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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 The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. 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