Teflon Thailand starts to flake
With consumer confidence low and forecasts grim, economists fear the short-term struggles are signs of long-term financial weakness
It’s almost noon and the Toyota saleswoman still hasn’t seen her first customer. Thaiyont, a Toyota dealership in Chon Buri’s Muang district, used to serve at least eight customers a day. But these days, they are lucky to have two.
“In the past, we couldn’t keep up with the customers. Nowadays, we need to seek them out,” said Kulcha Jariyawiwat, who sells mid-range models mostly to factory workers who already have a hard time making ends meet.
“They tell me that in the past, they would work overtime every day. But nowadays they are being paid only for the days they work, which on average is now three days a week,” Ms Kulcha said. “So not only do they have to make tougher decisions when buying a car, but it’s also hard to get financing.”
While she is lucky to be in the office today with the comfort of air-conditioning, most days she is out hawking for customers standing next to a new pickup at a local flea market. It’s the worst period in her 12 years working at the company, with first quarter sales dropping by 10% year-on-year for the dealership.
Although some customers are waiting for the new Hilux Vigo pickup that will be available in May, Ms Kulcha attributes 70% of the sales decrease to the economic slump. “Even if the customer says that he or she is interested in the new vehicle, I’m still not sure that they will have enough purchasing power,” she said.
When a veteran TV journalist confronted Prime Minister Prayut Chan-o-cha last month and asked him about the general public’s struggle to make ends meet, he cut the question short.
“I am doing the best I can — even more than the government that you adored in the past,” he responded in his usual terse military manner.
In the first few months after the May 2014 military putsch instigated by Gen Prayut, analysts and financial brokers welcomed the coup for restoring political stability and breaking the decade-long political deadlock. But 10 months on, it appears all that has changed. Consumer confidence hit a nine-month low last month, while several banks have painted negative prospects for the Thai economy.
The central bank recently cut its economic growth forecast from 4% to 3.8%, while Kasikorn Research Centre trimmed its prediction from 4% to 2.8%, on an assumption of flat export growth.
“It seems that the economic shock absorbers that have cushioned Thailand’s Teflon economy in previous coups have not worked their magic this time around,” said Pavida Pananond, an associate professor of international business at Thammasat University.
The short-term symptoms of a weak economy are evident in lower exports, domestic consumption and slower-than-expected government spending.
But Ms Pavida believes there are long-term weaknesses in the Thai economy that cannot be solved while the Prayut government is setting out its roadmap for political reform. Central to this is Thai production engaging in higher value-added economic activities — such as bioplastics, hybrid or electric cars, and medical equipment — both as an exporter and an investment destination.
“The ongoing political instability disturbs any substantive long-term investment and management of these issues, weakening Thailand’s competitiveness in an era when we are not short of upcoming competitors in the region,” Ms Pavida said.
But even completing a new constitution and returning to some form of elected government is no certainty of political stability conducive to investor confidence.
CIMB Securities (Thailand) said in a recent report to its clients that it believes political uncertainties will gradually rise, even though the situation is calm at the moment.
“We believe that there is a high chance that Gen Prayut Chan-o-cha will come back to power after the next election. Political risks are then likely to be high as red shirts may run out of patience,” the report says.
“With growing political uncertainties, we believe that people will be reluctant to spend and corporates will adopt a wait-and-see attitude for their new investments, which would bode ill for the economy.”
A recent Credit Suisse report sees politics leaving the period of certainty of the past six to nine months around mid-year, and entering a period of multiple uncertainties.
“If the constitution is approved, a six-month interim (one) will follow before elections in which the prime minister is a lame duck and investors will not know who next governs the country. Even if elections proceed successfully, Thailand might see a drop in governmental effectiveness,” the report said.
The report added that outlines of the new constitution indicate that the next parliament could be fragmented with a weak coalition government, while a change of national leadership could disrupt the current government’s infrastructure agenda.
“Rich valuations, the weak economy and the likelihood of earnings downgrades make us cautious on the market, and politics looks like it will lose its force as a supporting factor.”
THE SETTING SUN
The past several months have seen proposed changes to regulations affecting the international business community put on the back-burner.
The Foreign Business Act was to be amended to restrict foreigners’ influence over joint partnerships, while the Board of Investment (BoI) scheme was to be modified to reduce tax privileges for some industries. Both moves were criticised for being seen as benefiting local business at the expense of foreign companies.
The Japanese, who have been the largest investors in Thailand in recent years, lashed out against the government’s “nationalistic approaches”, threatening to invest elsewhere in the region if the measures were given a green light.
Japan’s charge d’affaires to Thailand Mitsugu Saito pointed out that although Thailand is still the most important Japanese investment destination in Asean, several competitors are now emerging, such as Indonesia and Vietnam.
While Gen Prayut’s trip to Japan in March re-affirmed the long-standing relationship between the two countries, his Japanese counterpart Shinzo Abe has repeatedly called for the government to resume the democratic process.
