06 (%)

CAGR 14/10 (%)

Unit: %

Size = value GDP SME

29 28

41 48

30 24

2006 2014

Retail and wholesale Other services

Unit: %

4.5%6.6%

0.2%

12.7%

3.0%

52.6%

20.3%Constructions

Real estates

Healthcares


Transportations and logistics

Retail and wholesale trading

Other services

58


59

Q4/2016

1) Transportation and logistics• Passenger Transport such as taxi, water

transport by ferries, excursion boats, or cruise ships. Freight transport such as couriers, cargo handling, freight by refrigerated vehicles, intermodal containers, towing and pushing services on water.

• Warehousing and storage such as refrigerated storage, grain storage, other warehousing and storage activities.

• Support activities for transportation such as towing, passenger luggage handling, packing goods for shipping, operation of airports or harbors, freight forwarding, and customs agent.

2) Hotels and restaurants• Accommodation, such as hotels, resort hotels,

guesthouses, and homestays. • Food and beverage service such as restaurants,

event catering, contract food services for transportation operators, food delivery service, and canteens operation.

3) Healthcare • Medical services such as general medical clinics,

dental clinics, beauty clinics, physical therapy clinics, and medical laboratories.

• Residential care services such as residential care activities for the elderly, children, or the disabled.

4) Real estates• Buying and selling property, such as land

development for residential housing or for commercial buildings.

• Renting and operating property, such as apartments, serviced apartments, office buildings, shopping centers or department stores, sport center businesses, real estate agents, or brokers.

5) Constructions• Construction of residences, such as construction

of housing, residential buildings, or apartments.• Construction of non-residential buildings, such

commercial buildings, office buildings, shopping centers and department stores, hotels, and factories.

• Other constructions such as streets, roads, bridges, tunnels, utility projects, waterways, and harbors.

• Specialized construction, such as demolition, site preparation, electrical, plumbing and other installations, joinery installation and interior completion, floor and wall covering, painting, and the construction of foundations, including pile driving.

BOX: Example of SMEs’ service business activities

*Compound annual growth rate (CAGR) 2011-2014Source: EIC analysis based on data from the BOL.

42 Sales growth of retail and wholesale trading is on average lower than that of other service industries.

Compound annual growth rate of sales of SMEs in service sector

However, sales growth in retail and wholesale trading is on average lower than that of other service industries. When compared to other service industries that also contribute significant shares to SME GDP, or to those currently in the spotlight such as constructions, transportations and logistics, real estates, hotels and restaurants, and healthcare services, wholesale and retail trading has posted lower sales growth on average in all regions (Figure 42).

Moreover, retail and wholesale trading is highly sensitive to local economic conditions. Sales growth in a particular area is strongly correlated to income growth in that area (Figure 43). For example, in Eastern Thailand, where the growth of retail and wholesale trading outperforms other regions, average income growth is also high. Conversely, Southern Thailand, which has seen negative sales growth, is also the only region experiencing a fall in income. Given such a relationship, it follows that many continually changing factors, such as agricultural prices, the climate, or the profitability of other industries will inevitably affect trading profits. As the Thai economy continues its fragile recovery, a large number of retail and wholesale trading SMEs will hit a ceiling and come across many risks. Therefore, at this juncture, there are opportunities for new industries to prosper, and for existing industries to expand, whether by raising sales, profitability, or market share. While opportunities for different industries will come in various forms, the crucial question is which industry will be the new hope for service SMEs in the years to come?

Unit: %

0

2

4

6

8

10

12

14

Constructions Real estates Healthcares Hotels andrestaurants

Transportationsand logistics

Retail andwholesaletrading

Average

60


*Compound annual growth rate (CAGR) 2011-2014Source: EIC analysis based on data from the BOL and the NSO.

43 Retail and wholesale trading is highly sensitive to local economic conditions.

Sales growth of retail and wholesale trading and income growth of people in each region

Unit: %

-2

0

2

4

6

8

10

-2 -1 0 1 2 3 4 5 6 7

Central

East

South

WestNorth-East

North

BMA

Sales growth

Income growth

Size = average income

61

Q4/2016

Opportunities for SMEs in the service sector

Since an increase in sales reflects greater demand for a product and the industry’s growth potential, sales growth will be the main variable considered when assessing industry potential. However, following sales, profitability is the next important factor that business owners and investors seek. Therefore, gross profit margins will also be considered in the analysis, which can vary across industries depending on the nature of the business. Indicators also reflect the pattern by which overall economic conditions affect industries in each region, as sales and costs depend directly on economic conditions. Although other types of management costs can also influence operating profits and profits at other stages, these costs depend mostly on company-specific management expertise, and not on general economic and industry conditions. Therefore, they are not suitable indicators for consumer demand and the growth potential of a given industry.

How has the growth of service SMEs performed in each region? (Figure 44-45)

1. Retail and wholesale trading. As previously mentioned, sales growth in retail and wholesale trading is low compared to other industries in all regions. Moreover, it is highly sensitive to the incomes and purchasing power of local residents. Regarding profitability, gross profit margins in this industry tend to be comparable across regions, falling in the range of 5-12%. The margin is highest in Bangkok, a trade hub, with higher purchasing power both among other industries and among households.

2. Transportation and logistics.The transportation and logistics industry performs best in Eastern Thailand, while lagging behind in the Western and Northeastern regions. Home to the country’s key industrial parks, Eastern Thailand boasts higher demand for transportation and goods warehousing. Apart from land transports, the area is also suitable for water transports from Laem Chabang Pier, and holds the potential for air transports from U-Tapao airport. As for profitability, gross profit margins are similar across regions at around 19-21%, partly due to homogeneity in transportation and warehousing services. For instance, goods transports or cold storage services are highly similar in all regions, so prices tend to be comparable. Also, a service in one region is often connected to other regions as well, making it unlikely for any company to price significantly higher than competitors outside the region. Nonetheless, since this industry grows with urbanization, it is also highly sensitive to economic conditions.

