Thailand’s prolonged political crisis is raising the risk that the nation will be the only one of Southeast Asia’s biggest economies to slide into a recession this year, undermining its allure as a manufacturing center.
The country’s gross domestic product probably shrank 2.2 percent in the three months through March from the previous quarter, when it expanded 0.6 percent, according to the median estimate of 12 analysts surveyed by Bloomberg News ahead of data due May 19. Economists at DBS Group Holdings Ltd. and Mizuho Bank Ltd. said Thailand could experience two consecutive quarters of contraction this year.
“Thailand may be the outlier in terms of one that could fall into a technical recession,” said Vishnu Varathan, a senior economist in Singapore at Mizuho Bank. “For a long time regionally, the way Thailand was looked at was that the economy ran on a separate track from its politics, but I think that assumption cannot be taken for granted any more.”
Protests that began late-October to unseat Yingluck Shinawatra as prime minister have stalled infrastructure spending and contributed to Honda Motor Co.’s decision to delay building a factory. Demonstrators have thwarted meetings between election officials and an acting premier who was installed after a court ruling forced Yingluck to step down, casting doubt on a vote planned for July and prompting ratings companies to warn of a credit-negative impact.
The Thai baht is the worst performer in the past six months among 11 widely traded Asian currencies tracked by Bloomberg. The benchmark stock index is the only major one in Southeast Asia to have slid in the same period.
Thailand has lured investment in past decades from overseas automakers including Toyota Motor Corp. and General Motors Co. to create a manufacturing hub. Foreign direct investment climbed to $10.7 billion in 2012 from $9 billion the previous year, according to World Bank data, trailing only Singapore and Indonesia in the region, even as countries from the Philippines to Vietnam boosted inflows.
“In terms of new investment, economies like Indonesia and Malaysia are starting to look more attractive,” said Glenn Maguire, a Singapore-based economist at Australia & New Zealand Banking Group Ltd. “Thailand’s likely to continue to underperform, and perhaps for an extended period. Until you get investment firing and expansion of capacity, it’s going to remain one of the weaker economies in Asia.”
Thailand has survived coups, natural disasters and downturns, with the last technical recession seen in end-2008 and the first quarter of 2009 after a global economic slowdown led to an exports slump and anti-government protesters shut down Bangkok’s main international airport for more than a week. Overseas sales slipped in two of three months this year, while consumer confidence slid for a 13th straight month in April.
The outlook on Thailand’s debt rating may be reassessed if the deadlock stretches into the second half, Fitch Ratings said March 20, and Moody’s Investors Service said last month that a prolonged period of below-trend growth would be credit negative. Thailand has been rated BBB+ by Standard & Poor’s since 2004, even as the Philippines won an upgrade from S&P this month to BBB after being raised to BBB- last year.
A ratings downgrade would not impact Thailand in the short term, as debt servicing is less than 10 percent of the budget and the debt-to-GDP ratio is only 45 percent, according to Korn Chatikavanij, a former finance minister who resigned last year as deputy leader of the Democrat Party to join the protests.
“We’ve got no growth and declining investment, declining purchasing power,” Korn said in an interview last week. “But there’s no systematic or permanent damage to the fiscal sustainability of the country.”
The Thai central bank kept its key interest rate unchanged in April after cutting it to the lowest since December 2010 the previous month. The monetary authority will lower its 2014 GDP growth forecast of 2.7 percent in its next meeting on June 18, Governor Prasarn Trairatvorakul said last month.
Honda, Japan’s third-largest carmaker, is delaying building a factory in Thailand as it monitors the nation’s economic situation, Executive Vice President Tetsuo Iwamura said last month. Construction of the plant that was slated to start production in 2015 may be delayed for six months to a year, company spokeswoman Yuka Abe said May 8.
Vietnam also risks an investment backlash as anti-China riots sparked by the placement of an oil rig in disputed waters have damaged factories and injured workers this week. Elsewhere, Hong Kong’s economy grew in the first quarter at the slowest pace since a contraction in 2012 because of weakness in exports, a report showed today.
Even so, Thailand will probably have the slowest growth among its major Southeast Asian peers this year, according to Bloomberg surveys, which showed GDP rising 3 percent this year, trailing Indonesia’s 5.3 percent and the Philippines’s 6.5 percent. It is the only major economy in the region forecast by analysts to have a quarterly contraction in 2014.
Thai GDP probably rose 0.5 percent in the first quarter from a year earlier, the smallest gain in two years, according to the median of 18 estimates in a Bloomberg survey. In contrast, neighboring Malaysia reported today growth accelerated to 6.2 percent last quarter.
Thailand’s army chief, Prayuth Chan-Ocha, warned yesterday that the military may need to use force if protest violence escalates. Prayuth has said a military coup won’t solve the political deadlock, and a legal solution must be found.
“Thailand’s competitive advantage remains, that’s undisputed, but the gap between the others and Thailand in terms of being able to offer a manufacturing base, is not as wide as it seems to be right now,” said Mizuho’s Varathan. “That’s another reason why this bout of political uncertainty, and a particularly bad one at that, is creating greater uncertainties.”