Download Thailand Economic Update

April 2012
April 2012
Thailand Economic Update
Supavud Saicheua
Thanomsri Fongarunrung
Emerging Asia Economist
Phatra Securities
Thailand: The next steps
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firm may have a conflict of interest that could affect the objectivity of this report.
11150212
1
April 2012
IMF: “Optimism must not lull us into a false
sense of security”
 World has stepped back from the brink but
Chart 1: GDP growth forecast
three major vulnerabilities remain.
 Euro area public sector and bank debt
rollover is 23% of GDP in 2012.
 Rising oil price is a threat to global growth.
 Growing risk of slowing EM in medium term
Asia +7.3% in 2012. Euro area -0.5%; US
1.8%; China 8.2%.
BoAML’s view
 ECB’s LTRO prevented a euro area banking
liquidity crunch.
 Mild recession in Eurozone
 Moderating inflation
 US economy will lose momentum; 50%
World
Advanced economies
US
Euro
Germany
France
Italy
Spain
Japan
UK
Devloping Asia
China
India
ASEAN-5
Latin America
2010
5.2
3.2
3.0
1.9
3.6
1.4
1.5
–0.1
4.4
2.1
9.5
10.4
9.9
6.9
6.1
2011
3.8
1.6
1.8
1.6
3.0
1.6
0.4
0.7
–0.9
0.9
7.9
9.2
7.4
4.8
4.6
2012F
3.3
1.2
1.8
–0.5
0.3
0.2
–2.2
–1.7
1.7
0.6
7.3
8.2
7.0
5.2
3.6
2013F
3.9
1.9
2.2
0.8
1.5
1.0
–0.6
–0.3
1.6
2.0
7.8
8.8
7.3
5.6
3.9
Dif from Sept proj.
2012F
2013F
–0.7
–0.6
–0.7
–0.5
0.0
–0.3
–1.6
–0.7
–1.0
0.0
–1.2
–0.9
–2.5
–1.1
–2.8
–2.1
–0.6
–0.4
–1.0
–0.4
–0.7
–0.6
–0.8
–0.7
–0.5
–0.8
–0.4
–0.2
–0.4
–0.2
Source: IMF, January 2012
“
chance of QE3 by 3Q
 GEM monetary easing window is closing
2
April 2012
Chart 2: Europe: LTRO brought down bond yield
Data stronger; investor sentiment improving
Chart 4: PMI Manufacturing is improving
Source: Bloomberg
Chart 3: US: Employment increases
US
52.4
54.1
-1.7
Expansion
Source: Haver Analytics, BAML, Fed
Source: Fed database
3
April 2012
Central bank: Quantitative Easing
Chart 5: G4 central bank balance sheets (% of GDP)
Chart 6: Europe: Real credit growth still weak
 ECB will be on hold, to evaluate the impact of LTRO on real economy.
 QE3 not ruled out but Fed not promising further easing either.
 ML believes QE3 still likely in September.
4
April 2012
Oil price risk
Chart 7: Probability of US or Israel air strike
against Iran
 BAML forecast: 2012: Brent $118/bbl, and
WTI $106/bbl; 2013: Brent $120/bbl and
WTI $111.
Chart 8: Energy prices are already close to 9% of global
GDP
Chart 9: Europe oil as a percent of GDP is rising again
 Oil could hit $140/bbl this year due to high
liquidity, improved demand, and tight
supplies.
 Critical threshold is Brent $135 in which oil
would account for 9% of world GDP
 Complete disruption of Iranian exports or
shut-down of the Strait of Hormuz could
raise oil price another $100/bbl.
5
April 2012
Vulnerabilities from higher oil price
Chart 10: Some market like Russia may be more resilient
Chart 11: Oil import dependency
6
Euro periphery: excess spending problem
April 2012
Chart 12: Current account and fiscal position
% of GDP
CA
Govt debt
Fiscal bal
2006
-9.0
39.6
2.0
2007
-10.0
36.1
1.9
2008
-9.6
39.8
-4.1
2009
-5.2
53.3
-11.1
2010
-4.6
60.1
-9.2
2011
-3.8
67.4
-6.1
2012
-3.1
70.2
-5.2
2013
-2.8
72.8
-4.4
Italy
CA
Govt debt
Fiscal bal
-2.6
106.6
-3.3
-2.4
103.6
-1.5
-2.9
106.3
