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Thailand Summary Moody’s Baa1 / S&P BBB+ / Fitch BBB+1 Economy: Agriculture 12%, Industry 44%, Services 44% Among Thailand’s key strengths are the size and diversification of its economy, the second largest in the Association of Southeast Asian Nations (ASEAN) after Indonesia. The economy has proven its resilience from major shocks in recent years, including the tsunami in Japan and the floods of 2011. Credit risks are low in Thailand in part due to a public debt stock that is almost fully domestic and widely owned by local financial entities. Despite setbacks in its external position, Thailand’s external liquidity is still quite comfortable with foreign exchange reserves exceeding the entire stock of external debt. The political stalemate and its impact on the economy represent the main negative for Thailand, and the turmoil is likely to continue. Growth is expected to be slightly above 3% over the next few years, in our view. At the same time, the fiscal position has deteriorated and public debt ratios, though still moderate, are rising. Economic Indicators 2011 2012 2013 2014 2015E 67.6 68.0 68.3 68.7 68.8 69.0 GDP per Capita (USD) 5,479 5,849 6,152 5,896 5,426 5,697 Nominal GDP (USD Billions) Population (Millions) 2016F 370.6 397.5 420.2 404.8 373.5 393.0 Real GDP (%) 0.8 7.3 2.8 0.9 2.5 3.2 Year-end CPI (%) 3.5 3.6 1.7 0.6 -0.3 2.3 Fiscal Balance (% of GDP) 0.0 -0.9 0.4 -0.8 -1.1 -1.4 Interest (% of Revenues) 4.0 4.0 3.4 3.4 3.3 3.3 FC Debt/Public Debt (%) 1.5 1.3 1.9 1.9 2.0 2.0 39.1 41.9 42.2 43.5 43.5 42.6 Government Debt (% of GDP) Government Debt (% of Revenue) 184.2 206.5 189.8 205.2 204.2 200.6 Current Account (% of GDP) 2.4 -0.4 -0.9 3.3 6.2 5.4 FDI (% of GDP) -1.3 -0.4 0.9 -0.1 0.3 0.6 External Debt (% of GDP) 23.1 24.3 28.5 34.6 39.8 36.1 Foreign Reserves/External Debt (%) 204.5 188.0 139.7 112.1 104.2 112.8 Foreign Reserves (Mo. of imports) 29.6 27.4 25.6 21.4 21.6 21.9 Foreign Reserves (% of GDP) 42.4 45.6 45.2 42.6 37.4 35.1 As of December 2015 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Sources: Haver, IMF, Lazard 109 Lazard Emerging Markets Debt Rating History Following is a history of the country’s foreign and local currency ratings by the major agencies dating back to 2000 demonstrating the country’s stable fundamentals. We have also included the local yield history against the JP Morgan Global Bond Index – Emerging Markets. There is no hard currency external debt spread available for Thailand. Rating History Hard Currency Local Currency A- A+ BBB+ A BBB A- BBB- BBB+ BB+ BBB BB 2000 2007 Moody’s 2015 S&P BBB- 2000 2007 Moody’s Fitch 2015 S&P Fitch As of December 2015 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Fitch, Moody’s, Standard and Poor’s, Bloomberg Bond Spreads Local Yield 10 8 6 NOT AVAILABLE 4 2 2000 Thailand 2007 2015 GBI-EM Global Div As of December 2015 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 110 Thailand Strengths Diversified, Open, Large Economy With a GDP of $375 billion, Thailand is the second largest economy in ASEAN after Indonesia.2 The mainstays are manufacturing and agriculture. While manufacturing is the larger sector, agriculture employs almost 40% of the workforce.3 Thailand’s economy has shown resilience, rebounding strongly from major shocks in recent years which have included the impact on its manufacturing sector from the tsunami in Japan, a major trading partner particularly for cars and electronics, and major floods in 2011. Thailand’s economy is very open with trade accounting for over 150% of GDP, underscoring a highly competitive manufacturing sector which is well integrated in supply chains.4 Exports have suffered some setbacks recently given slower growth in key trading partners, including the European Union (EU) and China. Low Rollover Risk for Public Debt One of Thailand’s key credit strengths is the lack of currency risk in its government balance sheet given the combined external debt of the central government and central bank represents only 5.6% of GDP.5 Further, given Thailand’s deep financial system—bank assets were 136% of GDP with the total financial system assets over 200% of GDP at the end of 2013— most of the public debt is held locally among insurance companies, pension funds, banks, and the publicly-held government pension fund and social security office.6 Non-residents held 16% of the total as of June 2014, down from 18% at the end of 2013.7 The country’s relatively large national savings provides an important buffer. Strong External Position At the end of 