62


3. Hotels and restaurants. The average sales growth in the hotels and restaurants industry is a healthy 9%, with Northern Thailand pulling ahead at 14%. This illustrates the connection between the growth of SME hotels and restaurants and growth in the tourism industry in the same region. In particular, Northern Thailand has seen an increase in the number of tourists ever since the rise in Thailand’s popularity among Chinese tourists. During the 2013 political unrest in Bangkok, a large number of tourists chose to remain only in the north. However, gross profit margins are highest in Southern Thailand, thanks to its status as a major tourist destination, which allows business owners to set higher prices. In contrast, those in Northeastern Thailand, which is less popular among foreign tourists, face lower prices and thus enjoy lower profit margins.

4. Healthcare services The healthcare services industry has posted a high average sales growth of roughly 10% in all regions. Growth is highest in Bangkok Metropolitan, thanks to a larger population and a stronger trend in beauty services. Meanwhile in Western Thailand, growth and profitability are markedly lower than other regions. This is explained in part by the region’s close proximity to Bangkok, which allows people in the area to choose between local services and those in Bangkok. Because of that situation local business owners are unable to set higher prices. Because healthcare services encompass a large variety of business, vulnerability to economic conditions varies. For example, by offering necessary goods and services, medical or dental clinics tend to be less sensitive to economic conditions. Conversely, dermatology clinics and beauty clinics offering luxury goods and services can be more vulnerable to changing economic conditions.

5. Real estates The real estate industry is highly variable. Growth can range from 6% to 25% in different regions during a given period. With a higher degree of urbanization, Eastern Thailand and the Bangkok Metropolitan Area (BMA) have seen the highest real estate growth rates. Also supportive of growth in these areas are the continued development of transport infrastructures, including the mass transit system in the Bangkok Metropolitan Area and the motorway in the east. However, profitability is highest in the south, with a 37% gross profit margin compared to around 27% margin common among other regions. Because real estates also include such tourism-related businesses as serviced apartments, this segment gives an edge to the south on top of other traditional real estate services like land development, office rentals, or dormitory services. Nonetheless, as real estate industry tends to grow with urbanization, especially in Eastern Thailand and the Bangkok Metropolitan Area, profitability will be highly vulnerable to changes in economic conditions.

6. Constructions Like real estates, the construction industry is highly variable. Although Eastern Thailand and the Bangkok Metropolitan Area stand out in terms of growth, the industry is also expanding in the Northern, Central, and Northeastern regions following urbanization. The activities range from road construction, building constructions, and the installation of building utilities. Profitability is comparable across regions at around 12-17%, reflecting the presence of common market prices, as well as standard costs for construction materials throughout the country. Finally, as with transportation and logistics, as well as real estates, the construction industry expands with urbanization, and therefore is similarly vulnerable to economic conditions.

63

Q4/2016

Source: EIC analysis based on data from the BOL

45Hotels and restaurants, and healthcare services exhibit high gross profit margins.

Gross Profit Margins of SMEs in each region

EIC analysis based on data from the BOL.

44 Sales growth of retail and wholesale trading is lower than that of other industries

Compound annual growth rate (CAGR) of sales of SMEs in each region

Unit: %

Unit: %

Low<12%

Low to medium12-13%

Medium to high24-35%

High> 35%

Real estates

Healthcare services

Constructions

Transportation and logistics



Bangkok Metropolitan (BMA)

Central

North

South

East

West

North-East

Low<5%

Low to medium5%-10%

Medium to high11%-16%

High> 16%

Real estates

Healthcare services

Constructions

Transportation and logistics



Bangkok Metropolitan (BMA)

Central

North

South

East

West

North-East

64


Risk factors to be considered

Opportunities always come with risks. Apart from an industry’s ability to generate sales and manage costs, another key criteria when assessing an industry is the likelihood of newcomers entering and gaining market share within a growing industry. In a given region, some industries can be dominated by an incumbent equipped with exceptional expertise both in the business and the region. In that case it will be risky for newcomers to enter the market, for they may fail to realize expected profits. Furthermore, the value of required investment and the costs of labor differ across industries and present risks in achieving break-even points, leading to losses.

Such risks are reflected in the difference in sales and gross profit margins among various players in the same region. On the one hand, if within the same industry and region different SMEs have vastly different sales figures, it implies that there exist players with very large and very small sales volume in the same industry and region. On the other hand, if SMEs in a given industry and region perform similarly in terms of sales, it suggests that they have comparable sales generating ability and market shares. The latter low-risk industry type is more favorable for new entrants, since they can more likely achieve the sales level enjoyed by incumbents. This method can be applied to the analysis of risks from unequal gross profit margins in a similar fashion.8

Source: EIC analysis based on data from BOL

46Hotels and restaurants, and healthcare services are relatively less risky.

Coefficient of Variation (CV) of sales

Unit: times

<1.51.5-2.52.5-3.5>3.5

Real Estate Healthcare

Constructions Transportation & Logistics

Wholesale & Retail trading

=

Hotels & Restaurant

High risk Low risk

BMA

Central

North

North-East

East

West

South

65

Q4/2016

8 To analyze variability in the abilities to generate sales, the Coefficient of Variation (CV) will be used. CV is computed based on the standard deviation and mean of sales volume for each industry and region. A higher CV value suggests a greater degree of discrepancy in SMEs’ abilities to generate sales. Thus, industries with low CV are associated with lower risk regarding sales generation.

Compared to other industries, the hotels and restaurants and healthcare services industries are relatively less risky in terms of discrepancies in sales generation and gross profit margins. Thus, they are friendlier for investors (Figure 46-47).

