Risk drivers and outlook

Since the military coup of May 2014, political stability has been restored and should be maintained after the next general elections, which might be delayed to 2019. However, those years have been a parenthesis in the country’s history – with the exception of the death of the revered old king – as deep divisions and inequalities within the Thai society have not been tackled yet. Also, under the new Constitution and with a more influential military, democracy has stepped back and might announce renewed instability in the medium to long term (MLT). Furthermore, the economy has remained in a standby for two years as it has suffered from political uncertainty and from the absence of reforms and government policies. This has been reflected in tumbled FDI, cautious tourism and weaker GDP growth. Still, strong macroeconomic fundamentals (including a record current account surplus, a sustainable external debt, sound public finances and banking sector) have allowed the economy to be very resilient.

In 2017, economic performances strengthened on the back of strong tourism receipts, higher public spending in infrastructures and improved foreign demand for manufactured goods. The jump in foreign exchange reserves led Credendo to upgrade Thailand’s short-term political risk rating to 2/7. And the improved business environment led Credendo to assign Thailand the lowest risk category for systemic commercial risk (A on A-C risk scale). The overall outlook is thus rather positive, but remains nevertheless vulnerable to external shocks given the country’s high economic openness. These potential shocks mainly lie in the rise in global trade protectionism, the uncertain economic context and, to a lesser extent, in the financial instability fuelled by the Fed’s continuous monetary tightening. Internally, main risks come from more frequent natural disasters and a consumer demand hindered by the high level of household debt. All in all, as the past years have shown, the risk outlook will first depend on the evolution of the uncertain political situation. In the meantime, on the basis of restored political stability and economic resilience, Thailand’s MLT political risk remains well rated with a classification of 3/7.

Facts & figures

Pros

  • Macroeconomic resilience
  • Healthy public finances
  • Low external debt, strong liquidity
  • Sound banking system

Cons

  • Social and political polarisation within Thai society
  • Reliance on manufacturing exports exposed to high regional competition
  • Vulnerable to external shocks
  • High household debt

Head of State

  • King Vajiralongkorn

Prime Minister

  • General Prayut Chan-o-cha

Next general elections

  • Early 2019

Population

  • 68 million

Income per capita

  • USD 5,720

Income group

  • Upper middle

Main export products

  • Tourism (17.1% of current account receipts), automotive (11.5%), electronics (10.7%), machinery & equipment (6.6%), agricultural products (5.2%), electrical appliances (4.3%), petro-chemicals (3.8%), metals & steel (3.1%)

Country risk assessment

A stronger army for more political stability…for now

The political situation has been stable since the military coup of May 2014. At that time, the army led by General Prayut Chan-o-cha considered that a military intervention was necessary as there was no solution in sight to a long-standing tricky political crisis. Sociopolitical divisions had indeed widened under the Shinawatra family rules (from 2001 to 2006 under Premiership of Thaksin Shinawatra and from 2011 to 2014 under Premiership of Thaksin Shinawatra’s sister, Yingluck) as both were overthrown by an army worried about a perceived threat to the constitutional monarchy. Consequently, the polarisation of Thai society kept increasing, opposing the rural supporters of Shinawatra’s PTP (the red-shirts) and the urban middle-class and royalists (the yellow-shirts). Since the ousting of PM Yingluck Shinawatra, the army has maintained the sociopolitical status quo by reducing freedom of expression (the press, social media…), deterring political protests and ensuring a stricter enforcement of the lèse-majesté laws.

Under the junta leader and named PM, Prayut Chan-o-cha, two major political events have occurred. First, the new Constitution has weakened political democracy after decades of democratic rule (excluding the sporadic and temporary coups) as the text approved by a referendum in August 2016 gives the military broader powers in the political system, including the capacity to appoint the PM and select Senate members.

The death of King Bhumibol Adulyadej – the world’s longest-reigning monarch – in October 2016 has been the second landmark event. The last king being regarded as a saint by a vast number of Thais, a one-year mourning period was declared in the country. The coronation of his son, Prince Vajiralongkorn, then marked a smooth transition. However, his first decisions (e.g. to control some royal institutions) and his request for constitutional amendments have demonstrated his will to assert his power and counterbalance, to some extent, his power-sharing with the army.

Elections possibly again delayed, uncertain MLT political outlook

The next general elections, which would allow restoring a partially civilian rule, are scheduled for the end of 2018 but could be further postponed to (early) 2019. Though the new political stability is likely to be maintained after the elections, some factors could still threaten it in the MLT. The new constitutional rules which have been settled under military government might be badly welcomed by the winning party and its supporters as they limit power and restrict political room for manoeuvre. This could also be the case if infringements of democratic rights would persist. All in all, the fact that the military junta has not tackled social polarisation and achieved the promised reconciliation could lead to renewed political unrest in the MLT.

Just as her brother did several years earlier, ex-PM Yingluck Shinawatra fled the country last August – ahead of the verdict in the trial that accuses her of having mismanaged the costly rice subsidy scheme – to avoid a 10-year prison sentence. However, her self-imposed exile makes things easier for the military, as her condemnation might have led to some political unrest. On the other hand, the departure of Yingluck Shinawatra signifies the loss of another charismatic leader for the popular PTP, which might be facing an uncertain transition period as the Shinawatra family’s dominance might be coming to an end. Consequently, the PTP’s position at the 2019 polls could be seriously weakened and bolster political stability under a potentially new pro-military party led by General Chan-o-cha. All in all, political stability will much depend on the degree of acceptance of the new political system by the population and the next ruling party.

