outlook - scbeic · outlook quarter 1/2015 chutima tontarawongsa, ph.d. piyakorn chonlaworn sivalai...

Siam Commercial Bank, SCB Economic Intelligence Center, 9 Ratchadapisek Rd., Jatujak, Bangkok 10900, E-mail:[email protected]

Overall Economic Outlook for 2015Bull - Bear: Oil pricesIn focus: Plunging global oil prices … winners and losers?Summary of main forecasts

Contributors:Sutapa Amornvivat, Ph.D.

Athiphat Muthitacharoen, Ph.D. Chinnawut Techanuvat, Ph.D.

OutlookQuarter 1/2015

Tanakorn Limvittaradol Chutima Tontarawongsa, Ph.D.

Khemarat Songyoo Vorada TantisunthornSivalai Khantachavana, Ph.D.Piyakorn Chonlaworn Phacharaphot Nuntramas, Ph.D.

Overall Economic Outlook for 2015

Bull - Bear: Oil Prices

In focus:Plunging global oil prices …winners and losers?

Summary of main forecasts

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34

36

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Content

Disclaimer : The information contained in this report has been obtained from sources believed to be reliable. However, neither we nor any of

completeness of any of the information contained in this report, and we and each of such persons expressly disclaims any and all liability relating to or resulting from the use of this report or such information by the receipt and persons in whatever manner.

Any opinions presented herein represent the subjective views of ours and our current estimated and judgments which are based on various assumptions that may be subject to change without notice, and may not prove to be correct.

and should not be relied as such. We or any of our associates may also have an interest in the companies mentioned herein.

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

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Falling crude oil prices

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

Quarter 1/2015

Slow recovery of domestic consumption

EIC estimates that Thai exports will grow at a slow pace of 0.8% YOY in 2015 because commodity prices are dragged down in tandem with lower oil prices. Prices for refined fuel, petrochemicals, rubber and sugar have fallen significantly. These four products account for 15% of all Thai exports. Slower growth in major trading partners will reduce the demand for Thai exports as well.

Domestic demand will recover slowly because

Private consumption is affected by the high levels of household indebtedness and decliningfarm income.

Tourism will return as a growth engine in 2015.EIC expects that revenue from international visitors will increase by 9%. We project that visitors from China will increase by 45%, offsettinga 40% declinein arrivals from Russia caused by the ruble crisis.

Private investment will expand only moderatelybecause of the delayed public budget disbursement and currently high leftover capacity.

Therefore, the key driver will be the clarity of the government investment plan. These public projects will inject a significant amount of money into the economy and, more importantly, will help restore confidence among both consumers and businesses.

1

2

1 2 3

3-3.5%

EIC expects Thai economy to grow

in 2015

Thai Economy in

Export

Domestic demand

Tourism

Although growth will surpass the subdued rates of each of the preceding two years, expansion faces several major constraints. Disbursement of the government’s investment budget is likely to fall short of the announced targets and private consumption will recover only slowly. Lower commodity prices and weakening global demand will limit Thailand's export growth. The key economic drivers this year will be rising tourist arrivals and clear public investment plans that will help restore confidence among both consumers and businesses.

Forecast for GDP growth and its components in 2014 and 2015

2014 2015

Unit: %YOY

Export value in terms of USD Source: EIC estimation

GDP Private consumption

Privateinvestment

Private consumption

Privateinvestment

Export*

0.8 0.9

-0.5

3.3

-2.0

-0.8

3-3.5

2.3

4.5

3.0

8.6

0.8

Expect BOT to maintain the policy rate at 2.00% in 2015

The headline inflation will be0.7%, lower than in 2014

Expect THB to weaken to baht/USD at the end

of 201533.5

Low inflation is driven by thefalling oil prices.

Domestic demand does not show significant weakness

The U.S. Fed will raise its interest rate in 2H2015.

Global oil and commodity prices

Easing monetary measures from central banks around the world

Thai baht fluctuationMonitor

Thai Baht

EIC expects Thailand’s economy to grow by 3-3.5% in 2015. Rising tourist arrivals and clear public investment plans will be the key drivers for the economy this year. EIC expects that revenue from international visitors will increase by 9% in 2015. Arrivals resumed positive growth in October, indicating that the impact of political turmoil has begun to dissipate. We project that visitors from China will increase by 45%, offsetting a 40% decline in arrivals from Russia caused by the ruble crisis. Public investment will also drive growth, now that the government has clarified its plans for several major infrastructure projects, including mass transit lines in Bangkok and dual-track railways upcountry. These projects will inject a significant amount of money into the economy and, more importantly, will help restore confidence among both consumers and businesses. Private consumption will recover only slowly because of high household debt and low farmers’ income. Lower prices and weakening global demand will limit Thailand's export growth to just 0.8% in value terms in 2015, by EIC's estimate. This year, the Thai economy might be impacted by risks in the global economy. The plunge of commodity prices along with the decline in oil prices could exacerbate geopolitical risks, erode the financial stability of net oil exporters, and worsen deflation in many countries. The risk of deflation could trigger central banks around the world to further relax their monetary policies. Already the European Central Bank has initiated quantitative easing and the Swiss National Bank has cut interest rates and abandoned its currency's peg to the euro. It is now possible that the U.S. Federal Reserve Bank could delay its long-expected rate hike until the second half of 2015. Amid these circumstances, we maintain our forecast that the Thai baht will depreciate to 33.5 THB/USD by the year’s end, with significant fluctuation throughout the year. We expect the Bank of Thailand to hold interest rates at the current level throughout the year with some room to cut rates if domestic demand remains weak.

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Economic Intelligence Center (EIC)

Overall Economic Outlook for 2015

The global economy will see stronger recovery this year than in 2014 led by the U.S. economy. The U.S. economy will grow fastest since the 2007 subprime crisis. Latest economic figures have exceeded market expectations such as nonfarm payrolls. The European economy will recover, but growth will remain low and the pace of recovery will vary within the region. The European Central Bank (ECB) is likely to implement additional monetary easing measures by buying government bonds early this year to boost the economy. In Asia, despite the negative impact from a sales-tax hike early last year, Japan’s economy is expected to expand this year thanks to the delay of the second sales-tax increase and strong recovery in the export sector resulting from a depreciation of the yen. Meanwhile, China will continue its structural economic reforms; therefore, its economy is likely to grow at a slower pace. Its slowing demand could also put downward pressure on commodity prices. However, an ongoing downswing in crude oil prices, which is likely to continue until late this year, will overall be a positive factor for the global economy as it reduces production costs and helps boost the economies of net oil importers.

World Economy in 2015

5

Q1/2015

The global economy will achieve higher growth than in 2014 led by the U.S. economy1

Source: Forecasted consensus from Goldman Sachs, J.P. Morgan, Deutsche Bank, Bank of America and EIC

GDP growth forecast for 2014-2015

Unit: %YOY2014 2015

2.5

0.8

0.2

3.5

1.21.4

7.17.4

U.S ChinaJapanEurozone

U.S.

The U.S. economy grew robustly last year. In the third quarter of 2014, the economy expanded 5.0% QOQ SAAR (Figure 2), the highest in over 10 years. Private consumption and investment were the key economic drivers. In the fourth quarter, the labor market showed positive signs with nonfarm payrolls hitting a new high since 1999. The unemployment rate was also down to 5.6% close to the Fed’s natural rate of unemployment at 5.2-5.5% (Figure 3). Meanwhile, inflation remained low at 1.2% in November 2014 because of unchanged production costs, slowly increasing wages, and falling oil prices.

In 2015, the U.S. will be the only country that supports the global economy. The U.S. economy will grow by 3.5% this year higher than the predicted 2.5% for 2014 with domestic spending as the main driver. Household consumption, which accounts for 70% of GDP, will expand steadily thanks to a strong rise in employment and improved consumer confidence, which reached an eleven-year high (Figure 4). Low oil prices will help increase household purchasing power and reduce costs for businesses.

Major risks are uncertain global recovery, a slump in the housing market, and a possible halt to investment in the energy sector. Compared to the U.S., other major economies like the Eurozone, Japan, and China, remain weak and could pose risks to U.S. exports and financial markets. The U.S. housing market shows little sign of improvement (Figure 5), and could be affected if the Fed raises interest rates too early. Plummeting crude oil prices may force shale oil producers to cut their production and capital expenditure (CAPEX). This could affect overall CAPEX because, over the past ten years, CAPEX in the energy sector has become much larger. It currently accounts for approximately 8% of total private investment. Yet, the energy sector’s share of GDP is only about 1% and should not significantly affect the overall U.S. economy (Figure 6).

The Fed has pledged not to rush into a rate hike. The Fed recently changed the wording in its forward guidance concerning the timing of its rate hike from “considerable time” to “patient”. In this regard, EIC believes that the key economic indicator that will influence the fed’s decision is inflation, which is now at a much lower level than the target of 2%, even though the labor market is performing better than previously expected (Figure 7). Therefore, EIC expects the Fed to delay the hike until at least its July meeting. The pace of the rate hike will gradually increase from 0-0.25% to 1.00% at the end of 2015.

6


7

Q1/2015

2 3

4 5

6 7

Source: EIC analysis based on data from CEIC

Real GDP growth and ISM Manufacturing index Change in Nonfarm Payrolls and Unemployment

Retail sales and U. of Michigan consumer sentiment index Housing Starts and Sales of New Homes

Mining/Oil equipment & structure investment Inflation Rate and Unemployment Rate

Household consumption will expand steadily following the consumer confidence that reached a 11-year high

Housing market shows moderate sign of recovery

The U.S. economy expanded at 5.0%QOQ SAAR in 3Q2014, highest in over 10 years

The 2014 nonfarm payrolls hit a new high since 1999

The energy sector’s CAPEX is increasing important, but still accounts for a relatively small share of GDP

Inflation remains lower than the 2% target, but the labor market performs better than previously expected

Unit: %QOQ SAAR Unit: Index

4.65.0

0

10

20

30

40

50

60

70

80

-10

-8

-6

-4

-2

0

2

4

6

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Real GDP growth (LHS)

ISM Manufacturing (RHS)

Unit: %

353

252

5.6

5.0

5.5

6.0

6.5

7.0

7.5

8.0

0

50

100

150

200

250

300

350

400

Jan-

14

Feb-

14

Mar

-14

Apr-14

May

-14

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec-

14

Change in nonfarm payrolls (LHS)

Unemployment rate (RHS)

Unit: 1,000 person (MOM SA)

Unit: %MOM SA Unit: Index 1966=100

98.2

0

20

40

60

80

100

120

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

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

Retail sales (LHS)

U. of Michigan consumer sentiment index (RHS)

-10-505

10152025303540

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

Housing startsSales of new homes

Unit: %YOY 3MMA

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Mining/Oil equipment & structureinvestment as a % of total investment

Mining/Oil equipment & structureinvestment as a % of GDP

Unit: % Unit: % Unit: %

5.6

1.2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

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

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0Unemployment rate (RHS)Inflation rate (LHS)

Fed’s inflation target = 2.0%

Eurozone

The Eurozone economy expanded slowly last year. In the third quarter, the economy grew by only 0.2% QOQ SA. Growth was mostly driven by small and medium economies such as Spain and Greece, who expanded by 0.5% and 0.7% respectively. Meanwhile, the German economy slowed and the Italian economy suffered from an economic contraction (Figure 8). In the fourth quarter, the Eurozone economy is likely to stabilize. The average manufacturing Purchasing Managers Index (PMI) dropped slightly from 50.9 in the third quarter to 50.5 in the fourth quarter (Figure 9). The weakening economic conditions together with falling global oil prices made the inflation rate turn negative in December 2014 at -0.2%, while the unemployment rate remained high at 11.5% (Figure 10).