The final risk to be considered is one from the high cost of investment and labor. Some industries require bulky investment in permanent assets during the initial stage, leading to a higher break-even point, and hence a higher risk of losses. For example, in real estates, or hotels and restaurants, investment in building constructions is required before the business can begin operation (Figure 48). As for healthcare services, SMEs can differ from large companies. Unlike large companies that require lumpy investment, such as the import of expensive technology in the case of hospitals or beauty clinics, SMEs can avoid such expense and choose to rent a venue. In terms of labor costs, healthcare SMEs may face higher expenses in hiring medical personnel. Similarly, real estate SMEs need to bear the costs of hiring professional engineers (Figure 49). Thus industries that do not rely on highly skilled personnel will enjoy lower labor costs.


47Hotels and restaurants, and healthcare services are relatively less risky.

Coefficient of Variation (CV) of gross profit margin

Unit: times

<0.50.5-0.750.75-1

Real Estate Healthcare

Constructions Transportation & Logistics

Wholesale & Retail trading

=

Hotels & Restaurant

>1

High risk Low risk

BMA

Central

North

North-East

East

West

South

66




48

49

Hotels and restaurants, and real estate industries require a large amount of investment in fixed assets.

Healthcare services require highly skilled personnel.

Average value of fixed asset

Average monthly wages

Unit: THB

Unit: THB

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000



Retail andwholesale trading

Average

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000



Retail andwholesale trading

Average

67

Q4/2016

It is critical for SMEs to strike a balance between risks and returns, because different industries offer different between the two factors. Healthcare services and hotels and restaurants are considered rising stars, with a distinct ability and certainty to generate sales and high gross profit margins. Meanwhile, risks to achieving break-even points stem from the investment they require and the cost of labor. That is, a large sum of investment in permanent assets is necessary for hotels and restaurants, while healthcare services require highly skilled workers. Turning to the construction and real estate industries, they also boast high potential to generate sales, but uncertainties come in the forms of variability in sales volume and gross profit margins among firms within the industries. In addition, they are highly sensitive to economic conditions. Last but not least, real estate companies require large amounts of investment in permanent assets, and face among the highest labor costs.

To summarize, as Thailand turns increasingly towards the service sector, opportunities abound for both SMEs and new investors. However, existing service SMEs are concentrated in retail and wholesale trading, which is approaching the saturation point. Therefore, SMEs should adapt their business models in order to seek opportunities in alternative service industries. Nonetheless, each industry’s prospects can differ in different regions of the country, and SMEs are also advised to take into consideration other relevant risk factors when designing a business model, such as capital or industry expertise.

68


69

Q4/2016

In focus:

The global economy is likely to continue its slow recovery in 2017 against a backdrop of increased uncertainty. The volatility of financial markets and unexpected turns of events, such as Brexit, whose fullest implications remain to be seen, continue to pose risks. EIC recommends keeping an eye on the following: risks due to accumulated debts in the aftermath of the global financial crisis, escalating geopolitical conflicts, and global fiscal policy pushes, an increasingly attractive option for many governments dealing with economic uncertainties. All of these factors will affect the dynamics of economic growth, and it is possible that the global economic outlook for 2017 may deviate from the baseline scenario.

Themes for the Global Economy in 2017

Themes for the Global Economy in

2017

US

Risk: Geopolitics

The Presidential electionAn opposition to TPPTrade blocs, tariffs, and trade barriersPolitical gridlock

2017GDP 2.0%Baseline

TPP

China

Risk: Debts

High corporate debts ownedby state-owned enterprisesPiling NPLs


Risk: Geopolitics

South China Sea

Japan

Key driver: Fiscal Push

Economic stimulus package, especially for infrastructure investment


Themes for the Global Economy in 2017MonitorWhen the UK government will trigger Article 50 to begin the official withdrawal of EU membership

Other Rising Global Issue

Possible factors that may deviate the global economic in 2017 from the baseline scenario:

Risks due to mounting global debts can potentially escalate into a new global financial crisis.

Escalating geopolitical conflicts of which impacts can be severe and reverberate widely

Fiscal push by many governments around the world to stimulate the economy

Governments promote infrastructure investment to help drive economic growth

ASEAN 5 EU

High debt level amid lingering political instability

2017EIC’s view

DEBT

DEBT

EU

Risk: Debts

Banking crisis


Risk: Geopolitics

The backdrop of anti-establishment sentiments following Brexit

ITA ITA POR

ITA FRA

High risk


Risk: Geopolitics

South China Sea


Infrastructure investment

ASEAN 5

Low risk

THA IND

www.scbeic.com

123

BrexitRCEPOne Belt One RoadISIS (Syria)OPEC (Middle East)Nuclear (Russia)

High riskLow risk

NPL

Themes for the Global Economy in

2017

US

Risk: Geopolitics



TPP

China

Risk: Debts



Risk: Geopolitics

South China Sea

Japan











ASEAN 5 EU


2017EIC’s view

DEBT

DEBT

EU

Risk: Debts

Banking crisis


Risk: Geopolitics


ITA ITA POR

ITA FRA

High risk


Risk: Geopolitics

South China Sea



ASEAN 5

Low risk

THA IND

www.scbeic.com

123


High riskLow risk

NPL

1. Risks due to mounting global debts. Loan defaults are a real cause of concern due to accumulated debts resulting from longstanding easing of monetary policy, coupled with an ailing economy. An increase in bad loans may lead to a banking crisis that can potentially escalate into a new global financial crisis. Close monitoring of corporate debt in China and bad debt in some European countries is recommended.

2. Escalating geopolitical conflicts. Brexit proved that regardless of how unlikely this radical political event may have initially appeared, major political changes such as this can occur – the impact of which can be severe and reverberate widely. In 2017, the global political calendar is filled with key events. For example, the inauguration of a new U.S. President and a number of elections in Europe amidst widespread anti-establishment sentiments.

