Our Opinion: 2015

Thailand’s Government gets pro-active

It is great to be back in Bangkok, visiting clients and local entrepreneurs.

I am staying directly opposite the Erawan shrine where, three months ago today, a bomb killed 27 and injured 120 more. The explosion, perceived as much an act of economic sabotage as of human tragedy, has triggered a pro- active economic policy response from the Thai government. This stems largely from concerns the bombing would hurt inbound tourism and, therefore, economic growth.

Because this year’s strong rebound in tourism has coincided with a weak growth patch for the Thai economy, tourism’s contribution to GDP growth was a disproportionate 50% in the first half of this year. Although it will be some time until data for the fourth quarter in 2015 is available, visitor growth could easily have fallen by 10% or more.

Three days after the Erawan bombing, and China’s currency depreciation, Thailand’s prime minister announced a new Thai cabinet. This was perceived as an emergency move to address the deteriorating domestic economy, especially in light of the new developments

Two new stimulus packages to support the rural economy and small and medium enterprises were implemented soon after the new cabinet’s formation. Whilst the new pro-active measures to stimulate the rural economy, Small and Medium size Enterprises and the property sector were applauded, the measures will, at best, offset the damage to the economy from an expected decline in inbound tourism, and likely to be insufficient to meaningfully grow the economy.

The aggregate impact of the capital injected into the economy from these packages is around 1.6% of GDP, primarily in the form of loans. In simple terms, a best case scenario is this to be enough to offset the negative impact from a sharp fall in inbound tourist growth. More stimulus is in the pipeline and the Government exhibits a pro-active stance, which is encouraging, especially if it also leads to the speedier disbursement of critical large scale public infrastructure spending over the next year.

Our strategic partner, the Union Bank of Switzerland, continue to see the Thai stock market trending downward, and most of our fund managers have ‘underweight’ exposure here in the Asian element of the portfolios they manage for our clients.

It makes sense to build up exposure to those segments of the Thai economy where there is a greater potential for recovery in the mid-term, and where inexpensive valuations are supportive. Selective exposure to Thailand’s tourism sector seems attractive, which has shown a strong recovery, driven by Chinese tourists. The bombing was a setback to the tourism sector, but this is already priced in and the impact is likely to be temporary.

Outside of tourism, contractors and materials companies will benefit from the roll-out of four new Metro lines in Bangkok and four new dual track rail projects.

Regardless of short-term concerns, Thailand remains a key emerging market and is a core holding for clients with Asian holdings as part of  their investment strategy.