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Thailand Country Risk Report Q2 2016

Thailand Country Risk Report Q2 2016

Core Views The military junta has been successful in returning Thailand to political stability following the 2014 coup, but we are not yet willing to upgrade the country's low Political Risk Index scores as fundamental divisions between the 'red shirts' and the 'yellow shirts' remain, and the impending royal succession has the potential to trigger renewed unrest. Thailand's real GDP growth of 2.8% y-o-y in Q415 reflects the positive impact of the government's renewed infrastructure drive and the negative effects of weakening external demand. With the construction sector likely to continue to benefit from a number of major project commencements, and low oil prices having a positive impact on the country's terms of trade, we forecast real GDP growth to pick up slightly to 3.0% in 2016, from 2.8% in 2015. We hold a mildly bullish view on the Thai baht as we believe that the terms of trade gains due to falling raw material input prices will continue to support the country's current account, while there is scope for portfolio flows to return following a lengthy period of outflows. Falling external demand from China, and yuan weakness, together with the potential for a renewed flare-up in political risk, are main downside risks facing the baht. Thailand's current account surplus has surged to the highest level since the Asian Financial Crisis despite relatively modest baht depreciation and continued strong non-oil imports. The concomitant huge outflows in the portfolio account have hit record levels, but these could return over the coming quarters should the country avoid an economic and/or political crisis. While the military government will continue to increase spending to sustain Thailand's economic recovery, positive steps taken to rein in wasteful spending will keep expenditure growth in check. Coupled with the prospects for higher fiscal revenue on the back of a gradually improving economy and the windfall receipts from the recent spectrum auctions, Thailand should have the fiscal resources to finance its eight-year master infrastructure plan. Major Forecast Changes We have revised down our real GDP forecast to 3.0% for 2016, compared with our previous forecast of 3.3% and the 2015 figure of 2.8%. That said, an acceleration in growth from 2015 will come in spite of continued external headwinds, most notably from the weakness in Chinese growth. We forecast the Thai baht to average THB35.40/USD in 2016, marking an upward revision from THB36.50/USD previously.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
GDP Report A Mixed Picture
Thailand's real GDP growth of 2.8% y-o-y in Q415 reflects the positive impact of the government's renewed infrastructure drive and the
negative effects of weakening external demand. With the construction sector likely to continue to benefit from a number of major project
commencements, and low oil prices having a positive impact on the country's terms of trade, we forecast real GDP growth to pick up
slightly to 3.0% in 2016, from 2.8% in 2015.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Monetary Policy
BoT To Remain On Hold But Downside Risks Growing
The Bank of Thailand is likely to maintain its policy rate at 1.50% for the remainder of 2016 as real GDP growth remains stable and core
inflation remains positive. However, the continued negative headline inflation print suggests the risks are weighted to the downside, and
a further slowdown in global growth could see the central bank lower rates further.
Monetary Policy Framework
External Trade And Investment Outlook
Terms Of Trade Improvement A Major Boost To External Picture
Thailand's current account surplus has surged to the highest level since the Asian Financial Crisis despite relatively modest baht
depreciation and continued strong non-oil imports. The concomitant huge outflows in the portfolio account hit a record level, but could
return over the coming quarters should the country avoid an economic and/or political crisis.
Outlook On External Position
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: MAIN EXPORT AND IMPORT PARTNERS
TABLE: MAIN EXPORTS AND IMPORTS
Fiscal Policy And Public Debt Outlook
Manageable Fiscal Profile Supportive Of Growth
While the military government will continue to increase spending to sustain Thailand's economic recovery, positive steps taken to rein in
wasteful spending will keep expenditure growth in check. Coupled with the prospects for higher fiscal revenue on the back of a gradually
improving economy and the windfall receipts from the recent spectrum auctions, Thailand should have the fiscal resources to finance its
eight-year master infrastructure plan.
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
Currency Forecast
THB: Terms Of Trade Gain Supports Stronger Baht
We hold a mildly bullish view on the Thai baht as we believe that the terms of trade gains due to falling raw material input prices will
continue to support the country's current account, while there is scope for portfolio flows to return following a lengthy period of outflows.
Falling external demand from China, and yuan weakness, together with the potential for a renewed flare-up in political risk, are main
downside risks facing the baht.
TABLE: CURRENCY FORECAST
Chapter 2: 10-Year Forecast
The Thai Economy To 2025
Political Uncertainty The Main Growth Obstacle
Ongoing political uncertainty, deteriorating demographic trends, and a lack of reform momentum are likely to undermine Thailand's longterm
economic growth trajectory. As such, we forecast real GDP growth to average 3.8% annually over the period from 2016 to 2025,
making it a regional growth laggard over the coming years.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Stability Returns, But Fundamental Risks Remain
The military junta has been successful in returning Thailand to political stability following the 2014 coup, but we are not yet willing to
upgrade the country's low Political Risk Index score as fundamental divisions between the 'red shirts' and the 'yellow shirts' remain, and
the impending royal succession has the potential to trigger renewed unrest.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Greater Political Turbulence Ahead, As Royal Succession Looms
Thailand will experience greater political turmoil over the coming decade, as the eventual passing of the king will remove a major arbiter,
worsening the schism between the 'red shirts' and 'yellow shirts'. The most likely scenario is a dysfunctional democracy with unstable
governments, with the military playing a strong role. At worst, rising political violence could push the country towards civil conflict.
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK SCORES
Trade Procedures And Governance
TABLE: ASIA – TRADE PROCEDURES AND GOVERNANCE RISK
TABLE: IMPORT & EXPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Tail Risks Mounting Amid Sub-Par Growth
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%)
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

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