Thailand Regains Its Shine

If 2007 was a year of political instability and fiscal policy gaffes for Thailand, 2008 looks set to be the year of promising economic revival for the Southeast Asian nation. Thailand seemed to be heading into economic oblivion after a series of harsh capital controls were put in place by the military-installed government to stem the appreciation of the Thai baht. Although some of the policies were soon retracted following the outcry by the business and investment community, foreign investors were spooked and all but avoided making large-scale investments in Thailand, in the aftermath of the military coup.

The military coup that took place in September 2006 deposed the then incumbent Prime Minister Thaksin Shinawatra and put in place a military-installed government that ultimately did more harm than good for the Thai economy, as most foreign investors and locals would attest to. The military regime suffered a crushing defeat in the recent Thai elections and the locals made a return to civilian rule (and democracy) by voting a coalition government made up mainly of the pro-Thaksin political party (People Power Party) into power in the elections held on 23 December 2007. Although the political situation in the country has taken a turn for the better and has seemingly stabilised, any negative turn in the political situation could once again throw the economy and financial market into disarray.

The political situation aside, the fundamentals of the Thai economy are looking robust: The nation’s economy expanded 5.7% in the fourth quarter of 2007. Exports, which account for about 60% of the economy, grew 24% on a year-on-year basis in the last quarter of 2007, almost double the pace registered in the third quarter of last year. The newly-elected coalition government has also vowed to continue with the expansionary fiscal policies previously envisioned by the Thaksin government, to lead Thailand on the path of economic recovery.

Valuations for the Thai market are also looking very attractive: According to estimates by Fundsupermart.com, the Thai equity market trades at very attractive valuations of 8.7X for 2008 and 8.1X for 2009 (as at 27 February 2008). Earnings are also expected to grow a strong 21.8% in 2008 and a reasonable 7.2% in 2009.

In an e-mail interview with Lydia Tjhia, Assistant Investment Manager at Aberdeen Asset Management Asia Ltd, and Lim Fang Suan, Fund Manager of the Lion Capital Thailand Fund, we uncover what the Thai market has to offer to investors in 2008, and the pitfalls to look out for along the way.

Q: The Thai equity market has proven to be resilient in the face of the ongoing credit crisis which has impacted major equity markets worldwide. What have been the main reasons for the strong performance of the Thai equities recently?

Lydia Tjhia : Investors are placing more faith in the political outlook, with the recent return to civilian rule. There may be a pent-up sense of relief because it has been more than a year since the bloodless coup in September 2006, which saw the military appoint its own government. Also, the new People Power Party-led coalition under Prime Minister Samak Sundaravej has pledged to reinstate expansionary policies implemented by former leader Thaksin’s Thai Rak Thai party. We expect the new cabinet to pump-prime the economy via infrastructure and transport. Consumer spending and private investment are likely to benefit further from the dismantling of restrictions on foreign investment ownership.

Fourth-quarter GDP expanded at an encouraging 5.7%. Although this cannot be directly attributed to the new government’s proposed policies, it may be argued that the turn in sentiment may have been supportive of both private consumption and corporate investment.

Meanwhile, Thailand remains one of the cheapest stock markets in the region, which probably means that there is room for valuations to increase further.

Lim Fang Suan: Thailand’s stock market valuation is one of the cheapest in Asia and Thailand, like the rest of Asia, has very little exposure to the US sub-prime credit crisis. Furthermore, with the elections over, the outlook for the Thai market has improved as the economy is starting to recover after a prolonged period of political crisis which hindered economic growth.

Q: In your view, will the political situation in Thailand continue to pose as a major problem to continued growth of the economy and stock market in 2008, as it did in 2007?

LT: It’s fair to say economic growth stalled badly under the military-backed government. We don’t expect the same under an elected administration. The new government has pledged to kick-start growth and has the scope to pursue expansionary policies. But coalition politics can be fractious and special interests difficult to suppress.

Although it is fair to say that Thailand appears to have reached a political nadir and that we are likely to see little downside from here, it is probably still quite premature to make a call on the political situation.

On one hand, we will need to see that the government’s rhetoric is translated into actual policy implementation. On the other, the election commission just a week ago planned to charge house speaker Yongyuth Tiyapairat for electoral fraud, a move that may put the stability of the new government in danger.

LFS: In the short-term, there could be some political uncertainty due to the election fraud charges brought against the house speaker Yongyuth Tiyapairat, and Thaksin’s return from exile to the country.

However, the new People Power Party-led coalition government is also likely to introduce more market-friendly policies and increase government spending. Domestic demand is likely to accelerate, led by increased infrastructure spending as well as pent-up private investment demand and this will likely be positive for the economy and stock market in 2008.

Q: What are the key drivers for and main risks to the Thai economy?

LT: Growth in private consumption and government spending are key to economic growth, and this should help to cushion an expected slowdown in external demand. Inflation, which is accelerating because of rising fuel and food prices, is a major worry as the consumer’s purchasing power may be affected.

The appreciation of the baht (which is at its highest level against the US dollar since August 1997) may negate part of the impact of imported inflation, but by the same token, it will make exports less competitive. Although there have been some improvements on the political front, there is still the risk of setbacks. The election commission’s move to discredit the house speaker may take some time to pan out, putting pro- and anti-Thaksin forces at loggerheads.

LFS: The key drivers are (1) Improving political outlook with the formation of the People Power Party-led coalition government. (2) Economic recovery with the likely rise in public investment spending and likely improvement in consumer sentiment as political concerns ease. (3) High earnings growth following three years of underperformance against its regional peers, as the Thai market is the cheapest in Asia.

The main risks would be a slowing global economy and rising inflationary pressures.

Stephanie Thng (Assistant Editor & Financial Adviser Representative) is part of the Research and Editorial team at Fundsupermart.com, a division of iFAST Financial Pte Ltd.

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