The Eurozone economy will face limited growth in 2015. We expect the economy to expand by only 1.2%, up from 0.8% this year. Domestic spending will remain sluggish as economic confidence has yet to recover partly due to the conflict with Russia and ongoing economic sanctions (Figure 11). Moreover, European commercial banks are reluctant to lend as evident in a contraction of credit by 1.3% YOY in November 2014.

The European Central Bank (ECB) has implemented several monetary easing measures to stimulate demand and combat deflation. The ECB has announced a target to expand its balance sheet by one trillion euros, or to reach the 2012 level of 3 trillion euros (Figure 12). Policy measures so far include targeted longer-term refinancing operations (TLTRO) and an asset purchase program. However, through the TLTRO program, commercial banks took up just 210 billion euros well below the target of 400 billion euros. As a result, the amount of assets purchased under this program including covered bonds and asset-backed securities might not meet the target. Therefore, the ECB might have to expand its purchase program to buy sovereign bonds. The market anticipation for this sovereign QE has pushed government-bond yields in the Eurozone to decline (Figure 13) along with the euro exchange rate.

The Eurozone will need more fiscal stimulus from governments. As its monetary easing measures alone cannot boost spending by the private sector, the Eurozone needs investment from the government sector to promote employment and increase revenue in an attempt to create a spending cycle. The European Union is currently carrying out an infrastructure investment plan called the European Fund for Strategic Investment (EFSI), aimed at boosting medium and long-term investment. The plan, with initial capital of 21 billion euros from the EU budget, is expected to generate investment of 315 billion euros (or about 2.4% of the EU’s GDP) from the EU and non-EU private sector interested in investing in infrastructure. The investment plan may not result in economic expansion this year, but it will promote European economies in the long run.

8


9

Q1/2015

8 9

10 11

12 13

Source: EIC analysis based on data from Eurostat and Bloomberg

GDP Growth in the Eurozone GDP Growth and Purchasing Managers Index (PMI)

Inflation Rate and Unemployment Rate Consumer Confidence Index: economic view in the next months

The balance sheet of the ECB 10-Year Government Bond Yields in major Eurozone economies

The Eurozone is facing deflation and high unemployment

Consumer confidence remains sluggish

Major economies in the Eurozone have been weak

In 4Q2014, the Eurozone economy remained stagnant

The ECB balance sheet will expand to 3 trillion euros close to the 2012 level

European government-bond yields continued to fall

0.2

0.40.3

-0.1

0.20.3

0.8

0.5

0.0

0.4

0.1

-0.1

0.0

-0.2

0.6

0.20.1

0.4

-0.1

0.5

Eurozone Germany France Italy Spain

4Q2013 1Q2014 2Q2014 3Q2014Unit: %QOQ SA

0.2

40

45

50

55

60

-0.5

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

1Q20

12

2Q20

12

3Q20

12

4Q20

12

1Q20

13

2Q20

13

3Q20

13

4Q20

13

1Q20

14

2Q20

14

3Q20

14

4Q20

14

GDP Growth PMI Manufacturing PMI

Unit: %QOQ SA Unit: Index

-0.2

11.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan-

11

Apr-11

Jul-1

1

Oct

-11

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

Inflation (LHS) Unemployment (RHS)Unit: %YOY SA Unit: % SA

Unit: Index

60

70

80

90

100

110

120

130

2008 2009 2010 2011 2012 2013 2014

Eurozone Germany France Italy Spain

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan-

10

Jun-

10

Nov

-10

Apr-11

Sep-

11

Feb-

12

Jul-1

2

Dec-

12

May

-13

Oct

-13

Mar

-14

Aug-

14

Jan-

15

Jun-

15

Nov

-15

Apr-16

Sep-

16

Unit: trillion EUR

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan-

14

Feb-

14

Mar

-14

Apr-14

May

-14

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec-

14

Germany France Italy Spain

Unit: %

JapanJapan’s economy was affected by last year’s sales tax hike and has slipped into a technical recession. The Japanese economy shrank for two consecutive quarters at 6.7% QOQ SAAR and 1.9% QOQ SAAR in the second and third quarters of 2014 respectively (Figure 14). The main cause of the slump was sluggish consumer spending caused by the sales tax increase. Consumption from July to September 2014 rebounded at only 1.5% QOQ SAAR (a decrease of 2.8% YOY). In addition, residential investment plunged by 24% QOQ SAAR due to low confidence in consumer purchasing power. However, foreign investment in the second and third quarters of 2014 increased by 2.7% YOY and 1.6% YOY respectively.

The Bank of Japan (BOJ) needs to expand its Quantitative and Qualitative Easing program to boost the economy. Japan previously tipped into a recession after a 1997 consumption-levy hike from 3% to 5%. To prevent history from repeating itself and to achieve the inflation target of 2%, the BOJ decided to expand its Quantitative and Qualitative Easing program by boosting the monetary base at an annual pace of about 80 trillion yen (up from 60-70 trillion yen a year in its previous packages) through purchasing in Japanese government bonds and real estate funds. The open-ended monetary base expansion plan started in the last quarter of 2014. In addition to monetary policy, the Japanese government also delayed the upcoming sales tax increase from 8% to 10%, previously scheduled for October 2015, believing that consumers would not be ready to bear the burden of higher goods prices within such a short period of time. The scheduled tax increase could have led to a drastic economic contraction as in the past.

The business sector showed signs of recovery in the last quarter of 2014, while the household sector remained weak. Businesses showed signs of increased investment and the average manufacturing Purchasing Managers Index (PMI) rose slightly in the fourth quarter from 51.5 to 52.2. (a rating higher than 50 is a positive sign for business conditions.) Meanwhile, the machinery purchase order volume increased from July 2014 onward. Higher business sector investment was motivated by high profits from the depreciation of the yen. Companies surveyed showed record profits in the fourth quarter of last year after continuous losses since the beginning of the year (Figure 15). Household consumption has yet to fully recover because increasing profits in the business sector have not been passed on to households in the form of wages, and goods prices have soared from the higher consumption tax. Therefore, real income fell, affecting purchasing power as can be seen from the consumer confidence index that dropped from 40.9 to 38.3 in the fourth quarter (Figure 16).

The yen depreciation will drive exports and the Japanese economy in 2015. Japan’s exports rose since last September thanks to a weaker yen relative to its trading partners’ currencies. Exports in the yen grew by 1.5% MOM on average since May (Figure 17), confirming that the yen depreciation benefited the Japanese economy. Falling oil prices may lead to a smaller import burden so Japan’s current account is likely to improve steadily (Figure 18).

All eyes are on the Abe administration’s structural reforms. Prime Minister Shinzo Abe’s Liberal Democratic Party and coalition partner Komeito, won the election last December with more than two-thirds of the vote after Abe’s dissolution of the Lower House seeking a mandate on LDP policies. The Abe administration will also reform the working-age population structure to be more in line with the current aging society. The Abe administration aims to boost the economy through the following measures: 1) Allocating a budget of about 3.5 trillion yen to stimulate the economy. 2) Reducing business tax from 35% to below 30% to attract more investment and encouraging the business sector to increase wages. 3) Adjusting the working-age structure, e.g. by encouraging more women to enter the labor market to prevent a looming labor shortage.

In 2015, the upcoming spring wage negotiations will set the direction for Japan’s economy over the next year or two and will resolve whether Japan can escape deflation and proceed with another consumption tax hike in April 2017 to maintain fiscal stability (Figure 19).

10


11

Q1/2015

14 15

16 17

18 19

Source: EIC analysis based on data from CEIC and Bloomberg

Quarterly GDP Growth and PMI Investment cost, company profit and machinery orders

Wage Growth (monthly salary) and Consumer Confidence Index Japanese value of export and yen

Global crude oil price, USD/JPY, and Japan’s energy imports Real Wage Growth, Household Spending, and Inflation Rate

Slow wage growth weighed down on consumer purchasing power

Weaker yen benefited exports

Japan’s economy went into a technical recession after its GDP shrank in 2 consecutive quarters

Private investment saw signs of recovery

Cheaper oil prices eased the burden from expensive energy imports caused by the weak yen

Real wage increased due to lower inflation, but remained negative

63

1.6

-1.5

5.8

-6.7

-1.9

52.2

42

44

46

48

50

52

54

56

58

-25

-20

-15

-10

-5

0

5

10

15

20

1Q2013 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 3Q2014 4Q2014

GDP Purchasing Managers Index (RHS)InvestmentPrivate Consumption

December PMI

The government hiked the

sales-tax rate from 5% to 8%

in Q2

Unit: % QOQ SAARUnit: Index

650000

700000

750000

800000

850000

900000

-6

-4

-2

0

2

4

6

8

10

12

14

16Investment cost Company's profit Machinery orders (RHS)

Unit: %YOY / %Balance Unit: million JPY (3-month moving average)

34

35

36

37

38

39

40

41

42

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14

Wage growth Consumer Confidence Index (RHS)

Unit: %YOY Unit: Index

80.000

90.000

100.000

110.000

120.000

130.000

5,000.000

5,400.000

5,800.000

6,200.000

6,600.000

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14

Export value USD/JPY (RHS)

