Thailand Business Forecast Report Q3 2009

Thailand will continue to grapple with multiple challenges in the third quarter of 2009, as economic activity remains depressed and the political scene unsettled. The rapid slowdown in the global economy has impacted the Thai economy disproportionately due to its heavy reliance on external demand. Steering the economy back towards domestic demand-driven growth will not be an easy feat. Meanwhile, the chances of political harmony still look remote, despite recent intimations by Prime Minister Abhisit Vejjajiva that elections will eventually be held. Vagueness as to when this would be, and over the criteria that first would have to be fulfilled, is likely to be read as a stalling tactic by opposition forces, which remain loyal to the exiled former premier Thaksin Shinawatra.

Dialogue is clearly necessary, but it is hard to see how a viable compromise could be found given the sharp fault lines running through Thai society.

Less than half a year into his tenure, Abhisit finds himself in a precarious position with many observers suggesting that he could be out of office before long. The violent anti-government protests in Bangkok and abutting areas in April, orchestrated by the red-shirted United Front for Democracy Against Dictatorship (UDD) movement, left two people dead and more than a 100 injured as security forces were deployed to quash the manifestations. The cancellation of the meeting of the Association of South-East Asian Nations (ASEAN) in the resort-town of Pattaya was particularly embarrassing for the PM, intensifying widespread fears that the situation is beyond the government's control.

While Abhisit's display of calm throughout the crisis - his car came under attack by protestors in Pattaya - may have earned him some kudos within the government, there is little doubt that he is under serious pressure both internally and externally.

Although there has been a great deal of talk about incipient 'green shoots' heralding a recovery, we remain unconvinced as to the likelihood of a swift rebound in the economy. Heavy dependence on exports in conjunction with seemingly ceaseless political turbulence has put a serious dampener on growth, hurting key sectors such as manufacturing and tourism. The latter has been battered heavily, with foreign arrivals more than halving on a year-on-year (y-o-y) basis in Q109 and tourism- related businesses experiencing a sharp fall in revenues. Granted, the Thai authorities have not been sitting on their hands, with both monetary and fiscal stimulus measures working their way through the system. The government's three-year THB1.43trn stimulus package - assuming that it can push through the attendant borrowing plans - should bring some relief, but is not likely to offset the manifest slack in the private sector in the short term. In view of the dim backdrop, and continued negative data, we have revised down our 2009 GDP forecast from -2.5% to -4.5%.

The volatile political situation is a clear deterrent to foreign investors, as evidenced in fairly sharp fall in direct investment inflows going into 2009. However, while there are question marks surrounding its longevity, businesses are likely to be satisfied with the Democrat-led administration, which is committed to market-friendly policies. Indeed, the fiscal stimulus planned for the next few years is focused very much on productivity-enhancing areas such as infrastructure and education, all of which need to be improved if Thailand is not to fall behind low-cost competitors such as China and Vietnam.