Director MBMG Investment Advisory
Thailand Q2: getting there, just about
If you spent any time in the UK in the 1980’s, you may be
familiar with the national railway operator’s telling slogan, “We’re getting
there”. How quickly was a detail the accompanying advertising campaign
failed to divulge. Fast-forward thirty years and the slogan seems equally as
apt to describe Thailand’s economic performance.
The Thai government’s National Economic and Social Development
Board (NESB) recently released reports for Q2 of 2014 and full year
forecasts.1 They showed that in Q2, Thai GDP grew by 0.4% year-on-year. This
is an improvement after its Q1 contraction of 0.9% but it means that in the
first half of 2014 overall the economy contracted by 0.1% year-on-year.
A breakdown of these year-on-year figures shows that the agriculture sector
grew by 2.2% and non-agricultural sectors by 0.2%. The slight rise in
non-agricultural came from an improvement in utilities (from -3.1 in Q1 to
3.4% in Q2); transport and communications (Q1 3.4% , Q2 2.6%) and
wholesale-retail trade (Q1 -0.4, Q2 0.3). There were continued rises, albeit
at decreasing rates, in financial intermediation (7.4% rise in Q1, followed
by 6.1% in Q2); and education (Q1 7.3%, Q2 2.6%).
Unsurprisingly, given the political situation, these increases were checked
by a decline in the tourism and restaurant sector (-4.2% in Q2 meaning a
7.3% decline in the first half of 2014). Worryingly, the manufacturing
industry also suffered a continued decrease of 1.6% in Q2 following a
horrible 2.7% decrease in Q1, meaning a -4.3% for H1 2014.
Overall, the small expansion that did occur was largely through government
expenditure, private consumption and exports; whereas private investment
declined. This was really to be expected as previous commentaries such as
the Bank of Thailand’s Q1 Report had highlighted the headwinds of:
(i) Softer global export markets
(ii) Reduced domestic consumption constrained by the dramatic increase in
private debt from 2010-13
(iii) The uncertainty created by the political deadlock in the second half
of 2013 and the first half of 2014.
The government body suggested that in 2014 as a whole, the Thai
economy was likely to grow at a slower rate than previously projected. It
put this down to the political disturbances in the first five months of the
year, the slow recovery of the export sector and the continual decline in
car production and sales.
So, although the economy contracted in the first half of the year as
expected, the NESB still expects growth, thanks to improved confidence and
“the return of government administration and budget disbursement to normal.”
That said, headwinds remain which are expected to continue to inhibit
(i) the constraints on export expansion due to slower than expected recovery
of the global economy and the decline in terms of trade (i.e. export
(ii) the delay in tourism recovery and the damage to Thailand’s image at a
time of heightened competition among the global tourism market, which have
combined to reduce the number of tourist arrivals;
(iii) the constraints on investment growth due to the low capacity
utilisation and the slow progress in investment promotion approval in the
first half of 2014; and
(iv) continued declining car production because of the inflated sales base
in the previous years.
This analysis certainly rings true with what was discussed by Adrian Dunn of
The Brooker Group and MBMG co-founder Paul Gambles at the BCCT-MBMG Insights
event in June (see the MBMG Update entitled Coup d’État or Coup de Grâce
from June 2014). At this event, Mr Dunn also suggested that the new
government would attempt to speed up approval of infrastructure projects and
All-in-all, the NESB forecasts that the Thai economy will grow by 1.5-2% in
2014. The export sector is expected to expand by 2% and private consumption
by 0.8 %. It still expects total investment to decline by 2%. It also
predicts that headline inflation will be at between 1.9-2.4% and the current
account in surplus of 2.6% of GDP.
As with any economic picture, some aspects are decidedly mixed but there are
already aspects of the new government’s policy that are being well received
at home, if not internationally:
(i) A healthy approach to structural reform - tourism may be temporarily
affected but some of the ‘cleaning-up’ activities proposed by new
administration2 should, in the long run, help improve the image of the
country in the eyes of foreign tourists in a way that makes it more
transparent and sustainable.
(ii) Attempts at wealth redistribution - proposed inheritance and wealth tax
programmes3 will actually make a difference in terms of tackling the
constraints of the Middle Income Trap; improved income distribution and
wealth distribution will help to spread the private debt burden more
affordably, stimulate consumption and boost GDP in the long run; although
this may take a while.
(iii) Plans to encourage greater domestic consumption4 are designed in the
long term to help reduce export dependence. Thailand should continue to fire
up its export engines but with a focus on the development of more
value-added sectors especially services; there are some areas where Thailand
is able to add value rather than just act as a source of cheap labour and
materials. Salaries in Thailand (excluding in the agricultural sector) have
risen by 80% in the last ten years5 but there are no indications that
productivity has outstripped this in recent years. This is essential for
Thailand’s economic development. Again this is a long-term change which the
military government says it is implementing.
(iv) As the new government has centred policy on anti-corruption measures,6
inefficiency should hopefully be consigned to the past. This would give
Thailand the opportunity to move towards an efficient, market-based economy
that owes no allegiances to rentiers.
The challenge for the new government, therefore, is the sheer scale of the
structural problems that they are aiming to tackle and the inevitable
resistance that they’ll meet along the way. Their greatest asset is the
goodwill that currently underpins their overwhelming popularity7.
With western governments imposing soft sanctions on the Thai people, I
wonder if any of them can point to an 88.5% approval rating? It could be
argued that the opprobrium of American, British and European governments has
far more to do with how they see their vested interests being threatened,
rather than with any genuine concerns for Thailand. Maybe the biggest
challenges to serious structural reform in Thailand are to be found in
London and Washington DC.
5 Source: Labour Force Survey, National Statistics Office
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