Thailand: Economic and Trade Policy Background BriefThailand: Economic and Trade Policy Background BriefThailand: Economic and Trade Policy Background Brief

British Embassy Bangkok

February 2014

Summary

Political turmoil, uncertainty over outcome of incomplete February elections and formation of next government pose, considerable risk to 2014 which was expected to hinge on government driven spending on infrastructure. Consensus puts 2014 economic growth at 3%, markedly down from over 4%. Central bank shares same concern, but confirmed that credit picture and macro fundamentals still resilient.

Detail

Latest Economic Update

Economic growth slowed throughout the latter half of 2013 due to expiry of consumption-boosting schemes and tightening of consumer credit as defence against rising household debts. Externally, weak global demand affected Thailand’s export performance as well, a picture typical across Asia. Disruptive political protests since October may bring 2013 growth down to 3-3.7%; far below 5% originally estimated for 2013.

The deep political crisis, Parliament dissolution, and uncertainty over the 2 February elections raise doubts whether government-spending could materialise in 2014 as touted. GDP growth, earlier tipped to reach 4.5-4.8% in 2014 may barely reach 3% if a new functional government cannot be formed promptly.

Credit risk is rising among unpaid rice farmers nationwide and SMEs near Bangkok protest sites as slow business dries up working capital. Indebted low income households will feel brunt of economic slowdown. Risks not yet shown in banking system; NPLs still 1-2%.

Bank of Thailand assesses credit picture as still resilient; currency weakness and fund outflows regarded within norms experienced by emerging markets as US unwinds monetary stance. Macro fundamentals sturdy but BOT Governor prefers political instability not overly prolonged.

Economic Outlook

Thailand is the 2nd largest economy (GDP $366bn in 2012) in Southeast Asia and ranks about 32nd globally. It’s a middle-income country with per capita income of $5,116 or 92nd globally and trails far behind neighbours Singapore and Malaysia. Moving further up the scale will need home-grown technology and knowledge base.

BIS data showed that UK goods exports to Thailand in 2012 increased by 38% to £1.88bn, underpinned by the steel and automotive sectors. With Thailand’s exports to the UK stable at £2.49bn (up 0.1%), the trade gap is narrowing as UK exports are rising faster in recent years. During the first 11 months of 2013, UK exports to Thailand rose 2.3% to £1.9bn, slightly outpacing total UK export growth of 1.8% to world markets.

Inflation, stable at 3% for both 2012 and 2013, is in-line with expectations although the Bank of Thailand continues to gauge risks from debt-fuelled domestic consumption and any speculation in the property market. Household debts have climbed to a high level (80% of GDP) and credit lines are currently being tightened by banks.

Challenges for businesses include the unprecedented political deadlock, the market tensions of global growth shifting from back from east to west, the rise of emerging market vulnerabilities, plus volatility in the global financial, currency and commodity markets as global financial conditions tightens in 2014.

Populist schemes to help poorer segments of the economy through programmes such as the rice price pledging scheme and easy-credit administered though state banks is at top of critics’ list. So far, public finances remain acceptable with the budget deficit shrinking to 1.9% in 2014, from 2.5% currently. Government debt is moderate at 42% of GDP.

Thailand’s economy remains export-dependent at two-thirds of GDP, up from 40% in the early 90’s. Global supply chains have played a significant role for two decades, boosting GDP, developing the country’s industrial capacity, and provide resilience in times of political instability. (i.e. the 2006 military coup, 2008 political demonstrators’ seizure of the airport, May 2010 riots).

Thailand’s economy relies on well-established sectors where it has depth and scale: electronics, automotive industries (11th largest in the world), service industries (hotels, hospitals), petrochemicals, value-added foods (chicken, shrimp), agricultural exports (a leading rice exporter, major pineapple, chicken, and tuna exporter), and tourism. While solid, the sustainability of this unchanged formula is increasingly debated. Steep wage hikes partly an attempt by the government to provoke business evolution towards higher value.

Technocrats aspire for a more balanced economy that does not overly depend on exports. The domestic economic engine should play a larger role; increased public spending on infrastructure upgrades and today’s higher minimum wage are starting points. The World Bank rates Thailand as an upper-middle income country. Government targets per capita income to double by 2025.

Trade Policy Issues

Thailand joined the WTO in 1995, has inked 9 regional free trade agreements (FTA)’s with another 7 in the pipeline. Thailand’s complex tariff structure and dated laws are commonly cited areas for improvement. Existing FTAs and preparation for imminent ASEAN single economic community (AEC 2015) have helped spurred some streamlining of customs procedures. Market access restrictions exist in many service sectors such as banking and insurance, unlike the manufacturing sector which liberalised quicker over the last two decades. EU-Thai FTA negotiations commenced in May 2013 with targeted completion in 18 months, but Thai Parliament’s dissolution will stall negotiation process for many months.

President Obama marketed the US’s Trans-Pacific Partnership (TPP) trade agreement to Thailand on his November 2012 visit, but Thailand likely leaning to the less-demanding ASEAN+6 pact (Regional Comprehensive Economic Partnership) first.

Business Environment Issues

Thailand continues to appeal to foreign direct investment (FDI) ranking favourably at 18th in the World Bank’s 2014 Ease of Doing Business survey and among the top 10 most welcoming destinations for FDI in UNCTAD’s World Investment Report 2013. Part of the success has unfortunately led to a labour shortage situation (unemployment 0.7%) and human resource threatens to hinder future expansion and growth.

Thailand struggles with a number of longstanding structural bottlenecks that not even post-1997 reforms have adequately resolved. Improvements are needed in productivity levels across all sectors, human resource skills, education, R&D (a mere 0.21% of GDP compared to 2-3% for developed nations), transparency, and corruption (ranking slips further from 88 to 102nd out of 177 nations ranked by Transparency International in 2013), and outdated rail transport and logistics. Some progress seen after FATF’s removal of Thailand from the grey list after tightened laws against money laundering. Stepped-up campaign by large corporates against corruption is another positive but relatively new trend.

Intellectual property (pharmaceuticals, broadcasting) and an allegedly uneven playing field (alcohol imports) are commonly cited complaints by foreign businesses. Modernisation of the Foreign Business Act is also sought, to open up the services sector and allow greater equity shareholding by foreign investors.

Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.