1 Economist: Clare Howarth, Lead Asia-Pacific Economist | Tel: +44 1865 268937 | e-mail: [email protected]24 Oct 2014 Emerging Markets Emerging Markets Weekly Economic Briefing Thailand – investor optimism at odds with fragile outlook The army takeover in May secured short-term stability for Thailand. It reinstated government spending and prompted a rebound in consumer confidence. At the same time financial markets have performed strongly and FDI flows have remained substantial. However, although some parts of the economy have picked up quickly, other areas have remained sluggish. The latter is in line with the fact that Thailand’s economic performance since the mid-2000s has been modest compared to its regional peers, with confidence in the future steadily undermined by political tensions. We expect Thai GDP growth to be under 4% a year in the medium term. Moreover, while there is little hope of a significant improvement in the political climate, the risk of a worse outturn is rising. There could, for example, be disagreement over succession to the throne – the ailing 86- year old King Bhumibol commands enough respect to hold potential rivalries at bay, but his death could lead to financial market turmoil, major capital outflows and hence a deep recession. The coup secured short-term stability… The army coup in May has allowed investment projects to be restarted and fiscal spending to resume. It has also ended the uncertainty about what may happen in the near future as the military government has said that elections will be held no earlier than late 2015, after new institutional and constitutional reforms have been introduced (no detail has been given on these yet). This has prompted a rebound in activity as households, firms and government agencies make up for the shortfall in spending induced by the political crisis between November 2013 and May 2014. Seasonally adjusted GDP rose by 0.9% on the quarter in Q2 and we expect further rises of 1.3% and 1.7% in Q3 and Q4 respectively, offsetting the stagnation at the end of last year and the 1.9% plunge in Q1 2014. …boosting the stock market and FDI inflows The ending of the short-term uncertainty has led to a revival of consumer confidence and a fairly strong performance by Thai financial markets. Although the Thai stock market has dipped in recent weeks, in line with regional and global trends, it is 9% higher than before the 22 May coup and up on the levels of a year ago (before the latest crisis started). By contrast, many other Asian markets have weakened over the past five months. At the same time, FDI inflows have been quite substantial this year, despite the uncertainty: inflows were up almost 30% in the first seven months of 2014. 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 Thailand: FDI and stockmarket strong in H1 '14 Source : Oxford Economics/Haver Analytics Stockmarket, Apr 75 = 100, RHS FDI inflows, US$, 12m total LHS But serious underlying problems persist… This seemingly relaxed attitude of investors seems puzzling for two key reasons. First, the underlying health
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Emerging Markets Weekly Economic Briefing Thailand – investor optimism at odds with fragile outlook The army takeover in May secured short-term stability for Thailand. It reinstated government
spending and prompted a rebound in consumer confidence. At the same time financial markets
have performed strongly and FDI flows have remained substantial. However, although some parts
of the economy have picked up quickly, other areas have remained sluggish. The latter is in line
with the fact that Thailand’s economic performance since the mid-2000s has been modest
compared to its regional peers, with confidence in the future steadily undermined by political
tensions. We expect Thai GDP growth to be under 4% a year in the medium term. Moreover, while
there is little hope of a significant improvement in the political climate, the risk of a worse outturn is
rising. There could, for example, be disagreement over succession to the throne – the ailing 86-
year old King Bhumibol commands enough respect to hold potential rivalries at bay, but his death
could lead to financial market turmoil, major capital outflows and hence a deep recession.
The coup secured short-term stability…
The army coup in May has allowed investment projects to be restarted and fiscal spending to resume. It has also ended the uncertainty about what may happen in the near future as the military government has said that elections will be held no earlier than late 2015, after new institutional and constitutional reforms have been introduced (no detail has been given on these yet). This has prompted a rebound in activity as households, firms and government agencies make up for the shortfall in spending induced by the political crisis between November 2013 and May 2014. Seasonally adjusted GDP rose by 0.9% on the quarter in Q2 and we expect further rises of 1.3% and 1.7% in Q3 and Q4 respectively, offsetting the stagnation at the end of last year and the 1.9% plunge in Q1 2014.
…boosting the stock market and FDI inflows
The ending of the short-term uncertainty has led to a revival of consumer confidence and a fairly strong performance by Thai financial markets. Although the Thai stock market has dipped in recent weeks, in line with regional and global trends, it is 9% higher than before the 22 May coup and up on the levels of a year ago (before
the latest crisis started). By contrast, many other Asian markets have weakened over the past five months. At the same time, FDI inflows have been quite substantial this year, despite the uncertainty: inflows were up almost 30% in the first seven months of 2014.
