Thailand: A likely short-lived sequential expansion in Q2 GDP
NESDC cut its 2021 GDP growth forecast further to 0.7-1.2% due to the
worsening Covid-19 situation.
GDP growth rose to a higher-than-expected 7.5% y-o-y in Q2 from -2.6% in Q1, partly on low base effects. On a sequential basis, GDP growth avoided a contraction and
instead picked up to 0.4% q-o-q sa from 0.2%, driven by manufacturing output in line
with rising exports.
• However, this has yet to reflect the impact of the lockdowns in Q3. The National
Economic and Social Development Council (NESDC) lowered its 2021 GDP growth
forecast further to 0.7-1.2% from 1.5-2.5%.
• Does this change our economic forecasts? Yes. We cut our 2021 GDP growth
forecast to 0.6% from 1.5%, taking into account the latest Covid-19 developments and
extensions of lockdown measures. We also raise our 2021 current account deficit
forecast further to 2.1% of GDP from 1.7%. We continue to forecast the Bank of
Thailand (BOT) will cut its policy rate by 25bp to 0.25% in September.
• FX strategy: We remain long USD/THB and expect THB to weaken further towards
the 34-level in the near term. This view is supported by the BOT likely turning more
pro-growth, with Nomura Economics’ view of a 25bp rate cut on 29 September, a
wider current account deficit on weak tourism, local portfolio outflows and potentially
sooner-than-expected Fed policy normalisation. One risk to watch is BOT’s stance on
recent THB weakness, as the governor commented (16 August) that BOT does not
want FX speculation, although he acknowledged that recent THB weakness was due
to the current account deficit and weak economy. We believe the BOT is more likely to
limit THB volatility rather than the to reverse the trend recent THB underperformance.
• Rates strategy: We currently hold a receive 5y Thailand NDIRS position (1/3 of total
size), and with preference to add, in light of the further GDP downgrade. We also look
for opportunities to initiate steepeners, as the combination of a potential BOT cut, a
fairly high fiscal deficit projection and Fed taper augurs well for a steeper curve.
GDP avoided a sequential contraction in Q2
The NESDC reported GDP growth increased to 7.5% y-o-y in Q2 from -2.6% in Q1 (Figure
1), mainly reflecting base effects, although still above expectations (Consensus: 6.6%;
Nomura: 6.8%). On a sequential, seasonally adjusted (sa) basis, this implies the economy
unexpectedly expanded by 0.4% q-o-q sa from 0.2% in Q1 (Consensus: -1.1%; Nomura: –
0.8%). Total economic output, however, remained below pre-pandemic levels of Q4 2019
by 3.8%, improving slightly from 4.1% in Q1 (Figure 2). Importantly, the Q2 reading has
not yet reflected the impact of lockdown measures, which were imposed from 12 July due
to the worsening Covid-19 situation in Q3.
Overall, domestic demand contributed a higher 4.7 percentage points (pp) to headline y-oy GDP growth in Q2 versus 1.8pp in Q1, though mainly on low base effects (Figure 3). Net
exports of goods contributed 1.5pp in Q2 from -1.0pp in Q1 on strengthening goods
exports, while net exports of services represented a drag of 2.5pp amid the continued
absence of foreign tourists, though moderating from a 6.0pp drag due to low base effects.
The contribution of change in inventories rose to 3.8pp in Q2 from 2.6pp in Q1, reflecting
higher stocks of manufacturing output driven mainly by rising external demand, according
to the NESDC.
A more uneven recovery by sectors
The positive surprise to our forecast was driven mainly by manufacturing sector growth
rising further to 2.4% q-o-q sa in Q2 from 2.1% in Q1, which contrasts with the moderation
in the manufacturing production index (MPI) to 0.7% from 1.7%. Nonetheless, the strong
outturn was broadly consistent with strengthening exports and rising inventories.
