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Economics: Thailand Economics – Markets – Strategy TH: Politics over economics • In the first quarter, Thai economy grew by 6% (YoY) and 5.6% (QoQ, saar) driven by strong export growth and modest recovery in domestic demand • However, since then, the political situation has deteriorated sharply with anti-government protests on the rise in Bangkok. In fact, risks of a coup have risen sharply in May08 / Jun08. In our central scenario, we assume the current turmoil continues • The lack of political stability and the rise in cost of living should prevent any material recovery in domestic demand. Yet, strong economic fundamentals and competitiveness in manufacturing should keep export strong. We, therefore, look for 5% and 4.7% GDP growth in ‘08 and ‘09 • There is still sense in reducing the degree of policy accommodation. Therefore, we have maintained our forecast for rates to be lifted by 50bps to 3.75% in 4Q08. A 3Q08 rate hike, however, cannot be ruled out. 1Q08 GDP review and summary outlook Political instability is likely to hurt domestic demand In the first quarter, Thai economy grew by 6% (YoY) and 5.6% (QoQ, saar) driven by strong export growth, modest recovery in domestic demand and inventory accumulation. The data particularly reveal Thailand’s export competitiveness - exports grew by 8.7% (YoY) or 23% (QoQ, saar). Consumption spending expanded by 5.5% (QoQ, saar) but was weaker than our expectations and unimpressive in YoY terms (2.6%). Private investment spending grew by 6.5% (YoY) but slowed down to 1% (QoQ, saar) in sequential terms. Oddly, government spending - consumption and investment - slowed sharply (Charts 1 & 2). Going forward, although economic fundamentals are sound, lack of political stability should hurt domestic demand. This coupled with the rise in cost of living and worries about higher inflation should keep domestic demand below potential. Therefore, we recently downgraded our 2008 and 2009 GDP forecast Chart 1: GDP contribution by expenditure Chart 2: GDP growth % YoY 8 6 4 2 0 % QoQ, 2qma 8 6 GDP growth (sequential terms) THAILAND -2 -4 -6 -8 Errors Net Exports Government Investment + Stocks Consumption GDP Sep-06 Mar-07 Sep-07 Mar-08 4 Latest: Mar08 2 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Ramya Suryanarayanan • (65) 6878 5282 • ramya@dbs.com 114
Economics – Markets – Strategy Economics: Thailand to 5% (vs 5.6% earlier) and 4.7% (vs 5.2% earlier). Domestic demand should still do much better than the dismal showing in 2007 (assuming we do not actually see another coup). No end in sight to political stand-off We are particularly concerned that there is no end in sight to the political instability that erupted with anti-Thaksin protests in 2005. As democratic institutions such as the judiciary and the constitution court were believed to be subverted by expremier Thaksin, the military justified a coup on the grounds that it is the only viable solution to non-violently end anti-government protests. Many Thais in Bangkok even hoped the coup would turn out to be a solution for the political woes once the military made it clear that this was a temporary move meant to restore the independence of democratic institutions. Following that, democratic elections were expected to return stability to the country with the hope that the Democratic party may return to power. As we know, this did not happen and political uncertainties have only worsened in 2008. Obviously, staging a coup again and / or holding fresh elections again will not result in different, more favourable and stable outcomes. But another coup is certainly a material risk and would be disastrous for the Thai economy. One main reason for the return of political instability is that the country is polarized with people in Bangkok against Thaksin and the (majority) rural Thais in favour of Thaksin. This means elections are likely to bring some form of Thaksin’s Thai Rak Thai (TRT) back in power. This, in turn, leads to government policies and functioning that bring people in Bangkok on streets in anti-government protests. The charter change agenda is just a policy that has brought out these deep divisions in the forefront. As such, it appears likely that political uncertainty is here to stay. Politics to hurt confidence and consumption recovery Consumption spending grew by around 3% (QoQ, saar, smoothed) in the last two quarters, double the rate that prevailed in the preceeding 12 months (Chart 3). Going forward, deterioration in politics implies consumption should stay below trend (~5%). We expect a continuation of 3% sequential growth ahead as consumer confidence should begin to deteriorate once again. It is interesting to note that despite political worries, the “present” and “future” confidence sub-indices have diverged in the last 12 months (Chart 4). The “future” was generally expected to be much better than the “present”. In other words a resolution was always expected for the political woes which were seen as relatively There is little hope for an end to the political stand-off as elections have failed to resolve outstanding issues Future subcomponent (Chart 4) of consumer confidence might begin to fall Chart 3: Personal consumption vs avg wages % YoY % YoY, 2qma 9 8 Chart 4: Consumer confidence - "future" to drop? Index 98 6 3 0 6 4 2 0 88 78 -3 Mar- 01 Mar- 02 Mar- 03 Mar- 04 Mar- 05 Mar- 06 Mar- 07 Private consumption indicator Avg wages (RHS) Mar- 08 -2 68 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Consumer confidence: present Consumer confidence: future Consumer confidence: future income 115
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