Thailand Business Forecast Report Q4 2008

Political Uncertainty And Inflation To Constrain Economy The political and economic outlook in Thailand will remain somewhat parlous, with anti-government sentiment still sizzling and inflation at a decade-high. The government suffered numerous blows over the summer, in the form of ministerial losses, the self-imposed exile of former Prime Minister Thaksin Shinawatra and drawn-out protests by opposition forces. Encouragingly, the military has remained calm, and does not (as yet) appear to be gearing up for another coup. Needless to say, such a scenario would deal a serious blow to Thailand's democratic credentials, hurting business and consumer sentiment and denting the country's appeal to foreign investors. As things stand it looks like the administration of Samak Sundaravej will muddle through on the assumption that the resolve of its many adversaries will eventually wane. However, it could still be tripped up by the country's judiciary.

Indeed, the big question now is whether or not the six-party coalition government will be able to steer clear of a dissolution, which most likely would trigger fresh elections and a new bout of uncertainty.

A cabinet reshuffle and former Prime Minister Thaksin Shinawatra's departure into exile in the UK have changed dynamics slightly but pending rulings by the country's Constitutional Court could prove fatal to the Samak administration. The ruling People Power Party and a few of its smaller coalition partners are still at risk of being disbanded, should they be found to have breached the country's constitution in the run up to last year's elections. There is also the possibility that the alliance could not implode of its own accord first, as the key glue behind their coalescence - Thaksin - is now far away from Thailand.

Political uncertainty and inflationary pressures are likely to keep a cap on economic sentiment in Thailand in H208. Along with a dimmer external outlook, this could spoil the government's aspiration of outperforming last year's growth. We maintain our 4.8% real GDP growth forecast for 2008, but expect to see a mild recovery to 5.2% next year as investment and consumption recover some momentum. The government's fiscal stimulus package and multi-year THB1.7trn infrastructure programme, shaped by Thaksin, could go some way towards propping up economic activity, but many key indicators suggest that sentiment is still glum. Somewhat worryingly, the government and the Bank of Thailand's differing views on monetary policy could mean that the battle against inflation is jettisoned in favour of keeping the pistons of growth running.

The democratically elected government's pro-market ethos was a source of a rebound in business optimism at the start of 2008, but as global trading conditions have soured, production costs risen and domestic political woes deteriorated, the short-to-medium term outlook has turned decidedly more downbeat. Longer term, renewed efforts to boost the country's educational system, particularly at the tertiary level, are imperative to raise productivity and prevent it from falling behind regional peers in competitiveness terms. Similarly, infrastructural improvements are key, to trim logistics costs and encourage greater inflows of foreign direct investment. In this regard the government's THB1.7trn mega-infrastructure programme is very encouraging, but could potentially suffer further delays if political turbulence persists.