Economic Monitor: Thailand’s rearguard royal maneuvering
After a brief selloff with King Bhumipol’s death following years of ill health, Thai stocks rebounded along with the currency, as the MSCI index gained 23% through mid-October. Bond outflows were also a record $1 billion in the wake of the announcement, on foreign fund inflows this year over $10 billion, according to Bloomberg data. Investors were long prepared for the event, but the royal and military junta transition implications continue to sow doubts, and tourism as a main economic bright spot will suffer with the prolonged mourning period, which has temporarily shuttered major sites. The Crown Prince will take the throne after a year and Prime Minister Prayuth Chan-Ocha reiterated the end-2017 election timetable would remain intact after constitutional referendum approval in August.
The government hinted at further ramping up public spending as the linchpin of 3% GDP growth to honor the deceased monarch, even though fixed investment fell 15% in the second quarter as private business and credit are frozen awaiting political and commercial confidence breakthroughs. Deputy Prime Minister Somkid, a respected technocrat, ordered clothing manufacturers to produce black shirts for funeral wear at state bank expense, adding to potential dud loans with household debt already in the 80% of GDP danger zone. In September, officials again restructured $10 billion in farmer obligations citing poor commodity prices, as they refuse to come to grips with runaway borrowing which buys loyalty but invites renewed stress two decades after the original Asian crisis.
The army has diverted economic debate into a grand 20-year vision, where the country will lead in medical and digital technologies in another development stage beyond current agriculture and industry. However, an October report by management experts Accenture cited prerequisites such as internet broadband and staff knowledge expansion, and for science and innovation to flourish in a creative climate, at a time when media censorship is rampant and freedom of speech is under threat. The BBC was blocked from reporting on the King’s succession, and critical commentators have been rounded up for police questioning and jailed along with opposition party figures. Former Prime Minister Yingluck Shinawatra remains charged with criminal and official abuses in her rice subsidy scheme, and prosecutors may try to recover $1 billion from the previous sponsors.
The $50 billion infrastructure project pipeline focuses on transport, and its size approaches tourism as a portion of GDP at over 7%, but softened in the last quarter as capital outlays fell 30%. Real domestic demand is lackluster, as evidenced by persistent deflation, particularly in the provinces outside the capital where income inequality has worsened. As measured by the Gini coefficient, wealth is concentrated in 0.1% of the population, who represent the business elite tied to Thailand’s residual 50 state enterprises where the military has proposed tentative governance reforms.
Progress has been slow toward major exporters, with trade in the doldrums as the the 8% current account surplus is due to import compression. Ratings agencies affirmed the sovereign investment grade rating, but stipulated that bank and company rescues pose contingent liabilities raising the debt level above the headline 45% of GDP. In October, Fitch Ratings assigned a stable outlook to the banking sector, but warned of lower profits and loan quality deterioration as the NPL ratio neared 3%, increasingly in the consumer portfolio. Credit Suisse, in a separate review, called for earnings to bottom this year, but noted persistent household and corporate weakness that may be masked by lenient central bank rules.
Thailand held a cross-border summit on trade with Malaysia around the time of the King’s passing, as executives on both sides pointed to stubborn leadership and banking roadblocks. Prime Minister Najib Razak lauded 4% growth this year, below the 5% target, as the global 1MDB crackdown extended to actions against intermediaries in Singapore and Abu Dhabi. His predecessor Mahathir Mohamed launched a new party to oust him, as industry leader Maybank reported oil and gas and Islamic finance woes presaging a royal cleanup challenge that could last into future government and family dynasty reigns.