Thailand’s economic outlook remains solid. Political risk seems minimal now, and so foreign investors have been pouring money back into Thailand.
The ruling military junta has maintained firm control of the nation since it took over in 2014. Stability is notable given the death last year of long-standing King Bhumibol. Some were concerned that his successor and son King Maha would be divisive and unpopular, but so far, the transition has been smooth.
The constitutional referendum was held last August and passed by a comfortable majority of 61%. However, turnout was relatively low at around 50%. Passage of the referendum suggests that the public was satisfied with the military-led National Council for Peace and Order. It will reportedly go into effect this week once it is endorsed by King Maha.
General elections were slated for 2017, but have since been pushed back to 2018 after King Maha requested some changes to the constitution. The constitution basically guarantees a controlling stake for the military in any future governments, as the entire 250-seat Senate will be appointed by the military. As such, we see very little in the way of policy shifts under the incoming government.
The Islamic insurgency in southern Thailand continues to simmer. Regular attacks on police forces in the southern states of Yala, Pattani, and Narathiwat have continued. Indeed, the attacks have spread northward to other provinces last year, suggesting a new phase for the insurgency. Perhaps the military will turn its full attention to this matter once the new constitution is promulgated.
Now that the new constitution is practically in place, boosting the economy has become the main focus of the junta. GDP growth is forecast by the IMF to accelerate modestly to 3.3% in 2017 and then to 4.0% in 2018 from 3.2% in 2016. GDP rose 3.2% y/y in Q3 and 3.0% y/y in Q4. Furthermore, monthly data so far in Q1 suggest potential slowing and so there are downside risks near-term.
Price pressures are rising, though CPI decelerated to 0.8% y/y in March from the cycle high 1.6% in January. This is the lowest rate since November and falls below the 1-4% target range after three months inside it. The BOT forecasts inflation of only 1.2% this year, up from 0.2% in 2016 but still well below the 2.5% target.
This would seem to support the case for steady rates. However, we think the March reading was an anomaly and look for re-acceleration in Q2. If so, the central bank should tilt more hawkish as the year progresses. The Bank of Thailand last cut 25 bp to 1.5% in April 2015 but has been on hold since.
Fiscal policy has remained prudent but bears watching in light of plans for fiscal stimulus. The budget deficit came in at an estimated -2.6% of GDP in 2016, slightly lower than -2.9% in 2015. It is expected to remain just a little below -3% of GDP in both 2017 and 2018. However, we see upside risks given plans for tax cuts and infrastructure spending.
The external accounts have peaked but remain strong. Export growth slowed to less than 1% y/y in February, but we view this as a temporary slowdown. Still, with imports picking up, the 12-month total trade surplus has been falling since it topped out in September. The current account surplus is also narrowing slightly after peaking in September. This surplus was over 11% of GDP in 2016, but is expected to narrow to 8% in 2017 and 7% in 2018.
Foreign reserves have remained fairly steady at high levels. At $180.8 bln in March, they cover 8 months of imports and are almost 3.5 times larger than the country’s stock of short-term external debt. Taken in conjunction with a current account surplus and strong FDI inflows, Thailand’s external vulnerability remains quite low.
The baht continues to outperform. In 2016, THB rose 0.5% vs. USD and was one of the top ten currencies in EM. So far in 2017, THB is up 4% YTD and remains one of the top ten currencies in EM. Our EM FX model shows the baht to have VERY STRONG fundamentals, so this outperformance is to be expected.
The Bank of Thailand recently took a step to deter hot money inflows. Assistant Governor Arromdee said it curbed the supply of short-term bills in an effort to limit foreigners parking money in Thailand. This suggests some discomfort with the firmer baht, as well as potential for destabilizing outflows if sentiment turns.
USD/THB made new lows for the cycle this week near 34.25. A break below the 34.00 area would set up a test of the April 2015 low near 32.32. Note that Thailand’s Real Effective Exchange Rate (REER) as measured by the BIS is at the highest levels since August 2015.
According to data compiled by Bloomberg, foreign bond inflows total $3.1 bln YTD and $7.3 bln over the last twelve months. This is one of the highest 12-month totals in emerging Asia, lagging only Indonesia ($8.4 bln) and Korea ($22.2 bln).
Thai equities are currently underperforming after outperforming in 2016. In 2016, MSCI Thailand was up 22.1% vs. 7.3% for MSCI EM. So far this year, MSCI Thailand is up 4.4% YTD and compares to 12.3% YTD for MSCI EM. This underperformance should ebb a bit, as our EM Equity model has Thailand at a NEUTRAL position.
On the equity side, foreign inflows total $225 mln YTD and $1.9 bln over the last twelve months. Here too, this is one of the highest 12-month totals in emerging Asia, lagging only India ($8.4 bln), Korea ($14.6 bln), and Taiwan ($11.7 bln).
Thai bonds have underperformed recently. The yield on 10-year local currency government bonds is +3 bp YTD. This is ahead of only the worst performers Czech Republic (+40 bp), China (+26 bp), India (+13 bp), Hungary (+12 bp), and Korea (+5 bp). With inflation likely to resume climbing and the central bank likely to tilt more hawkish this year, we think Thai bonds will continue underperforming.
Our own sovereign ratings model shows Thailand’s implied rating at A-/A3/A-. This points to some upgrade potential to actual ratings of BBB+/Baa1/BBB+.