3. Fiscal push. In recent years the effectiveness of monetary policy in stimulating economies has not been as strong as previously hoped. Many governments around the world are now turning to fiscal policy measures instead. Prominently, Japan is implementing a 28 trillion yen economic stimulus package. Thailand and other ASEAN countries, too, are investing in mega projects. The magnitude of this risk associated with fiscal measures will be determined by how effectively the fiscal push reaches target goals.

In terms of the overall outlook for 2017, EIC thinks emerging markets (EM) in Asia will be least exposed to the above risks. Growth in these countries should reach forecast levels. On the other hand, the Europe Union could find itself in particularly difficult terrain.

US

Risk: Geopolitics



TPP

China

Risk: Debts



Risk: Geopolitics

South China Sea

Japan











ASEAN 5 EU


2017EIC’s view

DEBT

DEBT

EU

Risk: Debts

Banking crisis


Risk: Geopolitics


ITA ITA POR

ITA FRA

High risk


Risk: Geopolitics

South China Sea



ASEAN 5

Low risk

THA IND

www.scbeic.com

123


High riskLow risk

NPL

73

Q4/2016

Global debt – a ticking time bomb

Mounting global debt in recent years has become a ticking time bomb, which may be ignited in 2017 by a Fed interest rate hike and slowing economies in many regions. Currently global debt stands at 178 trillion USD, or 242% of global GDP9. This number represents a 48% increase from the level before the 2008 financial crisis. The recent global accumulation of debt resulted partly from loose monetary policy and economic stimulus measures. The Federal Reserve is likely to hike US interest rates next year, thereby increasing loan costs globally. Slowing economic conditions around the world would pile on the risk. In the past, soaring debt usually led to an economic crisis and eventually a recession, such as the sub-prime crisis in the U.S. in 2008 or the 1991 economic crisis in Japan, the impacts of which are still being felt. Even today the Japanese economy still has not fully recovered from this crisis.

In the next 1-2 years, major risks to global financial and economic stability are 1) corporate debt in China and 2) non-performing debt in some European countries. The post-2008 increase in debt can be seen in almost every region in the world. In large economies, the debt came from rising public spending to stimulate economies, while the household and corporate sectors were able to deleverage slightly. In emerging markets, however, debt accrued in all sectors, especially among non-financial corporates (Figure 50). China accounts for a huge share of this debt. In general, borrowing for investment is, of course, par for the course in most economies. But fast mounting debt makes effective investment allocation difficult, leading to a higher risk of default, which may then impact other segments of the economy. In the short term EIC thinks the two biggest causes for concern are corporate debt in China, which is climbing at the fastest rate in the world, and the rising bad debt in European countries such as Italy, Portugal, and Ireland, which may lead to a banking crisis with wide implications.

74


9 As of Q1/2016 IIF

Source: IIF

50 EM's debt rose significantly as a result of non-financial corporates borrowing.

Total debt outstanding in developed and emerging markets by debtors

1. The continual slowing down of the Chinese economy in 2017, along with the government's efforts to reform state enterprises, may lead to a higher risk of loan defaults. These may have a severe impact on China's banking sector. China's swelling debt is caused by corporate borrowing, which currently stands as high as 174% of its GDP, or a 76% increase from 2008. Most of this borrowing came from state-owned enterprises. On the other hand, their profit-earning capacity has been falling in contrast to the debt level (Figure 51). The IMF recently estimated that China's corporate debts-at-risk may cause as much economic damage as 7% of the GDP. Moreover, 28% of these debts-at-risk are concentrated in the real estate and construction sectors, which face the risk of a bubble burst, especially in major cities.

In 2017 the Chinese economy is likely to slow down even more. Coupled with state enterprise reforms, banks may have to write-off huge debts. However, EIC believes the Chinese government still has some fiscal space and will be able to support the banking sector if necessary. Still, although government intervention may prevent a banking crisis in China, investor confidence would still drop, leading to volatility in the global financial market, as occurred after the unexpected devaluing of the yuan in early 2016. On the other hand, if the government implements no change, reforms will be slow leading to structural inefficiency in the long run.

unit: % of GDP

80.5 75.5

84.8 89.4

71.8112.5

DM 2007Q4 DM 2016Q1

21 34.2

64.1

10337.4

45.3

EM 2007Q4 EM 2016Q1

Government

Non-financial corporates

Household

75

Q4/2016

x IMF Global Financial Stability Report, April 2016. Debts-at-risk are defined as loans owed by companies whose income (EBIT) is less than interest expense.

* Listed non-financial corporates in the Shanghai-Shenzhen 300 Index, weighted by total asset sizeSource: Bloomberg, IIF

51 Chinese listed companies' profit-earning capacity has been falling in contrast to the debt level.

Chinese listed companies' debt and ROE

2. Increasing bad debt in Europe, coupled with a worsening economic outlook due to Brexit, may lead to an economic and political crisis in Europe. Since 2008, non-performing loans (NPL) in Europe have climbed steadily, especially in Ireland, Italy, Portugal, and Spain (Figure 52). These countries are already in the midst of a public debt crisis and are recovering at a slower rate than others. The piling up of NPLs is worrisome as this may lead to a crisis in the banking sector because banks may not have enough capital to absorb losses from enormous debt defaults. Although the immediate threat has been avoided as the private sector pooled together to help prevent the bankruptcy of Monte dei Paschi Bank in Italy, structural issues remain and are not limited only to that country. In the previous year a number of banks in Italy, Portugal, and Spain all required state interventions. A crisis hitting a major bank will shake market confidence, potentially leading to an economic crisis.

