Thailand after the lost decade


Thailand after the lost decade

Stocks and Financial Services Press Releases Monday November 24, 2014 12:36

Bangkok–24 Nov–Grant Thornton

The military coup on 22 May this year introduced a measure of stability to the economy through a functional government and peaceful streets. Whilst this stability has been initially welcomed by business leaders, there are significant domestic and external factors that continue to weigh heavily on the Thai economy.

Ian Pascoe, Managing Partner of Grant Thornton said, “Domestically, over 10 years of political volatility has left a serious mark on Thailand’s competitiveness. A consistent lack of investment with no cohesive long-term strategy and action has taken its toll. In addition to this, stagnated worldwide economic growth will place more pressure on Thailand given its reliance on exports of goods and services which in 2013 were 74% of GDP. Unemployment remains low at around 1%, increasing upward pressure on wages, which rose by approximately 50% in the decade to 2010. However, productivity has not increased, resulting in a decline in the competitiveness of the Thai workforce and an increase in costs for businesses.”

The new government’s positive overtures to foreign businesses since its inception have been questioned recently due to proposed changes to the Foreign Business Act (FBA). Whilst ‘controlling ownership’ changes to the FBA may be reasonable, commentators have been quick to point out that no other changes are being planned. Wholesale review and modification of the FBA in its entirety is required in order to increase Thailand’s competitiveness, productivity and attraction as an investment destination.

The government has declared that these changes will not be retroactive. However foreign businesses leaders have reacted to this with scepticism saying that if such negative changes can happen now, they can happen again. This ‘piecemeal’ approach seems likely to deter potential new investors, as well as investments from existing businesses. Such changes also appear to be contrary to Thailand’s AEC commitments.

Immediately after the coup, business confidence in Thailand soared to an all-time high in Q3 to 71%, up from 13% in Q2 and -28% this time last year, according to Grant Thornton’s International Business Report (IBR). The Southeast Asia average stood at 56% in Q3. However this initial perception may be short-lived.

The report also indicates that rising energy costs are also a problem across the region (49%) for Thai businesses, especially when compared to the global average (34%). This highlights business concern around the potential removal of massive fuel subsidies which governments have put in place to keep a lid on inflation and win votes. More than half of Thai business leaders also cite a lack of skilled workers (52%) as a concern, well above the regional average (39%). This comes as no surprise in a country with very low unemployment and an ageing population, but remains a real concern for long-term growth prospects.

Ian continued, “Thailand needs to sustain 4% GDP growth to remain at a ‘neutral growth’. In 2013 GDP growth was 1.8%. In 2014 the growth forecast has recently been revised down to 1% by the NESDB, and the IMF forecast for 2015 is 4.1% (below the ASEAN growth at 5%) and 5.4% in the period 2016-18. Given the number of times these figures have been revised down in the past, coupled with the slowdown in growth in major trading partners and the lack of sustained action of policies that encourage foreign investment, it looks likely that Thailand’s growth prospects will remain neutral at best through the next 24 months.”

This assumes continued political stability and sustained investment against cohesive long-term strategies. Private consumption has been broadly stagnant over the past 24 months, growing by 0.3% in 2013 and 0.6% in 2014. Household debt levels (estimated to be 85% by the end of this year) will further depress that. However, increased stability should boost household confidence and see consumption expand by 3.2% in 2015 and 4.2% in 2016.

Investment is expected to contract for the second straight year in 2014 (-2.3%). However, it is expected to pick up again in 2015 as the new government speeds up public investment in infrastructure and streamlines foreign-investment approvals reportedly worth some US$22bn. An investment of US$40bn has also been promised to update Thailand’s transport infrastructure.

Ian added, “Aside from political concerns, the demographic make-up of Thailand remains a key concern. As in many East Asia economies, the prevailing fertility rate (1.6) is well below the replacement rate (2.1), which will further constrict the supply of workers and could seriously dampen growth prospects. As such, it is imperative that there is an increase in productivity to sustain any level of growth, something we have currently yet to see.”

Sub-par growth in the global economy also poses a risk to economic growth in Thailand. The International Monetary Fund recently lowered its growth forecasts for 2014 and 2015, warning of persistent weakness in the Eurozone, the end of the emerging market commodity boom as China slows and further difficulties in Japan which has just officially entered a technical recession.