The export outlook looks brighter as the global economy improves.
The main story in 2014 is the political impasse, which caps our GDP growth forecast at 3%.
Political tensions have exacerbated financial stresses.
Thailand needs to boost capital spending to offset its diminishing demographic dividend.
Thailand’s economy is set to underperform in 2014 as ongoing political ructions drag on growth. This is, however, largely a domestic story, with confidence and demand already starting to turn down. Export-facing sectors are unaffected so far and the outlook is relatively bright.
Global demand is expected to pick up in 2014. World GDP growth is expected print at 3.1%, up from 2.2% in 2013, as developed markets in Europe and the U.S. improve and downside risks diminish. Thailand’s export sector has rallied in recent months and the sanguine global outlook points to further gains across 2014. The upturn in the global tech cycle will buttress electronics output, while the auto industry should benefit from stronger Asian demand in the second half of 2014. We expect net exports to add 2.5 percentage points to GDP growth this year, after contributing 1.4 percentage points in 2013.
A political mess...
But the big story in 2014 is Thailand's protracted political wrangling. Snap elections in February were intended to clean the slate and provide the elected government with a mandate to govern, but anti-government protesters obstructed polling booths, which rendered the result inconclusive. Since then, opposition and anti-government protesters have filed petitions to void the ballot. The Yingluck-led government remains in power, but only in a caretaker capacity.
The political balance has been complicated by the sudden ending of Thailand’s rice subsidy scheme. The scheme guaranteed rural farmers a high price for their rice, but has ended up costing the government upwards of US$8 billion over the last two years and prompted an investigation by the anti-corruption commission. This could now backfire for Yingluck. Rural farmers have not been paid in more than four months and it is not clear whether farmers will receive the originally promised price—implying that the government absorbs the losses via its budget—or whether farmers will be asked to take the hit. Given the Thai government's funding shortfall, it is likely that farmers will absorb at least some of the losses. Disgruntled farmers are threatening to revoke their support for the government, further complicating the political outlook.
...With implications for the economy
Political disruptions have been largely confined to Bangkok and have not caused any major disturbance in the industrial hubs in the north and southeast of the country. Yet business confidence has begun to suffer and firms are now set to cut back on investment spending in response to the political uncertainty. Anecdotal reports reveal that foreign firms are holding back on expansion plans and considering relocating some operations to neighboring low-cost countries.
Consumer confidence has waned as political uncertainty drags on and the economic outlook deteriorates. We expect consumer demand, which grew just 0.6% in 2013 in real terms, to improve only mildly over the coming 12 months.
Rising financial risk
Thai financial markets remain vulnerable. Like all emerging markets, Thailand is exposed to tighter U.S. monetary policy in 2014 as capital flows back to developed markets. Yet Thailand's political troubles are adding to the uncertainty. Last year, as speculation of a U.S. Fed taper reverberated through emerging markets, Thailand's stock market fell 22% from May to September. The Philippines PSE, by comparison, also fell 22% over this period. This time around, however, as the Fed prepares to taper, the Thai stock market has been among the hardest-hit, down 5% since December, while the Philippine market is down less than 2%. Foreign investors have withdrawn a net US$2.3 billion since the end of November, causing the baht to fall 2.2% against the greenback.
Traders in the credit default swap market, which gauges the likelihood of government default, have also begun to grow nervous. The CDS spread on the government's U.S. dollar-denominated debt has risen sharply since November, partly because of the falling baht but mostly due to the political gridlock. The CDS spread on U.S. dollar 10-year government securities has jumped 60 basis points since the start of November.
The Bank of Thailand has been relatively powerless to the calm financial storm. The Bank of Thailand cut rates to 2.25% late last year to buttress economic growth, but this is unlikely to offset the fallout from the political ruckus and will, if anything, exacerbate capital outflows during the Fed taper. We expect rates will remain at 2.25% over most of 2014.
Thailand could grow old before it gets rich
Thailand's working-age population will peak in the next couple of years. Yet unlike most developed countries, Thailand has not had adequate infrastructure or capital to utilize its demographic dividend. Gross national income per capita in 2012 was US$5,210, well below the World Bank's high income threshold of US$12,616.
On its current trajectory Thailand has little chance of joining the high income club. The aging population will likely shave 2 percentage points off annual GDP growth from 2021 to 2030. There is little that policymakers can do to overcome the demographic drag when it comes; until then, the government ought to boost spending on physical capital to exploit the demographic profile over the next decade.
A Bank of Thailand study estimates that fixed investment spending would need to rise to 30% of GDP, up from 22% currently, to keep GDP growth above 5% across the medium term. The government is partly to blame for lackluster capital accumulation, as it spends excessively on benefits, subsidies and grants at the expense of infrastructure.
Policymakers passed an infrastructure bill in late 2013 commissioning the construction of a high-speed rail link between Bangkok and Chiang Mai, Thailand’s two largest cities. The project will cost US$70 billion over the next seven years, creating jobs, improving transport links, and boosting productivity. However, the political impasse has halted progress.
Fred Gibson is an Associate Economist at Moody's Analytics.