“In 2010, there was disturbance from the red shirts, in 2011 there were the floods, in 2013 there was another anti-government demonstration, and last year there was a coup,” Mr Saito told Spectrum.
“Now we recognise the security situation has calmed down, but for company headquarters in Japan, when they make investment decisions, the recovery of democracy will be helpful. We wish for an early election and a return to the democratic process.
“Stability and predictability are very important for not only Japanese but other foreign investors. They don’t like unexpected new regulations.”
Although the government halted changes to the Foreign Business Act and relaxed some BoI measures to attract overseas investment, Japanese companies are now worried that its business community might feel the pinch of the economic slowdown.
There are about 8,000 Japanese companies in Thailand, with a 2014 investment value based on BoI applications of 30 billion baht.
Japan has a very large automotive operation in Thailand, producing about two million vehicles per year, almost half of which are sold on the domestic market.
Toyota Motors Thailand president Kyoichi Tanada last month painted a bleak picture for the automotive industry, saying the country could see domestic car sales drop for a third consecutive year — in the worst-case scenario to 820,000 vehicles, down 7% from 2014.
When the Yingluck Shinawatra administration’s “populist” first-car buyer subsidy scheme was in full force in 2012, yearly vehicle production reached 2.45 million. It was the first time it topped two million vehicles. Domestic sales increased by 81% from 2011 to 1.44 million
In 2013, production reached a new high of 2.46 million vehicles, with a backlog of demand under the subsidy scheme which ended in December 2012. Sales dropped a moderate 7% to 1.33 million.
By 2014, with the subsidy no longer having any affect, production fell to 1.88 million vehicles and sales plummeted by 34% to 881,832.
“The business community is very much concerned about the economic situation in Thailand because manufacturers not only export but also sell products in Thailand,” said Mr Saito, adding that Japanese businesspeople want more aggressive government expenditure to stimulate the Thai economy.
“If [the stimulus measures were] smoothly implemented, Thailand’s economic situation should have been much better,” Mr Saito said. “Unfortunately, implementation has been delayed.”
The government’s plan to boost the flagging economy hinges around a 450-billion-baht investment budget which includes infrastructure megaprojects.
Along with the projects are expected to come more job opportunities and increased spending power.
The Fiscal Policy Office reported last week that 51% of the total government budget of 2.575 trillion was disbursed in the first six months of the 2015 fiscal year, while disbursement of the 450-billion-baht investment fund reached 25.3%.
The government expects to meet its target of disbursing 96% of the regular budget and 87% of the investment budget by the end of this fiscal year on Sept 30.
However, the disbursement of the budget has slowed in line with the slow progress of state agencies in planning the projects and further weak domestic consumption. Compounding this is rising household debt and low savings.
Household debt rose to 10.4 trillion baht or 85.9% of GDP at the end of last year, up from 10.2 trillion or 84.7% of GDP in the third quarter, according to Bank of Thailand (BoT) data.
The Kenan Institute Asia warned last month that household debt is likely to hit a record high of 90% of GDP this year and could snowball into a major crisis if left unaddressed.
Possible delays in government spending was one factor that compelled the BoT's rate-setting committee last month to lower the country’s economic growth forecast to 3.8% this year from the 4% previously projected.
On Friday, the BoT said even if GDP growth expanded at a flat rate on a quarterly basis for each quarter this year, full-year growth was likely to come in at only 2.5%.
A report by KT Zmico Securities says the optimism surrounding economic growth this year seemed to fade after disappointing economic forecasts in the past few months.
Even though recoveries stalled almost everywhere — except in the tourism sector — the main disappointment was in the government sector, which saw disbursement fall short of initial goals.
“There are several restrictions currently hindering the government’s disbursement, especially in the capital budget, and the constraints on public spending are unlikely to be resolved very soon, despite the stepping-up of government efforts,” said the report seen by Spectrum.
But economists say another factor may be in play: that the Prayut government is too scared to act for fear it will be tainted with the stigma of “populist policies” that Thaksin Shinawatra and his proxy governments were attacked over, such as the flawed rice-pledging scheme.
Santi Chaisrisawatsuk, director of the National Institute of Development Administration’s Centre for Development Economic Studies, said the government’s stimulus measures are not as clear cut as the policies implemented by the Democrat Party in 2007-2009, which took immediate and direct action following the global economic crisis. Then prime minister Abhisit Vejjajiva responded with two economic stimulus packages, including a one-time issuance of 2,000 baht cheques to people making less than 15,000 baht a month.
Mr Santi argued that many of the Prayut government’s policies are populist. These include cash handouts to farmers late last year, and distributing land plots seized from those caught encroaching on national forest reserves as part of a project to help the landless poor.
“It’s OK to call it populism, as long as the budget [for each project] is limited,” he said.
The land plot disbursement was fast-tracked as a result of the invocation of Section 44 of the interim charter, which enabled the “Robin Hood” project to bypass normal legal procedures.
The section replaced martial law — which was lifted two weeks ago — giving the National Council for Peace and Order leader Gen Prayut unlimited power to run the country.
