IBR 2015 - Thailand focus

During the last ten years Thailand has had 11 Prime Ministers (including caretakers), 10 Finance Ministers, many deadly street protests, 2 coups, 1 airport shut-down and 1 economically devastating flood. Given this it is almost surprising that Thailand has managed to eke out an annual average growth rate of 3.13% over the last 10 years, albeit the lowest in the region.

Ian Pascoe, Managing Partner at Grant Thornton in Thailand said:
“Studies have confirmed that governments installed by coups tend to prioritise stability over prosperity. Paul Collier, a professor of economics at Oxford said in his 2009 book that the cumulative effect of a coup, tracked over several years, can be to reduce incomes by up to 7%, with a 3.5% decline in the year of the coup itself. Thailand has suffered 2 coups in the last 10 years albeit each of which was preceded by months of instability and conflict.”

Prosperity with stability is the desired outcome. Consider our neighbours in ASEAN during this same period.  Singapore – 1 Prime Minister and 5.17% growth; the Philippines – 2 Presidents and 5.43% growth; Malaysia – 2 Prime Ministers and 4.86% growth; Indonesia – 2 Presidents and 5.7% growth; and finally Vietnam – 1 Prime Minister and 6% growth.

However this lack of stability that the coups sought to help solve will also play a key role in shaping the future economic fortunes of Thailand. There are several substantial systemic issues which will start to act like an anchor on the long-term health of the economy. Even with substantial action now, it will take several generations for this anchor to be lifted and the Thai economy able to sail strongly again.

The Thai population is aging dramatically. By 2040 a quarter of the population will be over 65. The National Economic and Social Development Board recently said that this will lead to a highly dependent population after 2040, with a workforce not able to sustain the rate of consumption. This will have the double negative effect of reducing the working population whilst at the same time incurring higher bills for healthcare. This burden will be absorbed by not only the people in part but also by the National and local Thai governments.

Meantime productivity is not rising but wages are rising quickly.

Ian continued "This is like two ends of an elastic band. In the middle of that band is reduced competitiveness in a region which is becoming more competitive. Radical changes in the education system including greater technical education and a focus on advanced vocational training to promote increasing levels of productivity are not even being discussed.  Even if this were to happen at this moment, it would be one or two generations before there would be a measurable enough contribution to efficiency."

Thailand is attempting to move up the manufacturing “value tree” and away from low-cost labour intensive manufacturing towards a “knowledge based” economy. However key ingredients of moving towards such an economy are not present: R&D spending, IP protection, and investments in science and technology. Thailand’s worldwide university rankings continue to decline and remarkably even levels of English competency are in decline in the younger generation of students. Even a high-speed internet, which is a major key to this is severely lacking. This absence of digital infrastructure further contributes to even more basic challenges: business, banking and government transactions are still too paper-based thus encouraging a lack of transparency while incurring higher expenses for all involved.

Ian expanded on this saying “These systemic issues are against a backdrop of considerable global turmoil. When the world was growing a tremendous amount of capacity was built for what was seen then as preparing for demand from a fast growing world. Instead demand has dropped markedly however over-capacity remains. The world is also in a long deflationary cycle which can exacerbate the effects of debt given that the “present value” of the debt remains the same or greater. Meanwhile China’s GDP continues to grow however that growth is coming from the services sector meaning non-services related growth, which Thailand used to be able to feed with manufacturing, is in decline.”

Three factors to accelerate growth in GDP

Thailand can accelerate growth using three main levers including more household spending, more exports, and a substantial increase in government spending.  The first two of these levers are already too hot to touch. Household spending has been declining whilst household debt has increased dramatically at the fastest rate in South East Asia over the last 6 years. The prognosis for exports is also not strong. As mentioned earlier Thailand has not made the necessary adjustments to its education programs to improve productivity but instead has been fortunate that in the past the world economy and its major trading partners have been growing. That is no longer the case.  Our neighbours in the region are also competitive in this area. Thus the halcyon days of strong export growth are no longer sustainable.

Government spending is a possibility and is starting to happen with the large infrastructure projects that have been announced. The government’s bank balance can certainly support these projects. However, history has taught us that the government is generally slow to actually spend funds, while fast profligate spending can also encourage corruption, which the government is attempting to prevent.  This environment essentially paralyses the government from making any meaningful decisions for on the one hand the bureaucrats are scared of making decisions for major projects and on the other hand, are waiting for an environment better suited to making those decisions.

Finally Ian concluded "We expect stability in Thailand during 2016 however a continuation of relatively depressed economic growth. Robust tourism numbers will remain a bright spot and we also believe there will be a modest increase in private consumption in 2016. However with global growth stunted and some sizeable systemic issues looming in the economy, the net effect of this will be a projected GDP rise of 3.6% in 2016 and 4% in 2017. Only stability with prosperity will be able to assist with this in these economically challenging times."