Agricultural sector growth also turned positive for the first time in three quarters, rising to
2.7% q-o-q sa in Q2 from -1.4% in Q1, helped by favorable weather conditions, in our
view. Construction sector growth moderated to 4.9% q-o-q sa from 7.9%, in our view,
likely reflecting the outbreak in construction camps, which led to their full closure in late
The services sector contracted further by 0.8% q-o-q sa in Q2 after a 0.6% contraction in
Q1, reflecting some impact of the third Covid-19 wave that stared on 1 April. The worst-hit
sectors were transport and storage, which contracted by 5.0% q-o-q sa after a 1.2% drop
in Q1 amid the continued absence of foreign tourists. Nonetheless, growth in
accommodation and food services rebounded to 19.0% q-o-q sa in Q2 from -20.4% in Q1,
contributing to the positive surprise, on the increasing occupancy due to alternative
quarantine and hospitel (hotels temporarily converted into hospitals)
arrangements, according to the NESDC. Arts, entertainment and recreation growth was
Nomura | Asia Insights 17 August 2021
also resilient despite rising Covid-19 cases, rising to 9.9% q-o-q sa in Q2 from 4.7% in Q1,
on the increased operation of sports facilities and activities of other amusement and
recreation, according to the NESDC.
Overall, this implies total output in the services sector fell further below its pre-Covid level
by 7.5%, worsening from 6.7% in Q1 (Figure 4), lagging further behind other sectors and
suggesting a more uneven recovery, especially within tourism-related clusters. Industrial
sector output surpassed its pre-Covid level of Q4 2019 by 1.5% in Q2, rising from 0.3%
below those levels in Q1, while agricultural output also swung to 1.8% above its pre-Covid
levels in Q2 from 0.9% below those levels in Q1.
Private sector spending contracted on a sequential basis for the second quarter
The sequential expansion in Q2 GDP growth was driven mainly by goods exports, which
grew by 6.2% q-o-q sa in Q2 from 8.9% in Q1. This more than offset the slowdown in
private sector spending, which contracted for the second consecutive quarter, due to the
impact of the third Covid-19 wave (see Asia Insights – Thailand: Significant implications
from the third Covid-19 wave , 16 April 2021). In particular, private consumption contracted
by 2.5% q-o-q sa in Q2, worsening from a 0.6% drop in Q1, while private investment
contracted by 2.5%, deteriorating from a 0.5% drop.
Providing an additional offset, government consumption expanded by 1.2% q-o-q sa in Q2
after a 0.3% contraction in Q1, while public investment grew by 3.3%, though moderating
from 17.5%. The increase in government consumption was broadly in line with our view of
increased support from fiscal measures and a pickup in budget disbursement (see Asia
Insights – Thailand: Raising our FY21 fiscal deficit forecast further due to the new
borrowing decree , 2 June 2021), while the moderation in public investment is consistent
with weakening construction growth on Covid-19 outbreaks and restrictions.
NESDC lowers its full-year 2021 GDP growth forecast further to 0.7-1.2%
The NESDC lowered its full-year 2021 GDP growth forecast range further to 0.7-1.2%
from 1.5-2.5% (Figure 5), citing the worsening Covid-19 situation, which also prompted a
return of lockdown measures in Q3. This implies a new midpoint forecast of 1.0%, down
from 2.0% previously. These forecasts are premised on the NESDC’s assumptions that
new daily Covid-19 cases and deaths will peak in late August before gradually declining in
September and that at least 85mn doses of the vaccine will be administered by year-end,
covering ~60% of the population.
Importantly, the NESDC lowered its 2021 tourist arrivals forecast to 0.15mn from 0.5mn.
