Monthly Economic Insight Prepared by : TMB Analytic Date: 21 May 2018
Executive Summary Synchronized global economic growth remain intact. However, some economies especially Eurozone members start to show some signs of slow-down in activities as reflected by negative economic surprise index. Moreover, trade tension between the US and China could possibly threaten global trade growth and affect global economy. Nevertheless, continual expansion in the US economy could lead to more tightening monetary from the Fed which raise a probability of 4 rate hikes. As a result, Fed s 4 rate hikes assumptions among some market participants could further drive bond yields such that UST-10Y yield could test 3% psychological level and potentially trigger foreign outflows again. In March, Thai economy continued to expand, driven mainly by solid growth of exports and service sector. Private consumption continued to expand especially from durable consumption and services, while private investment contracted strongly albeit elevated business sentiment. March exports expanded at slower pace of 7.1% due to high base of March 2017 export, which amounted to 22.4 bn USD. Only 33% of export growth driven by quantity. The major sectors contributed to export growth were energy and industrial products ( electronics/ computer & parts, electronics/ Home appliance, and vehicle). Exports to ASEAN5, CLMV, and USA registered 2-digit positive growth, whereas exports to China shrank 8.7%. However, US trade protectionism policies, (the restrictions on the importation of steel and aluminum) and US-China trade war may present risks to Thai exports. -1-
Executive Summary March MPI increased by 2.6%yoy with capacity utilization rate of 76.06%, it was mainly supported by domestic demand in car, sugar, medical & equipment, petroleum, plastics, meat and cooking oil. However, fashion product, jewelry, rubber product, seafood dropped due to slowdown in export. Foreign tourists increased by 15.4%yoy to 10.6 mil. with occupancy rate of 77% in Q1/2018. The key markets were China (+30.2%), Europe(+12.8%) and Asian (+8%) respectively. Thailand tourism confidence index was 101 point in Q1/2018 remained stable compared with the previous quarter. Because of tourism growth, the most entrepreneurs will increase target sales in the next quarter. April inflation rate was 1.1%. Price increase was from higher energy prices as well as recovering fresh food prices. 2018 Inflation is expected to average at 1.1% as energy prices are expected to rise due to oil-supply disruptions and strong demand for oil. The GDP growth of the 1 st quarter of 2018 announced by NESDB was 4.8% yoy or 2.0% qoq (seasonally adjusted) driven by both domestic demand, namely private consumption and investment, as well as external demand, i.e. exports of goods and services. -2-
Executive Summary Year-to-date, Thai baht appreciated against the USD by almost 1.5% due to weak US dollar and hefty current account surplus (from exports of goods and services). Though, Thai baht recently depreciated above 32.00 THB/USD due to strength in US dollar index and dollar-demands due to foreign outflows, concerns over US twin deficits (Trade deficit and Budget deficit), economic ramifications from global trade war and US political risk could keep suppressing the US dollar over medium to long term. Additionally, improved economic fundamental such as resilient economic growth, robust current account surplus among Asian economies should attract fund inflows further and boost Asian currencies strength against USD. Thai baht could reach 30.75 THB/USD by the end of 2018 and could test 30 THB/USD mark, depending on how strong the fund inflow will be. However, financial market especially FX market could face increasing volatility environment from uncertainty over global trade policy as well as major central banks monetary policies which will gradually reduce liquidity in the market and trigger assets repricing. -3-
