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New Normal
Sethaput Suthiwart-Narueput
Sirikanya Tansakun
October 2015

Thailands economy is recovering (very)

slowly. But it is a recovery to a lower
and slower growth trajectory. Recovery
does not mean that we are going back to the
way things were used to be. We have been
through this before. Like other crisis
countries, Thailand took a big hit during the
1997 Asian crisis. It took 5 years for the
level of economic activityas measured by
real GDP excluding the effects of inflation
to recover back to what it was pre-1997.
But as can be seen in Figure 1, it was a
recovery to a slower and lower growth
trajectory. The economy never managed to
hit the kind of growth rates it experienced
before on a sustained basis. During our
boom years between 1985-1995, growth

averaged 9%. It has dropped to 5%

between 2000-2010 and to 3% since 2010.

Why Thailand faces a new normal

Things really are different. Table 1
provides a list of salient indicators which
illustrate how the landscape has changed
for Thailand over a variety of dimensions
since the last decade. Some changes are
cyclical, others are structural. Some are
tailwinds, but most are headwinds. On
balance, Thailand faces a much more
challenging environment.
This note draws from a previously issued report in

Figure 1 Thailands growth trajectory over the ages.

Real GDP Level
unit: mln. Baht

5% p.a.
Post crisis

9% p.a.
Boom years



Source: NESDB, Thailand Future Analysis

Challenging fundamentals
We start with the basics. How much an
economy can produce ultimately depends
on how many workers there are and how
productive they are. As is well known,
Thailand is aging very rapidly. The growth
in the labor force 1 is dropping from a
compound average annual growth rate
(CAGR) of 1.2% over the last decade to only
0.2% for the current decade. The labor
force is slated to actually decrease (-0.6%)
over the next decade.2 Neither have we
done a good job of making sure that the
fewer workers we have are that much more
Labor productivity growth
dropped from 2.3% to 1.7%. In a previous
report, we detailed some of the reasons for
our lackluster productivity growth, but one
significant contributor has been our slower
growth in investment.3


3% p.a.
Political turmoil



Wages have increased sharply outpacing

productivity, meaning higher unit labor
costs and lower competitiveness.
Average private sector real wages
(excluding inflation) were essentially flat,
growing by a mere 2% CAGR during the
previous decade. By contrast, they have
grown by a whopping 10% per year since
2011. 4 While unit labor costs actually
decreased by 1.0% per year CAGR over the
previous decade, they have been increasing
by nearly 5% per year since then. By
contrast, unit labor costs in Vietnam grew
by only 1% during the same period.
Greater competition from others in the
region. Twenty years ago, Vietnam was
hardly on the global radar screen. Since
then, the global share of exports and FDI of
Vietnam has increased markedly. FDI into
Vietnam increased from 30% of Thailand in
2000 to 70% in 2013. Exports have
increased to 70% of those from Thailand.
All this is from an economy that is still only
about half the size of Thailands.

1 working age population, aged 15-60

2 Neither can we expect to increase labor force

participation much as Thailandunlike many other

countriesalready has very high female labor force
participation rates (64% of female working age
population), outpaced neighboring countries like Malaysia
(44%), Indonesia (51%) and Philippines (51%).
3 See our previous report ,7 reasons why our labor
productivity is low

4 For further details regarding the increase in wages,

please see our previous report, TFF The 300 baht

minimum wage: What has happened, what needs to
happen, Policy Watch Aug 2014.

Subdued demand outlook

The outlook for domestic demand is not
sanguine. Almost 40% of our labor force
tied to the agricultural sector. But growth in
commodity prices (notably rice, rubber and
sugar cane) and farm incomes will likely be
much more subdued in the present decade,
due to slowing growth in China, high rice
stocks, lower oil prices and a stronger USD.
High levels of household debt (85% of
GDP, up from 46% at the beginning of the
previous decade) also suggest much more
urbanization rate remains markedly low
for its level of income and development and

is among the lowest in the region, second

only to Lao PDR and Cambodia.5 Much of
the superior economic performance of the
Indonesias and Chinas of the world have to
do with the rapid growth in their urban
middle classes, a phenomenon that has
substantially lagged in Thailand.
What about external demand? Exports of
goods account for about 62 percent of
Thailand's GDP. Consequently, anything
that affects Thailands export outlook has
Thailand saw export growth in USD in
double digits, with a 12% CAGR during the
previous decade. It has dropped to only 1%

Table 1 Then v. Now: The changing landscape facing Thailand in the previous
v. current decade.