The weakness of the European banking sector poses an obstacle to economic recovery as it limits the monetary transmission mechanism. In addition, the European case is different from the Chinese one because European governments dealing with mounting debts have less fiscal room to maneuver than their Chinese counterpart. Furthermore, they are limited by EU regulations, such as the 3% limit on fiscal deficits and the ban on using public money to bail out banks. These limitations are tied to the use of the common currency. As such, Europe's economic crisis also contains more significant political dimensions than in other regions.

Unit : times

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

0

5

10

15

20

25

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

ROE Corporate debt (rhs)

unit: % of GDP

76


Source: World Bank, IIF (as of 2016Q1)

52NPL in Euro rose substantially.

NPL as % of total loans and public debt in selected European countries

In addition to China and Europe, the high level of debt poses a risk globally, especially if the global economic recovery continues its slow climb. In general, a debt is resolved through a repayment coming from increased income, or a write-off by creditors, which in the European and Chinese cases are mostly banks. But due to the enormous amount of debts in these cases, both options may have significant adverse economic impacts. There are also other causes for concern: Japan's public debt is currently the highest in the world, at 250% of GDP. Fast growing household debt in Thailand and Malaysia also poses obstacles to the recovery of consumption in both countries. However, the risks from the latter issues are not as immediate.

unit: % of GDP0.0

5.0

10.0

15.0

20.0

25.0

30.0

Italy Ireland Portugal Spain

154

140

111

103

Italy

Portugal

Spain

Ireland

Public Debt

77

Q4/2016

Intensifying geopolitical risks

2017 could see major political changes in many countries, against the backdrop of anti-establishment sentiments. Like Brexit recently, these potential changes may have a severe impact on the economy. Anti-establishment sentiments against policies such as free trade and transnational immigration are gaining popularity around the world. Political conflicts have also generated more economic impacts. In the aftermath of Brexit, the value of the global stock market fell by more than 3 trillion USD, the pound dropped by more than 10%, while the yen gained in strength by 4% against the USD overnight. The UK's Manufacturing PMI index hit its lowest point in seven years in July. Uncertainty and volatility in financial markets led the IMF to adjust its global growth forecast downward to 3.4%. Brexit's widespread impact begs the question of whether the coming political changes will potentially lead to further volatility. EIC recommends a close watch on the following three political events:

Source: Bloomberg and NARA

53 Key political events in 2016 - 2017

Italian constitutional referendum

Oct/ Nov

Nov 8th

2016 2017

U.S. election day

Jan 6th

April/May

June Oct U.S. Electoral College

French presidential election

Aug/Oct

UK possibly triggers Article 50 to begin exiting EU membership

German federal election

China’s 19th party congress

78


1. Who will be next to the leave the EU? Potential impact level: High

Not only did the UK voters' decision to leave the EU affect the economy of both parties, but it also further ignited anti-EU forces in many other member states. Brexit had a significant economic impact in the UK in the short term, whereas its effects on the EU will become clearer next year. Its long-term economic consequences remain uncertain, depending on when the UK government will proceed with the official withdrawal of its membership following Article 50 of the Lisbon Treaty and on both parties' negotiations concerning the conditions for future relations.

A side effect of Brexit was to ignite a call among anti-EU groups in other member states for a similar referendum. Reasons given include the freedom to set policies to alleviate economic problems, as well as the issues of migrants and terrorism. In France the anti-EU presidential candidate Marine Le Pen has gained support, from 18% in 2012 to 28% last July, according to poll results by the BVA. In Italy anti-EU groups, such as the Five Star Movement Party (M5S), have become more popular than the current administration's party. The upcoming Italian constitutional reform referendum in November of this year may turn into a referendum on the government itself. If the majority of voters disapprove, Matteo Renzi, the current Prime Minister, has said that he would resign, leading to a new election in 2017. In addition, German voters will be going to the voting booths later next year. All three countries represent the three biggest economies in continental Europe. If anti-EU politicians or parties emerge as the leaders of these countries, the impact on global political and economic stability may be higher than that of Brexit.

2. Will Donald Trump become the next US President? Potential impact level: Medium

Many have predicted volatility in the global financial market if Donald Trump, the Republican nominee, wins the US election on November 8. This is due to Trump's radical policies, compared to the policies campaigned by Hillary Clinton, the Democratic nominee, who it is believed will continue the policies of the current President, Barack Obama. Trump has announced his positions and policies, including his opposition to free trade agreements such as TPP and NAFTA, support for tariffs on goods from China and Mexico, the banning of Muslim immigrants, and the deportation of illegal workers from Mexico. Because of these policies, Trump's victory may lead to political and economic tensions in the short term. In 2017 the impact may still be limited as any new legislation requires the approval of Congress, which is likely to be divided. The immediate risk to the U.S. would be political gridlock. Trump may need to compromise in order to appease Congress, yet this may anger his core supporters. His policies may cause conflicts in international relations, leading, for example, to retaliatory trade measures by Mexico and China, both major trade partners of the U.S. America's position as a global leader may also be on shaky ground.

79

Q4/2016

3. How will the South China Sea dispute end? Potential impact level: Low

Recently, the dispute between China and a number of countries over the South China Sea has widened, yet its impact on trade and investment is likely to be contained. China and the ASEAN countries in conflict with it are mutually and heavily dependent economically. China would also like to retain its image as a leader in the region, in competition with the U.S. As such, EIC predicts a resolution through diplomatic negotiations. However, nationalist sentiments among Chinese consumers may lead to unofficial campaigns against imported goods from other countries, such as the campaign against mangoes from the Philippines or against Japanese products in 2012. Nonetheless, such campaigns will affect trade partners only in the short term. However, if the disputes are drawn out and escalate, they may affect negotiations over the Regional Comprehensive Economic Partnership (RCEP). Partners are expected to come to an agreement by October 2017, but the process may be delayed due to political tensions.

