Thailand recently held its elections on the 24 March after much delay and controversies. After elections, it was expected to have a more stable political outlook. However, there was a slim majority in the lower house.
It may mean a shaky government that would struggle to pass legislation and might not hold together for more than a year or two.
Since there is no change in leadership after the election, progress on Thailand's 20-year national strategy and Thailand 4.0 programme is expected to continue. The purpose of these programmes is for Thailand to progress to a digital economy and become a high income nation by 2037.
Before the elections, the Government has been leaning on state-owned enterprises to support economic expansion through these programmes by speeding up investment. Over the long term, reliance on state-owned enterprises is not sustainable, as these enterprises lack efficiency and are poorly managed.
Nevertheless, the Thailand 4.0 programme is seen to be continued to be implemented.
1) Political instability
There were much confusion and unresolved allegations of fraud after the elections. The military junta's party continued its grip and was declared winner of the election.
The largest opposition party, Pheu Thai (founded by former Prime Minister, Thaksin Shinawatra) is mounting a legal challenge to the election commission’s convoluted formula for determining parliamentary seats, which was being used for the first time and still remained little understood to most Thais.
Maintaining political stability will be the main concern of the new Government. The result of the elections is not helpful to tackle sluggish economic growth and heal the divisions of more than a decade marked by coups, street protests and shrinking democratic space. Companies need to prepare for uncertainty in policies and potentially some unrest.
Foreign companies may continue to face corruption and lack of transparency in government procurement. There are frequent reports that the Thai government makes changes to technical requirements during the course of procurement. There does not seem to be any reform soon, despite the new Thai Public Procurement Act that has been in effect since August 2017.
2) Income inequality
According to a Global Wealth Report 2018 by Credit Suisse, Thailand has the highest wealth inequality in the world. The bottom 10% of Thais hold 0% of wealth, being either in debt or having no documented household income. The poorest 50% of Thais now hold only 1.7% of the country’s wealth, while the richest 10% now hold a massive 85.7%.
The issue is featured prominently on the Thai government's agenda. Government-led projects, as well as public-private partnerships have been used to create more job opportunities and increase the earnings of lower- and middle-income groups. However, initiatives have not yet seen results.
Most farmers in Thailand still earn a very low income. Although agriculture accounts for 40% of jobs, it accounts for 9% to 10% of the country's GDP. Fall in agriculture prices have made farmers' lives tougher. For example, rubber prices fell drastically from US$6.26 per kg in February 2011 to US$1.65 in February 2019.
Thailand also faces a shortage of skilled labour which contributes to its income inequality. This is largely due to education in poorer areas is being underserved.
The country risks losing competitiveness as a result of the widening skills gap. An unskilled, low-cost labour force no longer provides a comparative advantage. Companies in a more high-tech industry are likely to face the challenge to hire.
3) Economic slowdown
Thailand's economic fundamentals are seen to be weak. The exposure of companies and investors to different economic growth outcomes clearly depends on whether they are active primarily in the domestic or export market.
The domestic market has been sluggish due to political uncertainty and increased consumer pessimism. Additionally, due to the mutual tariff imposed by US and China on each other, trade goods are dumped into Thailand and domestic players face stiffer competition from US and China.
Thailand is export dependent. Exports account for about two-third of Thailand's GDP. There is an export slump including from its large electronics and automobile sectors amid the trade war between China and US and appreciation of Thai Baht. Thailand is ranked second in Southeast Asia in terms of external trade volume after Singapore.
Since the Thai economy has not exhibited production strength for decades, it is clear that the economy expands from domestic consumption which is financed by debt. As credit growth slows down, the economy slows down accordingly. This can be seen by slowdown in private consumption as % of GDP.
Household debt level has reached 78% of GDP in 2018 (see chart below). There are rising concerns that Thais are unable to service their debt. The reason why Thais quickly accumulate debt is because their income rises much slower than consumption demand. And demand is fulfilled by easy credit from financial institutions.
Although unlikely to be imposed, US's threat of potential tariff on automotive could be detrimental for Thailand. If imposed, it will affect its exports. However, this will not affect Thailand's position as the automotive industry leader in ASEAN due to established production facilities and activities and equal imposition of the law of other ASEAN countries.
In May 2019, automotive export was reported to hit a new 2-year low. Domestic demand for cars is also forecasted to drop after a 20% y-o-y growth last year due to lack of credit facilities. Automotive is one of the main sectors in Thailand, and has attracted major investments to manufacture hybrid vehicles. Therefore, the slowdown in the automotive sector has an impact on the overall economy.
Thailand alongside many developing countries, is still undergoing a long episode of political instability and democratic struggle. It faces repeatedly-rewritten constitutions, transitions from civilian to military governments, bloody and bloodless street demonstrations. How the Government will hold up in the next few years will be crucial to its progress.
The continued lack of political instability, consumer confidence (domestic demand) and high household debt will pose a challenge for the Thai economy. Despite efforts by the Government, income inequality is not seen to be improving and may hinder social development. Thailand also faces the challenge of skilling up its workers to progress to a digital economy.
Sustained pace and quality of reforms, as well as sound implementation, will be crucial for translating the reform effort into the desired economic outcomes.
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References
Living ASEAN, https://livingasean.com/explore/thailand-income-equality-wealth-report-2018-indonesia-economy/
SCMP, Why did Thailand's Junta bother with its farcical election? https://www.scmp.com/week-asia/opinion/article/3005163/why-did-thailands-junta-bother-its-farcical-election
Oxford Business Group, Challenges and Opportunities Facing Thailand, https://oxfordbusinessgroup.com/news/challenges-and-opportunities-facing-thailand%E2%80%99s-industrial-sector, published 14 March 2019
Bangkok Post, Auto exports at 2-year low, https://www.bangkokpost.com/auto/1682680/auto-exports-at-two-year-low, published 23 May 2019
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