Global Economy
Synchronized Global Recovery Boost Global Trade US EU GDP Growth (% YoY) -2.8-4.5 +2.8 +2.3 Unemployment (%) 9.3 4.0 9.6 8.6 Pre-Crisis Global Trade Value Trillion 30 USD 20 8.6 3 Months forecast JP +6.6 4.3 4.0 10 32 25 32 26 9 Months Actual JP -5 +1.3 09 18F 5.1 2.9 09 18F 0 '08 '09 '16 '17 Source: Bloomberg, CEIC, IMF, World Bank and TMB Analytics -5-
US Trade Policy could Disrupt Global Economic Growth Trend United States Eurozone US trade protectionism could spark global trade war and create volatility in economic projection Inflation could edge toward Fed s target from wage growth, tight labor market and rises in commodities prices Economy is projected to expand 2.8% in 2018, higher from +2.3% in 2017 due to Tax cut policy and US spending plans Source: Bloomberg, IMF WEO, CEIC and TMB Analytics Latest Releases Activity 2.3% QoQ SAAR Real GDP 1Q18 Price 1.9% YoY SA Core PCE Mar 18 Labor Mkt 3.9% Unemployment Rate Apr 18 Inverted yields curve accurately predict previous 7 recessions 5.0 % Spread between UST-10Y and UST-3M 4.0 3.0 2.0 1.0 0.0-1.0 US Recessions -2.0 Jan-67 Jan-77 Jan-87 Jan-97 Jan-07 Jan-17 UK economy expands without significant impacts from Brexit which could help BoE to hike rate this year Continual expansion among manufacturing and service sectors (PMI above 50) sustain EU s growth Growth in 2018 is expected to be around +2.3%, however, global trade protectionism could be a major risk for economic outlook 200 150 100 50 0-50 Decreased Increased Unchanged EU Activity 2.5% YoY SWDA GDP 1Q18 UK Activity Industry -100 Citi Economic -150 Surprise Index -200 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Latest Releases 1.2% YoY SWDA GDP 4Q17 54.7 EU Service PMI Apr 18 Slews of worse-than-expected data spark some concerns IFO German Business Climate From previous reading -56.8 110 105 100 95 90 85 80 75 70-6-
Trade Tensions could Impact Economic Expansion in Asia Japan China Economy is likely to sustain above 1.0% expansion in 2018, however, trade protectionism could affect exports growth Inflation and consumer spending gradually improve which could prompt the Bank of Japan to reduce asset purchases program next year Strong yen could be a headwind for Exports and ongoing recovery Latest Releases Activity 1.6% QoQ SAAR Real GDP 4Q17 Price 1.1% YoY SA CPI Mar 18 Export +2.1% YoY NSA Mar 18 BoJ could taper their QQE as inflation moves toward 2% target 4.0 % GDP is likely to grow by 6.6% in 2018 where growth story could be altered from quantitative-focus to qualitative-focus Economic & financial reforms could prevent hard-landing and retain growth Nevertheless, trade rhetoric between the US and China which might not escalate to trade war but still negatively impact trade outlook Latest Releases Activity 6.8% YoY SWDA GDP 1Q18 Price 1.8% YoY CPI Apr 18 Industry Higher profits reflects higher producer prices 52.9 Caixin Serv. PMI Apr 18 40 % 8.0 % Tax hike Japan Core CPI YoY BoJ s 2% target Japan CPI YoY -1.0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Source: Bloomberg, IMF WEO, CEIC and TMB Analytics 3.0 2.0 1.0 0.0-20 Decreased Increased Unchanged 20 0 China Industrial Enterprises total profits YoY (LHS) China PPI YoY (RHS) -40 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 From previous reading 4.0 0.0-4.0-8.0-7-
