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25 Mar 2021

Econ Digest

Thai economy has passed its most difficult time in 2021...although has not yet fully recovered, while businesses may face rising costs


        After being hit with the COVID-19 crisis for more than a year, hope is beginning to emerge owing to progress in various countries' vaccination rollouts and relaxation of governmental COVID-19 control measures. It is predicted that the global economy and the Thai economy have gone through their toughest period. However, it will take time to recover to pre-COVID-19 levels or to reach even higher levels, especially for businesses relying on foreign income such as tourism, which will take longer than other businesses to recover their income.

        For revenue or sales of major businesses in Thailand in 2021, KResearch estimates that some businesses will still recover only modestly and will not return to the scale or level of 2019, despite recovering from 2020 in line with the overall economic trend, e.g. consumer demand-based retail sales of consumer goods, vehicle sales, spending on hotels, accommodation and restaurant services. This is because the purchasing power of the low and middle classes remains very fragile due to income and employment risks. In addition, some businesses continue to face a difficult situation in which sales could decline further in 2021, as Thai and foreign consumers slow down their purchasing decisions for activities such as residential property ownership transfers in Bangkok and its vicinities. Even with good signals, tourism income from international travel remains very limited, meaning that the path to recovery for businesses is still uneven.

        It is not only the issue of purchasing power that drags down sales – it is also a challenge for entrepreneurs in each business to adapt quickly in order to cope with the faster and more complex changes in behavior and lifestyle, given the New Normal. Looking ahead, KResearch sees rising costs as another variable that the businesses may have to prepare for.

        In order to build customer confidence, in addition to the cost of continuing to implement hygienic and safe business operations, it is evident that: 1) Energy spending may be rising faster than many parties think, in line with rising global oil prices. Dubai crude oil prices may average USD50-60 per barrel in 2021, an increase of more than 25% compared to the average price of USD42.2 per barrel in 2020. This could result in a 9-10% increase in domestic oil prices and a 0.5% increase in costs for the business sector, with fisheries, transportation, electricity, chemicals and steel industries being affected more than others; 2) Financial costs, especially Thai long-term government bond yields that have accelerated in tandem with U.S. Treasury yields, are consistent with expectations of a U.S. economic recovery. From the beginning of 2021 to March 12, 2021, the 10-year Thai government bond yield has risen by 68 basis points, close to the 71 basis points rise in 10-year US Treasury yield. Therefore, businesses that need to raise funds in the future, specifically to manage maturing debts and prepare liquidity to support business operations, will have to face higher interest costs, which in turn will vary depending on the credit rating or credit status of each company. Of the more than THB700 billion of long-term debentures maturing in the remainder of 2021, the majority are in the financial, real estate development, food, energy, and ICT sectors, totaling more than 80%.

        In summary, 2021 will therefore be another year in which businesses face numerous challenges in terms of revenue and cost.

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