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April 2012 April 2012 Thailand Economic Update Supavud Saicheua Thanomsri Fongarunrung Emerging Asia Economist Phatra Securities Thailand: The next steps Phatra Securities does and seeks to do business with the companies covered in its research reports. As a result, investors should be aware that the 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 Important Disclosures Copyright 2012 Phatra Securities Public Company Limited (“Phatra Securities”). All rights reserved. Any unauthorized use or disclosure is prohibited. For distribution outside of Thailand, the distribution will be restricted to only “institutional investors” or other similar types of investors as stipulated in each jurisdiction. In preparation of this research report, Phatra Securities has assumed and relied on the accuracy and completeness of all information or data supplied or otherwise made available to us including public available information. 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