[Premium] Chairman’s Note (01/2016) – Thailand: The Changing Economic Landscape of the Country

January 2016 |
A number of our corporate members have asked my views about Thailand’s economic outlook. I have been there recently and met privately with Coordinating DPM for Economic Affairs, Somkid Jatusripitak, and the recently appointed Central Bank Governor, Veerathai Santiprabhob. These were private and informal meetings (some of you will remember that shortly before his appointment, Khun Veerathai kindly briefed our corporate members at our SIIA closed door panel discussion in Bangkok).

Based on these and other meetings, I wish to share some points with you. Please note however that at the current time, there is considerable speculation, and this makes a comprehensive view difficult. What I share therefore are observations focused more on the economic priorities. We will offer further notes as developments arise. Secondly, please note that I am sharing these views with more candour than I would publicly, as you are our SIIA corporate member. I would therefore appreciate you limiting the circulation to your senior colleagues.

1. Slow Economic Growth Without Easy Remedy:
The Prayuth government inherited a less competitive economy with much slower growth. As an export driven economy, Thailand continues to struggle amid weak global demand, especially as China – Thailand’s top trading partner is experiencing an economic slowdown. Thailand’s export revenue fell for the third consecutive year in 2015, dropping by 5.78 per cent – the biggest dip in six years. With exports accounting for nearly two-thirds of Thailand’s economy, the Bank of Thailand reduced its economic growth forecast for the country, from 3.7 percent to 3.5 percent. Additionally, labour costs continue to rise in Thailand and there are reports of FDI moving out from Thailand and into Vietnam.

However, it is reassuring that the macro financials for Thailand are sounder than some other emerging markets. Moreover, if demand rises in the USA and Japan, this can assist Thai exports. Domestically, Thai consumer confidence index continued to rise for three successive months up to December 2015, its highest level in eight months. There is some signs and also reason to sense that the economic slide has bottomed and there will be a modest rise in future months.

With high levels of household debt, there is however no easy way to pump the economy. Furthermore, Prayuth Chan-Ocha administration’s attempt to address problems of corruption amongst government officials has resulted in government expenditure on projects taking longer to process than anticipated. Thai bureaucrats have become more cautious due to the stricter graft penalties, following recent amendments to their anti-corruption act.

2. Reform and the Private Sector
The Prayuth government seeks to start the process of a deeper reform. Elements in this include new ambition in e-commerce and entrepreneurship. Thailand is also trying to integrate more deeply with the CLMV economies (Cambodia, Laos, Myanmar and Vietnam). This is not only in infrastructure and government-led efforts but as frontiers for its larger, leading companies.

The government is actively reaching out to the major private sector companies to take on a leadership role. Despite facing multiple headwinds, Thai companies have performed comparatively well. For example, Thailand’s Charoen Pokphand (CP) Group reported a USD$30 million profit at the end of the third quarter last year. Central Group, which focuses on the retail sector, reported growth that exceeds the overall economy. These and other large, diversified Thai companies are expected to do well in the coming year although their performance is not indicative of the wider economy.

In an attempt to direct more investments towards smaller Thai enterprises, the government has introduced a flagship initiative for a public-private sector collaboration by forming some 12 committees led by selected CEOs. State Owned Enterprises (SOEs) are visibly struggling, especially Thai Airways which reported a net loss of 9.9 billion baht (USD$276 million) in the third quarter last year. Some officials are considering a consolidation of these SOEs in a structure akin to Temasek Holdings.

3. Provincial Economies to Supplement Thailand’s growth
With the push for greater connectivity and increased efforts to increase the purchasing power of households living in rural communities, the wider Thai economy will benefit from growth in its provincial economies. The government recently approved a stimulus programme worth up to 35 billion baht (USD$972.49 million) to strengthen the country’s rural economy. With more than half of Thailand’s population living in rural areas, this form of government expenditure should stimulate growth across Thailand’s grassroots economies, boosting domestic demand at a time where export growth remains sluggish. This move is also an effort to shore up support when the drought and market conditions have hurt farmers and the rural economy.

4. Trans Pacific Partnership (TPP)
Originally excluded from the negotiation of the US-led TPP, the government is now actively studying and promoting their accession to the trade pact. This will require reform in a number of sectors including the pharmaceutical industry and agriculture. The USA may be cool to the idea while the military backed government is in charge. But expect that the Japanese, as a major TPP player will support and encourage Thailand – given the large industrial cluster they have in the country. Otherwise the TPP may further tip new investments towards Vietnam or even Malaysia as they are TPP members. The TPP has to be ratified among its original signatories in the coming months and Thailand’s process may take two years or more. Such an initiative can be tied to internal reform efforts noted above.

I hope the above may be of interest to you. If you might wish to respond to this note and share your views, I would be glad to hear from you by email or a brief telephone call. If you should be keen for the SIIA to share our insights in more detail or on more specific questions, you may wish to note that we offer an advisory service to cater to such needs of our corporate members.

Looking ahead, I will offer a chairman’s note on political developments in Thailand at an appropriate time. The SIIA will also work to organize a briefing in Bangkok with experts and policy makers there, as we did in 2015. Additionally, the SIIA will be planning briefings for Myanmar, Indonesia and Malaysia.

Best Regards,
Simon Tay