Unit: billion JPY (3-month moving average) Unit: JPY/USD

1,500.000

2,000.000

2,500.000

3,000.000

50

60

70

80

90

100

110

120

130

140 Import value of energy (RHS) Crude oil price USD/JPY

Unit: USD per barrel / JPY/USD Unit: billion JPY

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

-10

-8

-6

-4

-2

0

2

4

6

8 Real wage Household expenditure Headline inflation (RHS)Unit: %YOY Unit: %YOY

China

China’s economy showed signs of a continuous slowdown in the fourth quarter of 2014. The average manufacturing Purchasing Managers Index (PMI) in the fourth quarter was 50.4, down from 51.3 in the third quarter (Figure 20), reflecting a slowdown in the industrial sector. The exports sector, previously expected as the key economic driver, expanded only slightly. Specifically, in the last quarter of 2014, when there was no over-invoicing, the sector expanded by only 8.7% YOY, down from 12% YOY in the third quarter (excluding September, when there was over-invoicing) (Figure 21). Meanwhile, domestic demand showed no signs of recovery. China’s fixed asset investment rose 15.8% YOY in the first eleven months of 2014, below the 16.1% YOY increase in the first nine months of the year after investment in real estate fell (Figure 22). Retail sales also slowed, with average growth dropping from 12% YOY in the third quarter to 11% YOY (Figure 23). The economic figures suggested a downward trend; therefore, in a bid to ease short-term borrowing costs for the economy, the People’s Bank of China (PBOC) decided to cut its 12-month lending rate by 40 basis points to 5.6% and 12-month deposit rate by 25 basis points to 2.75% in late November1, after a previous reduction in the 14-day repo rate by 30 basis points. The PBOC also pumped about 269.5 billion RMB of low-interest three-month loans into state banks. The Chinese economy expanded 7.4% in 2014, which is slightly below the target.

EIC expects the Chinese economy to grow by 7.1% in 2015, from the previous forecast of 7.2% to 7.3%. In late 2014, Chinese leaders gathered at the Economic Work Conference to map out economic plans for 2015. China’s top leadership may lower the growth target for 2015 to 7.0% (down from 7.5%) to make it easier to rebalance its economy. EIC views that the main economic driver this year will be stimulus measures through monetary policies. Low inflation and macroeconomic stability will allow the PBOC to continue easing monetary policy, including reserve requirement ratio cuts in early 2015 to maintain liquidity after loans through re-lending and pledged supplementary lending mature in December 2014. Additionally, the government ramped up its fiscal spending through infrastructure projects of 693 billion RMB. To supplement domestic demand stimulus packages, the government is also investing outside China by providing assistance in infrastructure projects in ASEAN countries and helping countries with abundant natural resources, such as Russia, Argentina, and Venezuela, through bilateral currency swaps.

Corruption crackdowns and risks in the real estate and finance sectors will affect the economy in 2015. Expansion of China’s anti-corruption campaign in line with reforms stipulated at the 4th Plenum will put pressure on local authorities’ spending, as they will be required to submit reports on non-budgetary spending to the central government. There are risks in the real estate market as housing prices in large towns plunged for the first time in the third quarter of 2014 following signs of a downturn since early 2014 (Figure 24) even though the PBOC started implementing measures to loosen restrictions on the purchases of second homes to boost home sales and maintain prices. Regarding the financial sector, risks include rising non-performing loans at banks. The NPL ratio grew 8 basis points from the second quarter of 2014 to 1.16% in the third quarter and banks will not be able to offer many loans with such a high rate of NPLs. In addition, the government’s attempt to limit the role of shadow banking could reduce capital availability for the business sector (Figure 25).

1The PBOC raised the upper ceiling of 12 month deposit interest rate from 110% of the benchmark rate to 120% causing slight difference.12


13

Q1/2015

20 21

22 23

24 25

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

Real GDP and Purchasing Managers Index (PMI) Chinese export growth by export market

Growth in Fixed Asset Investment by Sector Export Growth in 2014 (by Country)

Growth of Housing Prices in Major Cities Ratio of bad debts to total loan

Fixed asset investment in the first 11 months of 2014 were sluggish

Retail sales growth fell to 11% reflecting a lower growth of domestic demand

China’s GDP growth slowed in 4Q2014

Exports expanded only modestly after the effect of over-invoicing dissipated

Housing prices in major cities contracted for the first time in 2014

Financial resources became limited after the government’s attempt to curb the role of shadow banking

7.7 7.5 7.8 7.7 7.4 7.5 7.3 7.3

49.0

49.5

50.0

50.5

51.0

51.5

52.0

0.01.02.03.04.05.06.07.08.09.0

Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

Real GDP growth Manufacturing PMI (RHS)

Unit: %YOY Unit: Index

15.311.6

4.79.7

-50

-40

-30

-20

-10

0

10

20

30

40Hong Kong Japan ASEAN Germany U.S. Total

Unit: %YOY

Over-invoice

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov-

12

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

Total Transportation Utilities Real Estate Chemicals

Unit: %YOY

11.7

10.0

11.0

12.0

13.0

14.0

15.0

16.0

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov-

12

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

Unit: %YOY

Unit: %YOY

-10

-5

0

5

10

15

20

25

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov-

12

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

Beijing Shanghai Chongqing Shenzhen Guangzhou

-500

0

500

1000

1500

2000

2500

3000

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

Other loans Trust loans RMB loan

ASEAN

ASEAN economies remained sluggish in late 2014 due to weak demand from trading partners. The impact was more pronounced for export-dependent countries like Malaysia and Singapore. Malaysia, whose exports accounted for 90% of GDP, reported growth of 5.6% YOY in the third quarter, down from 6.3% YOY in the first half of 2014. Meanwhile, Singapore’s economy expanded by only 2.8% YOY in the third quarter of 2014 after its export growth turned negative in July. Other ASEAN countries such as Thailand, Indonesia, and Vietnam are rebalancing their economies through structural reforms in terms of export dependence, investment, international trade talks, and regional trade stability. Their economic growth in the last quarter of 2014 therefore remained unchanged from the third quarter of the same year.

Malaysia and Indonesia have been undergoing economic reforms since last year, resulting in an economic slowdown. Both countries share similar economic policies in prioritizing fiscal reforms. The governments are cutting burdensome subsidies on commodities and focusing more on developments to life economic potential such as investment in infrastructure. Malaysia cut subsidies for retail prices of fuel, sugar, and cooking gas and also broadened its goods and services tax system. Overall, the government could gain up to a total of 6 billion USD, or 1.5% of GDP, from such measures. Meanwhile, Indonesia’s President Joko Widodo also announced a reduction in fuel subsidies as part of the country’s economic reform s (see further details in BOX: Indonesia Under the Reign of Joko Widodo), leading to a soaring retail price of fuel by more than 30%. With this policy move, the Indonesian government will have an extra 8 billion USD to invest in other projects in 2015. Even though the falling global oil prices helped facilitate the transition for subsidy cuts, both countries still face high inflation risks. In response, their central banks have to tighten monetary policy by increasing interest rates. These reforms may therefore result in an economic slowdown. EIC expects Malaysia’s and Indonesia’s economies to expand by 5.8% and 5.1% in 2014 respectively.

EIC expects ASEAN economies in 2015 to be similar to 2014. Fiscal reforms and tight monetary policy in Malaysia and Indonesia will still put pressure on private spending. EIC forecasts that their economies will expand by about 5% in 2015. However, growth in the overall ASEAN economy will be supported by the Philippines economy following the full budget disbursements in the fourth quarter of 2014 and throughout 2015, the final year of President Benigno Aquino’s term. The public spending on infrastructure projects that are public-private partnerships will help boost the Philippines economy to grow by at least 6% in 2015.

14


15

Q1/2015

26 27

28 29

30 31


GDP Growth Industrial indicators

Growth of ASEAN-4 Exports Inflation rates

ASEAN 4 currencies against USD ASEAN imports growth from Thailand

Indonesia faced accelerated inflation again following an increase in retail fuel prices

Overall export growth from ASEAN 4 slowed expect Indonesia who benefited from weaker IDR

ASEAN 4 economies slowed in 3Q2014 with an exception of Singapore

Growth in 4Q2014 is likely to stay put as in 3Q2014, but Indonesia has a clear downward trend of PMI.

ASEAN currencies depreciated steadily in response to strong growth recovery in the U.S. economy.

Overall growth of Thai exports to ASEAN countries in 2014 was stagnant albeit stable border trade

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Indonesia Philippines Singapore Malaysia

1Q2014 2Q2014 3Q2014

Unit: %YOY

49.7

49.5

46

47

48

49

50

51

52

53

54

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%Malaysia industrial production Philippines industrial productionSingapore PMI Indonesia PMI

Unit: %MOM 3-month moving average Unit: Index

3.0

3.7

6.2

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Malaysia Philippines Indonesia

Unit: % YOY

Indonesian government reduced oil subsidy

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0% Malaysia Singapore Philippines IndonesiaUnit: % YOY เฉล่ียเคล่ือนท่ี 3 เดือน

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%Indonesia Malaysia Philippines

Unit: %MOM 3-month moving average

AppreciateDepreciate

0.4%

9.6%

-13.6%

-1.0%

-6.9%

17.3%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

ASEAN CLMV Indonesia Malaysia Singapore Philippines

Unit: %YTD

BOX: Indonesia Under the Reign of Joko WidodoOn October 20th, 2014, Mr Joko Widodo, known as Jokowi, was sworn in as President of Indonesia, replacing the former President Susilo Bambang Yudhoyono, after he had won the election with 53% of the vote (against 47%). Jokowi has gained popularity as a political outsider who is not directly supported by any specific political party or the military, and has a reputation for being down-to-earth, humble, and corruption-free.

President Jokowi’s initial economic reform policy covers four major areas: 1) Combatting corruption and poverty through people’s involvement. 2) Reducing unnecessary fiscal spending to allow the government to spend on projects with high productivity and long-term economic benefits.3) Eliminating limitations that bar private investment, such as by introducing a one-stop service program that shortens the application period for investment approval. 4) Creating economic conditions that facilitate investment to attract more foreign investment.

In addition to the four priorities, President Jokowi also has a long-term plan to upgrade Indonesia as a regional maritime hub by investing in water-related infrastructure such as ports and water transportation.

The rupiah depreciation poses as a challenge for Jokowi. Indonesia is one of the emerging markets to face the risk of foreign capital outflows after the U.S. Fed decided to stop its cash injection as part of its quantitative easing policy. International investors are scaling down their high-return investment in emerging markets to follow the trend of higher interest rates in the U.S. The Indonesian economy, which suffers chronically from fiscal and trade deficits, is likely to be one of the first markets where foreign investors sell their risky assets. The economy may have to cope with serious capital outflows. The rupiah depreciated from 11,300 per USD in April to 12,700 per USD in mid-December, and will likely be below 13,000 in 2015. In addition, the value of Indonesia’s exports has dropped as commodity prices have been affected by falling oil prices. It will be interesting to see whether Jokowi’s reform policies will be able to restore investor confidence and draw investment back to the country.

