Thailand Special Report


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Our new country report on Thailand examines the state of Thailand’s economy. Real GDP grew by 6.4% in 2012, the fastest pace of expansion in nine years, as the economy bounced back from the previous year’s floods.

Despite all of its past political strife, global investors have taken a shine to Thailand. In 2012 the country’s main stockmarket index, the SET, surged by almost 36% to trade at record highs, outperforming every other bourse in Southeast Asia.

But stability is fragile and the government has remained in power partly because of its willingness to shelve contentious issues. How long can the economy grow at this pace with the government's populist policies and lack of reform?

Published in: Economy & Finance
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Thailand Special Report

  1. 1. The risks facing investors in Thailand would rise again in the event of an end to the fragile truce between Yingluck’s government and the country’s conservativeestablishment. Against a backdrop of recent political stability, the Thai economy is booming. Real GDP grew by 6.4% in 2012, the fastest pace of expansion in nine years, as the economy bounced back from the previous year’s floods. The local currency, the baht, is appreciating quickly as foreign funds pile into Thailand’s stockmarket, which is the region’s best- performing bourse. Not a day seems to pass without a Japanese carmaker announcing ambitious expansion plans into the country. And, at last, the telecommunications regulator has auctioned off third-generation (3G) spectrum—ending an embarrassing episode during which Thailand had some of the slowest mobile Internet speeds in South-east Asia, in perhaps the most glaring example of the way fractious politics had disrupted policymaking and the business environment. Thaksin Shinawatra, a former prime minister of Thailand who was toppled by a military coup in 2006, continues to loom large over the country’s political scene. Yet his sister, Yingluck Shinawatra, has brought about a degree of stability since she led her Puea Thai party to a decisive victory at the 2011 general election. A truce has been established between the Puea Thai-led government and the country’s military-backed royalist establishment, which was ultimately responsible for the coup against Thaksin. This return to relative stability has raised hopes that the country may finally be putting more than six years of often-violent power struggle behind it. Admittedly, there have been moments when the country has been on the brink of crisis, mostly over the thorny issues of constitutional reform and Thaksin’s return to Thailand from self-exile. Another round of protests and counter-demonstrations by pro-Thaksin “redshirts” and anti-Thaksin “yellowshirts” seemed certain in mid-2012, when the opposition petitioned the Constitutional Court to dissolve Puea Thai on the grounds that its proposed reforms to the military- sponsored constitution posed a grave threat to the monarchy. In the event, however, the court threw out the opposition’s complaint. Still, there is a sense of wonder about this new-found stability. Yingluck remains hugely popular, yet her truce with the establishment is a fragile one; it rests on the government’s willingness to shelve contentious issues such as constitutional reform and, above all, Thaksin’s homecoming. However, Puea Thai has not given up on rewriting the constitution for good. Instead, in line with the Constitutional Court’s ruling, it now proposes to put the issue to a referendum. Amnesty bills will also prove contentious. There are signs of an emerging consensus that those convicted of violating emergency decrees prohibiting protests could be pardoned. But the issue of whether to extend an amnesty to political leaders charged with other offences remains as divisive as ever. Any amnesty that would clear Thaksin of his 2008 corruption conviction could plunge the country back into political chaos. Wider questions remain unanswered about where power ultimately resides in Thailand. The country’s traditional elites—the royal family, the privy councillors, the generals, the senior bureaucrats and judges—are determined to cling on to their traditional claim to rule in the face of a challenge from a broad-based alliance comprising parvenu businessmen such as Thaksin as well as poorer Thais who seem to have attained a new political consciousness. In Thailand, a country that has experienced 18 coups since the constitutional monarchy was established in 1932, political institutions may not be mature enough to accomplish such a far-reaching transition peacefully. A repeat of the violence witnessed in 2010, when about 90 people, mostly redshirts, were killed in clashes with security forces, or of the large-scale protests seen in 2008, when yellowshirts closed down Bangkok’s airports, would weigh heavily on the Thai economy and asset prices. Sponsored by: Yingluck’s truce with the establishment rests on the government’s willingness to shelve contentious issues such as constitutional