-2.7
-2.1
116.1
-5.3
-3.3
119.0
-4.5
-3.5
121.1
-4.0
-3.0
121.4
-2.4
-2.5
120.1
-1.1
Port
CA
Govt debt
Fiscal bal
-10.7
63.9
-0.4
-10.1
68.3
-3.2
-12.6
71.6
-3.5
-10.9
83.0
-10.1
-9.9
92.9
-9.1
-8.6
106.0
-5.9
-6.4
111.8
-4.5
-5.3
114.9
-3.0
Greece
CA
Govt debt
Fiscal bal
-11.2
106.1
-6.1
-14.4
105.4
-6.7
-14.7
110.7
-9.8
-11.0
127.1
-15.5
-10.5
142.8
-10.4
-8.4
165.6
-8.0
-6.7
189.1
-6.9
-6.0
187.9
-5.2
Spain
Source: IMF (Sept 2011)
7
April 2012
US could slow down in 2H 2012
 Good employment data and spending in
1Q was due to unusually warm winter.
2Q data could start to disappoint.
Chart 13: Post election fiscal shocks
 Fiscal drag equal to nearly 4% of GDP in
2013 threatens to slow US economy
down during 2H 2012.
 Important fiscal decisions postponed to
after Nov elections under lame-duck
Congress. Fearing division and inaction
would cause economy to falter in 2012.
 Decisions needed to: renew Bush tax cut
($240bn); extend unemployment
benefits and payroll tax ($130bn);
sequestration ($150bn).
 BoAML still expect QE3 by end of 3Q.
8
April 2012
Chart 14: Projected spending and revenue
(% of GDP)
US economy: Fiscal time bomb
Chart 15: Unsustainable rise in entitlements
Source: CBO, Long-Term Budget Outlook, Jun 2011
9
April 2012
China and India slowing down
China: Wanting to slow down
 Chinese leadership will accept slower GDP growth to bridge the gap between
rich and poor and preserve political stability. Growth target 7.5%.
 More emphasis on consumption; less on investment
 Tight monetary conditions to persist to bring down home prices even if this
could hurt growth. Fiscal policy will support growth.
 Jan-Feb exports weakened which in part was the result of slowdown
especially in Europe.
India: Being forced to slow down
 Budget deficit in FY ending March is 5.9% of GDP vs. 4.6% projected. This is
forcing fiscal tightening with 2013 deficit target of 5.1% of GDP.
 Cutting energy subsidies would raise inflationary pressures and reduce room
for RBI to cut interest rates.
10
China economic data
April 2012
Chart 16: IP and power production
Chart 18: Local investments will be the key
Chart 17: Retail sales vs exports
Chart 19: Money supply and loan growth
11
April 2012
China “the worst is almost over” – Ting Lu
 “Unlucky" Jan and Feb: hit by weaker external demand, coldest winter in 27
years, political disturbance, destocking in response to falling home sales, and
laziness of banks (complacent about their surging earnings).
 Worst is almost over. Fight for political succession done. Leaders will focus on
stable growth; banks are cutting lending rates; and new home sales
rebounded as mortgage rates for first-time home buyers are cut.
 We expect pick-up in Mar industrial output (esp. steel and cement). Subdued
inflation provides room for price hikes of fuel, power and other utilities.
 GDP growth in 1Q12 slow to 8.3% YoY from 8.9% in 4Q11. QoQ growth (sa)
could slow to 1.7% in 1Q12 from 2.0% in 4Q11. We maintain our 8.6% GDP
growth forecast for 2012.
 No rate cuts and 100bps cut in RRR in 2012. PBoC to encourage banks to cut
their lending rates and govt will step up efforts on social housing.
12
April 2012
Thailand 2012: GDP growth 5.7%

Post-flood recovery could raise GDP
growth this year to 5.7%.

