Cascading economic sudden stops led by the virus crisis
Coronavirus pandemic creates twin supply-demand shock
- The global recession might be underway. But unlike the two previous global recessions in 2001 and 2008, the Covid-19 crisis has triggered two economic shocks: (i) supply shock: output cuts, factory closures, disruptions to supply chains, trade, and transportation, higher prices for material supplies, as well as tighter credit conditions; and (ii) demand shock: people and governments around the world take steps to slow the spread of the coronavirus (i.e. lockdowns, quarantines, social distancing); some businesses might be forced to shut down (either temporarily or permanently), leading to layoffs, falling confidence, and a further reduction in consumption as well as aggregate demand.
Devastating disruption to entire supply chains
- Fears of a contagion and intensifying efforts to curb the spread of the virus have hurt the tourism and airline industries, by preventing domestic and international travel. They are also affecting the hotel and restaurant industries, as well as supporting industries and those along the supply chain. Equally important, disruption to supply chains and the subsequent negative-income shock will drag global trade lower, which would directly hit the Thai export sector, especially manufactured goods.
A 2-month lockdown would cost Thailand’s economy THB1trn
- In our baseline projection, we expect a two-month lockdown and 65% drop in tourist arrivals to reduce 2020 GDP growth by 5.4ppt (approximately THB1trn) from pre-pandemic level. The most severe impact would come from the tourism sector (-2.1ppt), followed by income shock (-1.9ppt), and supply disruptions at home (-0.8ppt) and abroad (-0.6ppt). Looking at the quarterly evolution of the effects, losses due to supply disruption will subside relatively quickly but damage from income shock will persist.
Cascading impact of the massive economic fallout can be split into four groups
- The first two groups would be heavily affected – sectors that would see output drop by more than 5%. Within these groups, industries affected by income shock (or demand shock) are likely to take longer to recover than those largely affected by supply disruption. The other two groups would see moderate and mild impact: (i) Heaviest impact – Airlines, Hotels, Restaurants, Entertainment & Recreation, Business Services (e.g. Retail Space), Marine Transportation, Petroleum Refineries, Retail Trade, Banking Services, Real Estate, Wholesale Trade, Automobile; (ii) Heavy impact but with quicker recovery period – Oil & Gas, Beverages, Electronics, Non-Metal Ore, Metal Ore, Basic Metal; (iii) Moderate impact – Construction, Tobacco, Textile Products; and (iv) Mild impact – Hospitals, Agriculture.
However, the Covid-19 pandemic has a silver lining
- The coronavirus crisis has boosted demand for agricultural products as these provide food security. There have been rising overseas orders, especially for rice, dried and canned food products, concentrated latex (input for medical gloves), and cassava chips (input for alcohol-based sanitizer). Health concerns have put people on high alert, which could encourage visits from domestic patients although they have only mild symptoms. This would partly compensate for fewer non-resident patients, and help private hospitals to maintain revenues.
But a harsh drought and delays in infrastructure investment could complicate efforts to navigate the recession
- At a time when global demand is close to collapsing, the domestic economy is the only hope to shore up overall growth. But with a harsh drought around the corner and delays in infrastructure project spending, coupled with the subsequent failure to induce private investment, they project little hope. These headwinds will directly hit the agricultural and construction sectors. Crops that are sensitive to drought will be most affected, notably off-season rice and cassava. Despite rising demand for these crops, drought could prevent farmers from reaping this golden opportunity.
Covid-19 impact: A 2-month lockdown could cost Thailand’s economy THB1trn
In our baseline projection, we expect a two-month lockdown and 65% drop in tourist arrivals to reduce 2020 GDP growth by 5.4ppt (approximately THB1trn) from pre-pandemic level. The most severe impact would come from the tourism sector (-2.1ppt), followed by income shock (-1.9ppt), and supply disruptions at home (-0.8ppt) and abroad (-0.6ppt). Looking at the quarterly evolution of the effects, losses due to supply disruption will subside relatively quickly but damage from income shock will persist.
By sector, airlines, hotel & lodging, and restaurant sectors would be hardest hit
This would be closely followed by entertainment & recreation, petroleum, and business services. The impact would not only come from the collapse of the tourism sector and supply disruption at home and abroad, but also the multiplier effect which would lead the damage in those sectors. In a two-month lockdown with 65% drop in tourist arrivals, the multiplier effect would have substantial impact on industries and businesses. Sectors that would see output drop by more than 5%, collectively account for 55% share of the country’s total output.
Sectors suffering severely from liquidity shock are restaurants, airlines, and hotels
Restaurants, airlines, and hotels will have a difficult year. The number of restaurant operators that would be unable to service their debts is estimated to rise by 39% from pre-outbreak level. Small hotels and airlines are in a similar situation, with a 35% and 27% increase in the number of operators that would require liquidity, respectively. Even though banks are likely to be hit hard, they still have high liquidity. Most large-scale firms have stronger liquidity positions.