If growth then period CAGR, if stock, end of period..
Labor Force comparing between Then (2000-2010) and Now
(2011-2020), Governance Indicators: Then=2000, Now=2013.
Global FDI share: Then=2000, Now=2013

World Bank (2014), East Asias Changing Urban

Landscape: Measuring a Decade of Spatial Growth
Washington DC.

Sector specific issues and constraints

Many of our key sectors face significant
headwinds going forward. Electronics
(15% of total exports) has long been a key
driver of our headline export growth but
has lagged the region. While electronics
exports from Thailand grew 20% since
2009, those from Vietnam have grown 10fold.
Petrochemicals (6 % of total exports) are
likely to face increased competition on the
export front over the next petrochemical
cycle as markets which used to be
importers such as China and India have
significantly added to their own capacity
and are now becoming net exporters in
their own right.
Real estate and construction account for
11% of GDP. The stock of oversupply of
housing units in Bangkok and the vicinity is
at an all-time high and will weigh on the
growth outlook for the sector going
forward. Autos and automotive parts (16
% of total exports) still suffer from a
substantial overhang caused by the first car
policy, and tightening credit standards.
Tourism has long been an outperformer
and mainstay of the Thai economy. While
recent tourism numbers have come on
overwhelmingly by tourists from China.
While significant in number, each Chinese
tourist spends significantly less (roughly

Figure 2: What the New Normal looks like.

What the new normal will look like.

I have been anxious about the Feds whipping our
actual 1.5% donkey in the mistaken belief that it
was a 3% racehorse. The danger was, as I said,
that they would keep on whipping it until either
the donkey turned into a racehorse or dropped
dead. Death from overstimulation

- Jeremy Grantham co-founder and chief investment

strategist of GMO, a global investment management firm

Slower GDP growth: From "5" to 3" A

drop of one to two percentage points in
trend or long term average GDP growth is
likely. The drop in the growth in the labor
force (1 percentage point) and labor
productivity (0.6 percentage
would, other things being equal, already
tend to shave off 1.6 percentage points in
headline GDP growth. Such a drop is also
broadly consistent with the slower outlook
for export and consumption growth going
Slower export growth: from double to
low single digits, due to the various
structural factors cited in the Box: A New
Normal for Thai Exports.
Less fiscal space: from free spending
populism to more belt tightening. We
have used up a lot of the room in our
budget. Expenditures which are "difficult to
cut" (e.g., wages, debt service, legally
mandated transfers and the like) account
for 71% of tax revenue. While Thailand
does not have a high likelihood of
experiencing a fiscal crisis, it may
increasingly experience a "slow burn" of
being unable to fund the kinds of
investment spending it really needs.
Not just slower growth, but dirtier. Total
annual CO2 emissions have increased
nearly three-fold during the past 20 years,
and we rank 22nd out of 186 countries
globally in terms of greenhouse gas
emissions. Underlying much of this is our
wasteful use of energy.
and less secure. Despite being a country
that is highly dependent on energy imports,

we rank an astounding 168th in energy

intensity or how much energy we use to
produce our GDP, near such oil producers
as Iran, Russia, and Bahrain. We rely
(excessively) on energy imports from
Myanmar and Lao PDR. But as these
countries grow more rapidly their energy
needs will increase. What will we do if they
are less willing to supply us with energy?
With significant chances for continued
social conflicts. Perhaps most worrisome
is that continued social conflicts are likely
to be a feature of the new normal. When
growth is high and opportunities are
increasing for all, it is much easier to get
"buy in" from different segments of society.
But when the pie isn't increasing, attention
naturally focuses on who is getting the
larger share of the pie, with a subsequent
increased potential for conflict.
Shifting patterns of investment: from
FDI to ODI. Slower growth at home means
increasingly attractive. While foreign direct
investment (FDI) will continue to be critical

