Thailand is one of the key beneficiaries of China's early border reopening and an expected Chinese tourism rebound. With the strong tourism momentum, we now expect 25 million foreign tourists this year, compared to 19.2 million in a previous forecast.
Our sensitivity analysis shows that every 1 million tourists are expected to raise GDP and the current account balance by about 0.2 percentage points.
Upward GDP revisions: We have revised upward our GDP growth forecast for 2023 from 2.8% to 3.6% to reflect the potential increase in tourist arrivals, helped also by higher than expected numbers from Europe, and higher domestic consumption from the positive spillover effect from a rebound in the services sector. Exports of goods will be a drag on growth for most of the first half of 2003, given the weak global demand.
Current account turnaround: The higher tourism assumption would improve the current account forecast from a deficit 1.9% of GDP in 2022 to a smaller surplus 1.3% of GDP in 2023. Higher oil prices and freight costs would be the key risk to this forecast. The peak dollar and expectation of a strong current account turnaround should support the baht in the short term.
We note that with large interest rate differentials, the baht will be volatile. We expect a weak current account in the second and third quarters of 2023, given the expected weak exports, seasonally weak tourism and dividend repatriation.
Uneven recovery: We expect Thailand's economic recovery to be highly uneven. Retail sales and other services sectors will benefit from the strong tourism recovery. However, as foreign tourism revenues are highly concentrated in only a few provinces -- 95% of the total goes to Bangkok, Phuket, Surat Thani, Chon Buri and Chiang Mai -- the benefits of the tourism recovery will be highly uneven. Meanwhile, exports of the manufacturing sector will be under pressure.
We expect the economy to be soft in the first half of 2023, given the export drag and slow tourism recovery. The recovery should pick up pace in the second half as the global economy begins to recover and more tourists, especially from China, start to return.
GLOBAL HEADWINDS
While we expect a strong rebound in the tourism and services sectors, the global economic slowdown is expected to create strong headwinds on exports and production. Net exports, which had been a strong contributor to growth in Thailand in the past, started to contract in recent months.
We expect exports to continue to be a drag at least in the first half of 2023, before normalising as the global economy recovers and exports to China resume expansion.
Given our baseline assumption of a (mild) recession in the major economies, exports are expected to remain under pressure. We expect exports to be a drag with a 1.8% contraction in real terms for the whole year. We think things could get worse before they get better with a large contraction in the first half and potentially strong recovery in the second half as the global economy recovers and China reopens.
Gradual normalisation: We have kept our inflation forecast largely unchanged at an average of 3.3% in 2023, but admittedly there is an upside risk to inflation, given the strong recovery in tourism.
The rapid recovery in tourist arrivals could mean supply constraint issues as many operators went out of business and workers migrated out of the sector when foreign tourists all but vanished until early 2022. Most importantly, a labour shortage and wage pressure could become an issue.
We expect the Bank of Thailand to continue its gradual normalisation, raising rates by 25 basis points at each of the next four meetings with a terminal rate of 2.25% by the third quarter of 2023. We think the central bank is still concerned about fragile household balance sheets and uneven recovery. The risk on rates is tilted to the upside if the tourism recovery is proven to be inflationary.
RISKS TO RECOVERY
Despite our more positive view on the recovery, there are several key risks to the outlook. First, there is a risk that the disruption from China's reopening turns out to be more severe and takes longer than we expect. For example, the Covid-19 outbreak could last longer than we expect, or there can be new variants that are more deadly or can evade antibodies, which would derail what seems to be herd immunity in Thailand and threaten the domestic economic recovery.
Second, if the global economic slowdown turns out to be more severe or last longer, Thailand's recovery would be affected both by weaker exports and weaker tourist demand. Finally, a sharp rise in energy prices and global inflation would be severe in terms of a trade shock. This would have a strong impact on inflation, the current account and interest rate decisions.
Election uncertainty: The general election, due to take place in May, is one of the key uncertainties in 2023. The election outcome is binary. On the bright side, a stable and effective government would likely bring about new ideas for reforms, pro-growth policies, and policy proposals to promote long-term growth and address structural issues Thailand is facing. While detected at the macro-level data, pre-election spending can boost the local economy.
However, given the country's track record, political accidents and uncertainty cannot be completely ruled out from Thai politics. A new coalition could face an uphill battle given the context of a weaker external environment.
