Thailand puts growth first after economic slowdown

Although buoyed by decades of steady expansion, Thailand – South-east Asia’s second-largest economy – saw growth falter in recent years in the wake of political unrest and challenging external conditions. However, falling global oil prices have benefitted the economy, which, combined with stimulus packages, led to a moderate recovery in 2015.

Growth forecasts are positive for 2016, although the benefits of falling oil prices have been offset by a concurrent fall in commodities prices, while the slowdown in China will also constrain export revenues, which account for two-thirds of GDP. While the baht’s depreciation could bolster exports, the government is also implementing a long-term strategy aimed at improving export competitiveness and shoring up domestic industry. Stimulus packages and an expansive infrastructure development programme will keep growth stable in 2016, supporting lending, foreign direct investment (FDI) inflows and rural incomes, while robust federal reserves, accommodative lending policies and a well-provisioned banking sector should insulate Thailand against external shocks.

Asian Tiger

An oft-cited example of successful development, Thailand has seen rapid economic growth over the previous three decades, rising from a low-income country in the 1980s to be classified as upper-middle income by the World Bank in 2011. Though dependent on exports and facing external and domestic headwinds, the economy today is mature, dynamic and well diversified. In 2014 the agriculture and natural resources accounted for 12% of GDP, while industry and services comprised 42% and 46%, respectively, according to the World Bank.

Driven by industrial expansion and a powerhouse agricultural sector putting Thailand at the forefront of global rice production, the economy grew by 8-9% on average between the late 1980s and early 1990s, before being hit by the Asian financial crisis in 1997-98. Recovery was relatively quick, and Thailand returned to robust expansion through the early 2000s, although the global financial crisis in 2008-09, coupled with political instability and extreme weather events, have led to volatility in recent years.

Peaks & Troughs

Growth has fluctuated since 2009, when the economy contracted by 0.7%, with World Bank data showing a dramatic rebound in 2010 as real GDP growth hit a 20-year high of 7.5%, before plunging to 0.8% in 2011, due largely to floods which drove industrial production to a standstill late in the year. Growth rebounded again to 7.3% in 2012 on the back of a resurgence in capital markets, manufacturing and consumer spending, though political unrest affected expansion in 2013 and 2014. Real GDP growth dropped to 2.8% in 2013 and 0.9% in 2014, a year which saw former prime minister Yingluck Shinawatra deposed in a military coup in May, after more than 18 months of demonstrations and protests.

With investor confidence low following the coup, the new government implemented a host of stimulus measures and legal reforms aimed at improving investment and supporting farmers. These paid off in 2015: Thailand’s economy outperformed analysts’ expectations in the fourth quarter as the government’s original stimulus measures, unveiled in September 2014, began to bear fruit, with GDP expanding by 2.8% in the last three months of the year, compared to Bloomberg projections of 2.6%. Total GDP growth in 2015 also stood at 2.8%, after forecasts of 2.7%.

Growth outlooks for 2016 are mixed but positive, owing largely to an anticipated rise in industrial activity, a falling energy import bill and government stimulus measures, including a major infrastructure investment programme. Factors weighing on growth will include an ongoing economic slowdown and weakening global demand for Thai exports, high levels of consumer debt which will curtail domestic consumption, and one of the worst droughts in 20 years, which will have an impact on 4m rice paddy fields.

In January 2016 the Ministry of Finance downgraded its growth forecast from 3.8% to 3.7%, and in February the country’s planning agency, the National Economic and Social Development Board (NESDB), downgraded its outlook from 3-4% to 2.8-3.8%.

Oil

A major external factor currently affecting Thailand is the drop in global oil and non-oil commodities prices. Although it is an oil and gas producer, the country is a net energy importer, and saw its fuel bill soar in recent years: energy imports rose by 29% in 2010 to hit BT1.32trn ($39.7bn) in 2011, and by 12% and 7% in 2011 and 2012, respectively, to stand at BT1.59trn ($47.9bn) in 2013, or 21% of total imports.

