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Country Report Thailand

Country Report


Almost a year after its coup, Thailand’s economic growth only recovers gradually amid lingering uncertainty about the future direction of the country. While the imposition of martial law prevents social unrest, the military works on a new constitution to prepare the country for elections in 2016.

Strengths (+) and weaknesses (-)

(+)      Well-diversified and competitive economic base

The Thai economy comprises various large and strong sectors, which increase its resilience to external and domestic shocks.

(+)      Strong external position

Thanks to stable current account surpluses, Thailand has ample and increasing foreign exchange reserves that cover about 6 months of imports. Foreign debt and associated payments are low.

(-)       Ongoing political instability

Politically, Thailand’s population remains deeply divided between the country’s urban administrative and military elite (Yellow Shirts) and the mainly rural less affluent classes (Red Shirts). After months of protests, the military intervened and placed the country under military control in May 2014.

(-)       Low income levels and marked income inequality across regions

Thailand’s GDP per capita of USD 5,793 is relatively low and the unequal income distribution between rural and urban areas contributes to lingering tensions between the elite and the less-affluent parts of the population. 

Key developments

1. Very gradual economic recovery so far amid lingering crisis of confidence

Thailand’s economic recovery fails to gain steam so far, even though last year’s military coup and the subsequent imposition of martial law put an end to six months of anti-government street protests. While economic growth had been on a downward trend ahead of the coup, dragged down by markedly declining tourist arrivals and deteriorating domestic demand, the military-led government has so far failed to instill sufficient confidence to engineer a major turnaround. On the domestic front, even as consumer spending has gained some traction since the coup, investment growth remains weak amid lingering confusion about the direction of economic policy as well as low capacity utilization rates following double-digit investment growth rates in the aftermath of the devastating 2011 floods.

Figure 1: Very gradual economic recovery so far
Figure 1: Very gradual economic recovery so farSource: Bank of Thailand
Figure 2: Tourist arrivals recover
Figure 2: Tourist arrivals recoverSource: Thai Ministry of Tourism and Sports

Private consumption growth is being held back by lingering political uncertainty, as well as high levels of household debt, partly built-up as a consequence of the previous government’s populist policies. Meanwhile, external demand remains relatively weak, even as the gradual withdrawal of travel warnings by various countries contributed to a rebound of tourist arrivals, particularly from Eastern Asia. Manufacturing exports suffer from weakening demand from China, Japan and the Middle-East, while low commodity prices depress export earnings from agricultural produce. Consequently, economic growth in 2014 slowed to 0.7%, down from 2.9% in 2013. Notwithstanding Thailand’s recent relatively poor economic performance, the impact of the military takeover on Thailand’s financial markets has been limited so far, as foreign investors’ confidence in general economic stability under the military leadership has returned. While the USD/THB exchange rate stabilized at about THB 32 per USD, the country’s 5-year CDS spreads returned to pre-unrest levels of about 112 bps. Meanwhile, Thailand’s 10 year sovereign bond yield declined by one percentage point to about 2.8%. Thanks to the relative calm on Thai financial markets, as well as the likely promotion of large-scale public investment projects and the boosting of farm subsidies by the military government, economic growth in 2015 is expected to increase to about 4%. Meanwhile, lower global oil prices should boost consumers’ purchasing power. Still, the downside risks to the outlook remain considerable, particularly so if domestic confidence remains weak or sizeable protests against the military leadership were to emerge, which could also lead to renewed turbulences on Thailand’s financial markets.

2. Military prepares new constitution ahead of promised parliamentary elections

After having consolidated its grip on power in August by appointing a new military-dominated cabinet under the leadership of general Prayuth Chan-Ocha, Thailand’s junta is currently drafting a new constitution in line with its proposal to hold parliamentary elections by early 2016. As shaky public support for the army’s leadership may dwindle in case economic growth does not strengthen soon and widespread discontent, though currently suppressed by upholding martial law, may lead to renewed (violent) protests, a return to some form of democracy seems likely. Yet, elections may be postponed, in case of a sudden royal succession, as 87-year old King Bhumibol’s health seems to deteriorate, or if the proposed constitution is rejected in a planned referendum. The new constitution, which is currently being prepared by the military-appointed National Reform Council (NRC), is scheduled to be presented to the public in September 2015.

As stated by the military leadership, the new constitution should provide a structural solution for the conflict between themajority l ess affluent and mainly rural Red Shirts, who support the ousted prime ministers Thaksin and Yingluck Shinawatra, and the minority urban royalist elite Yellow Shirts, which has undermined the stability of Thailand’s democracy for almost 15 years. It will likely try to strike a balance between safeguarding a certain degree of political power for the Yellow Shirts, while keeping political allies of the Shinawatra’s from winning further elections. The recent retroactive impeachment of ousted prime minister Yingluck Shinawatra, which resulted in a 5-year ban from politics, bears witness to these efforts. In essence, the currently debated proposals aim at a restoration of Thailand’s traditional model of so-called ‘bureaucratic polity’, in which bureaucrats manage the economy and the powers of elected politicians will be restricted. Given its undemocratic credentials, it remains to be seen whether the proposal will get sufficient support in a yet-to-be held referendum. The fact that the NRC does not include any members from the two conflicting camps – Red Shirts and Yellow Shirts - does not bode well in this respect. Alarmed by their possible loss of power, politicians from both camps may mobilize their supporters against the military administration and push for the rejection of the proposed constitution. Left empty-handed, the military leadership would likely have to postpone promised elections once more, while its traditional support among the Yellow Shirts may weaken. Sizeable social unrest once more paralyzing parts of the capital Bangkok may follow, which may prove harder to control for the military and could escalate into violent repression, particularly so if public acceptance of its leadership role were to suffer.  

Factsheet of Thailand
Factsheet of ThailandSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank. 

Background information

Thailand ranks among the more developed economies of South-East Asia and, thanks to its attractive business climate, has become a major destination for foreign investment in the region. Even though the country’s nominal GDP per capita at PPP of roughly USD 15,000 of its 67-million strong population is still relatively low, the Thai economy is highly diversified. While tourism constitutes a major source of foreign exchange earnings, the country’s strong manufacturing sector generates a sizeable structural trade surplus. Thailand’s external position is strong, as foreign debt remains relatively low at about 40% of GDP and foreign exchange reserves covered about 200% of debt service costs in 2013. In contrast to its strong economic base, Thailand’s social situation is tense, as economic development could not bridge a marked divide in incomes between the rural and urban population. On the political stage, this problem has led to the creation of two major political camps, the so-called Yellow Shirts supporting the royalist administrative and military elite, and the less-affluent Red Shirts who mostly support former Prime Minister Thaksin Shinawatra, who was ousted in 2006, and his sister Yingluck Shinawatra. Both camps tend to stage mass protests, which negatively affect the economy. After various coups since 1932, the country’s military has been known to intervene if deemed necessary and did so again in May 2014 after 6 months of protests by the Yellow shirt movement. While the endorsement of the coup by the widely-revered 87-year old King Bhumibol, an important figure of reconciliation in Thai society, gives the military government some legitimization in the eyes of many Thais, there is a lingering risk of sizeable unrest unless the current administration succeeds in re-igniting economic growth and preparing democratic elections, which are currently scheduled for early 2016.

Economic indicators of Thailand
Economic indicators of ThailandSource: EIU 
Fabian Briegel
RaboResearch Global Economics & Markets Rabobank KEO
+31 88 726 7864

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