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Country Report Thailand

Country Report


One and a half year after the coup, the military regime is still in power. Elections are again delayed and stability is preserved through repression. In the meantime, the economy is performing disappointingly with tourism being the only bright spot.

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 7 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 6,022 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. Stability through repression

The military regime continues to rule Thailand through repression. Although this policy has brought stability in the short-run, it does not solve the underlying structural problem. Thailand’s political environment is deeply polarized between the Royalist, urban administrative and military elite (Yellow Shirts) and the poorer rural population (Red Shirts). Although, the junta abandoned martial law in March this year, the interim constitution still gives the military almost unlimited power in case of “any threats against public order, national security, the monarchy, national economy or sovereignty of the country”. Since the junta came to power, the amount of lèse-majesté charges increased dramatically. In Thailand, insulting the royal family is punishable by long prison sentences. It looks like the government uses these charges to warn opponents to not openly criticize the current regime. To reduce the power of the Red Shirts, the junta has begun a negligence trial against former PM Yingluck Shinawatra and has revoked the two Thai passports of former PM Thaksin Shinawatra, who lives in exile. In response to the economic slowdown (see key development 3), PM General Prayuth reshuffled his cabinet in August 2015. To raise support in the rural areas, he installed Dr Somkid, former Finance Minister in Thaksin’s government, to lead the economic team. His plans include the extension of subsidies to farmers and a subsidization of loans to the poorest people. These populist policies are clearly aimed at raising the popular support of the government in rural areas.                  

2. Elections unlikely to be held in 2016

It is widely expected that the elections will be delayed further than the currently proposed date, September 2016. This date was already a postponement of half a year compared to the original timeline laid out in the ‘roadmap to democracy’. The military will probably try to remain in power until the passing of King Bhumibol, whose health is precarious. The succession will likely be turbulent. The Crown Prince, Maha Vajiralong, lacks the support of the military and is said to be befriended with former PM Thaksin Shinawatra. A renewed power conflict between the army, the Yellow Shirts and the Red Shirts cannot be excluded. Before general elections, a constitutional referendum will be held on 10 January 2016. It is still unclear what the ballot questions will be. The cabinet might e.g. add a question on whether the current government should remain in power for longer. Even if the draft constitution is accepted, the military will remain powerful. The proposed constitution includes non-democratic elements, such as an upper house that consists for 2/3 of unelected members and that the prime minister can be appointed by the parliament.  

3. Economic performance is still among the weakest in the region

The Thai economy is still performing below its potential. Economic growth disappointed in both the first quarter (3.0% y-o-y) and the second quarter of 2015 (2.8% y-o-y) (figure 1). Going forward, growth will likely sluggish. The remain economic weakness is broad-based, with only the tourism sector performing well. Domestically, private consumption growth is sluggish and is expected to remain so. Thai households are among the most leveraged of the region (consumer debt is estimated at about 80% of GDP). Also the depreciation of the Thai Baht in the past year will weigh on households’ purchasing power. Private investment growth is still very modest and will likely not improve soon given the uncertainty over the political outlook.  On the other hand, public investment and government consumption are increasing fast. The current government plans to reactivate economic growth by increased public spending. It wants to increase subsidies to farmers, extend cheap loans to low-income earners and accelerate infrastructure investment plans. An improvement of the country’s infrastructure will likely be positive for Thailand’s competitiveness. Another bright spot for the Thai economy is the tourism sector, which contributed 2.7%-point y-o-y to GDP growth during the first two quarters of 2015. Tourism arrivals showed a strong increase over the last year (figure 2). 

Figure 1: Economic recovery remains muted
Figure 1: Economic recovery remains mutedSource: Macrobond
Figure 2: Tourist arrivals growing strongly
Figure 2: Tourist arrivals growing strongly Source: Macrobond

The bombings of 17 August 2015 could, however, quickly reverse this trend if the attacks turn out not to be one-off incidents or if it causes political instability to rise again. Finally, exports of goods is a drag to the economy, it subtracted 1.9%-point of economic growth in 15H1. The Thai export sector struggles due to weak global demand and the production of products that are becoming technologically obsolete. The weak domestic demand is reflected in low inflation figures. The headline inflation figure has been negative since the start of the year (-1.1% in 2015Q2), but this is mainly due to a large negative contribution of raw food & energy. Core inflation is also muted, though, (0.9% in 2015Q2) and below the lower bound of the inflation target (2.5% ± 1.5%). The central bank already lowered the policy rate twice during 2015 (current rate: 1.5%). Whether more monetary easing will be beneficial for the Thai economy in the long run is questionable given the already high private indebtedness.

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 16,000 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 an oftentimes sizeable structural trade surplus. Thailand’s external position is strong, as foreign debt remains relatively low at about 35% of GDP and foreign exchange reserves covered about 200% of debt service costs in 2014. In contrast to its relatively 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 supports the royalist administrative and military elite. The less-affluent Red Shirts mostly support former Prime Minister Thaksin Shinawatra, who was ousted in 2006, and his sister and former Prime Minister 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. It did so again in May 2014 after 6 months of protests by the Yellow shirt movement. 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. However, 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 late 2016.

Economic indicators of Thailand
Economic indicators of ThailandSource: EIU

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