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2006 2007 2008 2009 2010 2011 2012 2013 2014
Thailand: FDI and stockmarket strong in H1 '14
Source : Oxford Economics/Haver Analytics
Stockmarket, Apr 75 = 100, RHS
FDI inflows, US$, 12m total LHS
But serious underlying problems persist…
This seemingly relaxed attitude of investors seems puzzling for two key reasons. First, the underlying health
of the Thai economy looks very fragile. Even before the very weak growth performance this year, Thailand has been the most sluggish of the Asian emergers since 2006 (when the Thaksin government was overthrown). Second, the coup has not resolved the underlying deep divide in the country’s politics. As a result, a shock – such as the death of ailing 86-year old King Bhumibol and a disputed succession – could plunge Thailand back into crisis and deep recession.
…with patchy recovery since the coup
Although government spending is bouncing back and the new government has enthusiastically announced a number of stimulus measures, many other indicators suggest that large parts of the economy remained very weak in the June-August period. Private investment slipped throughout these months, while consumer spending has largely stagnated and the annual growth in tourism arrivals has yet to return to positive territory (-7% in September). Only August’s industrial output data, a rise of 3.8% on the month, showed some dynamism (but this is a volatile series).
Moreover, looking forward, even government spending may not rise particularly strongly as the new government has put several key projects on hold while their costs are reviewed – these include a 60bn baht expansion of Suvarnabhumi Airport in Bangkok and a 350bn baht water management scheme.
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1
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4
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6
7
2014 2015-18 average
Oct 12 forecastOct 13 forecastOct 14 forecast
Thailand: GDP growth% Annual Growth
Source : Oxford Economics/Haver Analytics
Growth performance has been undermined by poor politics since 2006…
Although the rebound in H2 2014 will be followed by a more modest rate of expansion through 2015, GDP growth is expected to average 4.3% next year. After that
we are now forecasting that growth will average just 3.9% between 2015 and 2018, whereas a year ago we were expecting 5.1% pa over this period. We believe that the lengthy period of political tension has undermined long-term confidence in the economy – making both consumers and businesses more cautious. The political problems in Thailand and the resulting less robust domestic market have probably reduced its attractiveness as a place to invest compared to neighbours such as Indonesia and Vietnam. In addition to the subdued domestic economic outlook over the next few years, the external trading environment is likely to be less dynamic in this period than might have been expected a few months ago – given the likelihood that Chinese growth will slow to significantly less than the current 7-7.5% pace.
Our caution on the Thai economic outlook is supported by the following:
It is worth remembering that activity was fairly subdued even before the turmoil erupted in November. Indeed Thailand grew by less than 3% year-on-year in both Q2 and Q3 2013, whereas Malaysia grew by close to 5% and Indonesia close to 6%.
In the 2014/15 World Economic Forum Global Competitiveness report, Thailand’s overall score was 4.7 (the maximum score is 7), down from 4.8 in 2006/07. Over the same period the Philippines and Indonesia both improved their scores by 0.4 points. It is likely Thailand would have made faster progress in key areas such as infrastructure, health and education had the political environment been more stable.
0 2 4 6 8 10 12
China
India
Vietnam
Indonesia
Singapore
Philippines
Malaysia
Thailand Five year average from 2014
Average from 2006-13
East Asia: GDP growth slowest in Thailand% Annual growth
In June the army announced a ‘Happiness’ campaign and organised free festivals across Bangkok to try and raise the collective mood. But this merely served to highlight the fact that since the intermittent political troubles began in 2006, living standards have improved at a much slower pace than in other countries in the region. From 2006, Thailand has experienced the slowest average growth in East Asia, even compared to much more developed Singapore. And we expect Thailand to continue to be the regional laggard.
Other forecasters have also downgraded Thai growth expectations, albeit less decisively than we have. For example, the IMF expects the country to grow an average 4.4% between 2015-18, down from 4.7% a year ago.
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2006 2007 2008 2009 2010 2011 2012 2013 2014
Jan 2006 = 100
Source: Haver Analytics
Emerging Asia: Stock markets
Indonesia
Philippines
Korea
ThailandMalaysia
Political situation could get much worse…
Another reason why investors might want to be cautious about Thailand is that the political situation could still deteriorate. Even if the military stick to their provisional timetable and elections are held in late 2015, it is difficult to see how Thailand will be any less polarised. And the delay over the announcement of any reform does not bode well for the prospects of the military government
trying to arrange a new institutional and constitutional framework that would start to heal the country’s deep political divide. Unless a spirit of political compromise can suddenly be found, the tensions will persist.