But the really important questions
are:
Quarterly GDP growth
1. Will the post-flood reconstruction
make Thailand better? Or the same
2. Coordination of fiscal and monetary
policies
3. Can Thailand cope with much higher
oil prices?
Economic Forecast
13
Recovering gradually from the floods
April 2012

Full recovery by 3Q

Auto sector recovering faster

About 51,000 unemployed; 30,000
from the seven industrial estates

Electronics recovery lagging

Most will remain in Thailand
Capacity utilization: sharp recovery in autos
Capacity utilization
Source: OIE
14
April 2012
Water management plan
Flood reconstruction to cost Bt350bn to return Thailand to pre-flood status quo
 Plant more trees (Bt10bn)
 Better land use and management (Bt50bn)
 Build 17 water catchment areas and a dam (Bt50bn)
 Turn 2mn rai of agricultural land into flood plains (Bt60bn)
 Build floodways to divert water from industrial areas and Bkk (Bt120bn)
 Improve floodwalls along river banks (Bt7bn)
 Better forecasting and information (Bt3bn)
 Subsidize construction of flood walls for industrial estates (Bt5-6bn)
 Bt50bn insurance fund for SMEs and households
15
April 2012
Immediate action plan of Water Management (2012-3)
Project details from the government
Action plan of Integrated Flood Mitigation in Chao Phraya
River Basin (2012-3)
16
April 2012
Thailand’s flood strategy
Bangkok
Source: KrungThep Turakit newspaper, 27 Feb 12
17
April 2012
Source: Strategic Committee for Water Resources Management, The Nation newspaper
18
April 2012
Flood prevention does not raise productivity
 Bt350bn flood prevention spending is meant to
restore Thailand to pre-flood status. It does not
increase the country’s long term potential
growth, however.
Examples of “real growth enhancement”
 Thai auto sector said it needs to employ another
150,000 (from 450,000) to produce 2.5mn cars.
But Thailand is not producing enough
technicians.
Unemployment rate is less than 1%
1,500
'000
%
5
1,200
4
900
3
600
2
300
1
0
0
1998
2000
2002
2004
2006
No. of unemployed
 Manufacturing employment is currently 5.7mn.
Thailand has 12mn workers in low paying nonagri sectors that must be retrained.
2008
2010
Jan-12
% of total
Employment by sector
 Thailand needs to invest Bt65bn to expand Lam
Chabang deep sea port by 2019. But EIA and HIA
approval will likely take two years.
 Participate actively in GMS which is becoming a
reality as Myanmar opens up
Labor force 38.6mn persons
Source: NSO
19
Investment remains solid
April 2012
Investment expansion remains solid
Thai direct investment surges
Source: BoT
Source: BoI
Thai direct investment by destination
Savings-Investment gap
Others
Others
Source: BoT
Source: NESDB
20
Thailand’s main crop prices
1-Jan-12
1-Jan-09
1-Jan-08
1-Jan-07
1-Jan-12
Source: Datastream
1-Jan-11
Rubber (US$)
700
600
500
400
300
200
100
0
1-Jan-11
1-Jan-10
1-Jan-08
1-Jan-07
1-Jan-09
Rice ($US/tons)
1,200
1,000
800
600
400
200
0
1-Jan-10
April 2012
Source: Datastream
1-Jan-12
1-Jan-11
1-Jan-10
1-Jan-08
1-Jan-07
Source: Datastream
1-Jan-09
Sugar (US cent/lb)
35
30
25
20
15
10
5
0
%YoY
Farm income
2010
24
2011
15.7
1H11
33.1
2H11 Jan-Feb12
1.7
-14
Source: BoT
21
April 2012
Monetary policy and inflows of “hot money”
 BoT is very clear that it is already very
accommodative with “neutral”
monetary policy plus Bt300bn soft loans
Foreign net buy of Thai equities (MB/month)
 BoT is concerned that risk-on trade
could mean massive inflows of hot
money
Foreign net buy of Thai bonds (MB, 1month rolling)
200,000
150,000
100,000
50,000
0
Mar-12
Feb-12
Jan-12
Dec-11
Nov-11
Oct-11
Sep-11
Aug-11
Jul-11
Jun-11
May-11
-50,000
Apr-11
 This could limit exports as an engine of
growth but the economy would likely