Oil prices began their freefall in June 2014, however, tumbling from $115 per barrel to around $30 per barrel by February 2016, significantly reducing Thailand’s energy bill. Energy imports moderated by 3.14% in 2014 to end the year at BT1.54trn ($46.4bn), and dropped by 35.4% to hit BT1.01trn ($30.4bn) in 2015, their lowest levels since 2009, including BT663.2bn ($20bn) of crude oil, BT158.75bn ($4.8bn) of natural gas, and BT141.97bn ($4.3bn) of petroleum products.

On top of another BT500bn ($15.1bn) in fiscal room, the situation is also advantageous for the energy-dependent manufacturing sector. Bank of America Merrill Lynch Global Research estimates that every 10% drop in oil prices boosts GDP growth in Thailand by 0.45 percentage points, making it one of the biggest beneficiaries of current energy market conditions. After edging up by 0.3% in 2015, industrial output is set to record robust expansion in 2015, partly due to lower energy prices, with the Ministry of Industry projecting automotive production will rise by 12.4%, and electronics goods and electrical appliances by 3-5%.

Commodities

Despite these gains, the economy has simultaneously struggled to maintain export revenues, after global commodities prices – including those for rubber and rice, Thailand’s top two agricultural exports – plummeted alongside oil. Making matters worse is the fact that the country currently has huge stockpiles of rice, following the failure of former prime minister Yingluck Shinawatra’s pledge scheme, which bought rice from farmers at elevated prices for three years, but racked up $15bn in losses, including $2.5bn owed to farmers, by mid-2014. Most of the rice purchased under the scheme went unsold, with the value of these stocks now significantly reduced after prices fell throughout 2014 and 2015.

The scheme was cancelled following the coup, which saw General Prayuth Chan-ocha become first interim and then full prime minister, although the government continues to heavily subsidise rice farmers through stimulus packages. It also remains under pressure to recoup some of the costs of the scheme. However, selling its stockpile, which stood at 13m tonnes in February 2016, would result in significant losses at current market prices. In February 2016 Duangporn Rodphaya, director-general of the ministry’s foreign trade department, announced Thailand had targeted 9.5m tonnes of rice exports in 2016, down from 10m tonnes in 2015 due to the drought.

Exports & FDI

Exports declined for the third consecutive year in 2015. Although exports had recorded robust growth in 2010 and 2011, expanding by 10.1% and 2.9%, respectively, political instability, collapsing commodities prices and, perhaps most significantly, an economic slowdown in China have had an effect. Import revenues declined by 0.27% and 0.43% in 2013 and 2014, respectively, but fell by 5.78% in 2015, due to poor performance in farm exports, which dropped by 7.4%, and industrial goods, which contracted by 4%.

The government is moving to address these issues through a two-pronged strategy of bolstering domestic industry, particularly the tourism and agricultural sectors, and adopting a new investment and industrial development strategy emphasising investment in critical and value-added areas of production (see analysis and Trade & Investment chapter). This should help boost FDI inflows, which plunged by 78% during the first nine months of the year, with the total amount listed in direct applications standing at BT93.8bn ($2.8bn) in November, while the total number of applications simultaneously fell by 37% to 513.

However, China’s outlook remains gloomy, and commodities prices are expected to remain depressed in the medium term. The baht has weakened considerably since a pair of central bank rate cuts in mid-2015, but this has also driven up input costs for import-dependent manufacturers, further dampening the outlook for industrial producers and exporters in 2016.

Deflation

Low oil prices have also led to deflation, driving the baht to a U-turn in mid-2015 and losing it the title as Asia’s best-performing currency. The consumer price index (CPI) fell 0.9% in 2015 and stayed in negative territory throughout the year. The situation persisted into 2016, and in January the Ministry of Commerce reported the 13th straight month of negative inflation, largely as a result of falling oil prices. Headline CPI fell 0.53% y-o-y, and by 0.26% from December. January’s core inflation, not including food and energy prices, rose 0.59% y-o-y and 0.07% from December, while the core CPI was up 1.05% in 2015.

January’s inflation was weaker than the Wall Street Journal’s median forecast of -0.46%, y-o-y, and the forecast for 2016 is also subdued; oil prices are not expected to recover yet, due to a rising supply glut driven by new production in Iran and the US, and sustained output from the Organisation of the Petroleum Exporting Countries. As such, the Ministry of Commerce’s forecast for 1-2% headline inflation is somewhat optimistic. This is bad news for Thailand’s consumer borrowers, as deflation increases the cost of borrowing. Household debt in Thailand doubled between 2008 and 2014 to reach an estimated 80% of GDP, and non-performing loans (NPL) have risen in recent years across both the corporate and consumer sectors. Although NPL ratios are far lower than the years before the Asian financial crisis, and the Thai banking system remains well-provisioned against rising defaults (see Banking chapter), domestic consumption will likely remain weak in 2016 as consumer spending and borrowing moderate.

