The military junta has been successful in returning Thailand to political stability following the 2014 coup, but we are not yet willing to upgrade the country's low Political Risk Index score as fundamental divisions between the 'red shirts' and the 'yellow shirts' remain, and the impending royal succession has the potential to trigger renewed unrest.
Thailand's real GDP growth of 2.8% y-o-y in Q415 reflects the positive impact of the government's renewed infrastructure drive and the negative effects of weakening external demand. With the construction sector likely to continue to benefit from a number of major project commencements, and low oil prices having a positive impact on the country's terms of trade, we forecast real GDP growth to pick up slightly to 3.0% in 2016, from 2.8% in 2015.
We hold a mildly bullish view on the Thai baht as we believe that the terms of trade gains due to falling raw material input prices will continue to support the country's current account, while there is scope for portfolio flows to return following a lengthy period of outflows. Falling external demand from China, and yuan weakness, together with the potential for a renewed flare-up in political risk, are main downside risks facing the baht.
Thailand's current account surplus has surged to the highest level since the Asian Financial Crisis despite relatively modest baht depreciation and continued strong non-oil imports. The concomitant huge outflows in the portfolio account hit record level, but could return over the coming quarters should the country avoid an economic and/or political crisis.
While the military government will continue to increase spending to sustain Thailand's economic recovery, positive steps taken to rein in wasteful spending will keep expenditure growth in check. Coupled with the prospects for higher fiscal revenue on the back of a gradually improving economy and the windfall receipts from the recent spectrum auctions, Thailand should have the fiscal resources to finance its eight-year master infrastructure plan.
Major Forecast Changes
We have revised down our real GDP forecast to 3.0% for 2016, compared with our previous forecast of 3.3% and the 2015 figure of 2.8%. That said, an acceleration in growth from 2015 will come in spite of continued external headwinds, most notably from the weakness in Chinese growth.
We forecast the Thai baht to average THB35.40/USD in 2016, marking an upward revision from THB36.50/USD previously.
A key risk could come from renewed political instability. The military has been successful in quelling protest activity since it assumed power, but with King Bhumibol Adulyadej in poor health, his death may spark renewed instability in Thai politics and the business environment.
|Real GDP growth, % y-o-y||0.8||2.8||3.0||3.5|
|Nominal GDP, USDbn||404.3||395.3||395.2||423.0|
|Consumer price inflation, % y-o-y, eop||0.6||-0.9||1.0||2.5|
|Exchange rate THB/USD, eop||32.91||36.02||35.10||34.92|
|Budget balance, % of GDP||-2.0||-2.1||-2.2||-1.5|
|Current account balance, % of GDP||3.8||8.8||8.6||8.5|
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