Economic Analysis - Growth To Moderate Amid Mounting Headwinds - APR 2018

BMI View: Thailand's economy performed relatively well in 2017, with real GDP growth coming in at 3.9%, which was above its 10-year average of 3.0%. We expect growth to moderate over the coming quarters amid headwinds from slowing export growth, increased political uncertainty, and worsening terms of trade over the course of 2018. While we have upgraded our 2018 growth forecast to 3.6% from 3.4% previously to reflect a short-term pick-up as suggested by the leading indicator, this still reflects a moderation in growth from 2017.

Thailand's real GDP growth came in at 4.0% y-o-y in Q417, which was slightly slower than 4.3% y-o-y in the previous quarter, which brought 2017 full-year growth to 3.9% (above our estimate of 3.6%). We expect the Thai economy to face increasing headwinds over the course of 2018 due to slowing export growth, increased political uncertainty, and deteriorating terms of trade. With the increase in the Bank of Thailand's leading indicator index suggesting a pick-up in short-term growth, we are revising up our 2018 real GDP growth forecast to 3.6% from 3.4% previously to reflect this. However, we highlight that the 3.6% growth rate still represents a moderation in growth from 2017. This is also largely in line with our expectations for Thailand to underperform the region over the longer-term (averaging 3.5% growth per annum) as structural political instability and deteriorating demographics present longer term challenges.

Suggesting Near-Term Pick-Up
Thailand - Real GDP Growth, % chg y-o-y And BoT Leading Indicator
Source: BMI, BoT, Office Of The National Economic And Social Development Board

Strengthening Baht Reducing Export Competitiveness

As a highly open economy, Thailand's economy benefitted from strength in the global economy over the course of 2017, with real export growth trending higher for four straight quarters, coming in at 7.4% y-o-y in Q417 and 5.5% for the whole of 2017 (versus 2.8% in 2016). The manufacturing sector has also benefitted from robust external demand, with growth expanding by 3.0% y-o-y in Q417 and 2.5% for the entire of 2017 (versus 2.3% in 2016). That said, export growth will likely face headwinds as the strengthening baht will likely weigh on the competitiveness of Thai exports over the coming quarters.

Largely Led By Exports
Thailand - Real GDP By Expenditure, % chg y-o-y
Source: BMI, Office Of The National Economic And Social Development Board

Increased Political Uncertainty And Worsening Terms Of Trade Likely To Act As A Drag

The military-led government has promised and postponed elections several times since it came to power following a coup in 2014, and it is likely that elections will be pushed to early 2019 from the previously-stated timetable of November 2018. We believe that political tensions will rise over the coming months, which will take its toll on economic activity as investor confidence weakens. Notably, we have notched down our short-term political risk score to 70.2 (out of 100) from 70.8 due to a reduction in the social stability subcategory amid rising public unrest ( see 'Uncertainty Ahead Despite Tight Military Grip', February 6). Indeed, pro-democracy activists have stated in February that they are looking to plan more public protests over the coming months, and there have been signs of pro-election protests flaring up in Bangkok, Chiang mai, and Khon Kaen.

According to the government, growth in gross fixed capital formation weakened to 0.3% y-o-y in Q417 and grew by only 0.9% for the whole of 2017 (versus 2.8% in 2016), and it is likely to remain rather subdued over the coming quarters. While construction activity will likely be supported by the infrastructure pipeline introduced by the military government, worsening terms of trade due to an increase in oil prices are likely to bite into the retained earnings of Thailand corporates, weighing on overall investment growth.

Ranking Third Last
ASEAN - Long-Term Real GDP Growth, %
Source: BMI, National Sources

Lagging Behind Most ASEAN Peers Over The Long-Term

Over the long-term, we are forecasting Thailand's real GDP growth to come in at 3.5%, which makes it a growth laggard in Southeast Asia (simple average of 5.1%). The two major factors that will likely hold back Thailand's growth prospects are its long-standing political woes and deteriorating demographics ( see 'At Risk Of Getting Old Before It Gets Rich', February 2, 2017). This is despite potential for the government to undertake further business environment reforms (notably in the area of state-owned enterprises) to boost productivity gains over the coming years ( see 'Further Progress On Much-Needed SOE Reform', October 26, 2017).