Small-size firms are most vulnerable
Overall, there will be a 19.3% increase in the number of small-size firms with insufficient current assets to service their loans. The number of medium-size and large companies that might be in trouble would increase by 13.0% and 7.2%, respectively. That implies small companies are much more vulnerable to shocks than others. Large-size companies involved in restaurant, auto dealership, and hotel operations – which have high exposure to the outbreak – would face higher risks of default than large players in other sectors. For medium-size firms, those involved in restaurant, other banking services, and auto dealership operations are vulnerable.
Sector impact can be split into four groups
Covid-19 pandemic reshapes 2020 outlook (I)
Covid-19 pandemic reshapes 2020 outlook (II)
Airlines: Air travel market to shrink by 33%; passenger travel will take longer to recover than air freight
Hotels: Pandemic has devastated tourism industry; arrivals projected to tumble 65% this year
Occupancy rate fell sharply in February, especially in tourist destinations; that could worsen throughout 2020
Restaurants: Lockdowns in several provinces will slash sales revenue
Entertainment & Recreation: Expect revenues to drop by 25% due to strict containment measures
Retail Space: Collapse in consumer spending and closure of entertainment spots is piling pressure on operators
Marine Transportation: Expect 25% drop in income due to collapsing global demand and supply chain disruption
Refinery & Petrochemicals: Hit by tumbling demand
Modern Trade: Consumer spending power is under severe pressure and will trigger a sharp drop in sales
Housing: BMR market will remain depressed in 2020 amid worsening economic conditions and Covid-19 outbreak
BOT relaxes LTV regulations; expect more easing to restore developer and buyer confidence
Banking: Hit by lower revenues and rising NPLs
Automobile: Covid-19 will cause a sharp drop in demand both at home and abroad
Domestic sales could drop for the second year, by 16% in 2020 following the virus-led recession
Another sign of weakness in automotive market – firms offer attractive promotions to reduce inventories
Oil & Gas: Crude prices are heading to a 17-year low as the market is hit by twin demand-supply factors
Declining oil demand and the oil price war could sending oil prices to 17 year lows, or below $20 a barrel. The Covid-19 global pandemic and strict containment measures such as lockdowns and travel bans have kept economic activities to a minimum. This has caused the first drop in oil demand since the GFC in 2008. On the supply side, OPEC+ cannot agree on cutting output further. This plan would prevent a flooding of the global oil market. Saudi Arabia has threatened to increase its oil production and has cut selling prices by $6-7 a barrel. Russia responded by preparing to level up their production and claims they can withstand the period of low oil prices. This has escalated concerns the price war among key oil producers to gain market share might lead to oil flooding the global market.
Looking ahead, supply glut remains acute and the imbalance would last until end-2020
Beverages: Demand will drop due to Covid-19 restrictions, especially for alcoholic beverages
Electronics: Hurt by weaker global demand, but sourcing components from China is now easier
Construction: Disruption to supply chain and higher material costs due to Covid-19 will drag the industry
Expect construction contractor industry to shrink this year, largely dragged by weak private sector activity
Private Hospitals: Weaker revenues as foreign patients stay away
Agriculture: Benefiting from demand for crops that provide food security
Several headwinds in supply-side – severe drought, critical water levels nationwide, and diseases
Central and East Region will be severely hurt by drought, especially second-crop rice and cassava output
The impact will vary depending on region, but the most seriously affected is likely to be the central region because the supply of usable water may be exhausted by April. This would be followed by eastern and northern Thailand, where water supply could be exhausted by May.
Rice: Expect flat export growth as prices stay high relative to peers due to drought and disease
Rubber: Prices will stabilize, supported by strong domestic demand and temporary boost from pandemic
Oil Palm: Recent price rally is not sustainable as output is projected to rise gradually
Since 4Q19, oil palm cultivators have been registering rising revenues, mostly driven by skyrocketing CPO prices. This is premised on: (i) stock declining to 0.32m tonnes at end-2019, below the buffer level of 0.25m tonnes in January 2020; (ii) supportive government measures to encourage greater consumption of B10 and B20; and (iii) lower FFB output following the extended dry season in southern Thailand in November-December. Last year Looking ahead, because rainfall conditions have returned to normal, FFB output is expected to rise gradually and pull down CPO prices to stabilize at THB4-5/kg for the rest of 2020.
Cassava: Global pandemic a temporary catalyst for exports
Sugar: Output is projected to tumble to 8.3m tonnes this year from 14.6m tonnes in 2019
Looking at demand, exports should continue to rise led by Asia
Domestic sugar consumption should see mild growth, capped by sugar tax on the beverage industry
Frozen & Processed Chicken: Still reaping benefits of ASF outbreak as chicken is a protein substitute for pork