Warning Signs: Global Synchronized Slowdown? As All PMIs Drop Sharply EU manufacturing sector faces some headwind? Industry activities in Asia also start to slowdown 65 60 60 US Mfg. PMI 59.3 55 Japan Mfg. PMI 53.1 55 50 EU Mfg. PMI Expansion Contraction 56.6 50 China Mfg. PMI 51 45 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Activities in EU services sectors tank sharply 65 60 58.8 US Services PMI 55 54.9 EU Services PMI Expansion 50 Contraction 45 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Source: Bloomberg, CEIC and TMB Analytics 45 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Asia Services will eventually face contraction? 60 55 China Services PMI 52.3 50.9 50 Japan Services PMI 45 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18-8-
Global Monetary Policy Tightening could Lead to Thai Market Liquidity Squeeze Central Banks Balance Sheet Trillion USD 15 13 11 9 Fed s balance sheet expansion caused acceleration in Thai market liquidity BOJ s Balance Sheet Future balance sheet reductions will decelerate Thai market liquidity Trillion THB 3 2 7 5 3 1 Thai Market Liquidity (Cumulative foreign net inflows) ECB s Balance Sheet Fed s Balance Sheet '08 '10 '12 '14 '16 '18 '20 1 0 Source: Bloomberg, Fed, BoJ, ECB and TMB Analytics -9-
Why? No More CB s Money Via QE in 2019 FED Short-term rate: Fed Fund Dovish Hawkish 1H/2018 2H/2018 1H/2019 2 Rate Hike 1 Rate Hike 1 Rate Hike $ -20 bn $ -30 bn $ -40 bn $ -50 bn $ -50 bn B/S run-off ECB Short-term rate: Refin Rate Dovish Hawkish 0 Rate Hike 0 Rate Hike 0 Rate Hike Start QE Tapering *we expect 1 st hike in 2019 EUR 30 bn EUR 15 bn EUR 15 bn BOJ 0 Rate Hike 0 Rate Hike 0 Rate Hike Short-term rate: PR-Balances Dovish Hawkish Source: Bloomberg, Fed, BoJ, ECB, CEIC Bloomberg and and TMB Analytics JPY 80 Trillion / year JPY 80 Trillion / year JPY 40 Trillion / year -10-
When Central Banks Unplug Money Bonds Seem to be Unnerved 500 Index Trillion 16 USD 490 Global-Aggregate Bond Total Return Index (LHS) 15 480 Fed+ECB+BOJ Balance Sheets (RHS) 14 470 13 460 12 450 11 440 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Source: Bloomberg and TMB Analytics 10-11-
Tightening Liquidity and Bond Rout will Drive Yields Higher As UST-10Y Marches Near 3%... Sign of Trouble Ahead? Correlation Coefficient 100% 80% 60% 40% 20% Positive relationship between yield changes and stock returns When UST-10Y Yield below 4%, rising yield has been associated with rising stock prices Rolling 2-year correlation between all US Stock returns (Wilshire 5000 Index) and Change in UST-10Y yield 0% -20% -40% -60% -80% Negative relationship between yield changes and stock returns -100% 0 2 4 6 8 10 12 14 16 UST-10Y Yield (%) Source: Bloomberg and TMB Analytics -12-
Warning! Risk of Fund Flow Reversal and Volatile FX Market In 2017 Foreign fund continuously flew into Emerging market and Thailand What s about 2018? 150 100 50 bn. THB Inflows to EM from unclear Trumponomics ST Bonds (TTM < 1y) LT Bonds Net Equity Foreign Flows Fading s Fed s Hike probability MPC HOLD rate 2018YTD Net Inflows = -12.3 bn. THB Equity = -92.7 bn. THB Bond = +80.4 bn. THB 0-50 -100 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Inflow Factors Outflow Factors Fund Flow 2018 Source: Bloomberg, CEIC and TMB Analytics GDP Robust Thai economy General Election Rate TARIFF CB s tightening monetary policies & 4x Fed Hikes Trade Protectionsim* -13-
Still More Demands for Thai Baht in 2018 2017 FDI 10% Foreign net buy 10% EEC, BOI attract more investment Increasing EPS growth of listed firms & Excessive liquidity in the market 2018 Outlook Inflow Net Export Services 31% Continual expansion of Thai tourism Surplus Net Export Goods 15% No More Robust Trade Surplus Outflow Outflow Deficit TDI 22% Growing economy lures more investments from Thai firms Inflow Thai net buy 13% Brightening outlook of Foreign Investment Fund Industry Source: Bank of Thailand, CEIC and TMB Analytics -14-
