Thailand Business Forecast Report Q2 2014, New Report Launched

Thailand’s political stalemate has had a devastating impact on economic growth, and with no signs of a possible resolution in the near term, we expect economic activity to remain depressed in 2014. The risk of a sustained contraction in GFCF over the coming quarters presents the biggest threat to Thailand’s economic outlook as confidence in political stability is shaken.

• We believe that the Bank of Thailand (BoT) will keep its policy rate on hold at 2.25% throughout 2014. We caution that should Thailand’s political situation deteriorate rapidly over the coming months, this could eventually force the BoT to ease monetary policy in a bid to support growth. However, for now, we believe that the risk of triggering major foreign capital outflows and the negative impact on the Thai baht will continue to weigh more heavily on the BoT’s stance on monetary policy.
• We hold a relatively neutral view on the Thai baht over the coming months following the recent 14.0% peak-to-trough decline in the unit.
• On one hand, the political and economic situation in the country is baht negative, with no meaningful end in sight to the ongoing political impasse, and foreign and domestic investment likely to struggle in 2014. On the other hand, the technical picture of the baht is stabilising, while a shift in protests away from central Bangkok should provide some relief to the economy following months of partial shutdown.
• The currency’s tight correlation with regional FX also suggests that the baht will follow regional trends. We believe the latest move by the National Anti-Corruption Commission (NACC) to charge caretaker Prime Minister Yingluck Shinawatra for alleged negligence could potentially tip the balance in favour of the People’s Democratic Reform Committee (PDRC) as the political stalemate in stretches into its fourth month. Should the NACC’s charges fail to remove Yingluck and her caretaker government from power, however, we believe that the political stalemate could drag further into H214

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Major Forecast Changes

We have downgraded our real GDP growth forecast for Thailand from 3.8% to 3.2% for 2014. With no signs of a possible resolution to the political impasse and violent protests,

Key Risks To Outlook

The main downside risks comes from a renewed escalation of violent protests by those opposed to the current government If this occurs we could see a violent backlash by pro-government red-shirt supporters, which could lead to a rapid escalation. The army has recently cautioned about the growing risk of a civil war, and has stressed its reluctance to step in to restore peace.

We believe the latest move by the National Anti-Corruption Commission (NACC) to charge caretaker Prime Minister Yingluck Shinawatra for alleged negligence could potentially tip the balance in favour of the People's Democratic Reform Committee (PDRC) as the political stalemate in stretches into its fourth month. Should the NACC's charges fail to remove Yingluck and her caretaker government from power, however, we believe that the political stalemate could drag further into H214.

Thailand's political situation will remain highly volatile, and it is difficult to envision political stability over the next few years. In the event of prolonged social unrest, we do not preclude another military coup occurring, although this would by no means resolve matters.

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We have downgraded our real GDP growth forecast for Thailand from 3.8% to 3.2% for 2014. With no signs of a possible resolution to the political impasse and violent protests, the risk of a sustained contraction in gross fixed capital formation over the coming quarters presents the biggest threat to Thailand's economic outlook in 2014 and 2015.

We forecast Thailand's fiscal deficit to widen from 2.4% of GDP in 2013 to 2.5% in 2014 amid increasing evidence that the political impasse could drag into H214. Meanwhile, the government's rice policy is proving to be a costly mistake, and we believe that scrapping the rice policy completely (or making major changes to it), is crucial to government efforts to bring the fiscal budget back in balance.

We believe that the Bank of Thailand (BoT) will keep its policy rate on hold at 2.25% throughout 2014. We caution that should Thailand's political situation deteriorate rapidly over the coming months, this could eventually force the BoT to ease monetary policy in a bid to support growth. However, for now, we believe that the risk of triggering major foreign capital outflows and the negative impact on the Thai baht will continue to weigh more heavily on the BoT's stance on monetary policy.

The Thai economy should expand fairly robustly until 2022 but continued political uncertainty means that its full growth potential is unlikely to be reached. Aside from the political turmoil, a greater focus on improving human capital and transport infrastructure is needed to ensure that Thailand remains competitive.

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