Reforms may hinder economic growth for at least another year. The Jokowi administration believes that the fiscal and trade deficits in Indonesia were caused by expensive fuel subsidies and excessive energy imports. The plunge of global oil prices presented Jokowi the opportunity to cut fuel subsidies last November to alleviate the fiscal burden and ease the trade deficit. However, the subsidy cut will affect the economy negatively in the short run because the 30% increase in retail fuel prices mean a heavier burden for consumers and thereby lower spending and savings. Furthermore, inflationary pressure forced the Indonesian central bank to tighten its monetary policy by raising the benchmark rate from 7.5% to 7.75% in November. The rate increase could limit private investment and lower consumption in 2015.

16


Thai economy

EIC forecasts that the Thai economy will grow 3-3.5% in 2015. The economy this year lacks clear driver to reach its full potential. Household spending remains under pressure because of high levels of household debts and falling prices of agricultural commodities. Private investment is likely to expand modestly partly because businesses are waiting for clear government policies. In addition, the manufacturing sector still has a low rate of capital utilization. Exports will grow only slightly because of uncertainties in the global economy. The main economic driver is thus public investment based on the government’s stimulus plan. This would depend on the government’s ability to accelerate budget disbursement to meet the targets for this year. A clear investment plan at least helps improve business confidence and therefore induces more investment for the private sector. Another potential economic driver is the tourism industry that is returning to normal after the effect from political unrest subsides, although there has been a decrease in the number of Russian tourists.

17

Q1/2015

32

* Export value in terms of USD Source: EIC forecast

Forecast for GDP growth and its components in 2014 and 2015

Thailand’s economic drivers in 2015 will rely on the government’s efficiency to disburse investment budget.

Unit: %YOY

GDP Private consumption

Private investment

Public consumption

Public investment

Export*

0.8 0.9

-0.5

3.3

-2.0

-0.8

3-3.5

2.3

4.5

3.0

8.6

0.8

2014 2015

Private consumption

Private consumption recovered in 3Q2014. It expanded by 2.2%YOY, which higher than previously expected. Consumption of non-durable goods, such as food, electricity, and water, grew by 2.8% YOY and spending on services expanded by 15.4%. However, consumption of durable goods shrank by 13.6% YOY, mainly because automotive purchases dropped by 25.9% YOY (Figure 33). The figures indicate that households are resuming their spending as the political situation has become more stable (Figure 34). Non-agricultural household income rose continuously in 2014 after a raise of starting-pay rates for government employees with a bachelor’s degree to 15,000 baht in January 2014. In the fourth quarter of 2014, private consumption continued to recover since the third quarter especially for consumer-goods imports and residential electricity consumption which expanded 4.8% YOY and 6.5% YOY in October and November respectively.

Private consumption will grow by 2.3% in 2015, up from 0.9% projected in the previous year. Positive factors include non-agricultural household spending, which is likely to see continuous growth in line with rising income. Lower fuel prices should also relieve the burden of household expenses (see In Focus: Plunging Global Oil Prices… Winners and Losers?). In addition, Thais are expected to increase spending on overseas trips, particularly to Japan, following the yen depreciation.

High levels of household debt and falling prices of agricultural products will hinder consumption. High levels of household debt limit the recovery of durable-goods consumption such as car purchases. Meanwhile, farmers are facing low agricultural product prices, especially rice, rubber, and sugar. It needs to be follow up whether there will be additional measures supporting farmers, as the recent government payout for farmer in 2014.

18


33 34


Contribution to private consumption growth Real Non-Farm Wage and Real Farm Income

Private consumption expanded due to a recovery of non-durable goods and services consumption

Growth in non-farm income will prop up consumption but lower farm income could be a drag to consumption growth

Unit: %YOY

2.2

-6

-4

-2

0

2

4

6

8

1Q20

13

2Q20

13

3Q20

13

4Q20

13

1Q20

14

2Q20

14

3Q20

14

Services Durable goods

Semi-durable goods Non-durable goods

Private consumption

70

75

80

85

90

95

100

105

110

115

120

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov-

12

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

Real non-farm wage Real farm income

Unit: Index Jan 2012 = 100, 3MMA SA

Private investment

Private investment growth was higher than expected in the third quarter of 2014. The unexpectedly high growth of 3.9% YOY followed a long period of contraction for four consecutive quarters. The expansion was mainly from investment in equipment and machinery, which grew by 6.4% YOY (Figure 35). Moreover, There were signs of continuous investment in the fourth quarter. Imports of capital goods in the Private Investment Index rose slightly by 0.2% YOY and 1.9% YOY in October and November respectively.

We expect private investment will continue to expand by 4.5% in 2015. Investment in equipment and machinery may not expand rapidly because the capacity utilization rate remains low at 60.7% below the normal range of 65-70%. Threrefore, businesses may not invest heavily this year, even though the volume of inventory is reducing. (Figure 36) Sectors which are likely to invest consist of 1) Government investment-related sectors such as construction and real estate 2) Businesses which are benefited by investment Promotion of the Board of Investment (BOI). These had been approved more than 600 billion baht worth of investment in the second half of 2014. In addition, accommodative monetary policy will help support private investment this year.

19

Q1/2015

35 36


Contribution to private investment growth Capital Utilization Index, Inventory, and Inventory Ratio

Private investment grew in 3Q2014

High leftover capacity indicates that investment in equipment and machinery may remain low

Unit: %YOY

3.9

-16.0-14.0-12.0-10.0-8.0-6.0-4.0-2.00.02.04.06.0

1Q20

13

2Q20

13

3Q20

13

4Q20

13

1Q20

14

2Q20

14

3Q20

14

Machinery and equipmentConstructionPrivate investment

55

60

65

70

80

85

90

95

100

105

110

115

120

Jan-

13Fe

b-13

Mar

-13

Apr-1

3M

ay-1

3Ju

n-13

Jul-1

3Au

g-13

Sep-

13Oct

-13

Nov-

13De

c-13

Jan-

14Fe

b-14

Mar

-14

Apr-1

4M

ay-1

4Ju

n-14

Jul-1

4Au

g-14

Sep-

14Oct

-14

Capital Utilization (RHS) Inventory Inventory ratio

Unit: Index (Jan-13 = 100) Unit: Index

Fiscal policy

The government plans to promote infrastructure investment along with multiple tax reform proposals. The proposed tax reforms include inheritance and gift taxes (see BOX: Inheritance Tax), land and buildings tax, negative income tax, and possibly value-added tax, which is pending. The government sets it goals for this year to fully achieve economic recovery and also restructure the tax system to be fairer and to increases fiscal revenue.

EIC believes that budget disbursement in the first quarter in 2015 will remain low as the government struggles with complicated procedures for budget disbursement and legal issues since October, leading to delays in disbursement. Especially investment budget disbursement, which is disbursed only 41 billion baht or 9.2% of overall investment budget in FY2015, is still far below the target of 29%. EIC forecasts that government consumption in 2014 will expand by about 3%.

The efficiency of budget disbursement will be a key driver for growth in 20152. Out of the 2.4-trillion-baht budget for long-term infrastructure projects, about 68 billion will be injected into the economy in 2015. Of this amount, the government expects to disburse 87% of investment budget and 96% of total government budget for 2015. Meanwhile, businesses are slowing their investment to see whether the government can deliver on its promises.

2An investment budget for local administrative units, worth some 23 billion baht, has been reallocated from the investment budget to the regular budget, effective from fiscal year 2015 onwards. 20


37Disbursement rate of total budget Capital Utilization Index, Inventory, and Inventory Ratio

The disbursement rate for the investment budget in the first quarter of FY2015 was disappointing

31%

0%

20%

40%

60%

80%

100%

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Fiscal year 2014 Fiscal year 2015

Unit: % of total budget

Q1 target= 32%

Q2 target = 55%

Q3 target =76%

Q4 target = 96%

9.2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Fiscal year 2014 Fiscal year 2015

Unit: % of total budget

Q1 target= 29%

Q4 target= 87%

Q3 target= 74%

Q2 target= 55%

BOX: Inheritance TaxThailand first imposed its inheritance tax when the original Thai law, known as the Three Emblems Law, was enacted. It later became the Legacy Tax and Inheritance Tax Act in 1933 after the country transited into democracy. The act imposed a tax on both estates and inheritance, but it was revoked ten years later due to the overly complicated tax collection procedures and legal issues derived from tax evasion attempts. Later in 1976, a draft Inheritance Tax Act was proposed and approved by the House of Representatives, but a coup was instigated in that same year before the act could be published in the Government Gazette to be effective. As a result, the attempt to implement the inheritance tax law was abandoned. No draft inheritance law was proposed again until the latest draft Inheritance Tax Act.

Under the currently proposed structure, recipients will pay a 10% tax on the portion of inherited assets exceeding 50 million baht.3 This rate is considered low compared to those in developed nations. For example, the U.S. uses progressive inheritance-tax rates with a maximum rate of 50%. Japan also shares a similar progressive system with the highest rate of 70%. The U.K., on the other hand, has a flat rate of 40%. Meanwhile, the proposed tax rate in Thailand is similar to other Asian countries. It is the same as the 10% flat rate in Taiwan; while, the Philippines uses progressive rates between 5-20%.

The government also plans to amend the gift tax to cover properties that an individual receives from either another individual or legal entity. With the implementation of the inheritance tax, property owners will be incentivized to transfer their assets to their heirs prior to death to evade the inheritance tax. Therefore, gift tax is necessary to prevent such behavior. This scheme can prevent the case in which individuals transfer their asset ownership to family members to avoid paying a high tax rate. Under the proposed structure, the government will impose a 5% gift tax on assets valued over the cutoff level of 10 million baht.