Political changes are often unexpected. As a result, it is difficult to forecast market reactions. Unexpected changes, furthermore, often have the potential to shift growth trajectories away from the baseline scenario. In 2017 it will be especially important to keep an eye on global political events, particularly in the U.S. and in major economies in the EU, and the dispute between China and ASEAN. Terrorism remains a risk and is difficult to predict. It also appears that terrorist groups are casting their nets wider. All of these factors may directly impact consumer and business confidence, which will then affect the global economy.

80


Prime Time For A Fiscal Push

In recent years the effectiveness of monetary policy in stimulating the economy has been called into question, as can be seen in the market's opposite reactions to what policymakers had hoped this year. In 2017 many governments will be turning towards fiscal policy instead. In 2016, the limitations of monetary policy as an economic stimulant have become clearer. For example, following the BOJ's interest rate cut earlier this year the yen depreciated for only one week, before continuing its upward trend, the opposite of what the BOJ had expected. Similarly, further easing of monetary policy by the ECB in March had virtually no effect on the euro. The side effects of prolonged lax monetary policy include the destabilization of the banking system and investors underpricing risks. As a result, many entities, such as the IMF and the G20 group, have called for the use of fiscal policy along with the already loose monetary policy. In 2017 EIC expects to see fiscal policy play a role in stimulating the economy in many regions, including Thailand, and mitigating risks from uncertainty.

Under current economic conditions, fiscal policy, especially in the form of public investment, can be an effective growth engine. Previous research indicates that public investment will be more effective in certain conditions, including a slowing economy, high level of liquidity, normal level of public debt, and stable tax regime. Currently the global liquidity level remains high, as can be seen in interest rates in Europe and Japan, which are in the negative and at a historically low level. In the US the relatively low interest rate and low economic growth make up a fitting environment for public investment as an economic stimulus measure. Although more public investment may lead to increased public debt, appropriate investment—such as in infrastructural development—will strengthen an economy's potential for growth, leading to fiscal stability. The risk of public debt in this case is thus not too worrisome.

Countries with low government spending-to-national income ratios and low public debt-to-national income ratios are particularly good candidates for high fiscal spending next year. The ratio of spending and public debt to national income is an important indicator of the government's fiscal capacity. A high public debt-to-GDP ratio reflects the country’s limited ability to incur more debt, while a high spending-to-GDP ratio certainly indicates further risk in spending more. Currently developed countries such as Japan, the U.S., and European countries are limited by both factors, more so than developing countries such as Thailand, Indonesia, and others in Asia (Figure 54).

x See EIC Outlook 3Q2015: In Focus - Public Investment: Leader without Followers?81

Q4/2016

1. Japan is leading the way among developed countries in using an aggressive fiscal policy. The UK is also likely to turn to fiscal measures to mitigate risks from Brexit. However, these developed countries have high public debt, limiting their fiscal space. Even so, despite its having the highest debt level in the world, the Japanese government decided to pursue an aggressive fiscal policy last July, with the announcement of a budget worth more than 28 trillion yen, higher than the economic stimulus budgets of 2013 and 2014 during the beginning of Shinzo Abe's tenure. The amount covers infrastructure investment, measures to address Japan's demographic crisis, and budget for quake-hit Kumamoto. Part of the budget will be for providing loans, which is likely to have a limited impact. Infrastructure investment may also not yield much as Japan already has a well-developed infrastructure. In addition to Japan, the UK will also have to depend on fiscal policy to support its economy next year in the wake of Brexit. Even countries which have adhered to austerity measures, such as Germany, may have to increase public spending in order to handle the influx of migrants.

2. EM countries, especially in Asia, have more fiscal space and face lower risks. In countries such as Thailand and Indonesia, there is also political willingness to use public investment as a driver of the economy. EM countries have relatively low levels of public debt. Governments are thus able to incur more debt in order to push through different projects. Since 2015, both Thailand and Indonesia have continually planned mega investment projects focusing on different infrastructure systems, including transport and energy (Figure 55). 2016 marked the beginning of Thai and Indonesian mega projects worth some 15 billion USD and 23 billion USD respectively, the highest level since the global financial crisis. In addition to upgrading the necessary infrastructure, these governments' commitments of large funds for investments may also lead to the use of financial instruments, such as Public-Private Partnerships (PPP) and Infrastructure Funds, opening up new opportunities for the private sector. The effort to boost infrastructure investment in this region is not only limited to individual governments, but has also spurred international cooperation, such as the founding of the Asian Infrastructure Investment Bank (AIIB), and the “One Belt, One Road” initiative spearheaded by China in order to strengthen regional networks in Asia. In addition to Thailand and Indonesia, whose infrastructure investment projects are ongoing, many in the region, such as the Philippines and Vietnam, also stand to benefit from additional investment in infrastructure. They are also not limited by tight fiscal space, as their public debt-to-national income ratios remain low. Such conditions provide a prime opportunity for countries in the region to pursue fiscal policy and raise their competitiveness.

82


Source: IMF Fiscal Monitor, April 2016

Source: EIC analysis based on data from Thailand’s Ministry of Finance, the IMF, and Indonesia Investment Coordinating Board

54

55

Countries with low government spending-to-national income ratios and low public debt-to-national income ratios are good candidates for high fiscal spending.

Thailand's and Indonesia's long-term public investment plans

Government spending-to-GDP ratio and public debt-to-GDP ratio

-15 -10 -5 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75

45

25

40

35

30

20

0

65

70

60

55

50

France

CanadaChina

G-7

Euro Area

public debt-to-GDP ratio

Japan

Italy

Germany

Vietnamgove

rnm

ent sp

endi

ng-to-

GDP

ratio

ThailandPhilippines

Malaysia

Indonesia

India EM AsiaU.S.

