Thailand 2025: Dealing with Major Trends
Keynote address by Veerathai Santiprabhob, Governor of the Bank of Thailand
TNSC 25th Anniversary Exclusive Dinner Talk
Grand Hyatt Erawan, Bangkok
25 November 2019
Permanent Secretary of Commerce,
Chairperson and members of the TNSC Board of Directors,
TNSC members,
Distinguished guests,
Ladies and gentlemen,
Good evening to you all.
I'd like to first thank the Thai National Shippers' Council for inviting me. Let me also
congratulate TNSC on the occasion of its 25th anniversary. Over the past 25 years,
exports have become Thailand's main engine of growth, and TNSC has played a
major role in making that possible through its commitment and dedication to serve
the community of over 2,000 exporters.
With today's topic of "Thailand 2025", I would like to commend TNSC for inviting
us to look beyond short-term issues: what this year's GDP growth rate will be, how
many tourists we will get this year, or what will the exchange rate be by year-end.
While paying attention to these short-term issues is important, it's equally-or even
more-important to take our eyes off the few meters in front of us and look further
ahead to ensure that we're heading in the right direction.
Ladies and Gentlemen,
We are at an important juncture in our economic history. Now is the time to look
into the future and imagine what the Thai economy will look like five years from
now. Amidst many critical transitions, the speed of these changes, and a number of
structural issues that we are facing, what has got us here will definitely not get us
where we want to be in the future.
Indeed, we will not know with certainty what the Thai economy will look like in
2025, but we know the major trends that will have significant implications for the
future landscape in which we operate. Today, I will highlight five major trends:
demographic change, climate change, changes in value chains, digital
transformation, and global excess liquidity with historically high leverage. These
trends will have big implications for Thailand. While most people would think of
these trends as threats to existing business models, they are indeed business
opportunities for those who look ahead and get ready for them.
1. Demographic Change
The first trend I'd like to highlight is demographic change.
Thailand is aging and is aging fast. We were the third Asian country to become an
aging society, and by 2035 we will be the first developing country to become a hyper-
aged society by the definition of the World Health Organization-meaning 20
percent of the population will be over the age of 65. This change will have
implications on at least two fronts, both very important to the business sector: labor
force, and consumer spending.
Impacts on labor force
Let me first start with implications on the labor force.
The Thai labor force has already passed its peak in 2013 and will only keep
declining. For businesses, the shrinking and aging labor force will have an impact
especially on labor-intensive sectors such as textile, apparel, leather, and wood and
furniture, which account for around 7 percent of the value-added in the
manufacturing sector. Businesses, particularly those that are labor-intensive, will
need to rethink business models and find ways to increase productivity, be it
through process automation or focusing on R&D to create higher value-added
products and services. Retaining and retraining employees will also have to become
an integral part of businesses.
Impacts on consumer spending
The second implication of demographic shift will be on the market, as consumers'
spending will change, both in terms of value and composition.
Thailand's aged dependency ratio-the ratio between population aged 65 and over
to the working age population-is projected to increase from less than 20 percent
today to more than 50 percent twenty years from now. This demographic shift
would impact the country's productivity and present a challenge to the country's
fiscal sustainability, as nearly half of Thai people are not enrolled in retirement
plans. With the majority of the people having high household debt, low savings, and
little financial security, aging population will add more burden to households in the
form of increased spending for elderly care.
Moreover, people tend to consume less as they grow older. A study by TDRI found
that Thais in their 50s will decrease their consumption by more than 20 percent
when they are in their 60s. Aging population will introduce a dramatic change to the
consumer market.
But this is also an opportunity: the domestic market for the seniors will become
larger. In 2017, consumption of Thai population older than 50 is worth 2.8 trillion
baht or around 18 percent of the GDP. This will only continue to grow, creating a
large niche market for businesses.
Realizing this will open doors for many opportunities ahead. The demand for
products focused on senior lifestyles such as orthopedic shoes and anti-slip floorings
will grow. Huge opportunities also lie in health-conscious products such as organic
produce, food supplements, and low-sodium diets, where Thailand's well-
developed food industry could give us a solid foundation.