The government should institute some exceptions and measures to reduce the tax burden on inheritance of SMEs. Studies on the impacts of the inheritance tax often point out the adverse effects on small or family-owned SMEs with high-value assets that generate only moderate income. Such assets make owners liable for inheritance tax once ownership is transferred. The tax burden and liabilities on the person inheriting the business may exceed the recipient’s ability to pay and reduce the motivation to carry out or expand the inherited business. There are several solutions to such problems. Studies of inheritance tax in other countries indicate that tax relief has often been implemented concurrently with the inheritance tax to reduce the burden on those small business owners. Such tax relief includes paying the inheritance tax in installments over several years instead of having to pay a lump sum. This could help reduce the tax burden on small business owners considerably and the inheritor would not be forced to sell assets to pay the inheritance tax. One interesting case study on inheritance tax is from Germany, where heirs are exempt from up to 100% of the tax, provided that the inherited business assets are used to operate a business and the business is continued for a minimum of seven years, with its employment fully maintained. It would be interesting to see what types of tax-relief measures for small business owners would be implemented along with the inheritance tax law.

3Read more about the inheritance tax law at the National Legislative Assembly website at http://click.senate.go.th.21

Q1/2015

Exports-Imports

Thailand’s exports in 2014 were disappointing. In the first eleven months of 2014, exports declined by 0.6% YOY due to several factors as follows:

1) A decline in natural rubber prices, which affected the value of Thailand’s rubber exports; in the first eleven months of 2014, the total value of Thailand’s rubber exports fell 25% YOY. 2) The economic slowdown in China led to a 6.7% YOY decline in Thailand’s exports to China. 3) The total value of automotive and parts exports increased less than previously expected. The volume of cars exported to Indonesia (a major market) declined after Indonesia ramped up its domestic production. In addition, the falling global oil prices led to a decrease in demand for imported cars and car parts in the Middle East. 4) The value of Thailand’s refined fuel exports, which accounted for 6% of the country’s total exports, dropped more than 34% YOY in November (Figure 38).

The value of imports to Thailand shrank after a decline in global oil prices and sluggish recovery in domestic investment. The value of imported crude oil, which accounted for more than 10% of all the country’s imports, fell 20% and 29% YOY in October and November, respectively, following the decline in global oil prices (see In Focus: Plunging global oil prices … winners and losers?). Furthermore, imports of machinery and parts in the first eleven months of 2014 also fell more than 8% YOY reflecting a slowdown in domestic investment. Imports overall declined 9% YOY in the first eleven months of 2014 (Figure 39).

Exports of electronics are likely to recover in 2015 thanks to the stronger recovery in the U.S. economy whose imports account for more than 20% of Thailand’s total electronics shipments. Also, exports to markets with strong growth potential like CLMV (Cambodia, Laos, Myanmar and Vietnam) continue to rise after expanding 9.6% YOY (Figure 40) in the first eleven months of 2014. However, these positive factors will only support non-commodities exports to grow by 3.1% in 2015.

The falling oil prices and agricultural product prices will put downward pressure on Thai exports to grow by 0.8% in 2015. Falling global oil prices are affecting Thailand’s refined fuel, chemical products, rubber, and sugar exports. This group of products accounts for 15% of all Thai exports. Additionally, the decline in oil prices affect demand in the Middle East, a high-potential market for Thailand’s automotive and parts exports. The aforementioned factors along with the economic slowdown in China and the end of the preferential tariff privileges under the European Union’s Generalized System of Preferences (GSP) will limit export growth to only 0.8%. Furthermore, the weakening yen and euro against the Thai baht could also affect Thai exports in some sectors (see BOX: The Weakening Yen and Euro’s Impacts on Thailand’s Exports).

22


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

23

Q1/2015

38 39

40 41

Export growth for key products Import growth for key products

Changes in Thai export value to major trading partners Current Account and Trade Balance

Exports to CLMV continued to grow steadily

Current account surplus and trade balance surplus will widen

Thai exports in the first 11 months of 2014 contracted by 0.6%YOY

Import value in the first 11 months of 2014 declined following the falling global oil prices

Unit: %YOY

6.5

0.9

-6.3

-1.3

0.7

2.1

2.4

-10.2

Computers and parts (8%)

Electrical appliances (10%)

Rubber (4%)-5.9

Cars and parts (10%)

-25.0

Refined fuel (6%)

Total export -0.6-0.3

2014 (Jan.-Nov.)2013Unit: %YOY

9.9

-5.6

-0.5

5.3

-9.0

-5.9

-8.3

-11.1

-0.1Consumer goods (9%)

Raw Materials

and intermediate goods (38%)

Capital goods (26%)

Fuel and energy (21%)

Total import 0.2

2014 (Jan-Nov)2013

Unit: Index Jan 13= 100, 3MMA SA

80

85

90

95

100

105

110

115

120 US EU Japan China CLMV Total

-1500

-1000

-500

0

500

1000

1500

2000

2500

3000 Current accountTrade balance

Unit: Million USD 3MMA SA

BOX: The Weakening Yen and Euro’s Impacts on Thailand’s ExportsThe high risk of deflation in Japan and Europe triggered the two central banks to launch additional quantitative easing (QE) measures in the hope of stimulating the economies. The Bank of Japan (BOJ) in November increased its purchases of bonds and assets under the QQE program to 80 trillion yen per year. Meanwhile, the European Central Bank (ECB) has been injecting liquidity into the economy via the targeted longer-term refinancing operations (TLTROs) and asset purchase programs. The moves caused the yen and the euro to depreciate 13% and 10% respectively, against the baht earlier this year (Figure 42).

The depreciation of the two currencies makes to imports from Thailand more expensive, which will affect industries that are particularly price sensitive and industries that rely on exports to these two regions. We find that exports of processed seafood will be most affected as the export volume to Japan and the EU accounts for 16% and 14% of all Thai processed seafood exports. It is also a highly competitive industry where importers have a higher bargaining power to negotiate the prices down because Thai manufacturers are mostly original equipment manufacturers (OEM).

In the long run, Thailand’s exports may benefit from the depreciation of the yen because a weaker yen will help boost Japan’s exports of finished goods whose parts are imported from Thailand. Such products include electronic appliances and cars.

Overall, the weaker yen and euro should not affect significantly because Thai exports are generally quoted in USD. According to a report from the Bank of Thailand in 2010, around 80% of all Thai exports were traded using USD, while the yen and the euro accounted for 6.1% and 2.8% of Thailand’s exports respectively, or a combined 9% (Figure 43). Therefore, the depreciation of the yen and the euro should not have much impact on Thailand’s exports (The depreciation of the yen will have more impact on the country’s exports than the depreciation of the euro.)

42

* As of Dec. 19 2014Sources : EIC analysis based on data from CEIC and the Ministry of Commerce

JPY/THB and EUR/THB Currencies used in Thai export transactions

JPY and EUR depreciated against THB

Sources : EIC analysis based on data from BOT

43 The majority of Thai exports are quoted in USD

38

39

40

41

42

43

44

45

46

26

27

28

29

30

31

32

33

THB/JPY THB/EUR THB/EURTHB/100 yen

Yen and Euro appreciates against THBYen and Euro depreciates against THB

US dollars80%

THB8%

Yen6%

Euro3%

Others3%

24


The majority of Thai exports are quoted in USD

Unit: %

Inflation

Inflation slowed considerably as a result of the sharp decline in oil prices. From July to December 2014, inflation averaged to 0.6%, compared to the average of 2.2% in the first six months of the year. Inflation fell dramatically, following a decline of more than 40% in global oil prices over the second half of 2014. As a result, inflation averaged at 1.9% in 2014; while core inflation remained at 1.6% after an indirect effect of the falling oil prices via cheaper transportation costs. (Figure 44)

Prepared food prices rose nearly 4% last year, which may have led consumers to feel that overall prices had gone up more than the 1.9% headline inflation. (Figure 45) Food prices are generally more noticeable for consumers and food accounts for 30% of the headline inflation basket. The increase in prepared food prices was linked to rising household LPG prices which rose by 5.5 baht/kg between late 2013 to May 2015. The prepared food price index accelerated in early 2014 and started to slow down in June. There is a possibility that the ongoing energy reforms might adjust the price for LPG upward to reflect its cost. The resulting increase in prepared food prices will push the living cost up creating a burden for households.

EIC believes that inflation will not accelerate in 2015. Oil prices, which is a key determinant of inflation, will stabilize at $50-60 per barrel for at least another year (see In Focus: Plunging global oil prices … winners and losers?). In addition, there is no clear economic driver for consumption. Therefore, EIC forecasts headline inflation and core inflation at 0.7% and 1.6% respectively, in 2015.

44

Source: EIC analysis based on data from MOC

Components of the Headline Inflation

Low energy prices were the key factor that dragged the headline inflation down

1.93% 1.96% 2.11%

2.45%2.62%

2.35%2.16% 2.09%

1.75%1.48% 1.26%

0.60%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14

Core CPI Energy Food

Dec-14

25

Q1/2015

Unit: %

45

Source: EIC analysis based on data from MOC

Headline Inflation and Food Price Index

Low-income households will be affected by the price of prepared food that rose 4% a month on average

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%Headline in flation Food in flation

Increase cooking gas to 50 satang/kg. per month

26


Policy rate

The Bank of Thailand (BOT) has switched its monetary policy framework to headline-inflation targeting in 2015. Previously, the BOT set its target range for core inflation to 0.5-3.0%. The targeting framework is now changed to targeting headline-inflation in the range of 2.5±1.5% per annum. The BOT reasoned that headline inflation can reflect the cost of living more accurately than core inflation which excludes the prices of fresh food and energy and also that headline inflation should be easier for the public to understand.

Headline inflation in 2015 will be lower than the BOT’s targeting range. EIC expects the headline inflation in 2015 to average at 0.7% because of the drop in oil prices by 40% compared to last year. It is difficult for monetary policies to affect supply-side shocks such as the oil price plunge. On the other hand, the demand-side factors are not moving in the downward direction as evident in the stable core inflation at 1.6%, similar to that of last year. The BOT has stated that although the headline inflation remains low, there is no clear signal of deflation because the currently low inflation is not caused by broad-based price fall. Rather, it is caused by the lower oil prices and inflation expectation is still well anchored. The BOT also added that the headline inflation should return to a higher level in the second half of the year.

EIC views that the policy rate will be kept 2.00%. In 2009, the Monetary Policy Committee (MPC) cut the policy rate to 1.25%, or 0.75% lower than the current rate (Figure 47), citing 3 main reasons: 1) weak global economy and high volatility caused by the financial crisis, 2) Thailand’s economic indicators that pointed to a downward direction and a high risk of recession, 3) very low inflation due to the falling oil and commodity prices. For the current situation, only the third condition is satisfied; therefore, the fact that the headline inflation is now lower than the lower bound of the BOT’s target might not trigger the MPC to cut rates. If the domestic economic condition does not slow down significantly as in 2009, an interest rate cut could create a capital outflow, especially when the U.S. Fed hikes rates in the second half of the year. The lower retail prices for fuel should support household spending without further monetary easing.

