Thailand: Wage hike looms large for firms
Businesses have mixed reactions to the new daily minimum wage hike finalised by the cabinet on Tuesday as they deal with a raft of economic challenges.
The government agreed to new wages ranging from 328 to 354 baht, taking effect from Oct 1.
Labour advocacy groups said earlier the last wage increase was in January 2020, which took the minimum rate to a range of 313-336 baht.
The cabinet’s decision to enforce new daily minimum wages from Oct 1 is causing worry among small and medium-sized enterprises (SMEs) as businesses are struggling to deal with many financial burdens, said the Federation of Thai Industries (FTI).
“The new wages come too soon,” Apichit Prasoprat, vice-chairman of FTI and chairman of Small and Medium Industrial Institute, said on Tuesday.
His comment echoed the concern of FTI chairman Kriengkrai Thiennukul, who said earlier the FTI was against the wage hike taking effect earlier than originally anticipated in January next year.
Entrepreneurs are facing high energy costs as well as higher interest rates and raw material prices.
Though the Thailand Industry Sentiment Index (TISI) improved among small and medium-sized industries, they cannot avoid the impact of higher minimum wages, said Mr Apichit.
The August TISI, based on a survey of 1,304 enterprises in 45 industries under the FTI, rose for the third consecutive month to 90.5 points, up from 89 in July, attributed to the gradual recovery of businesses following the easing of lockdown measures. The TISI among small industries increased to 66.5 points, up from 62.7, while the index among medium-sized industries rose to 95.6 points, up from 93.3.
“Wages may increase by only around 5%, but we should not forget that it’s difficult for businesses to increase profit by 5-10%,” he said.
The Employers’ Confederation of Thai Trade and Industry (EconThai) said the average wage increase of 5.02% is acceptable.
“It corresponds with Thai inflation,” said Tanit Sorat, vice-chairman of EconThai.
The increase reflects the inflation rate in line with the Commerce Ministry’s forecast that inflation will stand at 5.5% in 2022, according to Mr Tanit.
However, he said the new wages will affect businesses, especially those dependent on labour, which range from food manufacturers and restaurant operators to original equipment manufacturers (OEMs).
“For OEMs like garment manufacturers, their costs are mostly wages,” said Mr Tanit.
He believes the announcement of the wage hike in October stemmed partly from political motives because it will benefit a “big group of voters”.
Sanan Angubolkul, chairman of the Thai Chamber of Commerce, said the chamber agreed with the rise in the daily minimum wage, adding Oct 1 is an appropriate date for the increase after a three-year freeze.
“There are about 10 million workers eligible for the wage rise. Their higher income will be good for the overall economy,” he said.
Mr Sanan said foreign workers are likely to enjoy higher benefits from the wage rises in certain provinces, while SMEs, which engage mainly in labour-intensive industries, will face more impact.
NO SIGNIFICANT IMPACT
Naris Sathapholdeja, head of ttb analytics, the research centre of TMBThanachart Bank, said the new minimum wage would not significantly impact the economy overall as the current effective rates have been higher than the minimum wage in a lot of sectors.
However, some segments, such as fragile SMEs and labour-intensive businesses, would be affected by the rising minimum wage.
“For Thailand, a wage-price spiral will not occur because effective wage rates are generally higher than the minimum wage rate. There are no complaints from business operators in general regarding the minimum wage increase,” he said.
Given the rising inflation rate and higher cost of living, the minimum wage increase is reasonable to support the purchasing power of workers, particularly lower-income earners, said Mr Naris.
However, the inflation rate is expected to gradually decline in line with the drop in global crude oil prices. The core inflation rate needs to be monitored, excluding fresh food and energy prices, as it is still high at around 3%, said the research house.
Phuket is among three provinces facing the highest hike to 354 baht per day, or at least 10,620 baht per month. Most hotels will not be affected as employment has not fully resumed, said Suksit Suvunditkul, president of the southern chapter of the Thai Hotels Association (THA).
He said the employment rate is now only 50% of the pre-pandemic level as tourism has not yet recovered due to seasonality. At present, average occupancy is running at 40-45%, said Mr Suksit.
The positions affected by the wage hike are lower operational levels, such as newly recruited housekeepers and gardeners, which account for 10-15% of staff at four- and five-star hotels, he said.
Hotels with less than four stars don’t offer additional income from service charges, so they have to raise monthly salaries to much higher than the average industry rate to ensure skilled workers will remain with them, according to the THA.
If more international tourists return next year as expected, hotels across all segments will definitely face higher wage costs when they fully reopen, said Mr Suksit.
With a labour shortage, hotels are hiring workers with an average wage higher than the minimum rate that the cabinet approved today,” he said. “Employment costs previously accounted for 30% of hotel revenue during pre-pandemic operations, but as hotels must offer good salaries, the portion of labour costs surged to 50% of revenue.”
Mr Suksit said another key concern regarding operational costs is higher power bills. A proposed tariff hike means electricity bills might surge to 10-15% of operational costs from 5-6%.
SCB Securities said the increase in minimum wage by 5-8% will affect listed companies’ net profits by 2-5%.
Industries that are expected to be affected are parcel delivery, real estate and food companies. Parcel delivery and real estate companies’ earnings are expected to fall by 6-12%, while food groups will be affected by about 10%, said the brokerage.
Asia Plus Securities (ASPS) research said industries negatively affected are those with a high labour cost structure including construction, agro-food, developers, auto parts and retail businesses.
Construction uses a lot of labour, both via direct employment and outsourcing via subcontractors. The minimum wage-based cost of labour will be for construction workers who are both directly employed and via subcontractors, which accounts for 20-30% of total costs. Every 1% increase in the minimum wage will affect the cost of construction by 0.10-0.15%, according to ASPS research.
For the agro-food industry, the average wage structure is about 1.5-8% of total costs, although most entrepreneurs currently pay higher wages. If there is a small wage increase, this will affect the net profit trend of the agro-food sector in 2023 by 4.7%, said the brokerage.
For residential developers, labour costs based on minimum wage are estimated to account for 20% of total costs or 13% of sales, causing total costs to increase by 1%. An increase in wages by 5% affects the net profit of auto parts manufacturers in 2023 by about 2.2%, according to ASPS. For ICT contractors, with most staff outsourced, 2023 net profit is expected to drop by 4.1% from previous estimates.
Maybank Securities said the retail and financial sectors will benefit from higher purchasing power and lower credit risk outlook among lower-income customers.