have to significantly underperform
before BoT changes its view
Source: SET
Mar-11
 It is likely that BoT will intervene less to
“stabilize” the baht this time
Source: Thaibma
22
Sovereign and BoT bonds
April 2012
Bonds Outstanding (Jan 2012)
Bt bn
Government bond
SoEs bond
BoT bond
FIDF bond
T-Bill
Others
Total
Source: Thaibma
2006
1,511
333
897
320
218
10.7
3,300
2007
1,760
342
1,351
244
114
0.7
3,813
2008
1,851
379
1,392
167
81
0.7
3,870
2009
2,156
372
1,789
154
207
4,678
2010
2,523
342
2,381
78
72
5,396
2011
2,627
323
2,642
48
5,639
Feb-12
2,713
316
2,725
48
5,803
Bt bn
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
-
1trn
2.7trn
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: BoT
%YoY,3MMA
Money base and broad money
18
16
14
12
10
8
6
4
2
0
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Source: BoT
BoT monetary instruments
Mbase
7
%
BoT bond
BoT repo
Government bond yield (Thai vs US)
6
5
4
3
2
1-Year rolling correlation = 70%
1
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
TH10Y
US10Y
Broad money
Source: Thaibma
23
April 2012
Thailand is vulnerable to high oil prices
Thailand inflation correlates with fuel prices
 Thai inflation is more correlated to high
oil prices than high food prices
 The government is unable to afford
much more energy subsidies (now
costing 1.2% of GDP per year).
 If oil price spike causes a current
account deficit and weakens the baht,
the BoT could even hike rates
(hopefully not until next year)
Food price index
Fuel price index
Source: MoC
Correlation for the period
Weight in CPI
2003-Jan 2012
2006-Jan 2012
CPI vs Food prices
33.00%
0.35
0.35
CPI vs Fuel prices
5.30%
0.78
0.79
Source: Phatra calculations
24
April 2012
Myanmar: the game-changer
 The opening up of Myanmar is the missing piece that completes the Greater Mekong
Sub-region as an economic zone from the South China Sea to Andaman Sea.
 250mn new consumers and workers with rich natural resources to back them.
 Dawei (Tavoy) is like Map Ta Phut, only 8-10 times larger.
 But in his book “Burma and the new crossroads of Asia: Where China meets India”,
Thant Myint-U wrote:
“In October 2010, the governments of Burma and Thailand revealed plans for the
development of a massive industrial complex…$8.6bn will be invested in basic
infrastructure. Another $58bn in investments (that).… will include a deep-sea
port, steel, fertilizer and petrochemical plants, and an oil refinery. A new highway
will cut through the mountains to Bangkok. There will be tourist resorts as well,
on a giant scale. Tavoy will be ground zero….There are justifiable worries that all
this will devastate the environment. And indeed, the Thai government has said
that its prime motivation in supporting the project is to move environmentally
damaging industries from Thailand to Burma.”
25
April 2012
Greater Mekong Sub-Region
26
April 2012
Politics: A ceasefire waiting for a solution

A stalemate during the “twilight years” could last a long time and could
prove costly to Thailand

It is a zero sum game: realignment of political power is likely to produce
losers and winners

Three main political issues that reflect the ongoing search for a solution:
1. Amendment of the constitution to give more power to those elected by the
people
2. The talk of judicial reforms and inevitable realignment in the military
3. Govt. will push for a national reconciliation law

After constitutional amendment, new elections to confirm Pheu Thai’s
dominance next year is possible

However, any shortcomings of the govt on the economy could cause political
stability to unravel as it may be seen as a failure of democracy.
27
April 2012
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