Thailand: economic confidence starts to return
Published 17 September 2014
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This publication was archived on 4 July 2016
This article is no longer current. Please refer to Overseas Business Risk – Thailand
Summary
Following the military coup in May, some of the political uncertainty that was dragging down the Thai economy has reduced (at least in the short-term). Consumer confidence is at a 13-month high and business sentiment has turned positive. The National Legislative Assembly has passed the 2015 national budget bill and public investment is set to resume in October. The government is adopting an expansionary fiscal policy stance to help the economic recovery and structural reforms are expected. But domestic demand and exports are weak meaning that economic growth, while likely to improve, will remain below potential in the near future.
Detail
The Thai economy contracted by 0.1% in the first half of 2014 (on the same period in 2013) due to prolonged political uncertainty. Political tensions diminished economic activity and hurt business confidence. But recently economic confidence has started to return. The new government is trying to speed up its decision making process and accelerate the disbursement of government funds.
After the National Legislative Assembly was inaugurated on 31 July, it passed the first reading of the 2015 national budget bill on 18 August. The 2015 budget bill proposes a modest expansionary fiscal policy to support growth, amounting to a deficit of 1.9% of the forecasted 2015 GDP. The new government recently decided to amend excise and municipal taxes, and is proposing an inheritance tax law. The Oil Fund’s levy, which is the money collected from diesel and gasoline sales to subsidise environmentally friendly fuel, is to be amended as part of the government’s effort to levy a single excise-tax rate on all types of fuel, which will bring down petrol prices and raise diesel prices.
Consumer spending is gradually returning to normal after slowing dramatically in the first quarter of 2014. Household consumption grew in the second quarter, compared with a 3% decline in the previous quarter. The consumer confidence index reached a 13-month high in August, highlighting households’ increasing faith in the economic recovery. The halt in the government subsidy programmes, particularly for rice, might have a negative impact on consumer spending though, especially in rural areas where farmers have already been affected by lower prices. The 2015 budget reduced the allocations for subsidy projects such as the village funds and agricultural product price intervention, which could lower domestic purchasing power. These might offset the junta’s decision to authorise long-overdue payments to farmers which were owed under the rice pledging scheme of the previous government.
Investment spending is expected to get a boost now that the Board of Investment (BOI) has begun to approve THB 760 billion (around £14.5 billion) of projects from the backlog of approval applications. The junta has also released the framework of an infrastructure plan to form transport links to ASEAN countries, including widening and repairing the railway tracks. A member of the budget scrutiny panel said the investment budget will be closely monitored and the construction costs of state projects need to be trimmed down by at least 10-30%. The budget for water and flood management projects is allocated at 71,100 million baht (around £1,358 million), significantly less than the previous government’s plan.
Thailand’s exports are facing an even tougher challenge, growing by only 0.4% in the second quarter (on a year earlier), after four successive quarters of contraction. Imports fell in the first half of 2014, perhaps not surprising given weak domestic demand. But the decline in raw materials and immediate goods imports signals that exports are likely to remain weak for the rest of 2014. The tourism sector, which counts as services exports, has still not fully recovered. But it is expected to rebound in the latter half of the year, due to the more stable political conditions and a new visa fee waiver scheme for Chinese and Taiwanese tourists.
Headline inflation declined in August and continues to moderate while core inflation remained stable at 1.8% in August. The Monetary Policy Committee (MPC) decided to keep the benchmark interest rate at 2% in order to support the economic recovery. The Bank of Thailand expects inflationary pressure from the demand side as a result of accelerated domestic spending and export recovery.
Comment
The recent economic data show that Thailand’s prospects for a recovery in growth are promising, but serious challenges remain. Consumption and investment have started to recover although exports remain a drag on growth. The National Economic and Social Development Board recently forecast 1.5-2.0% GDP growth in 2014 and expects 3.5-4.5% next year - below estimates from the Bank of Thailand and HSBC, at 5.5% and 5% respectively.
Despite the political crisis, Thailand moved up its ranking from 37th to 31st out of 144 economies in the World Economic Forum’s recent Global Competitiveness Index 2014-2015. Among ASEAN, Thailand is ranked 3rd behind Singapore and Malaysia. However, after the political disruption hurt the economy, it is necessary for Thailand to improve its competitiveness. The key for Thailand to advance in the competitiveness ranking is policies that enable a sound business environment: infrastructure, taxation, regulatory framework, and education. Once the new cabinet is active, there should be more clarity on the public infrastructure plan and more changes in business-related regulation.
The outlook for Thailand’s exports is weakened further by the fact negotiations on the EU-Thailand Free Trade Agreement (FTA) are effectively on hold. Thailand will also lose preferential tariff access under the EU’s Generalised System of Preferences (GSP) scheme. As Thailand has been classified as an upper-middle income country three years in a row since 2010, Thailand will fully exit from the GSP scheme in 2015. This is expected to have an important impact on the economy since the EU is the 4th largest export market for Thailand after ASEAN, China and the US.
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