Being one of the first countries to become an aging society will also give us a head
start to develop new businesses that would help address the needs of the elderlies,
and expand to other markets abroad that will soon become aging societies as well.
According to the UN, ten percent of the world population will be older than 65 five
years from now, with more than 200 million living in China. Medical tourism
industry, for example, need to take advantage of Thailand's established foundation
and scale up to serve the needs of broader spectrum of senior travelers from all over
the globe.
In addition to demographic change in the Thai market, we should also look at
demographic changes at the global level. Outside of Thailand, demographic changes
mean more than just an aging society. In most developing nations, particularly those
in South Asia and Africa, populations are booming with urbanization, modern
lifestyles, and better access to healthcare and basic infrastructure.
These two often overlooked markets are filled with big and growing young
population, and a fast-growing share of the middle class that are expected to play an
important role in driving the global consumption and economy in the future. By
2030, these regions will be home to more than 45 percent of the world population.
These huge young markets with high potential for income growth will have to be the
new promising market for Thai businesses to explore. These two markets currently
account for only around 7 percent of our exports, and although exports to South
Asia has been steadily increasing in recent years, there is much room to grow and
we need to move fast.
2. Climate change
The second trend that will play a major role in the coming years is climate change.
Indeed, climate change is hardly anything new; scientists have been talking about it
for decades. But the impact of climate change keeps coming closer. Perhaps it started
with melting ice cap and changing bird migration pattern; now we started to really
feel climate change in the forms of more frequent and severe draughts and floods,
wildfires, and other natural disasters.
Climate change will impact businesses in many ways. Production line could be
disrupted by flooding as we witnessed in 2011, natural disasters could affect
logistics, and our popular beaches become more vulnerable to the rising sea level
and changing weather patterns.
Impact on agricultural sector
Most concerning, perhaps, is the effect on the agricultural sector which is the source
of employment for more than a third of our population. New types of plant and
animal diseases could thrive in the warmer climate. Soil loss and land degradation
through floods and land mismanagement could decrease crop yield. With only a
fifth of our agricultural land having access to irrigation, severe draughts and floods
pose serious risks to the Thai society. With most of the workforce earning low
income, impacts on the agricultural sector is likely to affect those who are most
vulnerable in the society.
While being net exporters of agricultural products provide us some sense of food
security, the agricultural sector-one of the least productive sectors in the
economy-needs a complete overhaul to stay competitive amidst these challenges
ahead. Adoption of agricultural technologies including data collection, precision
farming, and resource-sharing platforms; development of plant and animal varieties
that are resilient to climate change and diseases; along with usage of closed-
environment production techniques would help raise productivity and resilience of
the sector that many of us consider the backbone of our economy.
Sustainable businesses
The agricultural sector is not the only sector that needs to change. The more severe
and tangible impact of climate change has raised awareness of people around the
world, resulting in calls for new standards and regulations aimed at containing
environmental externalities from businesses. Two good examples are the ban of fuel
with high sulfur content for the shipping industry, and social calls for businesses to
reduce the usage of single-use plastics. Naturally, adopting these higher standards
comes with higher costs and it would serve businesses well to take this into account
when designing new business models.
For businesses taking these regulations passively, this will only mean higher costs
and lower profits. However, the sustainable movement presents an incredible
opportunity for businesses that can meet this demand. Consumers are now
demanding more environmentally friendly products and services. According to a
survey done by Nielsen, 66 percent of global consumers are willing to pay premium
for environmentally friendly products. The number is even higher for younger
generations. The concept of first-mover advantage also applies here, since those who
could first systematically identify new environmentally friendly practice will set
standard for the entire industry.
3. Changes in value chain
The third trend I will highlight is the change in the global value chain.
In discussing value chains, it is almost impossible to avoid thinking about the
ongoing trade tensions that are suppressing the global economic sentiment. While
the trade tensions might prove to be short-lived, they have distorted value chains
and engraved a long-lasting impact on global production through trade diversion
and production relocation.
