Thai stocks, which were up earlier this year, slid 20% on the MSCI index through August in the wake of China’s financial maelstrom and the Erawan shrine attack, striking at the vital tourism industry and army rulers’ economic and physical security promises. Before the bombing the prime minister, General Prayuth Chan-Ocha, had dismissed two members of his technocrat team for “failure to deliver results,” as the national planning agency slashed this year’s GDP growth projection to 2.5 %. The original election timetable for September has been postponed indefinitely pending consideration of constitutional reforms that would leave the military in power, and possible monarch succession to ailing octogenarian King Bhumibol. Media and political figures are routinely rounded up and detained. as ASEAN and western allies have started to distance themselves diplomatically. Ousted leader Yingluck Shinawatra has been barred from leaving the country on fear of joining her brother in exile. She faces trial for alleged abuses under populist spending programs the soldiers now in charge have also tried and bungled, including retail investor tax breaks for stock market participation just as it crashed.
The official 2015 forecast is for 3% export decline and continued flat consumption and manufacturing, with only a double-digit public spending rise mainly for transport projects to sustain growth. Deflation has prevailed in recent months with falling fuel and food prices, but the Pacific Ocean El Nino effect already introducing drought will raise the latter into next year. The central bank, with the benchmark at the historic 1.5% “lower bound” is constrained on interest rate reduction, particularly after the currency has again softened to 35/dollar after resident capital outflow limits were removed. The relaxation, originally designed to restore export competitiveness and channel informal fund flight, has since gutted the balance of payments as foreign investors also take billions of dollars out of debt and equity markets. The current account has flipped to deficit with advance hotel bookings down for the next quarter, and heavy equipment imports needed for rail and subway line outlays.
The junta’s fiscal plans could bump up against the 60% of GDP ceiling in place since the Asian financial crisis, and have prompted ratings agency sovereign downgrade warnings. High household debt at 85% is another alarm, and may be understated since underground channels are excluded. According to a Financial Times analysis, the burden will reach 100% by end-decade under conservative economic scenarios. The Thai Chamber of Commerce urges immediate cleanup to reverse depressed consumer sentiment. Banks’ loan-to-deposit ratio exceeds the danger zone of 100%, and credit growth has roughly halved from the previous 15% annual pace with reduced demand and a spike in bad personal loans. The financial sector is also at risk since it has increased external debt from the equivalent of 8% to 12% of GDP the past five years to support the binge. Half is short-term, and the baht is weaker as global interest rates have jumped in advance of the US Federal Reserve’s likely move. Corporate customers are not in position to offer a respite, with the auto industry especially in the doldrums. Japanese FDI has been lackluster as Abenomics’ monetary easing slashed the cost of domestic production.
In the region, the Philippines may have endured as the last small safe haven, but the MSCI stock market gauge was off almost 10% there too going into next year’s presidential election with the incumbent’s popularity and achievements under fire. Nearly half the population surveyed believes President Aquino failed to curb corruption as the centerpiece of his platform, and the 25% poverty rate is the same as when he took office. The peace deal with Muslim rebels in Mindanao has unraveled, undermining efforts to promote Interior Minister Mar Roxas as successor. Infrastructure and education spending is up and public debt is stable at 35% of GDP, but expected 6% growth may not be reached on slowing exports and worker remittances as political transition and income improvement doubts are enshrined in both countries.
Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.
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