Thai Baht is a New Safe Haven as Domestic Fundamentals Lessen External Impacts 35.50 34.50 33.50 32.50 31.50 30.50 29.50 Trump started presidency term Sell USD Theme GDP Source: Bloomberg and TMB Analytics Fed hiked policy rate by 25bps Macron won French election Fading EU political risk ECB s unintentionally signal QE tapering? 17Q1 17Q2 17Q3 17Q4 Strong THB Factors Robust Thai economy Geopolitical Risks USDTHB 2017 VS ECB finally tapered QE and extended QE until Sep 2018 1 Fed Hikes in December 2017 & Tightening dollar liquidity TARIFF Fed 1 st hike of 2018 under Jerome Powell 31.20 Fund inflows from improving economy The End of ECB s QE? 18Q1 31 18Q2 Weak THB Factors CB s tightening monetary policies Pro-growth Trumponomics* & Trade Protectionism USDTHB 2018 3 Fed s rate hikes Continual fund inflows High C/A surplus Dollar liquidity squeeze US Political risk 30.50 18Q3 3 Hikes & Robust Thai Economy 30.75 period-end 2018 Dollar Liquidity Squeeze fuels Baht selling 18Q4-15-
Warning! Tightening Interest Rate Gap Mean Decreasing Swap Points THB/USD 0.4 Swap Points = Forward Price Spot Price Swap point 3M Swap point 6M Repo rate - Fed Fund rate % 4.0 0.3 3.0 0.2 TMBA forecasted negative swap point in May 17 2.0 0.1 1.0 0.0 0.0 If RP > FFR => Positive Swap point -0.1 If RP < FFR => Negative Swap point -1.0-0.2 Exporters favor Positive Swap point Importers favor Negative Swap Point -2.0-0.3 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18-3.0 Source: CEIC and TMB Analytics -16-
2018 Key Events to Keep Eyes On EU Political Uncertainty Trade Protectionism Trio-CBs* Ready to Tighten Policy Robust Thai Economic growth Likelihood Low Medium High Medium Severity* *Impact to financial market EM Fund Flows IN OUT OUT IN THB Bullish Bearish Source: TMB Analytics *Trio-CBs: the Fed, ECB, and BoJ -17-
Domestic Economy
Thailand s GDP 1Q18: +4.8%yoy, +2.0%qoq (sa) GDP Private C (51%) Private I (18%) Public C (15%) 4.8 3.9 3.6 3.2 3.1 1.7 1.9 0.5 1Q18 2017 Index 14Q1 = 100, SA 115 110 105 100 95 90 2014 2015 2016 2017 2018 Non-durable Durable Services 200 Private Consumption Investment Public I (6%) -1.2 4.0 160 120 Export Goods (58%) Export Services (19%) Import Goods (55%) 4.7 5.0 5.6 8.5 9.4 9.3 80 120 110 2014 2015 2016 2017 2018 Private-Construction Private-Equipment Public-Construction Public-Equipment External 145 Import Services (12%) -0.4 7.8 100 105 %yoy ( ) indicates share to total GDP in 2017 Source: NESDB and TMB Analytics 90 2014 2015 2016 2017 2018 Ex-good Im-good Im-service Ex-service (RHS) 65-19-
Significant Drop in Private Investment, Albeit Elevated Business Sentiment Robust Service and Durable Consumption Strong Contraction in Private Investment %yoy 20 Index 85 10 80 0 75-10 70-20 65 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Services Durable Cons Confidence (RHS) %yoy 5 Index 2 50-1 -4 47-7 44 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 53 Private Investment Biz Sentiment (RHS) Farm Income Dropped Mainly from Price Effect %yoy 45 30 15 0-15 -30 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Source: BOT and TMB Analytics Price Quantity Farm Income Private consumption continued to expand in almost every product type especially in service and durable consumption, while consumer confidence remained elevated. Farm income continued to be pushed down by depressing agricultural price due to strong production growth especially rubber and palm oil. Private investment faced the strongest contraction since 2016 mainly from drops in imports of capital goods and domestic machinery sales despite optimistic business sentiment. -20-