But even before all these trade tensions started, value chains around the world had
begun to change in even more significant ways, thanks in part to the advancement in
technology. To this point, I'd like to highlight a few observations by McKinsey
Global Institute report earlier this year.
First, services are becoming a larger part of the global value chain. Cross border
services are growing more than 60 percent faster than trade in goods. The value-
added share of services is increasing as firms around the world today are spending
more on brands and intellectual property. Manufacturing firms in many areas start
providing leasing services, which add value to downstream processes and blur
borders between products and services. In addition, as people's standards of living
increase, they shift their consumption towards services, which could range from
tourism, medical services, financial services, and educational services. Unlike trade
in goods, trade in services are not the focus of the ongoing trade tension, which
makes service-related value chains less vulnerable.
The second observation is that global value chains are becoming more
knowledge-intensive and are relying more on high-skill labor. This is partly
attributed to the first observation, as service-related tasks generally require higher
skills than manufacturing tasks. The introduction of technologies such as automation
and the rising wages in developing countries diminish the importance of labor-cost
differences. Contrary to the common perception that the global value chains are
driven by cheap labor in developing countries, today less than 20 percent of global
trade is driven by labor-cost arbitrage.
The last observation is that goods-producing value chains are becoming more
regionally concentrated. Robotization and automation made cheap labor less
relevant when companies decide where to place production. This pattern is obvious
in certain sectors with closely integrated supply chain for just-in-time production
such as automotive, electronics, and electrical appliances. Locating production line
close to the end-market also helps businesses better customize the products based on
each market's preference. Trade protectionism is undeniably one other key factor
that help accelerate value chain regionalization.
All these changes in value chains could be a threat to today's businesses. Consumers
are ready to switch to a competitor's product if they find it suits their changing
preferences better and quicker. A standalone service business might be disrupted by
new service value chains that offers a more complete solution to the customer's
need. Rising wages in Thailand will draw production to emerging market countries
with lower wages, while automation will help advanced economies draw
production closer to home.
But then again, for those who are prepared, this could be an opportunity. Businesses
will have to think about how they could incorporate service components into their
products. An example of this transition is Daimler and BMW, who joined hands
earlier this year to explore service-focused business models such as taxi-hailing, car
sharing, parking, and EV charging. This, of course, also means that we will need to
continuously reskill and upskill our workforce.
4. Digital transformation
The fourth trend is digital transformation.
Technology is now engrained in all aspects of our everyday lives and it keeps getting
better. More importantly, those who benefit from modern technology are not limited
to the riches or large corporations any longer. More than 40 percent of the world's
population now have access to smartphones, and this number is projected to keep
growing.
The trend of devices that can store data, process it, and communicate with each other
will not be only limited to devices such as personal computer and smartphones.
Made possible by technologies such as 5G, devices ranging from electrical
appliances in our home, traffic lights, cars, robots, and sensors in farms and factories
will all be smart and connected. According to Gartner, the number of IoT-connected
devices is projected to triple within the next five years. This will change how we live,
how we consume, and will completely change how businesses operate.
The IoT movement also highlights the important role of data. With billions of
devices connecting with each other, huge amount of data will be created and utilized
to improve business operations. Data will be one of the most valuable resources.
Technologies will not only improve efficiency and help mitigate the effects of
shrinking labor force, but, through AI and data analytics, they will also help us make
smart business decisions.
In addition to the important role technology will play in factories and supply chains,
technology will also change consumers' behaviors.
In the past few years, "platform economy" has revolutionized the way businesses
and consumers interact. A platform creates value by connecting users-who could
be consumers or suppliers-reduce search cost and make economic transactions that
would have not happened otherwise possible. Businesses left and right are being
disrupted by the platform movement: hotels by Airbnb, transportation services by
the likes of Uber or Grab, and retail shops by e-commerce platforms.
Thais are especially keen on social media platforms, e-commerce, and social
commerce. We are ranked among the top five countries with the highest share of e-
commerce purchases, and this share is expected to keep increasing. For traditional
businesses who do not adapt, this means more competition in a shrinking market.