Nonetheless, there is room for a rate cut if domestic demand remains weak than expected. Low inflation this year as a result of cheaper oil should make it possible to conduct a further monetary easing, if necessary.

27

Q1/2015

Unit: %

46

47

Source: EIC analysis based on data from BOT and MOC

Source: EIC analysis

Policy Interest Rate and Headline Inflation

EIC expects the BOT to keep the policy rate at 2.00%, although the headline inflation has fallen below the target range

The current situation only meets 1 out of the 3 conditions that led the BOT to cut rates in 2009

-5

0

5

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Headline inflation Policy rate

2.5%

2.5+1.5%

2.5-1.5%

3 key factors that led to a rate cut to 1.25% in 2009 Current situation

Weak global economy and high volatility caused by the

financial crisis

Thailand’s economic indicators that points to a downward

direction and a high risk of recession

Low inflation as a result of falling oil and other commodity

prices

28


Thai baht

In late 2014, the Thai baht depreciated slightly in the range of 32.8-33.0 baht per USD. The depreciation was driven mainly by the strong economic recovery in the U.S., which helped push up the dollar against other major currencies like the euro, the yen and currencies in emerging markets. The decline in oil prices late last year was a positive factor for net oil importers like Thailand. The baht therefore strengthened when compared to the currencies of net oil exporters like the Malaysian ringgit.

In 2015, U.S. monetary policy will likely put pressure on the baht to weaken slightly. EIC projects THB to weaken to 33.5 baht per USD by year-end. There will be some capital outflow in anticipation of a rate hike by the Fed in the second half of this year. The Fed’s rate hike will be in the opposite direction to the BOT’s current accommodative monetary policy. The baht will not depreciate significantly because the volume of Thai equity and bonds currently held by foreign investors is not very high, and therefore a sell-off of the baht is likely limited. Another factor that supports the Thai baht is the current account that will remain positive because of the decline in energy imports along with the falling global oil prices.

48

Source: EIC analysis based on data from Bloomberg

THB/USD

In late 2014, THB/USD moved in the 32.8-33.0 range

Unit: THB/USD

31.0

31.5

32.0

32.5

33.0

33.5

Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14


Baht depreciate

32.9 THB/USD as of Dec. 29 2014

Baht appreciate

29

Q1/2015

The euro

The euro is likely to depreciate following the ECB’s stimulus measures in 2015. Eurozone economies are still weak with an increasingly persistent risk of deflation. The conflict between several Eurozone countries and Russia has undermined business confidence. The stimulus measures launched in 2014, including negative interest rates and ABS purchases, were not sufficient to boost the economy. Therefore, it is highly likely that the ECB will introduce more measures such as sovereign bond purchases to stimulate the economy. EIC forecasts that the euro-dollar exchange rate will be around 1.18-1.22 USD/EUR.

49


EUR

In 2014, the euro weakened because of the slow growth in the eurozone economies and the ECB’s monetary easing measures

36

38

40

42

44

46

1.15

1.20

1.25

1.30

1.35

1.40

1.45

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14

EUR-USD EUR-THB

Euro appreciate

1.22 USD/EURO as of

Dec. 29 2014

Unit: THB/EURUnit: USD/EUR

Euro depreciate

ECB first interest rate cut on June 5 2014 ECB second interest rate

cut on Sep 4 2014

30


Japanese Yen

The yen will continue to weaken. The sales tax hike from 5% to 8% since April 2014 significantly affected consumer spending more than previously expected. The Bank of Japan (BOJ) surprised the market when it announced that it would expand its asset purchase program as part of its QQE measures. As a result, the yen dropped to a seven-year low against the USD. The BOJ maintains its inflation target at 2%, but the latest figures show that Japan’s inflation (excluding the impact of the sales-tax increase) dropped to a 14-month low of 0.7% in November. This indicates that the country’s domestic demand was still weak. Therefore, there is a possibility that the BOJ will want to devalue the yen further to stimulate exports and the overall economy. EIC therefore projects that the yen will likely move in the range of 120-125 yen per USD in 2015.

50


JPY

Japanese yen fell further as the BOJ expanded its QQE program

2.8

3

3.2

3.4

3.6

3.8

4

90

95

100

105

110

115

120

125

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14

USD-JPY

THB-JPY

Yen depreciate

120 Yen/USD as of Dec. 29 2014

Yen appreciate

BOJ increased QQE size on Oct. 31 2014

Unit: THB/JPYUnit: USD/JPY

31

Q1/2015


Global Gold price

Factors Influencing the Price of Gold

The price of gold will remain stable in 2015. The end of the QE and strong recovery in the U.S. causes gold prices to move in a range of $1,100-1,200 per ounce. EIC expects that, in 2015, gold prices will not climb as high as when the QE program was carried out in 2009-2011. The main downside risk influencing gold prices will be the much anticipated rate hike by the Fed in the second half of this year that will make USD strengthen further. Nevertheless, certain financial risks could push up the gold prices in the short run such as Russia’s ruble crisis that could force its central bank to increase its gold reserves to help stabilize the ruble.

1,195 USD/oz. as of Dec. 29 2014

Factors that will cause the price of gold to increase •Easingmonetarypoliciesto stimulate the economies in the Eurozone, China, Japan and emerging markets will have a positive effect on the price of gold. •A spread of the ruble crisis could create concerns that Russia’s private sector may default. These concerns can push up the demand for gold, seen as a safe asset.

ปัจจัยที่ทำ�ให้ร�ค�ทองคำ�ลดลงหรือทรงตัว •ThestrongrecoveryoftheU.S.economy and the Fed’s decision to hike rates will cause the USD to continue to strengthen and thus negatively affect the price of gold. •The low Inflation environment in many regions, especially Europe and Japan, in 2015 could lower the price of gold. •The demand for gold bars from China and India shows no clear sign of growth.

5152

Factors Influencing the Price of Gold

The trend of gold prices have been down since 2012, but the prices should stay in the $1,100-1,300 range per ounce in 2015


Unit: USD/oz.

32


Bull - Bear: Oil prices

34


BULL-BEAR: Oil Prices

BULLs: Oil prices are likely to increase •Geopoliticalrisksmayleadtoatighteninginthedemandforoil that pushes up oil prices in the short term. Situations that could cause such risk include the on-going and prolonged fight between the Islamic State and Iraq and Syria, the drawn-out talks on Iran's nuclear program between Iran and the P5+1 partners that have yet to be finalized, and the conflict between Russia and Ukraine over territory.

• Thedemand for oil in theU.S.,which remains by far theworld’s largest user of oil, will likely expand 0.7% YOY in 2015 to 19.1 million barrels per day, driven by the country’s strong economic recovery. The IMF forecasts that the U.S. economy will expand by 3.1% in 2015. Meanwhile, China’s demand for oil in 2015 will rise by 3.3% YOY to 11.3 million barrels per day, despite the forecast that the Chinese economy will grow at the rate of 7% as it did last year. China acquired a large amount of oil when the oil prices dropped. It is speculated that China currently stores 30 days of stocks, or 170 million barrels of strategic oil reserve, which exceeds the legal requirement of 15 days of stocks.

• Shale oil and shale gas producers in the U.S. revisetheir investment plans. As of now, there has been some capital expenditure (CAPEX) cut among American producers. ConocoPhillips, a large exploration and production company, has announced a 2015 CAPEX of 13.5 billion US dollars, 20% lower than previously planned. It has also delayed several shale projects in North America. In addition, applications for new drilling permits in Eagle Ford Shale and Bakken Shale fell approximately 30% MOM in November of 2014. As a result, oil production in the US may not be as active as it was in the past. The projections of the growth of US oil production have been revised down from 950,000 barrels per day to 750,000 barrels per day, for 2015 and from 700,000 barrels per day to 450,000 barrels per day for 2016.

Source: EIC analysis based on data from leading global houses (as of 9 September 2014)

2013 2016FAvg. Q1 Q2 Q3 Q4 Avg. Q1F Q2F Q3F Q4F Avg. Max Min Avg.

WTI 98 99 103 98 73 93 50 49 54 60 53 72 47 68Brent 109 108 110 102 76 99 54 53 59 66 58 77 50 73

2014 2015FOil price

(USD/Barrel)(Avg.)

35

Q1/2015

BEARs: Oil prices are likely to decrease or stabilize•Theoversupplyofcrudeoilwillcontinuetoputdownwardpressureonprices.The U.S. Energy Information Administration (EIA) forecasts the global oil supply at 92.8 million barrels per day and global demand at 92.3 million barrels per day for 2015. Non-OPEC countries, led by the U.S., are expected to contribute to most of the global supply at the level of 14.9 million barrels per day in 2015, up by 7% YOY. The increase is considered low compared to the 13% YOY growth in 2014. •OPEChasdecidedtomaintainitscrudeoilproductionandswitchedrolesfroma “market balancer” to a “market share defender”. Saudi Arabia’s minister of Petroleum and Mineral Resources said in an interview that OPEC would not budge on its decision to maintain production, even if oil price hits $20 per barrel. He also added that the world may never see $100 per barrel again. Saudi Aramco, Saudi Arabia's national petroleum and natural gas company, also cut oil prices for customers in Asia and the U.S. to protect its market share. Global oil prices that fell below $60 per barrel will affect high-cost producers like Canada oil sand, U.S. shale oil, U.S. shale gas and Brazil deepwater. Some of which may halt production to prevent losses, and this should help OPEC maintain its market share. •IfOPECmaintainsitsproductionat30millionbarrelsperday,weexpectthatthe excess supply for oil will rise to 1.2 million barrels per day in the first quarter of 2015 and 1.6 million barrels per day in the second quarter of 2015, the highest level of excess-supply growth in two consecutive quarters since 1998. In 2015, the estimate for the “call on OPEC” (world consumption less non-OPEC production) is 28 million barrels per day.•Theoil demand in Europe and Japanhasweakenedas a result of sluggisheconomies. Contributing factors include Japan’s sales-tax hike leading to a slowing in domestic and public spending, and the risk of deflation in the Eurozone. The IMF has revised downward its economic growth projections for the Eurozone and Japan to 1.3% and 0.8%, respectively. The EIA projects Europe and Japan’s oil demand at 14.1 million barrels a day (-1% YOY) and 4.2 million barrels a day (-3% YOY), respectively.