In the wake of rate cuts, deflation and falling exports, Thailand found itself involved in a global currency war in 2015, as the baht went from being Asia’s best- to its worst-performing currency during the second quarter of the year. Although the Bank of Thailand (BOT) denied that it was trying to weaken the baht, two surprise rate cuts in March and April saw it depreciate by 3% between April 18 and May 18 2015, and 9.4% against the dollar in the four years to May 2015, with then-BOT governor Prasarn Trairatvorakul telling media a weaker baht would help spur economic recovery, particularly exports.

This came as central banks from Australia, Canada, Sweden, South Korea and China undertook monetary easing to boost growth, weakening their exchange rates and making their economies more competitive. The baht also weakened as a result of central bank measures, including new regulations permitting residents to hold foreign currency deposits of up to $5m, as well as purchase properties abroad for up to $50m annually. Bloomberg reports that global funds pulled a net $912m from the Thai debt market in May alone.

The baht sank to a five-year low of 33.9 to the dollar on May 12, 2015, while ongoing concerns about the US Federal Reserve’s plans to hike rates – which finally occurred in December 2015 – triggered further outflow of capital. In late July the baht fell to a six-year low against the greenback after the Thai Industries Sentiment Index fell to 84 in June, from 85.4 in May, its sixth consecutive decline, with Bloomberg reporting in the same month that total capital outflows for 2015 had reached $1.2bn. As of late February 2016 the baht was trading at 35.7 to the dollar.

Well-Insulated

Foreign reserves remain robust, however, rising to a six-month high of $160.8bn in May, and ending the year at $156.5bn, according to the BOT, leaving the central bank plenty of space to manage depreciation smoothly. The BOT reports that the country’s current account surplus has also soared in recent years, more than doubling in 2015 to hit $34.8bn, from $15.4bn in 2014, which was itself a rebound from a $5.2bn deficit in 2013 – although data from the IMF indicates the current account surplus stood at $14.2bn and $17.2bn in 2014 and 2015, respectively. In an interview with ChannelNews Asia in February 2016, BOT governor Veerathai Santiprabhob said lower external debt levels and high reserves will cushion the country against global volatility this year, enabling the bank to keep rates low, or cut them further if external circumstances necessitate.

The government is also embarking on a wave of ambitious stimulus projects aimed at boosting growth across nearly every sector of the economy, with both fiscal and monetary policy remaining accommodative through low central interest rates, rising government spending, soft loans to farmers and small businesses, and a major infrastructure development programme.

Fiscal Support

In April 2015 Thailand’s cabinet announced it had approved a BT2.72trn ($81.9bn) budget for the 2016 fiscal year, a 5.6% increase over 2014, which projects BT233trn ($7trn) of revenues for a BT390bn ($11.7bn) deficit. The budget was notable for its planned surge in investment, which jumped by BT94.16bn ($2.8bn), or 20.9% over 2015 to hit BT543.64bn ($16.4bn). Fixed expenditure simultaneously rose by 3.6%, or BT72.98bn ($2.2bn), to hit BT101trn ($3trn). Government spending will comprise 20.4% of GDP in 2016, roughly the same as the 2015 budget, which ended on September 30, 2015.

The majority of the 2016 budget’s investment funding will be channelled into water management, basic infrastructure, road connectivity and school buildings projects, according to Budget Bureau director Somsak Chotrattanasiri. Roughly BT520bn ($15.7bn) will be allocated to the Ministry of Education, BT402bn ($12.1bn) to the central budget, BT343bn ($10.3bn) to the Ministry of the Interior and BT207bn ($6.2bn) to the Ministry of Defence.