2015, Thailand’s external debt was 33% of GDP, but it has foreign exchange (FX) reserves of $158 billion (42% of GDP) which provides 127% of coverage of the total external debt.8 The current account surplus continued to surge in 2015 on the back of low oil prices and should reach $30 billion compared to $15billion in 2014, a hefty ratio of 8% of GDP. The financial account has offset some of the current account surplus, with foreign direct investment (FDI) and portfolio outflows surpassing 4.5% of GDP, while errors and omissions still account for 3.3% of GDP. Weaknesses Volatile Politics Political risk has worsened since the September 2006 coup which removed populist Prime Minister Thaksin from office. Since then, the political landscape has been characterized by conflicts between pro-Thaksin “red shirts” and anti-Thaksin “yellow shirts.” The red shirts are mostly rural workers, but students and those who are opposed to the urban elites and the military that they see as forces that disproportionally control power are also among them. The yellow shirts typically represent the urban middle class and the ultra nationalists. They see Mr. Thaksin’s power as based on widespread corruption and populist policies and, therefore, a threat to democracy. In December 2007, the anti-Thaksin coalition was in power until new elections were won in a landslide by Mr. Thaksin’s sister, Yingluck Shinawatra, in July 2011. The Shinawatra government was removed by a military coup on May 22, 2014. The military established a junta (National Council for Peace and Order - NCPO) that has ruled the country since then. 111 Lazard Emerging Markets Debt An interim constitution was written and the newly established national legislature elected General Prayuth as a new prime minister. A new constitution is expected to be submitted to a popular referendum by the middle of 2016. If approved, general elections should happen by mid-2017 with Thailand returning to civilian rule after three years of rule under a military junta. Slowdown in Growth Despite solid structural fundamentals and an average growth rate of 4.4% in the decade to 2012, Thailand’s economy is slowing due to a combination of softer external and domestic conditions. Full year real GDP growth slowed to 0.9% in 2014 and should post a small rebound in 2015 at 2.7%. Domestic absorption rebounded across the board, but the government investment led the recovery in 2015. The outlook for 2016 is for growth above 3% with some recovery in private investment. However, the years of 5% GDP growth seem behind us and political stability is necessary for Thailand to recoup its potential. Fiscal and Public Debt Deterioration Thailand has historically maintained a tight fiscal policy, typically running small deficits. This has recently been compromised by the fiscal stimulus in response to various shocks and the policy directives to boost infrastructure. As a result, fiscal deficits widened, with fiscal year 2014 at 2.8% of GDP for the general government, and likely stable at 2.7% in 2015.9 The IMF projects that at the broader public sector level, which also includes off-budget investment projects undertaken by other public entities, deficits would have widened to 4.2% of GDP by the end of fiscal year 2014, up from 1.5% of GDP in fiscal year 2011.10 As a result, public debt including guarantees to public entities has increased, reaching 46% of GDP at the end of 2013 up from 41% in 2011 and 37% in 2007.11 The government is planning major, off-budget infrastructure projects over the next six years, estimated to cost about 20% of 2013 GDP. This is also likely to pressure public debt ratios. For now, execution of these projects, as well as public expenditures in general, are being slowed down by the political crisis, but in the medium term, Thailand could see further rise in public indebtedness. The government intends to balance the fiscal accounts by 2017 and to keep public debt below 50% of GDP.12 Monetary and Exchange Rate Policy Inflation/Monetary Policy The Bank of Thailand (BoT) started its operations in 1942. The Monetary Policy Committee (MPC) is one of the main committees of the Bank of Thailand and is responsible for setting the monetary policy stance. The committee is comprised of seven members: three internal— BoT governor (Chairman of the MPC) and two deputy governors, and four external members that have a fixed term of three years with a maximum of two consecutive terms. The MPC meets every six weeks and is responsible for setting the monetary policy and for the exchange rate management. The