Thailand takes steps to reduce its reliance on exports

In the face of weakening global demand, a slowdown in China and falling export revenues, Thailand’s government is looking to improve its export competitiveness and further diversification, in addition to propping up its economy through promotion of domestic tourism and providing support for the agriculture sector. As part of its multi-pronged strategy, the government is also pushing the development of nine super clusters across the nation, which should spur investment in value-added industries, helping to offset rising wages and increase private sector investment.

Rising Dependency

Thailand’s export dependency has soared over the past two decades, with exports’ share of GDP rising from 40% in the lead-up to the 1997-98 Asian financial crisis to roughly two-thirds of GDP in 2015, according to Reuters. Exports have slowed in recent years in the wake of deceleration in the key markets of China and Japan, as well as tumbling global commodities prices, particularly those of rice and rubber. Rice farmers are also suffering after years of lower-than-average rainfall and a drought in early 2016 drained water tables, and left irrigation channels dry (see Agriculture chapter).

According to the Ministry of Commerce, Thai exports declined sharply in late 2015, falling by 8.73% year-on-year (y-o-y) in December – their most dramatic slowdown since floods forced thousands of factories to close in 2011. Thailand’s annual exports dropped for the third straight year in 2015 and recorded their largest decline in six years, 5.8%. The agricultural and industrial sectors were particularly hard hit: the total value of farm exports fell by 7.4% in 2015 as a result of plunging rubber, rice and processed food shipments, while industrial goods fell by 4%, despite a 4.3% increase in automotive exports.

China

Much of this can be attributed to weakening demand in China, where GDP growth has fallen from a 20-year high of 14.2% in 2007 to 6.9% in 2015, the lowest growth rate in 25 years. It averaged 8.7% between 2009 and 2014, according to the World Bank. China’s slowdown will have major ramifications for the Thai economy. Exports to China have already fallen in recent years, dropping by 8% y-o-y in 2014 to hit $25.08bn, and by 5% in 2015 to $23.72bn. The situation is not expected to improve in 2016, and in January the Centre for International Trade Studies forecast exports to China would fall by 1% in 2016 to rest at $23.47bn, representing 10.8% of total exports.

Diversification

In October 2015 Somkid Jatusripitak, former deputy premier and leader of a government economic team tasked with spurring growth, told media the government is planning to shift its focus towards restructuring the economy, diversifying its economic growth drivers away from manufacturing in a bid to reduce dependency on exports.

Citing agriculture and domestic tourism as economic foundations in need of support, Somkid also said that the Joint Public and Private Committee’s provincial units needed to play a larger role in transformation, through collaboration with provincial, district and village units. The government supported this notion in its most recent budget, with funding to provinces and provincial groups set to rise by 42% during the 2016 fiscal year to BT25.2bn ($759m), while rice and rubber farmers will benefit from generous government stimulus packages aimed at boosting incomes and borrowing (see analysis).

Tourism

With Thailand the fourth-largest market for Chinese outbound tourists in 2014, and Chinese visitors recording compound annual growth of 40% between 2009 and 2014, the impact of a Chinese slowdown was expected to extend to Thailand’s tourism sector. However, Capital Economics reported that an additional 3m Chinese visitors travelled to Thailand in 2015. Indeed, international visitor arrivals surged in 2015, rising by 20.4% to hit 29.88m, up from 24.81m, after which the government set bold targets for 2016. The National Economic and Social Development Board forecasts that there will be 32.5m tourist arrivals in 2016, up 9% on 2015, with tourism revenues forecast to rise by 9.8% to BT1.65trn ($49.7bn).

Growth in tourism receipts will be vital, with the industry acting as a major employer within the economically dominant services sector. The World Travel & Tourism Council reports that direct and indirect employment in tourism stood at 5.38m people in 2014, representing 14.1% of total employment, and is forecast to rise by an average of 4.1% annually until 2025 to support 8.14m jobs, or 20.2% of employment.

However, with global volatility lending uncertainty to future arrivals, promotion of domestic tourism is a priority for the government. In January 2016 the Tourism Authority of Thailand (TAT) announced that it had targeted an 8% rise in domestic tourism revenues for the year, as it unveiled a promotional campaign. TAT governor Yuthasak Supasorn said that the authority is also hoping to see a 6% spending increase by domestic travellers, to BT5000 ($151) per trip.

Agriculture

Support for the struggling agriculture industry is another top priority, and in addition to stimulus programmes including soft loans and one-time cash payments for rice farmers, as well as a planned stimulus package for rubber farmers (see analysis), the government is working on a 20-year strategy to diversify the agriculture sector.

The strategy will focus on reducing the country’s reliance on rice and rubber exports. Under the government’s Pracha Rat strategy, officials are also encouraging businesses and the government to work closely together in pushing agricultural innovation, through development of new processing facilities, value-added farm products, and improvements to existing irrigation sectors. In February 2016 the Prime Minister’s Office told media that the next agricultural budget would intensify investment in such projects.

Super Clusters

The government is also deploying a series of programmes aimed at boosting domestic growth and investment, as well as improving export competitiveness, with Somkid arguing that improvements to productivity and development of value-added manufacturing industries is a top priority for the government. Chief among the strategies to boost export competitiveness will be development of super clusters, new economic drivers specialising in high-value goods, and set to play a key role in shifting from mass-production manufacturing to highly skilled production requiring fewer workers. In September 2015 Thailand’s cabinet announced it had given preliminary approval to the BOI’s Super Cluster strategy, which provides significant investment incentives for new investments based on their activity and location.

The board identified four categories of industry eligible for enhanced benefits and incentives, including high-end automobiles and automotive parts, electronic and telecoms equipment, environmentally friendly petrochemicals, and digital products. Labour-intensive industries such as agri-processing and textiles will be encouraged by the government’s network of 10 planned special economic zones (SEZs), which will be located along Thailand’s borders and benefit from ample regional labour supply. Investments in super clusters and SEZs will both benefit from import duty reductions and tax holidays, among other incentives (see Trade & Investment chapter).

Infrastructure

Tax incentives aimed at targeting value-added investment in new manufacturing will provide considerable support, though major infrastructure investment could act as the most significant shot in the arm for lagging investment. Indeed, in a 2009 report examining the country’s export dependency, analysts at Siam Commercial Bank argued that investment in major new infrastructure projects is the best method through which to reduce export dependency, due to the knock-on benefits offered by an expansive, multi-year mega-project. “What is now needed are large public infrastructure spending projects which have a higher propensity to ‘crowd in’ additional private investment,” said the report.

Recent government announcements appear to support this argument. In November 2015, Arkhom Termpittayapaisith, the minister of transport, announced that the government had 20 infrastructure projects worth a combined BT1.8trn ($54.2bn) in the works, covering rail, roads, air transport and ports development. According to Arkhom, the projects would be all be launched by 2018, with financing derived from the government budget, borrowing and public-private partnerships. Finance minister Apisak Tantivorawong said that the government had allocated BT130bn ($3.9bn) for new infrastructure projects in 2016. Chief among them is the Sino-Thai rail project, worth BT468bn ($14.1bn), which will span 873 km and connect Nong Khai on the Thai-Laos border with Bangkok. Thai authorities agreed to the rail deal, which is expected to bolster GDP in connected countries by a cumulative $375bn, in August 2014, and in December 2015 Chinese and Thai authorities held an official signing ceremony for the project.