reform and, above all, Thaksin’s homecoming. About Aberdeen Asset Management Aberdeen Asset Management PLC is a global investment group, managing assets for both retail and institutional clients from offices around the world. The group’s headquarters is in Aderdeen but we prefer to locate our fund managers near the companies and markets in which they invest. Aberdeen is one of the UK’s largest investment trust managers and manages or advises 17 UK investment companies with assets in excess of £5.5 billion. The majority of Aberdeen-managed investment trusts and companies are on offer through the Aberdeen Investment Trust ISA or Share Plan, available at the award winning Aberdeen Investment Trust Centre: Aberdeen Asia, a wholly owned subsidiary of Aberdeen Asset Management PLC, manages seven Asian trusts including Aberdeen New Thai Investment Trust PLC, a unique and highly specialist investment trust which invests solely in securities listed on the Thai stock market. Launched in 1989, it is the only UK investment trust to offer pure exposure to this fast growing Asian economy - details available at the trust-specific website: About the Economist Intelligence Unit The Economist Intelligence Unit (EIU) is the world's leading resource for economic and business research, forecasting and analysis. It provides accurate and impartial intelligence for companies, government agencies, financial institutions and academic organisations around the globe, inspiring business leaders to act with confidence since 1946. EIU products include its flagship Country Reports service, providing political and economic analysis for 195 countries, and a portfolio of subscription-based data and forecasting services. The company also undertakes bespoke research and analysis projects on individual markets and business sectors. More information is available at or follow us on
  2. 2. Despite all of its past political strife, global investors have taken a shine to Thailand. In 2012 the country’s main stockmarket index, the SET, surged by almost 36% to trade at record highs, outperforming every other bourse in South- east Asia. Foreign funds were net buyers of Bt76bn-worth (around US$2.4bn) of SET-listed securities. In the second half of the year the local currency, the baht, appreciated by 4.2% against the US dollar. Is this confidence warranted? The local economy has certainly rebounded from the floods that swept across Thailand in 2011, the worst flooding to hit the country in almost 70 years, restricting real GDP growth in that year to just 0.1%. The economy expanded by 6.4% in 2012, the fastest pace of growth in nine years. Still, Thailand’s recovery has been fitful and hampered by strong global economic headwinds, not only from Europe and the US, but also from its Asian trading partners. Exports of goods and services account for 70-80% of Thailand’s GDP, making the economy seemingly less susceptible to depressed global conditions than Singapore, Malaysia and Vietnam (the three economies in South-east Asia where exports account for a larger share of GDP). Electronic and automotive goods are Thailand’s two main categories of export. But, as was shown by the 2009 global recession, the country is more exposed to weak external demand than is suggested by a simple exports-to-GDP calculation. In 2009 Thailand’s real GDP contracted by 2.3%, more than anywhere else in South- east Asia, and exports of goods and services plunged by 12.5%, also the sharpest decline recorded in the region. This year global growth is set to accelerate slightly. At market exchange rates, the Economist Intelligence Unit (EIU) expects the world economy to expand by 2.3%, up from an estimated 2.1% in 2012. Thailand’s main trading partners in Asia, and China in particular, which has displaced the US as Thailand’s leading export market, will grow faster this year. The Thai economy is expected to expand by 4.2% in 2013. Last year’s exceptionally rapid annual growth rate reflected the low base of comparison in flood-hit 2011. Although average annual expansion is set slow this year, the Thai economy is still strengthening. Populist policies The populist policies of the prime minister, Yingluck Shinawatra, and her administration will support domestic demand this year. Government spending is set to rise by 5.4% to Bt2.5trn (US$83.2bn) in fiscal year 2013/14 (October­ September), according to budget proposals approved by the cabinet on February 13th. On January 1st Yingluck’s government delivered one of its core election pledges: a national daily minimum wage of Bt300 (about US$10). moderate, with consumer prices rising by only 3% on average in 2012. But the central bank has sensibly shown no sign of loosening monetary policy and is expected to begin raising interest rates by the end of the year. Monetary policy and the baht’s exchange rate will therefore remain one of the most contentious areas of policymaking. Thailand’s economy is recovering. In 2013 stronger net export growth will provide further impetus to an already booming domestic economy. Real GDP expansion will then accelerate to 5.1% a year on