EIC’s view : Bear Short term (1 year): Oil prices will continue to decline especially in the first half of 2015. If OPEC insists on maintaining production, oil prices may plunge to as low as 40 US dollars per barrel temporarily before rebound. In the second half of this year, oil prices will be supported by increased demand due to lower prices and a slowdown in oil production in the US whose effects will be more pronounced in late 2015. Nevertheless, we still need to closely monitor geopolitical factors, which could lead to short-term oil price volatility.

Medium term (2-3 years): OPEC will continue to defend its market share in the medium term if OPEC powerhouse Saudi Arabia can withstand the pleas to cut production from fellow members like Venezuela as well as the pressure from rising fiscal deficit. However, expanding oil demand from economic booms especially in emerging economies can support oil prices in the medium term. Global oil demand is expected to surpass supply in 2017. Supply will grow at a much slower pace, partly because many oil producers have delayed their investments when oil price started to decline.

36


In focus:

The Thai economy will get a growth boost from lower oil prices in 2015, but it will be modest. The more than 40% fall in world oil prices since mid-2014 will help mainly by reducing living costs, especially for low-income Thai households, and by trimming logistics costs for Thai businesses, which depend heavily on road freight. Lower costs for gasoline and diesel will thus reduce inflationary pressures, allowing the Bank of Thailand to carry on with its accommodative monetary policies. Yet a few sectors will be hurt. The oil price collapse will reduce income for rubber farmers. Tourism will be dented by a fall in arrivals from Russia, where sinking oil revenues have dragged down the economy and the ruble. And there will be some downward pressure on the Thai stock market, and thus household wealth, because oil-related shares are a big part of total capitalization.

Plunging global oil prices … winners and losers?

Jun-14OPEC maintained its productionlevel at 30 mil barrels per day

The International Energy Agency(IEA) revised its estimates for 2015demand for crude oil down.

The U.S. reported the highest oil production level in 3 decades.

Saudi Arabia cut its crudeoil prices for the U.S.

OPEC refused to cut production.

Sep-14

Oct-14

Nov-14

Nov-14

Crude oil prices: recent timeline

Brent Crude Oil Price (USD/barrel)

Plunging global oil prices …

winners and losers

Demand: unexpected weakness in the global economy

Supply: rising non-OPEC production especially from shale oil producers in the U.S. and OPEC’s Adecision to maintain its level of production

$: price speculation in the crude oil market

What caused the crude oil pricesprices to fall by more than 40% or $50/bbl in 2H2014?

5.3 7.0 7.8 8.4 8.4

Monthlyincome

Fuel expenditure as a % of all household expenditure

10K 30K 50K 100K 100K+

7964 55 57 64

342042 37 30

Diesel

% Households of all income levels will benefit from the fall in oil prices

Real estateand construction

Construction materials

Agriculture

Industrial chemicals and raw materials

Rice andgrain mills

Gasoline

Impactson the

Thai economy

Household

Household

Lower operatingcosts

Monitor the impacts on the economiesof Thailand’s trading partners

ChinaJapanU.S.

Europe

Saudi ArabiaRussia5 industries that will benefit most

because of their high transportation cost

Thai exports that will benefit

Thai industries that have to adjustto mitigate the negative impact

Auto and parts

Tourism

Electronics

Electrical Appliances

Processed meat and poultry

Positive net position of the Oil Fund

Burden to support farmers who are affected by the falling commodity prices

Government

Export

Business

Quarter 2/2014 Quarter 4/2014

Unit: billion baht

Unit: billion baht

-8

81150

16

4.02.5

1.5 1.0 0.9

12 3

4

5

The amount that the businesssector saves from lower oil prices

Oil fund contributionremains the same

If there is no oil fund contribution

107

96

88

80

68

37

Q1/2015

Jun-14OPEC maintained its productionlevel at 30 mil barrels per day

The International Energy Agency(IEA) revised its estimates for 2015demand for crude oil down.


Saudi Arabia cut its crudeoil prices for the U.S.


Sep-14

Oct-14

Nov-14

Nov-14

Crude oil prices: recent timeline

Brent Crude Oil Price (USD/barrel)

Plunging global oil prices …

winners and losers

Demand: unexpected weakness in the global economy

Supply: rising non-OPEC production especially from shale oil producers in the U.S. and OPEC’s Adecision to maintain its level of production

$: price speculation in the crude oil market

What caused the crude oil pricesprices to fall by more than 40% or $50/bbl in 2H2014?

5.3 7.0 7.8 8.4 8.4

Monthlyincome


10K 30K 50K 100K 100K+

7964 55 57 64

342042 37 30

Diesel

% Households of all income levels will benefit from the fall in oil prices

Real estateand construction

Construction materials

Agriculture

Industrial chemicals and raw materials

Rice andgrain mills

Gasoline

Impactson the

Thai economy

Household

Household

Lower operatingcosts

Monitor the impacts on the economiesof Thailand’s trading partners

ChinaJapanU.S.

Europe

Saudi ArabiaRussia5 industries that will benefit most

because of their high transportation cost

Thai exports that will benefit

Thai industries that have to adjustto mitigate the negative impact

Auto and parts

Tourism

Electronics

Electrical Appliances

Processed meat and poultry

Positive net position of the Oil Fund

Burden to support farmers who are affected by the falling commodity prices

Government

Export

Business

Quarter 2/2014 Quarter 4/2014

Unit: billion baht

Unit: billion baht

-8

81150

16

4.02.5

1.5 1.0 0.9

12 3

4

5

The amount that the businesssector saves from lower oil prices

Oil fund contributionremains the same

If there is no oil fund contribution

107

96

88

80

68

Crude oil prices dropped by US$50 a barrel, or more than 40%, in the second half of 2014. Subpar economic growth in much of the world, especially Europe and Japan, has slowed demand for crude oil. Yet supply has swollen due to a steady rise in non-OPEC production during the past year. A surge in shale oil extraction in the United States pushed oil production up to the nation’s highest level in almost three decades.

However, demand and supply factors do not explain the entire $50 per barrel drop in oil prices. EIC estimates that the demand-supply changes account for just $30 of the price fall between July and mid November. The other $20 of decline reflects market dynamics that resulted from OPEC’s unexpected decision in November to maintain production. That move led the market to anticipate further downward pressure on prices (Figure 51 and 52).

Source: EIC Analysis based on data from Bloomberg and Energy Information Administration

53 54Dubai and Brent Crude Prices Supply and Demand of Crude Oil

Global crude oil prices have been falling since June 2014

Production level by non-OPEC countries has steadily increased

Unit: USD per barrel

40

50

60

70

80

90

100

110

120

Apr-

14

May

-14

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Dubai Crude Oil Price

Brent Crude Oil Price


Saudi Arabia cut its crude oil prices for the U.S.


OPEC maintained its production level at 30 mil barrels per day

The International Energy

Agency (IEA) revised its

estimates for 2015 demand

for crude oil down.

36.0 36.0 35.9

54.1 56.0 56.8

90.5 91.4 92.3

0

10

20

30

40

50

60

70

80

90

100

2013 2014 2015F

OPEC Supply Non-OPEC Supply Global Demand

Unit: million barrels per day

38


Falling oil prices will benefit the global economy as a whole. World growth will gain because energy is a key production input, and energy spending makes up a large portion of household expenditures. The IMF estimates that the drop in oil prices resulting from increased supply will boost global GDP growth by 0.3-0.7% in 2015. The boost will most help countries with large oil imports like China and India. Thailand will be among the winners as well because the value of its imports of oil and fuel comprises 8% of GDP, a rate that is even higher than that of China and India. On the other hand, oil producers like Russia, Venezuela and Nigeria, which rely on crude oil exports as their main source of income, are now facing sharp currency depreciations.

In Thailand, the most visible benefit is lower retail prices for fuel. Retail gasoline and diesel prices declined steadily in the second half of 2014. Gasoline prices such as benzene 95 and gasohol 95 and 91 have dropped by 26%, while diesel prices have only fallen by 10% (figure 53). The fall in retail fuel prices is smaller than the fall in world oil prices due to add-ons like excise tax and VAT as well as contributions to the national oil fund and energy conservation fund, which vary by fuel type. Thus oil prices contribute only 50% of retail fuel prices. Moreover, the oil fund contribution and excise tax rate were recently hiked, which might further limit price declines, especially for diesel.

55

Source : EPPO

Dubai Crude Oil Prices and Domestic retail oil prices

Retail oil prices in Thailand dropped by a smaller proportion than the global crude oil prices

Unit: Index (Apr-14 = 100)

40

50

60

70

80

90

100

110

120

Apr-1

4

May

-14

Jun-

14

Jul-1

4

Aug-

14

Sep-

14

Oct

-14

Nov

-14

Dec

-14

Dubai Crude Oil Price (-50%)

Diesel (-10%)

Gasohol 95,91 (-26%)

(% Change from June 2014)

39

Q1/2015

The fall in fuel prices put an extra 20 billion baht in the pockets of Thai consumers during the second half of 2014. This estimate is based on comparing prices to the year’s second quarter. Because the price decline was sharpest for gasoline, which is mostly consumed by households, the main benefit went to consumers. Industry gained less because it relies more on diesel, whose price fall was relatively modest. The industries that benefited most were transportation and logistics

Users of gasoline and diesel, both consumers and businesses, will save 100 billion baht or more in 2015 compared to last year. This calculation is based on the assumption that the crude oil price average will be between $58 per barrel in 2015, much lower than last year’s $98. This figure also assumes that the oil fund contribution rate remains the same as at the end of 2014, which appears likely, because the fund has a surplus of 15 billion baht, which is larger than in the past. The savings may be as high as 148 billion baht compared to 2014, which is equivalent to 1.2% of GDP. If the oil fund contribution were to be eliminated, the savings would total as much as 241 billion (Figure 55).

56

Note: Savings are calculated from a comparison of oil prices in 3Q2014 and 4Q2014 to those in 2Q2014.Source : EIC analysis based on data from CEIC and Energy Fund Administration Institute (EFAI)

Energy costs saved by the household and business sectors Net Position of the Oil Fund

Retail fuel prices declined continuously during the second half of 2014, reducing costs for consumers and turning the Oil fund account to a surplus

Unit: billion baht Unit: billion baht

55

2.7

12.80.3

5.2

2014Q3 2014Q4

The amount ofenergy costs savedby the businesssector (from cheaperdiesel)

The amount ofenergy costs savedby households (fromcheaper gasoline)

18.0

3.0

Households and businesses can save even more if the

government reduces the oil fund contribution rate.-8.0

15.9

2014Q2 2014Q4

40


57

Source: EIC analysis based on data from the Energy Policy and Planning Office

The amount that households and businesses will save in 2015

Unit: billion baht

Thai households and businesses can save up to 100 billion baht if the crude oil price in 2015 averages between 65-75 $/bbl, assuming that the contribution rates to the Oil Fund are held constant

Households at all levels of income will benefit from the fall in oil prices. Fuel costs account for 5.3-8.4% of spending by households, with the rate varying by income (Exhibit 56). But households with monthly income below 10,000 baht will gain the most in percentage terms because they spend a larger share of income on fuel, and 80% of it in the form of gasoline, whose price has fallen most. Note that these households depend heavily on transport by motorcycle.