Size = government debt-to-national income ratio as of 2016

Thailand Indonesia Period 2015 – 2022 2015 – 2019 Budget (% of GDP) 18% 50% Uses Roads, rails, airports Roads, maritime transport, electricity,

water/drinking water resources

83

Q4/2016

Conclusion: Dark Cloud over Europe

Given the three aforementioned factors, namely; fiscal push, political changes, and mounting debt, EIC thinks EM countries in Asia will be the least exposed and will therefore be likely to meet forecast growth levels. These economies will see major spending by their governments, not to mention funds for infrastructure through international cooperation. Although some sectors have high debts, this is not a cause for concern in the short term. Political risks in this region seem to be less critical than in others.

On the other hand, Europe faces the most risk from the three factors mentioned above. Many countries' debt levels are alarmingly high in all sectors, limiting the use of fiscal policy. As the ECB's monetary policy seems to have lost its power, the weak banking sector and mounting bad debts in Italy and Portugal may trigger another economic crisis. Against the backdrop of anti-EU sentiments among voters, there are also major political risks in the region. Thus, Europe has a higher risk of falling off the baseline scenario.

84


Q4/2

016 86

1

Key

indica

tors

2015

Un

it Ac

tual

EIC fo

reca

st Co

nsen

sus

Cons

ensu

s Sh

are

(%)

2015

16

Q1

16Q

2 16

Q3

16Q

4 20

16

2017

20

16

2017

Re

al GD

P gr

owth

%

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2.8%

3.

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3.5%

2.

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2.5%

3.

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3.3%

3.

1%

3.2%

De

mand

-side

Priva

te co

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52

% %

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2.1%

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3.8%

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2.6%

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Publi

c co

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% %

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Contributors

Phacharaphot joined Siam Commercial Bank in the Credit Risk Analytics Division of the Risk Management Group. Previously, he was Assistant Professor of Economics at San Diego State University, USA and his research was published in the Journal of International Money and Finance. He was also an intern at the Board of Governors of the Federal Reserve System.

Phacharaphot received a Bachelor of Arts (First Class Honors) in Economics from Thammasat University and a doctorate degree in Economics from the University of Michigan, Ann Arbor, USA.

Phacharaphot Nuntramas, Ph.D.Head of Economic and Financial Market Research

Sutapa Amornvivat, Ph.D. Chief Economist and FEVP

Sutapa is Chief Economist and First Executive Vice President at Siam Commercial Bank (SCB), where she leads the Economic Intelligence Center (EIC). She previously served as Head of Credit Risk Analytics Division under Risk Management Group.

Before SCB, Sutapa set up and headed the Risk Analytics and Research Group at TMB Bank during her secondment from ING Group. Prior to joining the banking industry, Sutapa was Economist (EP) at the International Monetary Fund (IMF) in Washington, DC. She had also served as Advisor to the Thai Senate Committee on the Economy, Commerce, and Industry, as well as Director of Macroeconomic Analysis Section at the Thai Ministry of Finance.

Sutapa holds an undergraduate degree in Applied Mathematics from Harvard University and a doctorate degree in Economics, Management, and Policy from Massachusetts Institute of Technology (MIT). She was a recipient of Thailand’s most prestigious King’s Scholarship. In 2007, Sutapa was honored by the Asia Society as Asia 21 Young Leaders Fellow, selected among a diverse group of professionals under 40 from the Asia-Pacific region.

Chutima Tontarawongsa, Ph.D. Senior Economist

Chutima has worked on a variety of research projects related to development economics. One of her projects studied the relationship between economic behavior and social network structures of villagers in rural Gambia. She also has experience in public health and microfinance research in India.

Chutima graduated summa cum laude from Lafayette College (PA, USA) with a Bachelor's degree in Economics and Mathematics. She spent a year at the London School of Economics, UK, and then went on to receive her Ph.D. from Duke University (North Carolina, USA).

Contributors

Sivalai Khantachavana, Ph.D.Senior Analyst

Sivalai has prior work experience in conducting research and analysis in economic, monetary, and fiscal policies as well as transport infrastructure at the Ministry of Finance, NESDB and Department of Highways. She was also an advisory staff member for the Minister of Transport. Her research interests include entrepreneurship and financial market risks.

Sivalai received her Bachelor of Economics (First Class Honors) from Chulalongkorn University. She was awarded the Royal Thai Government Scholarship to pursue MSc program in Policy Economics at the University of Illinois at Urbana-Champaign, and the World Bank Graduate Scholarship to pursue MSc program in Economics at the London School of Economics. She completed her doctorate degree in Applied Economics and Management at Cornell University.

Krasae has experience in the area of macroeconomic analysis and forecast. He specializes in using quantitative models as a tool. He formerly worked as a researcher in the macroeconomic program at the Thailand Development Research Institute (TDRI). After that, he worked for the Fiscal Policy Office (FPO) as an economist. At the FPO, he was responsible for producing quarterly macroeconomic forecasts as well as public policy analyses.

Krasae received his Bachelor's degree in Economics with a Quantitative Economics major from Chulalongkorn University. He was awarded a Royal Thai Government scholarship to pursue a Master of Science in Economics degree from University of Warwick, UK. He also received certificates for various training courses from the International Monetary Fund (IMF).

Thanapol has experience in conducting research in the field of international economics and has worked on several empirical studies concerning the Thai economy, especially concerning micro-level analysis. His firm-level studies are related to international trade, foreign direct investment, and firm performance by utilizing applications from microeconometrics and business economics. Apart from academics, he had an internship experience at Siam Commercial Bank Asset Management (SCBAM) and the Bank of Thailand in the Monetary Policy Group during his undergraduate studies. He also worked as an information officer for the Tourism Authority of Thailand (Tokyo Office) during his studies in Japan.

