Industrial utilization rate slips back to 51.2% in July

The market was expecting to see signs of further economic slowdown in the July economic figures reported by the Bank of Thailand (BOT) last Friday. And that is precisely what the market got. Exports fell 14.2% yoy, while domestic consumption continued to slow. This culminated in the industrial capacity utilization rate slipping back to only 51.2%. If we exclude the typically slow month of April, July’s utilization rate was the lowest since September 1998. The market may not immediately react to these economic numbers. However, we believe the market will be prone to selling pressure later as the economic slowdown translates into worsening bad debt problems for the commercial banks.

• Production indicators: The manufacturing production index rose 1.9% yoy, but declined for the second consecutive month. With the sharp slowdown in global IT spending, the electronics and electrical sector recorded the biggest decline of 10.2% mom and 37.0% yoy. According to the BOT numbers, utilization of integrated circuit manufacturers fell from 60.4% in June to 47.3% in July.

On the positive side, production of passenger cars and motorcycles continues to show surprisingly strong growth of 103.4% and 36.7% yoy, respectively. Production of passenger cars rose to 14,924 units in July while domestic sales increased to 8,709 units. Thai automakers exported $122mn worth of passenger cars and parts (+67.1% yoy) in the month, which probably accounts for the 6,215-unit difference in production and sales. Despite the sharp increase domestic sales and exports, average capacity utilization rates of the passenger car and motorcycle industries still stand at 42.4% and 46.3%, respectively.

• Private consumption: Private consumption indicators are quite mixed, but the overall trend points toward slowing spending. Imports of consumer goods fell 8.3% yoy, which was partially due to the weakening baht. A broader measurement, VAT collections, rose 5.7% yoy in July, only slightly slower than the 5.8% yoy increase recorded in the first half of this year. June retail sales showed a 12.2% increase yoy, but this number reflects the strong growth of the modern trade stores at the expense of the smaller retailers and vendors, which still account for 60% of total retail sales.

The auto and motorcycle markets continue to record very sharp growth, however, on the back of new model launches, some price-cutting and very attractive hire purchase terms. In July, passenger car and motorcycle sales increased 32.4% and 41.4%, respectively.

• Private investment: There is a lot less ambiguity in the private investment numbers. Imports of capital goods fell 13.8% yoy in July. Domestic cement demand, meanwhile, grew only 2.4% yoy. The only bright spot is the increase in housing demand in the Bangkok metropolitan area. Construction areas permitted for residential development increased 32.4% yoy in the second quarter. However, development permits for commercial projects fell 30.4% and for industrial and other purposes rose only 14.7%.

• External Sector: In July, exports fell 14.2% yoy. We have seen double-digit declines in exports on only two other occasions over the last 10 years – just before the Asian economic crisis starting in mid-1996 and as the economic crisis spread throughout the region in mid to late-1998. From 1999 to the beginning of this year, the export-manufacturing sector has been the primary engine of Thailand’s economic growth. This is clearly no longer the case.

Thailand may not be affected as much by the sharp reduction in global IT spending than some neighboring countries, but exports of machinery and mechanical appliances, integrated circuits and parts and electrical appliances still represent 25.0% of Thailand’s total exports. In July alone exports of these three categories fell 16.9% from the previous month.

Total merchandise imports declined 3.8% yoy in July to $5,146mn. The decline would have been much steeper if it weren’t for $331mn imports of aircraft and ships. Imports of crude oil declined 1.3% yoy, helped by weakening oil prices. In July, crude oil represented 10.2% of total imports. The most noticeable declines were in the IT sector with integrated circuits and components decreasing 9.2% from the previous month and 27.9% from the previous year. Integrated circuits make up 7.9% of total imports.

The sharp fall in exports left the country with a trade deficit of $3mn in July compared with a US$403mn surplus the previous month. However, the balance of payments recorded a surplus of $41mn after four consecutive months of deficits thanks to a fall in net capital outflows and higher tourism receipts.

• Financial Sector: Commercial bank credit declined by 4.9% yoy in July. Adding back loan write-offs and transfers to AMCs, total outstanding loans would have expanded by only 1.0% in the month. As deposits continued to grow by 5.9%, the difference between total loans (excluding BIBF loans) and total deposits widened to Bt571.5bn, or a loan-to-deposit ratio of 0.88x.