Households will spend 50 billion baht less on fuel, but only a small share of this will translate into extra household consumption. Most of this savings from cheaper fuel will accrue to middle- and high-income households, which use cars and live in urban areas. Because these households were not short on disposable income before the price drop, their fuel-cost savings will not greatly boost their consumption. Therefore the benefit to the economy as a whole from higher consumer spending will not be significant.

67 91

81

150

Oil fund contribution remains thesame

No oil fund contribution

Lower transportation costs forbusinesses

148

241

41

Q1/2015

58

Source: EIC analysis based on the Household Socio-Economic Survey in 2013

Households of all income levels will benefit from the fall in oil prices

The industries that will gain the most from lower fuel prices are real estate and construction, construction materials and agriculture, which have the highest transportation costs in percentage terms (Exhibit 57). Indirect benefits will go to tourism, hotels and restaurants, thanks to a modest uptick in household consumption. Yet these direct and indirect gains depend on how much transportation and logistics businesses adjust their prices down following the fall in diesel prices.

Types of fuel consumed by households of different income levels

Unit: % of all fuel consumption

7964

55 57 64

2034

42 37 30

0-10,000 10,001-30,000 30,001-50,000 50,001-100,000 100,001+

LPG

NGV

Diesel

Gasoline(Benzine)

Household

monthly income5.3 7.0 7.8 8.4 8.4


42


Cheaper retail fuel prices and declining transportation costs will help hold down inflation. If the Dubai crude oil price stays at $58 per barrel in 2015, EIC estimates that Thailand’s inflation rate will remain at 0.7%. Inflation could go even lower if 1) the government ends the oil fund contribution and 2) electricity prices decrease with oil prices. Cheaper energy will indirectly cause core inflation (which excludes food and energy prices) to stabilize around 1.5%, which is about half of the BOT’s inflation target. Thus, lower energy prices will support accommodative monetary policy.

Even though Thailand will benefit overall from cheaper oil prices as a net oil importer, some risk factors need to be watched.

Lower household expenditures on energy might not lead to higher spending, especially among households hurt by lower farm commodity prices. Rubber farmers will lose the most because their prices will fall to compete with lower prices for synthetic rubber, produced from crude oil. Lower prices in the stock market might have a psychological effect on middle- and high-income consumers because the energy sector accounts for a large share of capitalization. For these reasons, lower energy prices will not greatly increase domestic consumption.

59

Source: EIC analysis based on data from Conference Board

Proportion of transportation costs

Businesses with high shares of transportation cost will benefit from the fall in oil price

Unit: % of total cost

4.0

2.5

1.5

1.0 0.9 0.8 0.7

Real estate

and

construction

Construction

materials

Agriculture Industrial

chemicals

and raw

materials

Rice and

grain milling

Food and

beverage

Electronics and

Electrical

Appliances

43

Q1/2015

The government’s fiscal position might not improve greatly from lower oil prices. The government will benefit from collecting extra taxes, especially from the excise tax on diesel fuel, because lower prices will encourage greater consumption. Moreover, the oil fund will stay in surplus. But the government still has a heavy spending burden for various programs that benefit farmers hit by lower agricultural prices.

Tourism has slowed. Russia’s economic downturn will affect the tourism sector because its travellers rank third among all visitors to Thailand. Some 23% of Pattaya’s guests come from Russia and 19% of Phuket’s visitors. In these two destinations, tourist arrivals fell 20% in the second half of 2014, partly from the Russian decline. Thailand’s exports will not be greatly hurt by a fall in demand from oil-exporting countries, according to EIC’s forecast. Shipments to these countries account for just 5% of all Thai exports with some still growing (Fig 58). Demand in Saudi Arabia should be monitored, however, because it is the third largest market for Thailand’s auto exports.

60

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

Exports from Thailand to oil exporters.

Crude oil exporters % of all Thai exports Export growth (August-October)

U.A.E. 1.5 4.7

Saudi Arabia 1.2 -22.9

Nigeria 0.8 262.8

Canada 0.7 0.0

Russia 0.5 2.3

Qatar 0.2 26.6

Kuwait 0.2 -14.6

Total 5.1 2.0

Commodity exporters % of all Thai exports Export growth (August-October)

Australia 4.6 2.3

44


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66

58

As

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EIC

summ

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of m

ain

fore

casts

ContributorsSutapa 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.

Sutapa Amornvivat, Ph.D.Chief Economist and FEVP

Chinnawut Techanuvat, Ph.D.Senior Economist

Dr. Chinnawut was the Contributor on Thai economy and politics for Oxford Analytica and has researched in the fields of experimental economics, sociology and education, modelling principally on socioeconomic data. He has his prior training at the Bank of Thailand and Citigroup London (Canary Wharf).

Dr. Chinnawut received his bachelor's degree (First Class Honors with Gold Medal Award) in economics from Thammasat University. A Citibank/FCO Chevening scholar, he completed his master's degree and a doctorate degree from the University of Oxford with his thesis on Thai education and societal changes in the twentieth century.

Athiphat is an economist with broad experiences in the macroeconomic policy area. He has over 4 years of experience working as a senior economist at the U.S. Congressional Budget Office (CBO) in Washington DC. At CBO, his responsibilities include analyzing the impact of macroeconomic policies on the economic and budget outlook of the United States. He also conducted the economic study on the behavioral responses of investors to changes in the tax policy.

Athiphat received a Bachelor of Arts in Economics (First class honors with Gold Medal Award) and a Master of Arts in International Economics and Finance from Chulalongkorn University. He later completed his doctorate degree in Economics from Rice University (USA).

Athiphat Muthitacharoen, Ph.D.Senior Economist

Chutima Tontarawongsa, Ph.D.Senior Economist

Chutima has worked on a variety of research projects related to development economics. One of her projects studies 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. She then went on to receive her PhD from Duke University (North Carolina, USA).

Piyakorn has extensive experiences in the financial industry. Before joining EIC, he worked in private wealth at a leading securities firm in Thailand, where he provided advisory in asset allocation, derivatives, and structured products investment. In addition, he was a member of the pioneer team to establish the first financial futures exchange in Thailand.

Piyakorn received his bachelor's degree in Industrial Engineering from Chulalongkorn University and obtained a Master of Science in Financial Engineering from Columbia University. He is also professionally qualified as a Financial Risk Manager (FRM) and a Chartered Financial Analyst (CFA). Besides his role at SCB, Piyakorn serves as a member of the Board of Directors of CFA Society Thailand.

Piyakorn Chonlaworn Senior Analyst

Contributors

Phacharaphot Nuntramas, Ph.D.Senior Economist

Phacharaphot joined Siam Commercial Bank in the Credit Risk Analytics Division in 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.

Khemarat SongyooAnalyst

Khemarat received his Bachelor of Arts in Economics and a Master degree in Economics from Thammasat University.

Contributors

Tanakorn LimvittaradolAnalyst

Tanakorn received a Bachelor of Arts in Economics (First class honors) from Thammasat University.

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.

Sivalai Khantachavana, Ph.D.Senior AnalysisAreas in Charge: Petroleum and Energy,Transport and Infrastructure

Vorada Tantisunthorn Analyst

Vorada received her Bachelor degree in Economics at Chulalongkorn University (EBA program) with first class honour and Master degree in Finance and Risk at University of Bath with distinction.

Economic Outlook for 2014 and 2015


In focus:Thailand’s competitiveness on the world stage


4

42

45

61

Content





03



Privileges:






Economic Outlook for 2014 and 2015


In focus:Thailand’s competitiveness on the world stage


4

42

45

61

Content





03



Privileges:






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

Macroeconomics

Athiphat Muthitacharoen, Ph.D. [email protected]

Chinnawut Techanuvat, Ph.D. [email protected]

Chutima [email protected]

Phacharaphot Nuntramas, Ph.D. [email protected]

Kasemsook Thaksadipong [email protected]

Khemarat [email protected]

Tanakorn Limvittaradol [email protected]

Vorada [email protected]

Knowledge Management & Networking

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

Alan [email protected]

Ekarat [email protected]

Napat Srichamorn [email protected]

Vipasara Arpaskundait [email protected]

Wanitcha Nateesuwan [email protected]

SORODDA UPAMAI [email protected]

Financial MarketPiyakorn Chonlaworn [email protected]

Strategy and Advisory

Teerin Ratanapinyowong FSVP, Head of Sectorial Strategy [email protected]

Chotika Chummee [email protected]

Nitnara Mintarkhin [email protected]

Pranida Syamananda [email protected]

Sivalai Khantachavana, [email protected]

Srinarin Poudpongpaiboon [email protected]

Supree [email protected]

Tubkwan Homchampa [email protected]

Vithan Charoenphon [email protected]

Alisa Tamprasirt [email protected]

Kaittisak Kumse [email protected]

Kaweepol [email protected]

Nutchaya Arakvichanun [email protected]

Pakanee [email protected]

Pann [email protected]

Therdtum [email protected]

Wisuta [email protected]

Economic Intelligence Center (EIC)E-mail : [email protected] Tel : +662 544 2953

Economic Intelligence Center

Overall Economic Outlook for 2013Bull - Bear: Oil Prices

In focus: Capital inflows…consequences and countermeasures

In focus: New wave of FDI from Japan… implications for Thai economy

Summary of main forecastsContributors:Dr. Sutapa AmornvivatDr. Sivalai Khantachavana

Dr. Phacharaphot Nuntramas Kasemsook Thaksadipong

Dr. Chinnawut Techanuvat Tanakorn Limvittaradol

Dr. Athiphat MuthitacharoenSophon Vijitmethavanich

OutlookQuarter 1/2013

Siam Commercial Bank, SCB Economic Intelligence Center, 9 Ratchadapisek Rd., Jatujak, Bangkok 10900, E-mail:[email protected]

outlook - scbeic · outlook quarter 1/2015 chutima tontarawongsa, ph.d. piyakorn chonlaworn sivalai...

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