However, the NESDC raised its 2021 goods exports growth forecast to 16.3% from 10.3%,
partly providing some offset to the slowdown in other components such as private
consumption growth, which NESDC now forecasts at 1.1% from 1.6% before. Reflecting
its more cautious view on the recovery in tourist arrivals, the NESDC also lowered its 2021
current account balance forecast to a deficit of 2.0% of GDP from a surplus of 0.7%
Nomura’s view: We lower our 2021 GDP growth forecast to 0.6% and raise our
current account deficit forecast to 2.1% of GDP
We lower our 2021 GDP growth forecast to 0.6% from 1.5% previously, penciling in a
sharp sequential contraction of 2.2% q-o-q sa in Q3 followed by an expansion of 1.0% in
Q4. On a y-o-y basis, this implies GDP growth will turn negative to -0.7% in H2 from 2.0%
in H1. Our new forecast is also below the new NESDC’s forecast range of 0.7-1.2% and
Nomura | Asia Insights 17 August 2021
3-consensus forecast of 1.4%. Importantly, our forecast implies that the return of economic
output in Thailand to pre-Covid levels will be delayed by one quarter to Q4 2022 (Figure
6), lagging further behind its peers.
The downward revision to our forecast mainly reflects our more cautious view on domestic
demand, consistent with the Q2 outturn, which has already shown the impact of the third
Covid-19 wave on private sector spending even before the deterioration in Q3. We lower
our 2021 private consumption growth forecast further to 0.1% y-o-y from 1.4% and private
investment growth to 4.5% from 6.3%. Indeed, the sharp decline in the leading indicators
such as the business sentiment index (BSI) and consumer confidence index (CCI)
suggests that the significant impact of lockdowns was already evident in July (see Asia
Chart Alert – Thailand: A plunge in consumer and business sentiment in July , 12 August
We also raise our current account deficit forecast slightly to 2.1% of GDP from 1.7%
previously, broadly in line with the new NESDC forecast of 2.0%, but against the
consensus forecast for a small surplus of 0.2% of GDP. This reflects our view of a further
delay in a recovery of tourist arrivals, which should more than offset the weaker domestic
The main factors underpinning our cautious view are:
More prolonged lockdown measures: We expect the lockdown measures will be
extended to mid-Ocotber, or by one more month, from our previous assessment that it
would remain in place for 1-2 months from 12 July, due to the continued surge in
Covid-19 cases and deaths. Our new forecasts also take into account the extensions
of lockdowns to cover a significant 77.6% of GDP from 2 August, compared with
49.2% of GDP on 12 July (see First Insights – Thailand: Another lockdown extension
and more street protests , 2 August 2021). On a seven-day moving average basis,
daily new Covid-19 cases continued to increase to a new record high of 21,785 on 17
August, while deaths also rose to a new record high of 198 (Figure 7). According to
the Ministry of Public Health, the positivity rate was also a worrying 24.9%, suggesting
that the actual caseloads are likely under-reported, in our view. Importantly, the Centre
for Covid-10 Situation Administration projected that daily Covid-19 cases could double
to 45,000 by early September even with the current lockdown measures.
• Still low vaccination: We maintain our forecast that the number of doses being
administered will represent only 30-35% of the population be year-end, well below the
official target of 70% (see Asia Insights – Thailand: Cutting our 2021 GDP forecast
again as lockdowns return , 16 July 2021). The vaccination rate lags well behind those
of its peers, with only 7.3% of the population fully vaccinated as of 13 August – the
lowest in ASEAN and well below the 70-80% required for herd immunity (Figure 8).
The low vaccination rate also supports our view of the more prolonged outbreak and
more extensions of the lockdown measures. In addition, the pace of vaccine rollout
averaged 416k per day in the week ending 13 August, still below the official target of
500k, though rising from the July average of 250k.
Rising political uncertainty: Despite the surge in new Covid-19 cases and
lockdowns, political protests have become more frequent recently since their return in
mid-July (see First Insights – Thailand: Protests return, lockdowns extended, and
more fiscal measures underway , 19 July 2021). This time, the protesters are mainly
demanding the resignation of prime minister Prayut Chan-o-cha owing to the growing
disappointment in the government’s handling of the Covid-19 situation and
The protests have also grown more violent recently after a week of
confrontations, usually ending with a clash with the authorities, who have increasingly
resorted to rubber bullets, tear gas and water cannons to disperse the protesters.