BoT has been conducting monetary policy under an inflation target regime since the 2000. The central bank targets 2.5% for headline CPI with a tolerance range of ±1.5% since 2015. The committee has argued that shifting into headline targeting would improve transparency and hence communication with the public. Over the past 10 years the 12 month headline inflation has been 2.6% on average, while core (ex-raw food and energy) has been 1.5% on average. Over the past ten years, core inflation 112 Thailand changes year-over-year have never breached the 4% ceiling, and reached a peak at 3.75% in the 3Q 2008 in response to the shock in commodity prices. Note that headline inflation has a higher average and also higher volatility than core inflation. The large proportion of food (48%) and transport (25%) in the headline CPI explains the persistency of the deviation. In line with commodity price trends, headline CPI is currently lower than core inflation and at historical lows for the series, excluding the global financial crisis. The YoY measure for food inflation is currently at 2.05% versus a 6.4% average for the past 10 years, and transportation inflation is at -6.5% versus 1.35% average. Inflation THB/USD 50 10 8 45 6 4 40 2 35 0 -2 30 -4 -6 2000 Inflation 2007 2015 25 2000 2007 2015 Reference Rate As of December 2015 Source: Bloomberg 113 Lazard Emerging Markets Debt Exchange Rate Policy The Thai baht (THB) is a convertible currency that has traded in a managed-float exchange rate regime since July 1997. Under this regime, the BoT does not target a level for the exchange rate, but is ready to intervene in case of excess volatility in a manner that is consistent with the inflation target framework. The BoT also seeks to maintain national competitiveness, as measured through the Nominal Effective Exchange Rate (NEER), which comprises currencies of important trading partners and not just the US dollar. Balance of Payment: Thailand’s 12-month current account balance should reach a surplus of $33 billion in 2015, or 9% of GDP, versus a 3% surplus in 2014. The windfall came mostly from low fuel prices as the decline in fuel import costs represented 73% of the improvement in the trade balance. Exports were down by $10 billion in the period as global demand for manufactured goods remained subdued. Manufactured goods represent 88% of total exports receipts, while the United States, Japan, China, and European Unions represent 50% of the export destination. The outlook for 2016 is for another sizeable surplus barring a major rebound in fuel prices. The THB real effective exchange rate (REER) is currently 1.8% above versus its 10-year historical average. Adjusted by its volatility, that gap represents 0.4 standard deviations from the average. REER 115 106 97 88 79 70 2000 2007 2015 REER Median since Dec 2000 Median last 5 yrs Median last 10 yrs As of December 2015 Source: JP Morgan, Lazard 114 Thailand Country Background Size 513,120 KM2 (51st) Capital Bangkok Population 68.0 Million Ethnic Groups Thai 96%, Burmese 2%, Other 1% Religion Buddhist (official) 93.6%, Muslim 4.9%, Christian 1.2% Median Age 36.7 Years Literacy Rate 96.7% Independence 1238 (Traditional Founding Date; Never Colonized) Political System Constitutional Monarchy Executive Branch King Bhumibol, Prime Minister General Prayut Chan-ocha Legislative Election 2017 Legislative Branch N/A Pending Elections Economy Agriculture 10.5%, Industry 36.8%, Service 52.7% Labor Force Agriculture 32.2%, Services 16.7%, Industry 51.1% Merchandise Exports Automobiles and Parts, Computer and Parts, Jewelry and Precious Stones, Polymers of Ethylene in Primary Forms Export Partners China 11%, US 10.5%, Japan 9.6%, Malaysia 5.6%, Hong Kong 5.5% Currency Baht (THB) As of December 2015 Source: CIA 115 Lazard Emerging Markets Debt Country Timeline Financial turmoil 1997 Asian financial crisis: The baht falls sharply against the dollar, leading to bankruptcies and unemployment. The IMF steps in. Chuan Leekpai becomes prime minister. 1998 Tens of thousands of migrant workers are sent back to their countries of origin. Chuan involves the opposition in his government in order to push through economic reforms. 1999 Economy begins to pick up again. Thai media highlight high cost of drug treatments for Aids and HIV. Thailand begins to put pressure on drugs companies to find ways to make the drugs cheaper. 2001 January—New Thai Love Thai party wins elections after partial re-run of poll. Leader Thaksin Shinawatra forms coalition government. 