Besides the risks related to the domestic political environment, the country is dealing with a long-standing conflict in the Muslim-dominated southern provinces. Given the recent changes of leadership in the main separatist group and the internationalisation of jihadist groups, notably in South-East Asia, there is a risk that Thailand would be more frequently hit by violent attacks against officials, on public targets and potentially on tourist destinations too. Still, Credendo assesses domestic and external political violence risk in a moderate 4/7 rating.

Economy accelerates amid an upbeat global context

After the 2014 military coup, the economy remained somewhat on standby until 2016, thus reflecting the junta’s primary goal of achieving macroeconomic stability during the extended political transition. Given the political uncertainty and the absence of reforms, the period from 2014 to 2016 was characterised by poor performances. Average GDP growth reached 2.4% (compared with 3.2% for the period 2009 to 2013 and 4.8% for the period 2000 to 2008), inflation and credit growth were low, while total exports stabilised at a weaker level. The resulting uncertainty and harmed confidence caused FDI inflows to tumble while FDI outflows from Thai groups seeking for higher growth prospects overseas soared.

In 2017, the Thai economy showed notable progress. These mostly resulted from higher public infrastructure investments (the ongoing 8-year Infrastructure Development Master Plan (2015-2022)), sharper FDI inflows, stronger exports and tourism receipts (especially from China), all within an improved global economic cycle. Manufactured exports (77% of total goods exports) benefited from higher US and EU demands and contributed to raise the GDP growth to an expected 3.7%. Consequently, Thailand remains indeed a very open economy (merchandise trade is above 48% of GDP, albeit coming down from 58% in 2011).
 

A stronger external position boosts investor confidence

The current account surplus more than tripled in the period from 2014 to 2016 (to a 20-year high of 11.5% of GDP in 2016). This was however partly explained by a sluggish domestic demand (reflected in a decrease in imports) as private consumption and investments suffered from the high household debt, the one-year mourning period after the death of King Bhumibol Adulyadej and the persistent political uncertainty. In 2017, this surplus was still expected at 10% of GDP, with oil imports still benefiting from enduring low prices. Nevertheless, in the coming years, increasing domestic investments and related imports are likely to bring the surplus to much lower levels.

Thailand’s improved economic shape and positive external position, as well as the heightened investor confidence, allowed the baht to become the best performing Asian currency in 2017 (+9% against the weaker USD until mid-December), i.e. almost reversing the 10% decline observed between May 2014 and the end of 2016. In the absence of any major exogenous shock, the strong economic momentum is expected to continue this year thanks to supportive external conditions.

Solid banking sector, healthy public finances

The Thai economy has so far shown economic resilience under the rule of the military junta. This was made possible mostly by overall strong macroeconomic fundamentals, which include the banking sector. It is sound in all dimensions as shown by the main financial indicators, notably permanently low NPLs. It has thus buffers to withstand shocks.

Public finances are strong as well, with a moderate public debt (slightly above 40% of GDP and mainly domestic) and a reasonable government fiscal balance, which nevertheless fell into deficit at an expected 1.4% of GDP last year. It is forecast to slightly rise in the future, towards 1.7% of GDP, as it will be fuelled by higher spending in infrastructure. The high stability in budget forecasts and the fiscal consolidation observed over the past decade – despite some slippages under the populist Shinawatra governments – should be preserved under army supervision, regardless of the government to come to power. The top fiscal challenge for upcoming governments will be to raise the public revenue ratio as it is expected to stay around 22% of GDP without fiscal reforms, a level that is deemed insufficient to finance the rapid ageing of the Thai population.

Constrained by high household debt and exposed to volatile external developments

Still, Thailand’s economic performances remain below its potential and below those of its regional peers, and will largely depend on further political developments (e.g. extra postponement of the elections, contested poll outcome…) and future government policies. Like Malaysia, Thailand fell into a middle-income trap following the end of the low labour cost era, the ageing of its population and weaker domestic investments. The latter dropped from 28% to 22% of GDP between 2012 and 2016. Private investments are nevertheless expected to rebound to higher levels in the MLT thanks to the spillover effect from the bold government investment plan. On the other hand, economic growth, forecast at an average 3.2% by 2022, is also likely to be hindered by a high household debt which stabilised at 70.2% of GDP at the end of 2016 (i.e. the highest in South-East Asia at par with Malaysia) and will continue to harm MLT private consumption despite the slight decrease in 2017 and the support from low oil prices.

Looking ahead, as an open economy, Thailand is exposed to several potential external shocks. The possible rise of protectionism in global trade – under Mr Trump’s impulse – weaker foreign demand in the uncertain global context, and, to some extent, financial instability related to the pace of Fed’s monetary normalisation are risks in the MLT for the internationally integrated Thai economy. Moreover, natural disasters – e.g. with record destructive floods in Bangkok in 2011 – might be a rising threat as climate change is accelerating.

A sound liquidity and external debt position

Thailand’s financial risk is weak and has slowly decreased since 2014. In 2017, external debt ratios were low – at an expected 31.6% of GDP and 44% of export – in line with the past 15 years and miles away from 1998 when they peaked during the Asian crisis. In the MLT, they are expected to remain on a slow downward trajectory and thus keep the external debt sustainable.

Positive external developments have brought Thailand’s external liquidity to even more comfortable levels. Foreign exchange reserves are at record high levels (+18% between December 2016 and November 2017) and allow a cover of more than 8.5 months of imports (from 6.4 months in 2014).

Such an increase is explained by contracted imports in the period 2014 to 2016 and by stronger exports since 2017. Foreign exchange reserves exceed the external debt and are ten times higher than stable and low debt service, which is expected in the future to stay around 6% of export revenues. As for short-term debt, it has shown high stability over the years, fluctuating around 18% of export earnings and less than 30% of foreign exchange reserves.