We think these Covid-related concerns will add to the unresolved political tensions
since Q4 2020 and that the protests will not only increase the risk of more Covid-19
infections but also weigh further on domestic demand (see Asia Special Report –
Thailand: The economic fallout of political protests – this time is no different , 10
• A further delay in the tourism recovery: We lower our tourist arrivals forecast to
0.15mn from 0.4mn previously. We think the worsening Covid-19 situation will weigh
further on already weak tourism sentiment, with many countries including the US – the
leading source of tourists so far in 2021 – issuing a warning on travelling to Thailand
So far up to 15 August, the Phuket reopening (including Samui plus) has
been underwhelming, attracting only 475 tourists per day, well below the 1,400 implied
by the government’s target for Q3. In our view, the worsening Covid-19 situation and
still-low vaccination rate support our view that the full border reopening to international
tourists will be delayed to Q2 2022 from mid-October (see Asia Special Report –
Thailand: The long road to a tourism recovery , 6 July 2021). Our Nomura
TRIPTracker reading was also low at just 0.8% on 15 August (100% = full recovery;
Figure 9), suggesting a still limited tourism recovery.
• No change in our fiscal assumptions: We maintain our fiscal deficit forecast of
10.1% of GDP in FY21 (year ending September 2021), widening from 6.4% in FY20
and above the 8.0% implied by the original official projection. Our forecast takes into
account the sharp revenue shortfall and front-loaded spending under the THB500bn
borrowing decree of THB156bn in Q3 in line with the latest official debt management
plan (see First Insights – Thailand: Bond issuance target raised further by THB50bn in
August , 23 July 2021), and another THB156bn in Q4, slightly above the NESDC’s
projection of THB100bn. We also continue to expect the government to raise the
public debt ceiling to at least 70% in September from 60% currently (June: 56.1%).
• We expect the BOT to cut its policy rate by 25bp to 0.25% in September
We maintain our forecast that the Bank of Thailand (BOT) will deliver a 25bp policy rate
cut to 0.25%, a new record low, at the next Monetary Policy Committee (MPC) meeting on
29 September. Our forecast is supported by our cautious view that the lockdown
Nomura | Asia Insights 17 August 2021
measures will be extended into early Q4. Our new GDP growth forecast is not only below
the BOT’s forecast of 0.7% but also projects a sharp decline in domestic demand, which
we think is a more important policy consideration than headline GDP growth. In addition,
two dissenters of six MPC members also voted for a 25bp cut in August (one absentee),
citing that the cut would help complement other tools in supporting the recovery (see Asia
Insights – Thailand: BOT sends a strong dovish signal with two dissenting votes for a cut ,
4 August 2021).
At his press interview on 16 August, BOT governor Sethaput Suthiwartnarueput reiterated
that the BOT’s GDP forecasts could be revised down further if lockdown measures are
prolonged. Importantly, Mr Sethaput called for significant fiscal support of an additional
THB1tn (6.4% of GDP) to boost the recovery, citing that the public debt would still be
manageable even if it were to rise to 70% of GDP by 2024.
In terms of monetary policy,
Mr Sethaput reiterated that the policy rate is a “blunt tool” to address the Covid-19 impact
while added that the policy rate cut alone is not sufficient to help the recovery. However,
he also suggested that the BOT will remain “flexible” and “pragmatic”.
Overall, we think although his comments imply that there is a risk of a delay in delivering a
policy rate cut, if there is one at all; they also suggest that the BOT has still not closed the
door to more easing. In addition, inflation is back to below the BOT’s target range after
falling sharply in July, providing more scope for monetary easing (see First Insights –
Thailand: A substantial drop in CPI inflation in July to below BOT’s target range , 5 August
“Q2 growth b