THAILAND'S ECONOMY is one of the most vulnerable in the region to the likely decline in household spending in Japan after its sales-tax increase, resulting in a drag on Thailand's economic growth in this and the next quarter, according to Credit Suisse.
When the consumption tax in Japan was raised to 8 per cent from 5 per cent at the beginning of this month, the brokerage considered what impact the inevitable hit to Japanese spending would have on the rest of Asia in its report, Credit Suisse analyst Santitam Sathirathai said.
Thailand’s exports to Japan that are the most exposed are the ones most sensitive to fluctuations in Japanese household spending.
The Philippines will also be affected. A significant proportion of exports to Japan from these two economies are products whose demand is particularly price-sensitive, such as textiles and transport and electrical equipment.
Indonesia and Malaysia were not found as vulnerable. Though more than 10 per cent of both countries’ exports go to Japan, the bulk of them are low-elasticity mineral fuels.
“What was quite surprising was how the exercise showed that exports from [mainland] China and Hong Kong are quite sensitive to Japanese household spending growth,” the report said.
This could reflect how some of the exports from other Asian countries are being processed and/or routed via these two economies, given China’s role as a manufacturing hub in the region. This result probably exaggerates the exposure of exports from the mainland and Hong Kong to Japan’s domestic spending and underestimates these from some other non-Japan Asian countries.
“There is a risk that some of the Asian countries’ exports might be exposed to Japanese household spending shock via exports to China,” Santitam said.
There will likely be significant drags on growth in gross domestic product in the second and third quarters in the Philippines and Thailand. The hit to average GDP growth in 2014 should be small, but there are likely to be significant effects on the pattern of growth through the year.
“In particular, export and GDP growth in the second and third quarters will be hurt, and we have cut our Philippine and Thai growth projections for this period,” he said.
The impact on full-year GDP growth in these economies would be about 20 basis points, but the brokerage has decided to leave its 2014 GDP growth forecasts for these economies unchanged.
In the case of Thailand, the projection was already near the bottom of the consensus range. Credit Suisse projected 2 per cent while consensus was at 2.8 per cent.
Also, the projection for growth in the third quarter will be weaker than previously thought. But this assumes that the country’s political situation will improve and the government will become functional again in the second half, allowing growth to rebound from a low base in the third quarter.
For implications on the baht, even though the weaker outlook for exports coupled with the negative current account would increase pressure on the currency, the improvement in the current account from weaker imports would more than offset the hit to exports.