Thanapol received a Bachelor of Arts (First Class Honors with Gold Medal Award) in Economics from Chulalongkorn University. He was awarded a Japanese Government Scholarship to pursue his graduate studies and received his Master of Arts and Ph.D. in Business and Commerce from Keio University, Japan.

Krasae RangsipolSenior Economist

Thanapol Srithanpong, Ph.D. Senior Economist

Contributors

Pimnipa BooasangAnalyst

Pimnipa had an internship experience with Bank of Thailand in Economic Intelligence Team, Monetary Policy Group, Macroeconomic and Monetary Policy Department.

Pimnipa graduated from Thammasat University with Bachelor of Economics degree in a Quantitative and Theoretical Economics major, International program (First Class Honors) and received the first place of B.E. Best Seminar Paper Award

Kantima VongsthapatAnalyst

Kantima previously interned in a management and public relations at the Langham Hotel, Boston responsible for developing content marketing strategies to enhance external communications by identifying target customers and journalists and potential sales opportunities.

Kantima was admitted to dual degree program, receiving a Bachelor’s degree in economics and a Bachelor’s degree in communication with a concentration in public relations from Boston University, USA. She later graduated with a Master’s degree in international political economy (IPE) from London School of Economics and Political Science, UK.

Natakorn Visudtiko Analyst

Natakorn was a bond analyst at the Thai Bond Market Association (ThaiBMA).His experience includes Bond Mark-to-Market valuation, technical support advisory, and market data research for market development purposes.

Natakorn graduated from Thammasat University with a Bachelor of Arts degree in Economics (First-class honors).

Lertpong LarpchevasitAnalyst

Lertpong has prior work experience as a business analyst in various business industries, such as steel manufacturing, logistics and warehousing, and financial leasing.

Lertpong received his Bachelor of Science degree in Statistics from Thammasat University and a Master’s Degree in Logistics and Supply Chain Management from Heriot-Watt University, United Kingdom.

Contributors

Nontakorn Terdtoontaveedej Nontakorn is currently a fourth year Economics student at the University of British Columbia (UBC). He is a Trek Excellence scholarship recipient, and a Chancellor Scholar designated student at UBC. He previously had an internship at BASF (Thai) as a market development analyst intern before coming to EIC.

Nontakorn is expected to receive his B.A. in Economics in May 2017.

Yuwanee Ouinong Analyst

Yuwanee previously worked for a management and strategic consulting firm specializing in telecommunications, media, and technology sector. Prior to that, Yuwanee has internship experience with the Bank of Thailand in Macroeconomics team, in the Department of Monetary and Economy Policy. She also received award for her economics research from the Bank of Thailand’s Annual Economics Articles Competition.

Yuwanee received her Bachelor of Economics, International program (First class honor), from Thammasat University and awarded fellowships throughout the program.

Wirunpon RochanavibhatavanichAnalyst

Wirunpon previously interned at International Market Analysis Division, PTT Public Company Limited and Private Wealth Management, Phatra Securities Public Company Limited.

Wirunpon graduated from Chulalongkorn University with Bachelor of Art (First Class Honors) in Economics, International program and received the Undergraduate Assistantship Scholarship from Faculty of Economics in senior year.


Economic and Financial Market Research

Phacharaphot Nuntramas, Ph.D.Head of Economic and Financial Market [email protected]

Chutima Tontarawongsa, [email protected]

Krasae [email protected]

Thanapol Srithanpong, [email protected]

Kantima [email protected]

Natakorn Visudtiko [email protected]

Pimnipa [email protected]

Wirunpon [email protected]

Yuwanee [email protected]

Sectorial Strategy

Teerin Ratanapinyowong EVP, Sectorial Strategy(Acting) Head of Export Cluster [email protected]

Panjarat [email protected]

Siwakorn [email protected]

Valairat [email protected]

Veerawan [email protected]

Service Cluster

Vithan CharoenphonHead of Service Cluster [email protected]

Pavaris [email protected]

Pranida [email protected]

Kanchanok Bunsupaporn [email protected]

Kanit [email protected]

Lapas [email protected]

Puripat [email protected]

Tanyaporn [email protected]

Vipavadee [email protected]

Infrastructure Cluster

Tubkwan HomchampaHead of Infrastructure [email protected]

Pimjai [email protected]

Sivalai Khantachavana, [email protected]

Supree Srisamran, [email protected]

Apinya [email protected]

Issarasan [email protected]

Lertpong [email protected]

Pann [email protected]

Sutapa Amornvivat, Ph.D. Chief Economist and [email protected]

E-mail : [email protected] Tel : +66 (2) 544 2953

Knowledge Management & Networking

Anyarat Boonnithivorakul, Ph.D.Head of Knowledge Management & [email protected]

Ekarat [email protected]

Kallaya [email protected]

Napat [email protected]

Nattida [email protected]

Rata [email protected]

Sorodda [email protected]

Vipasara Arpaskundait [email protected]

Wanitcha Nateesuwan [email protected]

Export Cluster

Chotika Chummee [email protected]

Konjanart [email protected]

Lerdsak [email protected]

Nantapong [email protected]

Napong [email protected]

Narithtorn [email protected]

Pharadon [email protected]

Teerayut [email protected]

Economic Outlook in 2016 4

Global Economy in 2016 5

Thai Economy in 2016: Keep an eye on government measures 18

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Contents

Bull - Bear: Oil Prices

Brexit, will it happen?


In focus: Public Investment - Leader without Followers?

58In focus: CLMV economies, 5 years down the road: how will Thailand embrace the opportunities?

04Short articles on topical events

03Update and analysis of current issues affecting the Thai economy and business sectors

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Analysis of macroeconomic outlook, key indicators and business drivers.

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