%YoY Thailand Industrial Outputs Continued to Grow Up Manufacturing Production Index 2018Q1 Petroluem Agricultural Machinery Autopart Healthcare Consumer Goods Vehicle Chemical Food Papers & Printing Electronic/Computer & Parts Steel Construction Material Packaging Electronic/Electric Home Appliance Rubber Product Furniture and Household Fashion Products Plastics Beverage Source: OIE and TMB Analytics Mar-18-20 -10 0 10 20 30 40 %YoY Q1/2018, MPI expanded by 3.9%yoy driven by petroleum, agri. machinery, vehicle and part, healthcare, consumer goods and chemical. MPI increased by 2.6%yoy with capacity utilization rate of 76.06% in March, it was mainly supported by domestic economy recovery. 20 15 10 5 0-5 -10-15 Manufacturing Production Index (MPI) By Export Share March car, sugar, medical & equipment, petroleum, plastics, meat, cooking oil March MPI (Export 30-60%) MPI (Export < 30%) MPI (Export > 60%) fashion product, jewelry, rubber product, seafood Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18-21-
No. Tourist Arrivals (Mil. person) (%) Occupancy Rate International Tourist Arrivals Still Gradually Increase Q1/2018, Foreign tourists increased by 15.4%yoy to 10.6 mil. with occupancy rate of 77%. The key markets were China (+30.2%), Europe(+12.8%) and Asian (+8%) respectively. Thailand tourism confidence index was 101 point in Q1/2018 remained stable compared with the previous quarter. Because of tourism growth, the most entrepreneurs will increase target sales in the next quarter. Foreign Tourist Arrivals Still Grown Up No. Foreign Tourists in 2018Q1 by Market (%YoY) 3.8 85 unit: thousand persons 3.5 3.3 80 75 (+30.2%) (+12.2%) (+8.0%) (+12.9%) (+16.1%) (+4.8%) (+3.4%) (-3.2%) 3.0 70 2.8 65 2.5 60 2.3 55 2.0 50 Foreign Tourist Occupancy Rate Source: MOTS, The Tourism Council of Thailand and TMB Analytics -22-
Thai Export..Continuing Expand in All Major Markets and Products What is 2018 outlook for Thai Export? Markets China +8.0 (2017 +23.7) CLMV +7.5 (2017 +13.1) USA EU Japan +7.0 (2017 +8.3) +5.5 (2017 +7.6) +5.0 (2017 +8.9) ASEAN 5 +3.5 (2017 +6.0) Total +4.8 (2017 +9.9) Continual economic growth supported by fundamental and high technological development Strong economic expansion Strong domestic consumption Recovery in household consumption and business Growth in domestic consumption and industrial production Continual economic and export growth from a raise in oil price Continuing Growth of trading partners Oil Price still affect on export growth Computer & Parts +6.5 (2017 +8.9) +6.5 (2017 +20.9) +6.0 (2017 +17.0) Electricals Appliance Steel Chemical Rubber Food +6.0 (2017 +16.1) +5.0 (2017 +37.9) +5.0 (2017 +6.8) Products Strong consumption supported by digital economy Solid expansion in global manufacturing production and major economies consumption Continued consumption growth from major trading partners Rising demand for tire mfg from China Expect better consumption, especially form EU and USA Sources: Ministry of Commerce and TMB Analytics -23-
Sources: Ministry of Commerce and TMB Analytics -24-
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Sources: Ministry of Commerce and TMB Analytics -26-
US-China-Thailand Trade Relations China Exports to US Total Export Value USD 385 bn Electronic/ Computer & Parts: cell phone, computer parts, CPU (50%) Toys and Plastics Products (8%) Furniture (7%) Footwear and Garments (3%) The color below represents Thai-China supply-chain products Total Export Value USD 26 bn US Exports to China Total Export Value USD 130 bn Electrics and Electronics (21%) Aircraft (12%) Agricultural products (Fruit and beans) (10%) Total Export Value USD 29 bn Thai Exports to US Electronic/ Computer & Parts: Monitors, routers, HDD, printers, PC parts (48%) Rubber: Natural Rubber and Polymer Products (11%) Fashion Products: Jewelry(4%) Foods: Shrimp and Tuna (4%) Beverage: Vegetable & Fruit Juice (3%) Thai Exports to China Electronic/ Computer & Parts: IC, camera, LCD, computer parts (23%) Rubber: Natural Rubber and Polymer Products (20%) Chemical: Aromatics and Chemical Base (10%) Other Agriculture: Woods(6%) Note: ( ) represents share of total export value Sources: Trade Map, Ministry of Commerce and TMB Analytics -27-
