Thailand Business Forecast Report Q2 2009

Economy Slowdown to Aggravate Political Turmoil

Owing to its heavy dependence on exports, the Thai economy will be significantly affected by the slowdown in global demand, with sectors such as manufacturing and tourism taking a particularly hard knock. The government and the Bank of Thailand have both pulled out the defibrillators, in the form of fiscal stimulus and monetary easing, but it remains to be seen if this will be enough to offset the externally induced slowdown and forestall a sharp rise in unemployment. To be sure, although things have been relatively calm on the political front at the start of the year, public frustration with the state of the economy could galvanise opposition forces, and lead to further mass protests, possible complicating the government's ability to enforce policy.

While some calm has been restored following the change of administration in December 2008, there is scope for tension to flare up again, particularly in view of the deteriorating economy. By-elections in January strengthened the Democrats' previously slim parliamentary majority, but they remain reliant on a motley group of coalition partners, including members of the previous government who switched sides following the dissolution of the People's Power Party on December 2 2008.

Smooth policy-making can thus not be taken for granted. Moreover, credibility-wise the government suffered a number of setbacks at the start of the year, including its first cabinet resignation following a scandal in which a minister was alleged to have sold rotten fish to flood victims. The army's harsh treatment of the Rohingya boat people fleeing from neighbouring Myanmar, which received a lot of media attention in the early months of the year, has also left a dent in Thailand's international image.

Economic conditions have deteriorated sharply over the past few months, with demand for Thai exports all but seizing up. As a result the manufacturing sector has taken a serious pounding, dealing a real blow to the investment outlook going forward. Moreover, a more frugal global consumer bodes ill for Thailand's important tourism sector, with lay-offs in this sector likely to rise sharply in 2009. Aware of the dangers of inaction, the government has announced a THB116.7bn (US$3.3bn) fiscal stimulus package which it hopes will foster a recovery towards H209. However, due to possible delays in implementation and the relatively small size of the stimulus, it is likely to fail in picking up the slack left by the slump in external demand. Further monetary easing by the Bank of Thailand, although called for, may not do the trick either due to an impaired transmission mechanism and weak appetite for investment amid the gloomy demand outlook. In view of all this we have revised down our growth forecast for Thailand in 2009 to negative 2.5%, from positive 1% previously.

Policy-wise the new government is likely to be good for the business environment, with a number of encouraging initiatives in the pipeline. Significantly it has pledged to up the fight against the violation of international property rights, which remains a drag on Thailand's attractiveness to foreign investors. Via a number of measures the government is hoping to lift Thailand out of the US Trade Representative's Priority Watch List into the Watch List category. Notably, the Bank of Thailand has proposed a further relaxation of restrictions on foreign ownership of Thai lenders as part of an effort to boost foreign direct investment and improve competition in the local banking sector.