2001 June—Burma-Thailand border crossing, which was closed after clashes between the two countries' troops in February, re-opens after Thaksin visits Burma. 2002 May—Burma closes border with Thailand again after Thai army fires shells into Burma during battle between Burmese army and ethnic Shan rebels. Border reopens in October. Temple row 2003 January—More than 500 Thai nationals are evacuated from Cambodia amid angry protests after remarks attributed to by a Thai actress that Cambodia "stole" its Angokr Wat temple complex from Thailand. 2003 February—Controversial crackdown on drugs starts; more than 2,000 suspects are killed. The government blames many of the killings on criminal gangs; rights groups say extra-judicial killings were encouraged by the authorities. 2004 January-March—Martial law is imposed in largely-Muslim south after more than 100 killed in a wave of attacks blamed on Islamic militants. 2004 February—More than 100 Islamic militants die in coordinated attacks on police bases in the south. 2004 October—85 Muslim protesters die, many from suffocation, while in army custody following violence at a rally in the south. An enquiry concludes they were not killed deliberately. Tsunami 2004 December—Thousands of people—both Thais and foreign tourists—are killed as when a massive tsunami, triggered by an undersea earthquake off the coast of Sumatra, devastates communities on the south-west coast, including the resort of Phuket. 2005 March—Thaksin Shinawatra begins a second term as PM after his party wins February's elections by a landslide. 2005 July—As violent unrest continues in the south, Prime Minister Thaksin is given new powers to counter suspected Muslim militants in the region. In November the death toll in violence since January 2004 tops 1,000. 2005 October—Thailand redoubles efforts to fight bird flu as fresh outbreaks of the disease are reported. Coup 2006 April-May—Snap election called by the PM amid mass rallies against him is boycotted by the opposition and is subsequently annulled, leaving a political vacuum. The PM takes a sevenweek break from politics. 2006 August—Prime Minister Thaksin Shinawatra accuses several army officers of plotting to kill him after police find a car containing bomb-making materials near his house. 2006 19 September- Military leaders stage a bloodless coup while Prime Minister Thaksin Shinawatra is at the UN General Assembly. Retired General Surayud Chulanont is appointed as interim prime minister in October. 2007 January—Martial law is lifted in more than half of the country. 116 Thailand 2007 April—First draft of a new constitution is approved by a committee appointed by the military administration. 2007 May—Ousted PM Thaksin Shinawatra's Thai Rak Thai party is banned. Thousands of soldiers are put on alert. 2007 August—Voters approve a new, military-drafted constitution in a referendum. Democracy restored 2007 December—General elections mark the first major step towards a return to civilian rule. The People Power Party (PPP), seen as the reincarnation of Thaksin's Thai Rak Thai (Thais Love Thais) party, wins the most votes. 2008 February—Return to civilian rule. Samak Sundaravej of the Thaksin-linked People Power Party (PPP) is sworn in as prime minister. Ousted premier Thaksin Shinawatra returns from exile. 2008 July—Pojaman Shinawatra, the wife of former prime minister Thaksin Shinawatra, is found guilty of fraud and sentenced to three years in jail. She is granted bail pending an appeal. 2008 August—Thaksin flees to Britain with his family after failing to appear in court to face corruption charges. Unrest 2010 November—Thailand extradites Russian national Viktor Bout to the US on charges of arms dealing, after months of legal wrangling. Russia says the move is a "glaring injustice" and politically motivated. 2011 January—Tensions rise as Cambodia charges two Thai citizens with spying after arresting them for crossing the disputed border. 2011 February—After an exchange of fire across the Thai-Cambodian border, the two countries agree to allow Indonesian monitors access to the area to prevent further clashes. 2011 April—Eighteen people are left dead after border dispute over land near the ancient Preah Vihear temple on the Thai-Cambodian sparks armed clashes. Election sweep 2011 July—The pro-Thaksin Pheu Thai party wins a landslide victory in elections. Yingluck Shinawatra—the sister of Mr Thaksin Shinawatra—becomes prime minister. 