Thailand: The pangs of political unrest

Thailand: The pangs of political unrest

Thailand: The pangs of political unrest

Asia Pacific Economic Outlook, May 2014

Thailand’s economy has been hit by political unrest since November 2013. Given the widening rifts in Thailand’s polity, there is worry that even elections might not be able to solve economic problems.

Thailand_protestThailand’s economy has been hit by political unrest since November 2013. Snap elections in February 2014 to counter weeks of protests did not help due to a boycott by the opposition. In fact, the elections themselves were annulled by the Constitutional Court, thereby paving the way for fresh ones. With the current government continuing in a temporary role, the lack of clarity on key policies continues, especially those relating to rice subsidies and infrastructure. Stakeholders worry that even elections might not be able to solve this, given the widening rifts in Thailand’s polity.

Key growth drivers suffer in Q4 2013

Real GDP grew just 0.6 percent year over year in Q4 2013, the slowest pace of expansion since Q1 2012. This pulled down annual growth for 2013 to 2.9 percent from 6.5 percent in 2012. Both households and businesses held back in Q4 2013 as political tensions escalated in November and December. Personal consumption fell 4.5 percent in the quarter, the sharpest dip since the Asian financial crisis. Fixed investments fared even worse, contracting 11.3 percent. This was the biggest fall in investments since Q1 2009, when the global financial crisis hit domestic sentiments and foreign investments. With two key expenditure segments getting battered, overall GDP growth should have ended up lower than last year. But strong tourist inflows came to the economy’s aid, while net exports’ contribution to GDP picked up.

Shaky tourism outlook in 2014; expected uptick in exports

Tourism is one of Thailand’s economic strengths, contributing 7–8 percent to GDP. In 2013 foreign tourist arrivals rose 19.6 percent to 26.7 million, surpassing the government’s target. But, with political protests continuing, tourism has been hit this year. Foreign visitor arrivals fell 8.2 percent year over year in February; the Tourism Council expects a 7.3 percent decline in Q1. This has hit sentiments in the sector, with the Thailand Tourism Confidence Index dropping below the benchmark 100 figure in the quarter.

Exports are likely to be the only bright spot for Thailand’s economy this year.

Exports are likely to be the only bright spot for Thailand’s economy this year. In 2013 real exports grew 4.2 percent, which, combined with weakening imports, helped push up overall GDP growth. The impact of declining imports was most evident in Q4 2013, when a 3.5 percent dip combined with a 2.0 percent rise in exports to keep overall GDP growth in positive territory. Imports demand will remain weak in 2014 as well, due to subdued domestic consumption. This, along with an expected 5.0–5.5 percent rise in exports, due to economic recovery in the West, will push up the contribution of net exports to GDP.

Troubling times for investment

For businesses, both foreign and domestic, the current political turmoil has clouded the investment climate. Even well-established businesses in the country have raised concerns. No surprise then that industry sentiment fell to its lowest level in 56 months in February 2014, reflecting businesses’ concerns about the current political stalemate. Setbacks to the government’s mega-infrastructure plans, including high-speed rail projects, have not helped either. The Constitutional Court struck down the government’s $62 billion funding legislation, citing a breach of fiscal laws. Other ventures have also suffered; for example, a water management project worth 350 billion Thai baht is caught up in environment-related legal wrangles. Unfortunately, even elections might not be able to ease the deadlock in these projects this year—which in turn is likely to push down fixed investment by 3.0–3.5 percent in 2014.

Consumer spending will stay subdued

Even before the current unrest, households in Thailand were feeling the heat due to rising indebtedness. At 82 percent of GDP in 2013, household debt in Thailand is one of the highest in Asia. The current political instability has worsened the economic scenario. Consequently, consumer confidence fell for the 11th straight month in February 2014 to a 12-year low. This was despite income gains due to a tight labor market (unemployment is at 0.9 percent) and lower tax rates. Meanwhile, subdued consumer sentiment was also evident from auto sales, which slumped 45.5 percent year over year in January 2014.

In rural areas, household consumption has been hit by the discontinuation of the rice subsidy scheme. For the north and northeast regions of the country, a drought has exacerbated the situation. Sadly, both urban and rural scenarios are not likely to change much this year. A stable government post elections would help stem the current slide but will not be enough to push private consumption growth above 1.0 percent in 2014.

Monetary policy support to continue

The Bank of Thailand (BOT) cut its benchmark interest rate in March 2014 by 25 basis points (bps) to 2 percent, the lowest since January 2011. The BOT has been pursuing a loose monetary policy to prop up growth. However, it has admitted that growth is not entirely possible without a stable political environment. In line with this view, it recently lowered its 2014 growth forecast to 2.7 percent from January’s figure of about 3 percent. The figure is also lower than the National Economic and Social Development Board’s forecast of 3–4 percent, which itself was revised down. Growth is not the BOT’s only worry; its monetary easing is also aimed at preventing household debt servicing costs from rising, something that would enhance risks for banks. Although under control, nonperforming loans in consumer credit edged up in 2013 to 2.2 percent from 1.9 percent in 2012.

Fortunately for the BOT, price pressures are low. Consumer inflation was 2.1 percent in March 2014, with core inflation (1.3 percent) well within the central bank’s 0.5–3.0 percent target. If inflation remains in check, the BOT might be tempted to go in for an additional rate cut of 25 bps in the latter half of the year to boost the economy. Such a move would depend on the baht’s strength as well. Despite being up by about 1 percent against the US dollar this year, the baht could come under pressure due to a prolonged political conflict, continued Fed tapering, and lower interest rates.

No easy task for the new government

The new government that emerges post elections in mid-2014 will have to focus immediately on three key politico-economic issues. The first is the controversial rice subsidy scheme, which has resulted in estimated losses of $4–8 billion, but whose discontinuation will lead to loss of popular support. Second, the government has to redraw its mega-infrastructure plans, given that it has run into funding roadblocks. The plans are ambitious and aim to not only spruce up domestic infrastructure but also make Thailand a more attractive investment destination at a time when economic integration in Southeast Asia is set to speed up. Last, but not least, the government will have to bridge its differences with the opposition, a difficult task given strong political polarization in the country. Until now the turmoil has not impacted Thailand’s sovereign ratings, thanks to healthy public finances, improving external balances, and prudent monetary policy. However, a prolonged political conflict could change that, forcing investors and rating agencies to review their outlook. That could well be the biggest hit to Thailand’s brand value since the Asian financial crisis.


Akrur Barua

Akrur Barua is an economist and a manager at Deloitte Research, Deloitte Services LP.

Asia Pacific Economic Outlook, May 2014: Thailand
Cover Image by Jessica McCourt (Cover), Stephanie Dalton Cowan (Thailand)