Research and analysis

Thailand: economy: 2014 growth revised sharply downwards – April 2014

Published 16 April 2014

The Bank of Thailand cut its forecast of economic growth for 2014 to only 2.7%, down sharply from 4.8% estimated before the political protests began last October. The downgrade reflects political unrest and lack of a properly formed government since Parliament’s dissolution in December 2013. The present government’s caretaker status means its mandate is limited and large government spending such as the 2.2 trillion Baht (£47 billion) infrastructure projects or rice scheme payments run into problems. Essentially, any large financial decision that burdens a future government is prohibited by the Constitution.

On top of that, the caretaker government’s ability to work has diminished sharply because of continued campaigns by anti-government protesters that paralyse the government by physically blocking entry to key ministries (i.e. Finance Ministry, Commerce Ministry, etc.) or discouraging stakeholders (state banks, commercial banks, etc.) from facilitating government work as every matter has become politicised. Any business, seen as politically aligned to one side, can also be subjected to intimidation by political enemies which may eventually affect revenues or ultimate survival of that business. In the central bank’s latest revisions, key drivers have been revised downwards sharply for 2014. Growth of government consumption revised from 11% to 3% and government investment from 7% to 1.7%. The political crisis compounds an economy already slowing from over-consumption in 2012 and early 2013. Private consumption this year is estimated to show no growth. Private investment, earlier expected to grow 9% in 2014, will show zero growth this year as investors are unsure how the political impasse will unfold.

Actual results for the first 2 months have indeed been weak. Car sales have fallen 40-50%, exports have not grown, and imports have dropped 16%. Corporations have scaled down investment budgets and consumer confidence is at a 24-month low. Tourism is also affected; estimated visitor arrivals have dropped 14% in Q1 (though UK visits increased 10%).

At this stage, the economic problems Thailand faces are still limited to short term growth (i.e. 12 months). The central bank is confident the macroeconomic pillars are solid. Analysts and credit rating agencies also agree that Thailand has credible macroeconomic policymaking, firmly anchored inflation, a flexible FX regime (absorber against capital flow volatilities), global supply chains, and strong consumer spending, private investment, and exports. Bank of Thailand Governor Dr. Prasarn Trairatvorakul has said that he is confident these macro economic factors can support the economy well over the short term.

Thailand does not have large economic imbalances suffered by some of the large “Fragile Five” emerging markets. Nor does it have potentially hidden financial losses akin to China’s shadow banking system, or a property bubble to contend with. Potential losses on the rice-price guarantee scheme are large but can be absorbed by the size of the economy. NPL levels are seen as being containable under 3%. Immediate risk of the economy imploding because of the political crisis is small.

Unless the political problems are addressed soon, there is a risk that longer term growth will be affected. Private investment is weak, projected to drop 0.5% in 2014 as opposed to prior views of a 9% expansion. Without new private investment or government investment in infrastructure soon, drivers of future growth will be weak. It was earlier estimated that infrastructure spending alone could have added 1% to GDP each year for the next 7 years. Thailand quickly needs to have a government with a full mandate, otherwise economic policy-making is compromised and investors will hold back. This is so important that credit rating agencies promptly stated that the nullification of the 2 February elections is seen as negative as it prolongs problems.

0.1 Comment

Thailand’s recurring political problems since 2006 continue to cause frustrations for the economy. Economic growth below 4% does not generate sufficient progress to trickle down to the wider population and is regarded as a disappointment in Thailand. We are now six months into the Thai fiscal year ending September, and the economy has effectively been on hold for the whole of this period. As with previous crises, the economy will largely rely on its relatively balanced economic fundamentals to provide progress without a functional government. Past crises show that these fundamentals could power the economy for about 12 months, but beyond that, the consensus is that economic growth and investor confidence will require a properly formed government at the helm.
While uncertainty persists, businesses that are able to operate in the status quo environment will tend to fare better than those hoping to clinch new business generated by reforms or central government decisions (i.e. government spending, investment incentives, trade agreements, allocation of extractive industry rights etc.).

0.2 Disclaimer

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