Thai junta oversees strong but unequal economy

After nearly five years of military rule, Thailand’s economic fundamentals are strong across the board. Whether that translates into votes for the ruling junta’s proxy Palang Pracharat party at March 24 elections, however, isn’t yet clear.

The Thai baht is Asia’s top performer this year, appreciating 4% against the dollar at a time other regional currencies have wobbled against various economic headwinds, including the US-China trade war.

In 2018, Thailand recorded a current account surplus of 7.4% of gross domestic product (GDP), equal to US$37 billion, piled up foreign reserves of $202 billion and notched economic growth of 4.1%, according to the National Economic and Development Council’s (NESDC).

The national planning agency forecasts national GDP will grow anywhere between 3.5-4.5% growth in 2019.

Exports contributed $23 billion to the current account surplus while tourism earnings contributed another $14 billion, thanks to the arrival of some 32.3 million foreign visitors in 2018, up 7.5% year on year and earning the country $64.3 billion, a rise of 9.5% on 2017.

Private consumption and investment also showed signs of a revival in the fourth quarter of 2018, rising 5.3% and 5.5% respectively, after five previous years of relative sluggishness. Analysts say the junta’s economic management deserves some of the credit for the bounce.

“The economy is picking up a bit,” said Charl Kengchn, managing director of Kasikorn Research Center (KRC) in Bangkok. “Consumption spending was up in the fourth quarter, especially on automobiles, and the election will boost consumption as the political parties canvass and spend cash, but only in the short term.”

Campaign spending for the upcoming general election, the first the country has held since 2011, is one economic upside analysts expect from the return to democracy after almost five years of strict military rule.

Prime Minister Prayut Chan-ocha’s economic team has done well to boost public spending on much-needed infrastructure, but less so at attracting foreign direct investment (FDI) and boosting poor and middle class incomes, analysts say.

When Prayut seized power in 2014, bringing a lull to a decade of political turmoil marred by revolving and often violent street protests, Thailand’s export-led, FDI-fueled economic growth was beginning to flounder.

The kingdom’s labor force was no longer abundant nor cheap, especially compared with its up-and-coming neighbor rivals in Cambodia, Laos, Myanmar and Vietnam. Traditional export leaders, namely automobiles, electronics and electrical appliances, meanwhile had all failed to substantially climb the value chain.

In response, the regime launched a massive infrastructure-building spree, allocating 2.45 trillion baht ($78 billion) between 2014-2018 for improvements to the country’s railway system, extensions of Bangkok’s mass transit network and three new motorways outside of the capital, according to NESDC.

The infrastructure building was launched in part to stimulate growth and enhance competitiveness, but more importantly aimed to attract new FDI.

“With all the infrastructure building we are saying to the world that we want your investments,” KRC’s Charl noted. “Infrastructure is an important way of attracting FDI and multinational companies to Thailand.”

Bureaucratic efforts have also gone towards amending laws and regulations to improve the investment climate, boosting Thailand’s standing on the World Bank’s Ease of Doing Business index to 26th place in 2017, up from 48th place in 2016.

Last year, the kingdom fell a notch to 27th place, although this was due more to faster progress in some of the other 190 economies surveyed in the annual index than perceived new hurdles in Thailand.

Prayut’s Eastern Economic Corridor (EEC), an ambitious $44 billion scheme to transform the country’s three eastern coastal provinces into a special economic zone for value-added industries in 12 different sectors – including new generation automobiles and aviation – aims for new export and employment opportunities.

The EEC, which builds on the former Eastern Seaboard development scheme in the same three provinces launched by another general-cum-premier Prem Tinsulanonda during his 1980-1988 tenure, was first introduced in March 2017, or nearly three years into Prayut’s coup-installed term.

Cognizant of concerns that whatever the junta initiated could be overturned by a new elected government, Prayut used his special powers under the constitution’s Article 44 to pass the EEC Act in May 2018, giving the scheme a legal framework to ensure its continuity.