On the other hand, there are plenty of opportunities to be taken. By enabling their
users to share assets, sharing platforms help eliminate the need for individual
business to take on huge investment cost upfront. The direct connection and
platform-based trust between buyers and sellers across the globe also provide
opportunities for firms-especially SMEs-to design their own product flows, get
direct customer feedbacks, and quickly expand their customer base like never
before.
5. Excess global liquidity with historically high leverage
The last trend I want to highlight this evening is excess global liquidity which has
led to a historically high degree of leverage, along with the vulnerabilities that come
with it.
We have been living in the low-for-long interest rate environment since the Global
Financial Crisis. The monetary policy "normalization" period was proved to be
short-lived as major central banks decided to delay or reverse their normalization
paths in response to the global slowdown resulting from trade conflicts. Excess
liquidity created in this low-for-long environment has led to at least two areas of
vulnerabilities.
Overleveraging of businesses
The first area of vulnerability is the overleveraging of businesses. According to the
recent IMF's Global Financial Stability Report, corporate debt has spurred in recent
years. In the event of a global economic downturn that is half as severe as the one
spurred by the Global Financial Crisis, the IMF estimated that almost 40 percent of
corporate debt-approximately 19 trillion USD-could be at risk of defaulting,
exceeding the levels seen during the last crisis.
In Thailand, we could observe high leverage in many business segments. Some firms
even take on debts to buy back their equities from shareholders, thereby reducing
their equity base. Moreover, some large corporations have increasingly engaged in
new investment outside their core businesses, making risk assessments challenging.
In this rapidly changing world, the path ahead is filled with risks and uncertainties
that may affect businesses' revenue and cash flows. Businesses need to ensure
appropriate capital structure. Having too much debt will heighten financial
vulnerability and could amplify the effects of adverse shocks. Importantly, while
debt is necessary for investment and financing through debt is especially enticing in
this low interest rate environment, an appropriate level of equity must be preserved
to ensure sufficient cushion for adverse events.
Financial stability risks remain sources of concern in periods ahead, and this is an
opportune time for businesses to review and restructure their capital and financing
structure to enhance their resilience to the world that will become more volatile,
uncertain, complex, and ambiguous.
More volatile financial flows
The second area of vulnerability comes from international fund flows, which have
become more volatile especially for small open economies.
Following a decade of unconventional monetary policies, there has been a shift in
the structure of foreign exchange markets as well as the nature of capital flows into
emerging markets. These flows could lead to two-way volatility in exchange rate
and asset prices.
With the prospect that low interest rates and excess liquidity will not be over soon,
the volatile nature of exchange rate and asset prices will only keep increasing. While
we might be able to influence some domestic factors, exchange rate movements in
the world with excess liquidity are often driven by external factors that are beyond
our control. It is therefore important that we all do our parts to increase our
resilience against exchange rate volatility and reduce its impact on the Thai
economy. Let me remind everyone that foreign exchange hedging needs to be a
regular business practice.
Concluding remarks
Ladies and gentlemen,
The Thai economy is facing significant adjustments: demographic change, climate
change, changes in value chain, digital transformation, and global excess liquidity
with high leverage. We were more or less aware of these trends since the Global
Financial Crisis. Now it becomes more and more clear that these trends will be the
major forces that will shape the landscape and structure of our economy, and the
pace and degree of changes will be faster and larger than before.
On one hand, these changes could become big threats to your businesses and the
economy as a whole if we don't adapt. On the other hand, if we embrace these
changes and recognize the many opportunities that come with them, we could ride
this wave of changes forward. In doing this, business model transformation and
large structural reform policies are needed in order to increase both the productivity
and resiliency of the Thai economy.
Let me end my talk by saying once again that we will not know with certainty what
the Thai economy will look like in 2025. The structure, competitiveness, and
resilience of our economy five years from now will depend critically on how we
address the five major trends.
Thank you very much for your kind attention.