for Thailand, overseas direct investment

(ODI) by Thai firms will be an increasingly
important part of the new normal
landscape. Between 2004 and 2014, ODI
grew from 0.5 to 7.8 billion USD. How to
execute, staff, and manage ODI will be an
increasingly valuable skill set for many Thai
Shifting sources of growth: from
Bangkok and Thailand to upcountry and
Greater Mekhong Region. Where growth
will come from will also be different.
Growth in Greater Mekhong Subregion
(GMS) countries including not only
Cambodia, Lao, Myanmar, Vietnam but
Thailand and Sounthern Cina, will continue
to grow rapidly, and will also benefit
upcountry cities. Population in the region is
over 300 million people. Already, our
exports to the CLMV countries above
(excluding China) totaled 21 billion USD,
nearly what we exported to Japan. Therein
lies the potentials for Thailand.

Box: A new normal for Thai exports

The slowdown in Thai exports over the past several years has been attributed by
many to a slowing global economy and the appreciation of the Thai baht (THB),
leading to expectations that the slowdown is largely temporary. In fact, there are
at least 3 structural factors, suggesting that slow export growth will be with us
for some time to come.
First, global trade has slowed down. Global trade grew at an average of 10%
between 2001 and 2008, but dropped to only 0.7% between 2011 and 2014.
Much of this reflects slower global GDP growth since the 2008 US mortgage
crisis, but a significant part reflects the greater disconnect between global GDP
and global trade growth. Previously, a one percentage point increase in global
GDP translated into a 1.5 percentage point increase in global trade growth.
Recently, that ratio has dropped to 0.25.6
Second, greater competition from the region. As noted above, the share of
Vietnam in global FDI has increased substantially and is now roughly equal to
that of Thailand. Much of this FDI is for export production. Witness the rapid
growth of electronics and electrical equipment (E&E) exports from Vietnam,
which now exceed those from Thailand by over 40%. As recently as 2010,
Vietnams E&E exports were only a quarter of those of Thailand (See Figure 2.)
Third, factors specific to Thailand. 2011 was not a good year for Thailands
competitiveness. We saw the beginnings of a rapid increase in wages as a result
of the proposed 300 baht minimum wage hike. And we had the floods, which led
to a sharp dropoff in exports. Export volumes recovered, but to a much slower
growth trajectory. While it isnt really possible to disentangle these effects, they
appear to have had a lasting, long-term impact. While the floods were (largely)
beyond our control, how we responded to it was. Perhaps our seeming inability
to address flood and water management in a timely and effective manner was
the proverbial straw that broke the camels back, coming as it did on the back
of continued political and policy instability.7

One likely culprit is structural changes in China which have caused the ratio of the value of
imports to GDP drop from 30% to less than 20% between 2004 and 2014. Export growth from
ASEAN as a whole has dropped off from 10% per annum during 2001-2010 to 4% between 2011
and 2014.
7 Other factorse.g., our low R&D, inability to move up the value chainare no doubt also
germane, but by themselves dont explain the sharp disconnect since 2011 as these factors have
been features of Thailand for a long time.

Thailand exports face challenges ahead as the greater disconnect between global GDP and our export growth.
Export Volume v. Trading partner GDP

Trading partner GDP (RHS)

Unit: 2001q1 =100



Export Volume (LHS)




Wage hike Floods

300 bt.





Because global trade has slowed down

Global Trade Value v. Global GDP
Unit: bln US$

= 2.8%

Global GDP growth = 10%



Global trade growth = 15%


= 0.7%




We face with greater competition from the region

E&E Export Value: Thailand v. Vietnam



Unit: bln US$

Thai E&E export growth = 9%



= 2%








and other factors specific to Thailand

Average wage of private employees
Unit: baht/day

Average growth = 4%

= 16%





Source:, IMF, Bank of Thailand, Labor Force Survey, Thailand Future Analysis

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