Download Thailand: “Thaksinomics 2.0” to Keep Bonds Under Pressure

ECONOMICS: ASIAN PERSPECTIVES—MAY 11, 2012
Thailand: “Thaksinomics 2.0” to Keep Bonds
Under Pressure
Vincent Tsui
Economist—Global Economic Research, + 852 2918 5203
Anthony Chan
Asian Sovereign Strategist—Global Economic Research, + 852 2918 7846
A rift between Prime Minister Yingluck Shinawatra’s cabinet and
the central bank highlights some worrisome aspects of the
administration’s economic policy that may keep the local bond
market under pressure.
Display 1
THB Stayed Resilient in Previous Crises
Change in THB vs. USD
4
noted that the board has the authority to
The Finance Ministry’s nomination of a
amend regulations on selecting monetary
former finance minister for the Bank of
policy committee members.
Thailand’s (BoT) chairman—to compete
2
Percent
BoT’s Independence at Risk
One day after the event
One week later
0
(2)
(4)
against the incumbent who is re-running
While the interventionist nature of the
as the central bank’s preferred candidate—
Yingluck cabinet may undermine the
highlighted the growing tension between
market’s confidence in the central bank’s
the government and the central bank. The
independence and the credibility of its
relationship began to sour after a dispute
macroeconomic management, the Thai
over transferring the Financial Institutions
baht has remained stable over the past
Development Fund’s liabilities to the
several months. Indeed, to a certain
central bank earlier in the year, and Prime
extent, this comes as no surprise as the
Minister Yingluck Shinawatra’s cabinet has
market has experienced plenty of such
Display 2
also been at odds with the BoT over its
uncertainties in the past. Under the BoT’s
Equities More Prone to Volatility
advocacy of funding infrastructure
proactive intervention, local bond yields
investments with foreign reserves,
and the baht saw only modest pressure
weakening the baht to boost export
after the military coup in September 2006,
the introduction of capital controls in
despite lingering inflation risks.
December 2006, and the “red shirt” and
“yellow shirt” protests in November 2008,
Other than a reshuffle of the central bank’s
April 2009 and April 2010 (Display 1).
board, the impact of the standoff on
This compares with the volatile responses
monetary policy should be limited for now.
in the equity market (Display 2).
As of May 9, 2012;
Source: CEIC Data and AllianceBernstein forecasts
Change in Bangkok SET Index
Percent
competitiveness, and cutting interest rates
(6)
6
4
2
0
(2)
(4)
(6)
(8)
One day after the event
One week later
Whoever the new chairman of the board
might be, the Bank of Thailand Act
Thus, we believe that missteps by the
provides sufficient protection for the
current administration will not immediately
governor, who heads the monetary policy
cause drastic reactions in the bond or
committee. Nonetheless, it should be
currency markets—a view supported by
As of May 9, 2012
Source: Bloomberg and AllianceBernstein forecasts
the relatively light foreign investor
tenure, the Yingluck administration has
positions in Thai government bonds
shown less determination to contain fiscal
Display 3
(Display 3). But there are a lot of question
deterioration. The revised public debt
marks for long-term prospects.
management plan, approved in March,
Foreign Position in THB Bonds Remains
Relatively Light
borrowing to THB800 billion from THB350
Many of Yingluck’s policy measures, such
billion for the current fiscal year. This will
as debt relief for state banks and soft loan
result in a sharp rise in public debt from
schemes backed by the central bank, have
42.2% of GDP to 48.7% in the current
parallels with those during the 2001–2006
fiscal year and 53.1% by 2016 (Display 6,
Thaksin era. “Thaksinomics” was
next page). This essentially unwinds the
symbolized by off-balance-sheet funding
fiscal consolidation efforts over the past
by state-run banks to support the prime
decade, pushing debt close to its post-
minister’s political agenda of alleviating
Asian Crisis peak.
Share of Outstanding Government Securities
Owned by Foreign Investors
40
Indonesia
Malaysia
30
Percent
doubles the government’s domestic
Déjà Vu “Thaksinomics”?
Korea
20
10
poverty. Thaksin also sacked the BoT
Thailand
0
governor in May 2001, blaming his
The revised debt levels remain manageable
reluctance to raise interest rates—a move
and relatively benign by Asia’s regional
which raised concerns about central bank
standards, and a number of barriers exist
independence in a similar vein to today’s
to contain a fiscal crisis, such as a cap on
BoT feud.
public debt at 60% of GDP and a cap on
deficit at 20% of expected expenditure.
However, the market should not expect a
Still, an expansion in fiscal liabilities of such
repeat of the Thaksin administration’s
a scale will put a persistent upward
successes—bringing down debt while
pressure on bond yields.
