Thai politics is no longer the art of the possible. Thailand has been without a fully functioning government for more than four months. Political unrest and legal maneuverings have intensified and complicated the conflict such that it now seems impossible to reach a viable solution.
An anti-government protester during a march to the Finance Ministry. Political stalemate has increasingly weighed down on the economy. (Photo by Patipat Janthong)
There are numerous signs that Thailand’s political Gordian Knot is increasingly weighing down on the economy. Household consumption expenditures are weak; even purchases of everyday items such as snacks and beverages are declining.
Businesses have been shedding capital investments in structures and equipment. Manufacturing capacity utilisation is nearing a 2009 low and continues to dive despite some recent pickup in exports.
Even Thailand’s bread-and-butter industry, tourism, has struggled. Siam Commercial Bank’s Economic Intelligence Centre (EIC) estimates that Gross Domestic Product (GDP) for the first quarter of 2014 fell short of last year’s level, and that growth for this year will only be 2.1%.
Evidently, the economic slowdown we are experiencing is substantially more severe than the impact of inefficiencies or delays in government spending. Indeed, the government is still spending.
Government officials still receive their monthly pay cheques and there is little doubt about the continuation of their future income or job security. In addition, most of the public works already on the budget are still proceeding.
Our situation is unlike the US government shutdown in 2013, when US government workers and contractors did not get paid, and public works were halted. In the US, not knowing when payments would arrive caused people to lose confidence, and temporarily stop spending. Delayed payments to rice farmers could be viewed as a similar case for Thailand.
However, the effect those delays have on personal incomes does not pose such a severe threat to Thailand’s whole economy because it is not pervasive and can be quickly reversed. Rice farmers will likely start spending again once their budget constraints are finally lifted.
We are seeing a crisis of confidence. The economy has been hit repeatedly by bouts of political turmoil. This prolonged and intense political conflict has caused people to hunker down. The willingness to spend or invest is not there, even though people have the means to do so.
But the problem is not merely psychological. The real issue is also that there are many unknowns, especially on big issues that dictate where we are heading.
Top of the list is what to expect from the government’s infrastructure investments. Conventional wisdom today holds the majority of projects will remain largely intact and be financed via the normal budgetary process, beginning the fiscal year 2015.
This may sound far off, but the fiscal year 2015 begins in October 2014. Some are expecting one or two quarters of delay for the passage of the budget. We may not have a budget in time. Even if we do, there is very little indication which projects will be given priority — making it difficult for business planning, and thus crippling the crowding-in effect for which these infrastructure investments are devised.
To further complicate matters, there is a possibility that the next government’s top priority is not the economy altogether. This uncertainty is definitely weighing on people and businesses expecting work off the back of government undertakings.
And then there are the legal matters — outlined in these three prime examples.
Firstly, the recent reduction in income tax could be reversed. Unless the current bill is extended, lower tax rates for individuals and corporations will expire at the end of this year and tax rates will reverse to the original higher schedule.
For individuals, tax savings of 4,000–200,000 baht per person will be gone. For corporations, the tax rate will jump from 20% back to 30%. At the margin, this can cause people and businesses to increase precautionary savings to buffer the higher tax burden.
Secondly, international trade negotiations have been put on hold. Thailand stands a chance of losing import tax privileges under the EU’s generalised system of preferences (GSP) at the beginning of 2015, because it has risen into the upper-middle income category.
The EIC estimates that Thailand could lose about US$2.5 billion (80 billion baht) in business opportunities to lower income countries that still enjoy the GSP, as well as other countries that have successfully negotiated trade arrangements with the EU. Affected businesses will likely wait for clarity on this before proceeding with investment.
Thirdly, FDI inflow may be deterred. Approvals of investment projects seeking incentives are delayed in the absence of the board of investment. The medium-term consequences could be massive, but for this year this legal difficulty has spillover effects on confidence supporting local businesses.
The next government must put restoring growth high up on the agenda, rather than on the sideline to make way for political reforms. The public may expect, or even pressure for, some forms of fiscal stimulus to boost consumption.
Unfortunately, it may not deliver a quick-win in resuscitating the economy as it has in the past decade. The economy now has more limitations, especially deteriorating credit quality and skyrocketing household debt level; Thailand’s is among the fastest-growing in Asia.
The EIC forecasts that, for 2014 alone, political unrest will cost the Thai economy about 1.5 percentage points decline in growth. The negative momentum of the economy must be arrested quickly. We certainly do not want or need a repeat of 2013 when growth underperformed expectations by a wide margin, causing investors to shun Thailand’s financial assets.
To conquer this crisis of confidence, everyone — from all political affiliations — must work towards getting rid of the legal uncertainties. Damage spillover to 2015 could still be substantial even if a new government were to function by the end of this year. And that’s a big if, given deep social divides, street protests and legal entanglements. Our political conflict has become so convoluted that we may not be able to solve it with the same old thinking. We need to cut through the Gordian knot at once.
Sutapa Amornvivat, PhD, is chief economist and first executive vice president at the Economic Intelligence Centre, Siam Commercial Bank. She has a BA from Harvard, a PhD from MIT and international work experience at IMF, ING Group and Booz, Allen, Hamilton. eic@scb.co.th | EIC Online: www.scbeic.com