1,333 Chinese products under proposed 25% of tariff US-China Trade War: Impact on Thai Exports China exports to US of Goods subject to proposed tariffs( about USD 50bn) Televisions (8528) Printers (8443) Electrical Circuit Apparatus(8536) Pumps (8413) Motor Vehicles (8703) Computers (8471) Heavy Machinery Parts (8431) Medical Instruments (9018) Semiconductors (8541) Rolled Aluminum (7606) US exports to China of Goods subjected to proposed tariffs ( about USD 53 bn) Actioned on128 US Goods (USD 3 bn) 25% on Pork products (0203,0206) and Aluminum scrap (7602) 15% on Fruit and nut products (0801-0813, 2204, 2207, 1211) and Steel piping (7304) Additional 106 US goods (USD 50 bn) 25% on 14 additional categories, including soybean, cars, chemicals, some type of aircraft and corn products. Sources: Ministry of Commerce and TMB Analytics Possible Exposure to Thai Exports from US-China Trade Wars Impact from US proposed 25% tariff on 1,333 Chinese products Key Major Affected Products HDD (37%) Electrical Machinery (17%) Electronic Office Equipment (16%) Industrial Machinery (9%) Consumer Electronics (6%) Electronic Parts (4%) Other Machinery (3%) Electrical Components & Equipment (2%) Note: (share%) is share of product under proposed of US 25% tariff exports to China Thailand could benefit from Thai pork products export to China (new exporting market). Current Existing Markets Hong Kong (42%) Laos (35%) Malaysia (14%) Myanmar (7%) There could be a trade opportunity for Thai exporter to ship more goods to US such as Electronic/ Computer & Parts (Monitors, routers, HDD, printers, PC parts), which amount to 48% of total Thai exports to US. -28-
Expect More Public Investment to Drive Growth In 1Q18, investment spending increased by 7% from the previous quarter due to speed-up disbursement measure and we expect over 70% of disbursement rate for FY2018. Stronger disbursement is expected for mega projects in the second-half of Y2018, supporting private sector confidence. Capital Budget Disbursement Capital Budget Disbursement Rate Billion THB 60 50 2015 2016 2017 2018 29% 6MFY18 Disbursed 40 30 20 70% FY17 Disbursed 10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Fiscal Policy Office and TMB Analytics -29-
Policy Rate Normalization is Expected to Begin Later This Year Inflation Rate Reached BOT s Target for the First Time since Early 2017 Avg17 = 0.7% Apr18 = 1.1% April inflation rate was 1.1% due to energy price increase as well as recovering fresh food prices. It is the first time inflation hit BOT target since early 2017. As energy prices are expected to rise further due to oil-supply disruptions and stronger demand, inflation is expected to gradually rise and averaged at 1.1% this year. However, lower-than-expected fresh food prices could cause delay in inflation rate recovery. 1.5% Policy Rate is Expected in the First Half of 2018 to Accommodate Economic Recovery % We expect the rate normalization to begin later this year as global interest rate is on an upward trend following 3 fed rate hikes in 2017 and expected other 3 hikes this year. Thai policy rate is forecasted to increase to 1.75-2% at the end of 2018. However, there is still concern over recovery of private investment, which can delay Thai rate normalization. Source: MOC, BOT, CEIC and TMB Analytics -30-
THANK YOU Disclaimer This document is issued by TMB Analytics, a division of TMB Bank PCL. All analyses are based on information available to the public. Although the information contained herein is believed to be gathered from reliable sources, TMB makes no guarantee to its accuracy and completeness. TMB may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Opinions or predictions expressed herein reflect the authors views, not that of TMB, as of date of the analysis and are subject to change without notice. TMB shall not be responsible for the use of contents and its implication.