Thai Fundamentals Strong Ahead of Planned Elections in 2018

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The Bank of Thailand meets tonight and is widely expected to keep rates steady.  The economy is growing robustly, yet price pressures remain low.  On the political front, stability is seen ahead of planned elections in late 2018.

POLITICAL OUTLOOK

Thailand announced general elections will be held in November 2018. An exact date will be chosen around mid-2018, according to Prime Minister Prayuth Chan-Ocha.  Note that elections have been delayed several times before, and so this 2018 date is certainly not set in stone.

The country has been ruled by the military since the coup in 2014.  Initially, post-coup relations with the West turned frosty.  They have since warmed as Thailand has forged ahead with widening and deepening regional economic ties.  Thai-US relations are solid, and led to a state visit by Prayuth for a meeting with President Trump in early October.

We see little change in economic policies after the elections.  The new constitution, approved in a public referendum in August 2016, cements the military’s continued influence over government even after the next ballot.

The accession of King Maha Vajiralongkorn has gone largely without incident.  While this is a largely ceremonial post, royal approval is still seen as very important within the political realm.

Thailand scores very well in the World Bank’s Ease of Doing Business rankings (26 out of 190).  The best components are getting electricity and protecting minority investors, while the worst are paying taxes and registering property.  However, Thailand fares worse in Transparency International’s Corruption Perceptions Index (101 out of 176 and tied with Gabon, Niger, Peru, the Philippines, Timor-Leste, and Trinidad & Tobago).

ECONOMIC OUTLOOK

The economy remains robust.  GDP growth is forecast by the IMF to accelerate to 3.7% in 2017 from 3.2% in 2016, falling back slightly to 3.5% in 2018.  GDP rose 3.7% y/y in Q2, the strongest rate since Q1 2013.  Monthly data for Q3 suggest some further acceleration, and so we see upside risks to the growth forecasts.

Price pressures are non-existent, with CPI inflation steady at 0.9% y/y in October.  This remains below the 2.5% target as well as the 1-4% target range.  Core inflation also remains low at 0.6% y/y in October, as does PPI inflation at 0.1% y/y.

This backdrop supports the case for steady rates, and we believe Bank of Thailand will keep rates steady at 1.5% when it meets tonight.  Rates have been kept steady since the last 25 bp cut back in April 2015.  Further easing is unlikely due to concerns about financial stability.

Fiscal policy bears watching.  The budget deficit came in at an estimated -2.6% of GDP in 2016, down from near -3% 2015.  It is expected to remain around -2.5% of GDP in both 2017 and 2018, but there is risk of greater fiscal slippage next year as the elections approach.

The external accounts remain strong.  Export growth has been accelerating in recent months.  The current account surplus was about 12% of GDP in 2016, but is expected by the IMF to narrow to 10% in 2017 and 8% in 2018 as imports pick up.

Foreign reserves continue to rise to all-time highs.  At $199.8 bln in October, they cover about 10 months of import and are nearly 4 times larger than the stock of short-term external debt.  Thailand’s external vulnerabilities remain low.

INVESTMENT OUTLOOK

The baht continues to outperform.  In 2016, THB rose 0.5% vs. USD and was amongst the top ten EM performers.  So far in 2017, THB is up 8% YTD and behind only the top EM performers KRW (8.6%) and MXN (8.1%).  Our EM FX model shows the baht to have VERY STRONG fundamentals, so this year’s outperformance is likely to continue.

Despite the broad-based EM sell-off seen this past month, USD/THB continues to trade near the year’s low around 33 from early September.  These are levels last seen back in May 2015.  Indeed, charts point to a test of the April 2015 low near 32.32.  Whilst some officials have expressed concerns about the strong baht, we do not expect any concerted action beyond intermittent FX intervention to smooth the moves.

Thai equities are underperforming EM after a strong 2016.  In 2016, MSCI Thailand rose 22% vs. 7% for MSCI EM.  So far this year, MSCI Thailand is up 14% YTD and compares to 32% YTD for MSCI EM.  This underperformance should continue, as our EM Equity model has Thailand at an UNDERWEIGHT position.

Thai bonds have performed well this year.  The yield on 10-year local currency government bonds is about -33 bp YTD.  This is behind only the best performers brazil (-132 bp), Indonesia (-127 bp), Peru (-112 bp), Hungary (-83 bp), Russia (-74 bp), and Colombia (-37 bp).  With inflation likely to remain low and the central bank on hold, we think Thai bonds can continue outperforming.

Our own sovereign ratings model show Thailand’s implied rating steady at BBB+/Baa1/BBB+, in line with actual ratings.