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<html><body><div><p><em>Aris Dacanay is ASEAN economist at HSBC.</em></p><p>For much of the past 50 years, Thailand's manufacturing prowess has been, and still is, something many emerging economies aspire to attain. Its sheer market size and reach still make it an attractive hub for trade. Reading the recent headlines though, one now might be forgiven for thinking that Thailand's manufacturing is in trouble -- a reflection of the sector's fading dynamism after five decades of roaring growth.</p><p>Thailand's manufacturing engine is, indeed, sputtering. Since the pandemic, manufacturing production has fallen by 6.7%, while the rest of ASEAN's production continues to rise. This has been dragging growth and increasing frustration in the economy, fueling calls for the Bank of Thailand to cut policy rates. To the market's surprise, the central bank eventually did so in early October, despite Thailand's high household debt levels. However, government and industry representatives continue to call for further rate cuts.</p><p>But further easing monetary policy may not deliver the boost Thailand's manufacturing sector needs. To quote a comment made by the central bank's governor at the start of the year, ASEAN's first manufacturing powerhouse needs to do the "structural stuff" that enhances productivity and efficiency.</p><p>To see what it will take to kick-start the manufacturing renaissance, we first need to know how Thailand is faring vis-a-vis its regional and aspirational peers.</p><p>Back in its heyday, the manufacturing sector grew 9.9% per year on average between 1961 and 2010, making Thailand one of the world's fastest growing economies in the 1990s. Its value added in manufacturing was the second highest in ASEAN at $128 billion in 2023, behind only Indonesia -- a nation with a population 275 million.</p><p>But since 2011, growth in Thai manufacturing has been the slowest in ASEAN, averaging slightly less than 1% per year. Furthermore, the share of manufacturing to the economy shrunk from as high as 31% of gross domestic product in 2010 to just 25% today, making manufacturing less important to the overall economy. As a result, many residents have been finding ways to make ends meet through services, supplying the labor that makes Thailand the tourism hub it is today.</p>        
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<p>One reason for this is competition. As in competitive sport, staying on top gets harder and harder over time. After 50 years of Thailand leading ASEAN in terms of exporting manufacturing goods, other economies, especially Vietnam and Malaysia, have found their footing and have overtaken Thailand. The country also faces increasing competition from mainland China, especially in producing hard disk drives and cars, goods that Thailand specializes in.</p><p>Being the best for a long time can make life a bit too comfortable. Thailand became a manufacturing powerhouse by churning out high volumes of low-end goods. However, it has since struggled to move up the value chain, with only a fifth of its total manufacturing exports being high-tech -- well below regional peers. It has also fallen short when it comes to enhancing productivity. For instance, the value added in manufacturing per worker remained stagnant between 2016 and 2023, while productivity increased in Vietnam, Malaysia and the Philippines.</p><p>To kick-start a renaissance in manufacturing, Thailand will need to follow in the footsteps of the likes of Japan and Singapore and innovate. Innovation, however, requires hard-earned, long-term structural reforms that will need much political will to implement. Nonetheless, these reforms are measurable and, more importantly, doable.</p><p>One is developing a highly skilled workforce that can generate new ideas. Key to this is public investment in education and R&amp;D, areas where Thailand could consider spending more. Public spending in education was 3% of GDP in 2019 while R&amp;D was at 1.1%, versus 4% and 1.7% on average in other upper-middle income economies.</p><p>Encouraging local competition is also crucial for turning smaller enterprises into breeding grounds for innovation. The economy must foster an enabling environment of "creative destruction" where successful ideas from smaller companies replace the traditional thinking of more established firms and corporations.</p><p>World Bank data in 2017 ranked Thailand behind Singapore, Malaysia and Indonesia on the intensity of local competition. This was also a risk flagged by the World Bank's 2024 Systematic Country Diagnostic Update, which noted that a few large companies saturate local production and services, making it harder for smaller enterprises to profit from their ideas.</p><p>Going back to monetary policy, keep in mind that manufacturing is a matter of supply, while monetary policy is a matter of demand. So far, private demand in Thailand has been robust -- though, perhaps, at the expense of higher leverage. Private consumption in Thailand is 13.6% above pre-pandemic levels, which is the highest recovery rate in ASEAN.</p><p>Monetary stimulus will boost private demand more than manufacturing, given the structural challenges facing the sector. With local supply not catching up with demand, there is a risk that when interest rates are reduced, consumers will, instead, find refuge in imported goods, leading to a further deterioration in Thailand's trade balance. Not only will further monetary easing increase the risk of FX volatility and a rise in household debt, its ability to boost the economy may also be limited if demand ends up in imports.</p><p>To reignite dynamism, ASEAN's first manufacturing powerhouse will need to make a series of structural reforms. While there's no low-hanging fruit, these reforms are ultimately within reach, setting the stage for a potential manufacturing renaissance.</p>
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Thailand needs to do the structural stuff to regain its economic mojo

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