…driving the economy into deep recession Against this background, a sudden shock to the political system could push the country back into turmoil and ramp up the political and regional divides. The most obvious risk is the death of King Bhumibol, currently recovering in hospital after a gall bladder operation, and a dispute over the succession. His son and heir-apparent to the throne is Prince Maha Vajiralongkorn, who has poor relations with the leadership of the military coup and the Democratic Party (and whose personal army is reported to be increasingly drawn from the Shinawatra heartlands). As a result, in the event of the king’s death, the military might impose a different monarch, which could push some to consider civil war. In such a situation, Thailand could be plunged into a recession much closer to the scale of the downturn it suffered in the Asian financial crisis of 1997/98 (the economy contracted by 10.5% in 1998) than the global financial crisis of 2008/09 (when Thai GDP fell 2.3% in 2009).
These risks are far from negligible and particularly relevant when considering the location of long-term investments. However, the exchange rate does at least have some protection from a sustained current account surplus in the medium term (which has been further bolstered by the sharp fall in oil prices since mid-year). But this would not be enough to cope with a shattering crisis that sparked huge capital outflows.
We are cautious about Thailand’s economic and financial outlook. Even if the political situation remains fairly calm, the country’s growth prospects look subdued compared with other countries in the region. In the event of a serious political, shock the country could quickly spiral into recession.
Official GDP growth for Q3 was close to the 2014 target rate of 7.5%, but a slowdown in the property market, together with slowing investment and retail sales growth, indicate that activity is cooling. House prices for China as a whole contracted y/y in September for the first time since November 2012. The flash PMI for October edged up a little but is still barely in expansionary territory.
Mexico – Unemployment Rate (Sep, s.adj)
4.8%
4.8%
Stronger domestic activity should start to push the unemployment rate down next year.
Korea – GDP (Q3, s.adj)
– Consumer spending
– Machinery investment
– Export Volumes – Import Volumes
0.5% q/q
3.5% y/y
1.5% y/y
7.6% y/y
3.6% y/y
2.8% y/y
0.9% q/q
3.2% y/y
1.5% y/y
4.0% y/y
2.1% y/y
2.5% y/y
GDP picked up in Q3, with private spending and construction boosted by a 11.7 trillion won stimulus package. Increased government spending over the next three years and loose monetary policy will support domestic activity, but the external outlook is challenging. Export volumes suffered the largest quarterly fall in Q3 since 2008, and weaker growth in China is likely to weigh on trade prospects across the region.
Poland – Industrial Output
(Sep, s. adj)
– Retail sales (Sep, constant prices, s. adj)
-1.1% m/m
0.8% y/y
1.4% m/m
3.7% y/y
1.0% m/m
1.9% y/y
-1.4% m/m
2.2% y/y
Industrial output and retail sales have stagnated, as exports have steadily weakened this year. The manufacturing sector is likely to remain under pressure.
Singapore – Industrial output ex biomed (Sep, s.adj)
4.4% m/m
3.4% y/y
1.2% m/m
-0.1% y/y
Although industrial activity fell in September, the pace of decline was less severe than the Q3 advance GDP estimate suggested. We expect Q3 GDP to be revised up.
Taiwan – Export Orders (Sep)
– Unemployment Rate (s.adj)
– Industrial Output (Sep, s. adj)
– Retail Sales (Sep)
5.2% y/y
3.9% (Aug)
1.3% m/m
8.0% y/y
4.5% y/y
12.7% y/y
3.9% (Sep)
0.6% m/m
8.8% y/y
4.4% y/y
Export orders picked up sharply, driven by the release of the iPhone 6, but there are concerns that orders will drop when this effect wears off. Unemployment has trended downwards in recent years, helping to support the consumer recovery.
S. Africa – Consumer Prices 6.4% y/y (Aug) 5.9% y/y (Sep) Inflation eased to within the 3-6% target range for the first time since March on lower food and fuel prices. But core inflation remains elevated. We therefore expect a further rate hike in November.
Unchanged As expected, the Philippine central bank decided to keep the reverse repo rate at 4%. The interest paid on its Special Deposit Account (SDA) was also left unchanged at 2.5%. This brings to a temporary halt a tightening cycle that started in June and saw repeated increases in both rates. Inflation dropped from 4.9% y/y in August to 4.4% in September. However, the weaker peso is likely to push inflation higher in coming months and we expect another 25bp rate hike at the next meeting on 11 December.
Oct 23rd – Turkey 8.25% (1-week repo rate)
Unchanged The central bank left the interest rate on hold for a second successive month as expected. Inflation remained well above target at 8.9% y/y in September. However, we expect no further changes to monetary policy until much later in 2015, when inflation should have eased enough for the bank to consider reducing rates.