The EEC is included in the regime’s 20-year master plan for the economy, which new governments will, at least in principle, be legally bound to follow.

Some key EEC infrastructure projects, such as a high-speed train link connecting three regional airports, have also been expedited to get the construction contracts signed before the election and transition to a new government, expected to be installed by mid-year.

There are certain early signs of the EEC’s success. In 2018, Thai and foreign applications for Board of Investment (BOI) tax incentives hit 902 billion baht ($28.7 billion), up 43% year-on-year, of which 683.9 billion baht were for EEC targeted industries.

“The EEC is already happening and after the election it will be faster,” predicted Prinn Panichpakdi, chief executive officer of CSLA Securities Thailand.

“Incrementally you are going to see more FDI coming to Thailand over the next three to five years than we had under military government,” Prinn predicted, basing his optimism on an EEC take-off. “I think an elected government will lend some legitimacy when investors come to sign a full, long-term contract because investing in the EEC is not for five to ten years; it is for 15-20 years and upwards.”

To what extent the EEC is implemented as currently envisioned hinges on the election’s result.

If the opposition Peau Thai Party, affiliated with ex-prime ministers Thaksin and Yingluck Shinawatra, both ousted by military coups respectively in 2006 and 2014, and its allies win a majority in the Lower House, they could seek to hinder or slow the scheme’s progress.

On the other hand, if the military-backed Palang Pracharat Party and its potential coalition partner the Democrat Party muster a majority, the EEC is expected to progress as currently planned.

If so, analysts say it will take a few years before its high-tech, value-added sectors start to improve Thailand’s export performance. “In the future I am hopeful you will be seeing more Thai export products counting on their quality and not just their foreign exchange and cheap-labor advantage,” Prinn said.

Either way, there are various economic challenges ahead for the kingdom’s next government. Those include perhaps most significantly a potential slowdown in exports, which currently contribute around 70% of GDP.

In the short-term, Thailand’s exports are not expected to maintain the 7.7% growth clip they hit in 2018. Exports expanded by only 2.3% in the final quarter of last year, dragged down by a global slowdown, a strong baht and uncertainty over the US-China trade war.

NESDC estimates export growth will not exceed 4% in 2019. Trade war tensions have adversely hit Thailand’s exports to China more than to the US, NESDC’s data shows.

“Exports to the US increased by 6.7% [in the fourth quarter], improving from a 0.01% contraction in the previous quarter, supported by the US economic expansion and the positive impacts from the US trade protection measures against China,” said the NESDC. Thailand’s exports to Japan and Southeast Asia were also up in the fourth quarter, while exports to China fell by 4.6% quarter-on-quarter.

With the US Federal Reserve unlikely to hike interest rates further this year, and FDI starting to flow back to Thailand, the baht could continue to strengthen vis-a-vis the dollar, making Thailand’s exports even less competitive, some analysts warn.

Significantly, Thailand’s agricultural sector, which employs 40% of the work force, has fared poorly under Prayut, partly due to a global fall in commodity prices, but also exacerbated by the junta’s moves to scrap Peua Thai’s populist policies, including a rice paddy pledging scheme that paid farmers prices well above market rates for their crops.

While the Palang Pracharat Party is campaigning on a welfare card scheme it aims to expand if elected, it’s not clear the policy will have the same resonance at the ballot box as Peau Thai’s past populist pledges.

Income inequality has reportedly increased under junta rule, earning Thailand the dubious distinction as the world’s most unequal society, according to research released by Credit Suisse, an investment bank.

On March 24, Prayut may wish he had spent more time tackling inequality than building infrastructure, some suggest.

“They should have looked in to the issue of inequality more seriously, especially the disparity between the superrich and the middle income people,” said Somchai Jitsuchon, research director for inclusive development at the Thailand Development Research Institute (TDRI), a Bangkok-based think tank.