Unrest in Thailand has intensified and shows no signs of nearing an end, likely disrupting growth prospects. Although political turmoil is not unusual in Thailand, this time economic conditions had been weakening before the protests began. GDP growth should slow considerably in 2013, falling to around 3%, compared to 6.5% in the previous year. At the same time, the fiscal and external positions have deteriorated, while capital outflows accelerated in 2013. This all suggests that the political impasse will only aggravate the situation. Since the protests started, consumer confidence and tourism have been particularly affected, Even if elections take place as scheduled on 2 February, which seems unlikely, the political impasse will not be solved in the short term. This all has led us to revise our GDP forecasts for 2014 from 4.5% to 3.5% due to the duration of the political turmoil and uncertainty about its developments.
Politics takes its toll
Thailand’s political crises are not unusual. Thailand has been constantly amending its democratic process and protests, coups and changes in the constitution have been the order of the day. The current protests follow accusations that Prime Minister Yingluck Shinawatra is a stand-in for her elder brother Thaksin Shinawatra, who was ousted by a military coup in 2006 and has been living in self-imposed exile in Dubai. In November 2013 the ruling party, which won the general elections with a landslide in July 2011, attempted to pass a bill that would grant amnesty for those accused of the 2010 political violence. This was the trigger that led to this long period of confrontations between the government-supporting “red shirts” and the opposition “yellow shirts”. Elections have been scheduled for 2 February 2013, but the opposition has signalled that it will not take part in the polls. Their proposal is to replace the government with an “unelected people’s council”. Even in a scenario where the elections go ahead, it is unlikely that this will solve the political conflict. In the past, Thailand has faced contested elections which have been officially invalidated. This suggests that a democratic solution is growing more distant by the day and that a military intervention can’t be ruled out.
Growing economic impact
The past year saw a gradual erosion of economic activity in Thailand and the government deficit has been escalating since 2012, while the government debt to GDP ratio has been increasing (see table). The surge in capital flows that Thailand experienced in 2012 slowed considerably in 2013. According to the IMF, the change in market sentiment in mid-May spurred by fears of Fed tapering reversed capital flows to Thailand and outflows have only accelerated since then. This suggests that the economy entered the political turmoil in a rather fragile state, which is only becoming more complicated as time passes. The protests have been centred in Bangkok and other main cities. But Bangkok alone accounts for about 30% of the nation’s GDP. Tourism, which accounts for around 12% of GDP, is already being affected, as more and more foreign governments issue negative travel advice. The Chinese New Year, which is normally a peak time for tourism to Thailand, will therefore be a missed opportunity.
Finally, consumer confidence has plunged, while manufacturing activity seems more resilient as the sector appears to have well-developed contingency plans. The ISM manufacturing survey was practically flat in December at 57. Exports have also been holding up well in the past months, enjoying the lift in external demand with shipments in electronics leading the way. This suggests that the stronger sectors of the economy are still weathering the unrest well.
Risks to the outlook
The political impasse has lasted long enough to impact economic activity in this first quarter. The lack of dialogue and the further weakening of the governance structure in Thailand suggest that problems will not be over soon. Given the increasing weakness in the economy, including a deteriorating government deficit, it is unlikely that the authorities will opt for fiscal stimuli to mitigate the effects of the turmoil. At the same time, we think that monetary policymakers will remain on the sidelines until there is more clarity surrounding political developments and evaluate the options once the tensions have been cooled down. Our interest rate forecast remains unchanged, but a rate cut in the course of the year is becoming more likely the more the economy is affected by the turmoil. We have already adjusted our Baht forecasts to 33.5 for end 2014 in the FX monthly released in January 2014. We are also adjusting our GDP forecast for 2014 to 3.5% from 4.5%. We expect growth to revive in 2015 after the scars of the political unrest fade away, reaching 4.5%. A firm global recovery should support this outlook.