2011 October—The government introduces a rice subsidy scheme with the aim of ensuring that farmers - who form the main part of Pheu Thai's social base in the rural north of Thailand receive a guaranteed price for their rice crop. The scheme causes government debt to soar, and the resulting increase in the price of Thai rice causes the country to lose its rank as the world's number one rice exporter. 2012 June—Anti-government yellow-shirts blockade parliament to prevent debate on proposed reconciliation bill aimed at ending six-tear-old political tensions. Group fears that a proposed amnesty would enable the return of ousted PM Thaksin Shinawatra. 2012 November—Police disperse 10,000-strong protest in Bangkok calling for overthrow of Prime Minister Yingluck Shinawatra. New Pitak Siam (Protect Thailand) movement led by retired Gen Boonlert Kaewprasit unites yellow-shirts and others who see the government as a puppet of exiled former PM Thaksin Shinawatra. 2012 December—Former Prime Minister Abhisit Vejjajiva is charged with responsibility for the death of a taxi driver shot by troops during anti-government protests in Bangkok in 2010. Peace moves 2013 February—Government, Muslim separatists in south sign first-ever peace talks deal. 2013 April—Constitutional Court blocks moves by ruling Pheu Thai party to amend 2007 post-coup constitution. 2013 June—Government cuts guaranteed price for rice, provoking an angry reaction from farmers and protests in Bangkok. PM Yingluck Shinawatra reshuffles cabinet for fifth time, sacking commerce minister responsible for rice price subsidy cut and taking on defence portfolio herself. 117 Lazard Emerging Markets Debt 2013 July—Government, Muslim separatists in south agree to Ramadan ceasefire. 2013 November—Tens of thousands of opposition supporters protest in Bangkok against a proposed political amnesty bill that critics say would allow ousted leader Thaksin Shinawatra—the brother of Prime Minister Yingluck Shinawatra—to return to Thailand without facing jail. 2013 December—In response to opposition pressure, PM Yingluck Shinawatra announces that early elections will be held in February 2014 but rejects calls for her to step down in the meantime. Former prime minister Abhisit Vejjajiva charged with murder over 2010 crackdown on demonstrators in which more than 90 people died. Mr Abhisit, leader of the opposition Democrat Party, denies the charges and is granted bail. The opposition says that it will boycott the February elections. 2014 February—General elections go ahead but the Constitutional Court declares them invalid because of disruption by the opposition. 2014 May—Constitutional Court orders Prime Minister Yingluck Shinawatra and several ministers out of office over alleged irregularities in appointment of security adviser. Army seizes power in coup. 2014 August—Coup leader General Prayuth Chan-ocha is made prime minister. 2014 November—Finance Minister Sommai Phasee says Thai elections unlikely until 2016. Parliament bans the trade in babies born through surrogate pregnancies, following growing public opposition to the practice. 2014 December—Crown Prince Vajiralongkorn revokes royally-assigned family name of his wife, following the arrest of several of her relatives in a corruption case. 2015 March—Coup-appointed Prime Minister Prayuth Chan-ocha ends martial law, continues to rule by executive order. 2015 May—Military government to hold referendum on new constitution in early 2016, delaying move to restore democracy.Ex-Prime Minister Yingluck Shinawatra pleads not guilty at start of trial on charges of negligence over rice subsidy scheme. She faces up to 10 years in prison if found guilty. 2015 August—Terrorist bomb attack kills 20 people at Hindu Erawan shrine, Bangkok. Source: BBC Notes 1 As of December 2015. 2 As of December 2015. Source: Haver, IMF. 3 As of December 2015. Source: Haver, IMF. 4 As of December 2015. Source: Haver. 5 As of December 2015. Source: Haver. 6 “J.P. Mrogan Local Markets Guide,” J.P. Morgan, September 2013; As of December 2014. Sources: Haver, IMF. 7 As of March 2014. Source: Haver. 8 As of December 2015. Source: Haver, IMF. 9 As of December 2015, Sources: Haver, IMF. 10“Thailand: 2013 Article IV Consultation,” IMF Country Report No.13/323, November 2013, http://www.imf. org/external/pubs/ft/scr/2013/cr13323.pdf. 11As of December 2014, Sources: Haver, IMF, and Lazard. 12As of December 2015, Sources: Haver, IMF. 118 Important Information Published on 13 January 2016. Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the date the date published and are subject to change. Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. An investment in bonds carries risk. 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