02 03 04 05 06 07 08 09 10 11
As of May 9, 2012
Source: CEIC Data and AllianceBernstein forecasts
Display 4
Thai FDI Outperformed in Thaksin Era
Foreign Direct Investment as % of GDP
Thailand
6
concurrently pursuing populist growth
Philippines
4
Loan bonds (LB) have already been under
in the macro backdrop that do not appear
pressure due to a delayed endorsement of
to be priced into the market.
the budget by the parliament which led to
2
Percent
measures. We see fundamental differences
0
(2)
a concentration of issuance. An upward
Supply Pressure Remains
revision to the borrowing target also
(4)
First, besides efforts to boost domestic
exacerbates the supply pressure and drains
(6)
consumption, Thaksin’s administration had
further liquidity from the financial system.
also entered numerous free-trade
Moreover, an upward revision to public
agreements (FTAs) to promote foreign
debt levels is based on an optimistic
investment and manufacturing-sector
assumption that the budget deficit will
growth. This was reflected in the brisk
narrow to THB300 billion in FY2013 from
foreign direct investment (FDI) inflows
THB400 billion in FY2012. Given the
(Display 4) and a higher share of exports
Yingluck administration’s spending
in the Thai economy (Display 5).
tendencies, we see the risk of an overrun
Trade-related investments were a key
in the fiscal deficit and supply pressure in
impetus for growth and helped sustain
LBs beyond the current fiscal year.
Indonesia
Malaysia
00 01 02 03 04 05 06 07 08 09 10
As of May 9, 2012
Source: CEIC Data and AllianceBernstein forecasts
Display 5
FTAs Have Made Trade a Crucial Growth
Driver
Exports as % of GDP
70
solid tax revenue increases that averaged
Third, an announced reduction in
60
2006 and funded Thaksin’s initiatives.
corporate income tax from 30% to 23% in
50
Today, with fiscal austerity in Europe likely
2012 and 20% in 2013 is likely to erode
to dampen external demand, the outlook
the tax intake markedly. Corporate income
for growth and fiscal resources is less
tax accounts for around 25% of gross
20
favorable.
government revenue, and such a reduction
10
implies a permanent cost of more than 1%
0
Second, compared with Thaksin’s
of GDP to the budget. Moreover, the
administration, which maintained a
finance minister has already ruled out an
balanced budget during most of his
International Monetary Fund proposal for a
Percent
12.1% year on year between 2001 and
40
30
1996 1999 2002 2005 2008 2011
As of May 9, 2012
Source: CEIC Data and AllianceBernstein forecasts
MAY 11, 2012 ECONOMIC PERSPECTIVES
Value Added Tax (VAT) hike to compensate
growth potentials. And with the lenders’
for the loss in tax revenue.
risk approach distorted by the political
Display 6
agenda, non-performing loans may grow,
Public Debt to Surge Even Under
Optimistic Assumptions
We also note the risk of growing off-bal-
resulting in higher bailout costs for the
ance-sheet financing of populist measures.
government.
Total Public Debt as % of GDP
For instance, the rice mortgage scheme
implemented by the Bank of Agriculture
Inflation Expectation to Rebound
and Agricultural Cooperatives (BAAC), in
In the near term, THB LB performance may
which the BAAC buys unlimited amounts
also be hurt by rising inflation expecta-
of paddy at artificially high prices, will
tions. Although disinflation in Asia, thanks
result in significant implicit fiscal liabilities.
to well-behaved food prices and a
The BAAC has already announced that it is
correction in oil prices, has continued,
raising THB290 billion, or 3% of GDP, from
Thailand’s headline inflation could be
various sources to fund the scheme. With
driven by several technical factors,
rice exports plunging 40% year on year in
including: 1) a gradual pass-through of the
the first quarter, we believe the scheme is
40% increase in minimum wage in April;
not sustainable. The longer such an
2) a planned public-transport fare hike;
intervention persists, the heavier the
and 3) tighter capacity in the manufactur-
cumulative implicit fiscal costs.
ing sector, exacerbated by delays in capital
Display 7
expenditure because of external uncertain-
Tight Capacity May Fuel Inflation
Furthermore, we are seeing signs of
ties and late insurance disbursements. A
state-run banks crowding out private
continued increase in capacity utilization
banks. Their share in the loan and deposit
rates to historic heights suggests further
markets climbed to 27% in 2011 from
price pressure going forward (Display 7).
60
Percent
50
40
30
1997
2003
2009
2016
As of May 9, 2012
Source: CEIC Data, PDMO and AllianceBernstein forecasts
Capacity Utilization Rate (3-month moving
average) and CPI excluding food and energy
4
18% in 2003. Recent policies such as debt
3
The bottom line, in our view, is that THB
premium for deposit insurance (from
LBs will likely continue to underperform
which state banks are exempted) will
because of a rebound in headline inflation,
further erode the competitiveness of
potential confusion in monetary policy, less
(1)
commercial banks. Greater presence of
favorable supply-demand dynamics
(2)
state banks will reduce the efficiency of
vis-à-vis other ASEAN countries’, and the
(3)
the financial system and undermine
rising risk of economic mismanagement.
Percent
2
1
65
0
60
Percent
relief for state banks and increased
CPI Ex-Food, Energy
(Left Scale)
75
Capacity
Utilization Rate 70
55
50
04 05 06 07 08 09 10 11 12
As of May 9, 2012
Source: CEIC Data and AllianceBernstein forecasts
MAY 11, 2012 ECONOMIC PERSPECTIVES
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MAY 11, 2012 ECONOMIC PERSPECTIVES