average in 2014-17. To this extent, the strong performance of the stockmarket and the baht seem warranted. But the impact of the government’s populist policies on the economy and debt ratios remains a cause for caution. © The Economist Intelligence Unit Limited 2011 Report sponsored by Aberdeen Global Asset Management Furthermore, this year the rate of corporate income tax was cut to 20%, from 23% in 2012 and 30% in 2011. In addition, state-owned banks continue to support rural incomes by buying up as much rice as farmers can grow at a guaranteed price of Bt15,000 per tonne—well above the market rate. The EIU estimates that domestic demand, mainly driven by private consumption and fixed investment, added 7.2 percentage points to GDP growth last year (the external sector meanwhile subtracted almost 2 percentage points). Industry expanded by 7.2%, services by 6.2% and agriculture by 3.1%. Although Thai exporters are likely to see some improvement in trading conditions this year, private consumption will continue to fuel the economy. Nevertheless, populist policies pose risks. Although the government’s fiscal position does not appear to be too profligate, with the budget deficit in 2012/13 expected to reach Bt400bn, equivalent to only around 3.5% of GDP, its policies are responsible for a slow but steady rise in public debt. Concerns are mounting over the sustainability of the rice- subsidy scheme, which has supported rural incomes, albeit very inefficiently. Exports of rice plunged by about 36% in volume terms last year, as the government, via state-owned agricultural banks, offered producers higher prices than those available in international markets. Thailand lost its decades-long position as the world’s largest rice exporter, coming in third place behind India and Vietnam. Meanwhile, the rise in the wages of the country’s lowest-paid workers—who in some cases have seen their pay increase by 88% in less than a year—threatens faster rates of inflation and higher unemployment, as well as a loss of international competitiveness for the export-led manufacturing sector. The Federation of Thai Industries is calling for tax breaks for small- and medium-sized firms whose profit margins have come under pressure from high-wage bills. Another of the government’s populist schemes, tax rebates for first-time buyers of cars, has also caused concern. It underpinned a record 82.6% spike in domestic sales of passenger cars last year. But the programme is also partly responsible for an increase in household debt. Personal loans grew by 21.6% last year, the fastest pace in seven years. Households are not, on the whole, highly leveraged, but the Bank of Thailand (BOT, the central bank) has expressed concern over rising debt, especially among low- income borrowers. Policy spats Yingluck’s government would like the BOT to stimulate the economy further with monetary policy. Exporters are also calling for lower interest rates, as a means of weakening the baht, whose ascent threatens to price them out of international markets. The hawkish central bank governor, Prasarn Trairatvorakul, has left the BOT’s main policy interest rate, the one-day repurchase rate, on hold at 2.75% since October 2012, despite calls for further rate reductions. Inflation remains THAILANDA BOOM BUILT ON CAPITALISM Macroeconomic overview 2 0 1 2 Population 2012: 68.8 m GDP 2012: US$ 366 bn Real GDP growth 2012: 6.4% Consumer price inflation 2012: 3% Current-account balance 2012: 0.7% Median household income 2012: US$6,043 Passenger car sales 2012: 669,857 Commercial car sales 2012: 762,920 Motorcycle sales: 2,132,295 International tourist arrivals: 22m Hotel occupancy rate: 60.9% In 2013 stronger net export growth will provide further impetus to an already booming domestic economy. Thailand Stock Exchange (SET) performance (January 2008 = 100) 2008-Jan 2008-Apr 2008-Jul 2008-Oct 2009-Jan 2009-Apr 2009-Apr 2009-Oct 2010-Jan 2010-Apr 2010-Jul 2010-Oct 2011-Jan 2011-Apr 2011-Jul 2011-Oct 2012-Jan 2012-Apr 2012-Jul 2012-Oct 2013-Jan 200 180 160 140 120 100 80 60 40 20 0 Source: Economist Intelligence Unit Gross domestic product (quarterly and annual percentage change) 2008-Q1 2008-Q2 2008-Q3 2008-Q4 2009-Q1 2009-Q2 2009-Q3 2009-Q4 2010-Q1 2010-Q2 2010-Q3 2010-Q4 2011-Q1 2011-Q2 2011-Q3 2011-Q4 2012-Q1 2012-Q2 2012-Q3 2012-Q4 25.0 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0 Quarter on quarter Year on year Source: Economist Intelligence Unit Interest rates: One-day repo rates (%, end of period) 2008-Jan 2008-Mar 2008-May 2008-Jul 2008-Sep 2008-Nov 2009-Jan 2009-Mar 2009-May 2009-Jul 2009-Sep 2009-Nov 2010-Jan 2010-Mar 2010-May 2010-Jul 2010-Sep 2010-Nov 2011-Jan 2011-Mar 2011-May 2011-Jul 2011-Sep 2011-Nov 2012-Jan 2012-Mar 2012-May 2012-Jul 2012-Sep 2012-Nov 2013-Jan4 3.5 3 2.5 2 1.5 1 0.5 0 Source: Economist Intelligence Unit Gross domestic product (annual forecast) “US$ bn (right scale)” “% change; real terms (leftscale)” 2008 10.0 8.0 6.0 4.0 2.0 -2.0 0.0 -4.0 2009 2010 2011 2012 2013 2014 2015 700.0 600.0 500.0 400.0 300.0 100.0 200.0 0.0 2016 2017 Source: Economist Intelligence Unit