A TOUGHER TASK
Political scientists say that to understand the mind of Gen Prayut, one should look back to the era of Field Marshal Sarit Thanarat, who staged a coup nearly 60 years ago.
Despite being an authoritarian state, the army’s power was justified as long as they were able to keep the economy growing. Government spending and infrastructure development attracted foreign investment from the US and European countries.
The US was unconcerned that the army was in government — Thailand at the time was much needed as an ally to fight communism during the Cold War, and the US poured huge amounts of money into Thailand’s military budget.
Fast-forward to the Gen Surayud Chulanont government following the 2006 military coup and more similarities can be drawn.
In 2006, the ample corruption under the Thaksin government led to a reorientation to a sufficiency economy, along the principles put forth by HM the King.
Similar to the post-2006 coup military government, said Ms Pavida of Thammasat University, this government’s main economic agenda is linked to its coup rationale.
“The latest 2014 coup was also linked to an economic rationale of unscrupulous populist policies that result from careless policymaking,” she said.
“Unfortunately, not so different from post-2006, economic policy implementation has proven more difficult and cumbersome than expected.”
What differs most from the post-2006 period, said Ms Pavida, is the global economic environment.
The 2008 financial crisis that spread from the US to Europe slowed down global markets, hurting Thailand’s export-oriented economy as demand slumped and inward foreign direct investment reduced.
“The ongoing political instability and the seemingly more authoritarian governance add further to the cost of doing business in Thailand, which includes a lack of transparency,” Ms Pavida said.
“I am afraid these factors do not bode too well for our international competitiveness.”
But Anusorn Tamajai, dean of the Faculty of Economics at Rangsit University, believes that the military government has learned its lesson from the 2006 coup, and not scrapped any policies they consider beneficial.
While Gen Surayud tried to revise or change policies of the Thaksin government, Gen Prayut took away only measures that he considered problematic, such as the rice-pledging scheme, the tablet scheme and the first-time car buyer subsidy.
But it seems as though the government has to do much more than getting rid of old schemes and coming up with similar ones.
For decades, economic growth depended on exports and manufacturing. But exports have slowed and annual GDP has not exceeded 5% in the past four years.
Deputy Prime Minister MR Pridiyathorn Devakula recently promised new policies to move Thailand to the next level of economic development, with the BoI coming up with a list of high-tech product lines which will attract promotional privileges.
The government will stop giving tax privileges to toy manufacturers, for instance, and instead shift support to bio-plastic producers.
But so far, the country has not really been able to implement any long-term economic strategy due to political instability, boasting 19 coups in the past 82 years.
A CONSERVATIVE APPROACH
MR Pridiyathorn was and is a key person in both Gen Surayud and Gen Prayut’s economic teams, consisting of soldiers and former
“They [economic advisers to both governments] have a similar way of thinking — a conservative approach to things,” former finance minister Korn Chatikavanij told Spectrum.
No one forgot the controversial foreign capital controls implemented by the Gen Surayud government, which the following day led to the worst one-day decline in the history of the Stock Exchange of Thailand — a 15% drop.
The capital controls were imposed by the central bank on Dec 18, 2006, to help stem the appreciation of the baht and to help support Thai exports.
Foreign investors were originally required to set aside 30% of capital inflows with the central bank, and were subject to a 10% penalty for transactions of less than one year.
The Surayud government quickly reversed its position and exempted inflows into the stock market, and the central bank has since relaxed the rules for other types of transactions.
Although the current government has not yet faced such a serious issue, policies such as the planned land tax and increase in value added tax have caused a public stir and might take a toll on the investment climate.
But to Mr Korn, who is also deputy Democrat party leader, Gen Prayut’s conservative approach is understandable considering that the current government stepped into power following the previous Yingluck administration’s issues with “good governance”.
An example is the establishment of a “superboard” to supervise state-owned companies in a move to prevent political interference and ensure management transparency.
These might be conservative measures, but Mr Korn describes it as a “proactive conservative approach”.
“We need to accept the limitation that everyone related to this government is of the old generation, and naturally they might be more used to the bureaucratic system than the demands of people,” he said.
But while public attention remains focused on the slow pickup in the economy, Mr Korn pointed out that the country has had a return of peace and order from the first day of the coup.
“The main purpose of the coup was because the country did not have stability. They [the coup-leaders] did not see it as the best solution for the economy, and I’m not judging them in terms of economics. Because that is not the reason why they came [to power],” he said.
“I never expected that they would be able to solve all problems.”
VR Toys, an importer of plastic toys from China, saw a 5% drop in first quarter sales year-on-year. The company sells wholesale toys to distributors and retailers nationwide.
But managing director Pongtorn Phanishsarn is hoping that the Songkran holidays will revive the falling sales. Orders of water guns have to be placed six months in advance, and are sold over only three days.
“When Songkran arrived at the time of the protests last year, the two sides [of the political camps] were like, ‘Let’s stop for now and meet up again on the 16th’. So those who had water guns for sale were getting in a lot of money,” Mr Pongthorn said.
“And this year, the political situation is more stable than last year.” n