Funding Rise

Sectors including health, transport, natural resources and agriculture will benefit from a surge of government spending in 2016. Provinces and provincial groups were allocated BT25.2bn ($759m), a 42% increase over 2015, demonstrating the government’s commitment to distributing wealth among farmers and low-income rural earners. The Ministry of Transportation also saw a spending increase of 25%, to BT138.89bn ($4.2bn), while the Ministry of Natural Resources and Environment received a 20% spending hike, to BT36.42bn ($1.1bn). Funding to non-ministry government agencies rose by 15%, to BT120.68bn ($3.6bn), while the Ministry of Public Health saw spending rise by 14% to BT125.15bn ($3.8bn).

Stimulus

Prayuth’s government has accelerated budget spending to help everyone from farmers to small businesses, in a bid to boost local demand and reduce export dependency. From September 2015 to January 2016 it allocated BT470bn ($14.1bn) of stimulus measures, excluding BT50bn ($1.5bn) of additional budget spending, according to Porametee Vimolsiri, secretary-general of the NESDB (see analyses).

The BOT is also set to keep accommodative lending policies in place, as the weakening baht and deflation put pressure on heavily indebted consumer borrowers, and the government seeks to attract new investment in priority sectors. In February 2016 the newly appointed BOT governor, Veerathai Santiprabhob, said that the bank is unlikely to hike interest rates in 2016, after the board voted to maintain the current rate of 1.5% for the sixth consecutive meeting.

Infrastructure

In addition to an expansive round of stimulus packages aimed at bolstering growth, the government has announced plans to invest heavily in new infrastructure. In September 2015 it approved five major fast-track infrastructure projects worth a combined BT200bn ($6bn), including three mass rapid transit (MRT) projects in Bangkok – the BT56.7bn ($1.7bn) pink line, the BT54.7bn ($1.6bn) yellow line and the BT82.4bn ($2.5bn) blue line extension – and two new waste-to-energy power plants. All are expected to be delivered through public-private partnerships (PPPs), creating opportunities for private designers and contractors.

These will be part of a broader long-term infrastructure drive, and transport minister Arkhom Termpittayapaisith announced in November 2015 that the government is set to launch 20 infrastructure projects worth nearly BT1.8trn ($54.2bn) before 2018, covering rail, roads, air transport and ports, as part of a five-year investment plan running until 2020. PPPs are expected to comprise 20% of the plan’s budget. According to Arkhom, these measures will help boost GDP growth by roughly 1% over the next two years, with financing to be sourced from the government budget, borrowing and PPPs. Outside of the MRT and power projects, plans include a BT468bn ($14.1bn), dual-line rail network linking Bangkok to Laos, one link in a Chinese-led international high-speed network (see analysis), a proposed “super-link” rail system connecting the Suvarnabhumi, Don Mueang and U-Tapao airports, and a BT6bn ($181m) upgrade of Laem Chabang Port, 130 km outside Bangkok.

The infrastructure plan is expected to have a major impact on growth in the construction sector, which expanded by 9.3% in the third quarter of 2015, and by 23.9% in the fourth quarter, according to the NESDB. Public construction grew as a result of disbursement to government projects under the development policy loan, which provided financing for water resource management systems, as well as road projects.

The rise in infrastructure spending also offers knock-on benefits that will boost broader economic growth, with Arkhom estimating that the programme will add a percentage point to GDP growth in 2016 and 2017. In February 2016, for example, the Investment Analysts Association announced that it is expecting the Stock Exchange of Thailand (SET) to gain 11% to 1442 points in 2016, with a survey of analysts revealing that 96.4% agree infrastructure mega-projects will be the driving force behind the country’s economic recovery.

The government has also announced plans to launch a Thailand Future Fund on the SET in 2016, which will enable investment in new and existing public infrastructure projects. This is a welcome development for the bourse, which saw average daily trading values fall by 2.6% in 2015 to $1.23bn, and market capitalisation fall by 11.5%, despite a 35.9% increase in derivatives trading, to 199,749 contracts per day.

Outlook

Although it faces a host of domestic and external challenges in 2016, the Thai economy is set to continue its ongoing recovery as a result of supportive government policies, expansive stimulus packages, and an ambitious infrastructure spending plan offering considerable opportunities to the private sector. Concerns about China and depressed commodities prices will continue to weigh on economic growth, although Thailand remains well positioned to manage these challenges, with robust international reserves and rising government spending expected to support and sustain recovery into 2017.