Slowly but steadily, Thailand is regaining momentum after several years lost to political turmoil, a military takeover and then, in 2016, the death of the country’s beloved king. This is no India, or even Indonesia, but the government expects the economy to grow by a very decent 3.6 per cent this year — a far cry from the stagnation of 2014 (see chart). Meanwhile, the deflation that briefly raised its head in 2015 has been banished; January’s consumer prices rose at a reassuring annual rate of 1.55 per cent.
As a result, Thai assets are doing better as well. So far this year, the currency is more than 2 per cent stronger, a somewhat better performance than Indonesia and Malaysia, while the stock market is up by a similar amount — again, matching or beating its Asean peers.
The improvement is largely down to reviving exports, boosted by stronger global demand and higher commodity prices. Last December’s exports rose 6.2 per cent year on year and for 2016 they finished 0.45 per cent to the better, snapping a three-year contraction. This year, the finance ministry expects them to grow 3 per cent. With exports accounting for 70 per cent of GDP, that matters.
Imports are also strengthening, suggesting more robust manufacturing activity in coming months. And while private consumption remains sluggish, the government is opening the fiscal taps ahead of promised elections later in the year. Last month, parliament approved an additional $5.4bn in public spending for the 2017 fiscal year.
As a result, the Bank of Thailand should be happy to remain in the background, reckons Medley Global Advisors, a macro research service owned by the FT — and indeed, the bank remained on hold last week, maintaining interest rates at 1.50 per cent.
While rising non-performing loans and high household debt levels will prevent further cuts now that the economy is on a firmer footing, it will not be in any hurry to raise rates either. Inflation, after all, is well within its 1-4 per cent target range. More importantly, policymakers would be reluctant to help the baht to strengthen further, since this could hit both exporters and tourism (responsible for a further tenth of GDP).
Indeed, the BOT has been suspected of buying dollars in recent weeks, and has visited local banks to inquire about “speculative” FX positions in hopes of pushing back against currency appreciation. The bank may continue to smooth out currency volatility, says MGA, and may reiterate the importance of the baht as a factor in future policy decisions — a tactic it used last year to warn markets against excessive appreciation.
The real risks, then, lie not in policy but in politics. Protectionist noise, or indeed actions, emanating from Washington could weigh on exports from Thailand and hurt trade across the entire region, as could rising geopolitical friction between China and the US. Domestically, any further delay to the free elections promised by the military administration would surely spark public dissent and demonstrations that would depress private consumption and investment. But as long as cooler heads prevail both at home and abroad, Thailand looks set to continue its recovery.
Dan Bogler is a commissioning editor at Medley Global Advisors
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