THAILAND:
At A Crossroad

Thailand ’s 1Q05 GDP saw the economy growing 3.3%, in line with already lowered consensus estimates as domestic consumer and business sentiment remain muted. Oil prices remained well above US$50 and with slower global economy restraining export growth, there appears to be no significant signs of pickup in Thailand ’s economic activity in 2Q05. Thai economic releases continue to signal an economic slowdown and the government will need to choose between being cautious or aggressive in pump priming as early as August, if economic growth is to rebound in 2H05 while oil prices remain at current levels.

In the cautious scenario, the government follows the path of seeking to minimize the current account deficit with policies focusing on curbing imports, energy conservation and promoting export and tourism revival. The rolling out of Thailand ’s infrastructure projects hinges on whether the current account deficit could be kept at a manageable level.

In the Aggressive scenario, the government would target a 5-6% annual GDP growth at the expense of a balanced fiscal budget, a current account deficit of 4-5% of GDP, higher inflation and interest rates, and a weaker baht. The infrastructural spending plan will proceed.

One of the most important economic growth drivers for the Thai economy in the next 4-5 years is the government’s spending on large – scale infrastructure projects, which focuses on transportation, energy and housing. The 5-year Bt 1.7 trn plan was recently sanctioned by the cabinet but actual disbursement for the projects remains unclear, as it is dependant on stronger economic growth in 2H05. With the government keen on limiting the current account deficit, it is probable that the import-intensive infrastructural projects will be delayed.

In the coming months, signs of the likely route that the Thai government might choose are dependent on some key events.

• The upcoming set of economic releases would dictate government policies.

• Oil price movements. If oil prices remain at current levels or rises, current economic growth forecast would slide downwards.

• Talk of increasing foreign debt financing would signify that an aggressive route is being considered.

• Global growth development and peaking interest rates in US.

Although we are cautious on near term market performance, largely because of our concern over 2Q’s earnings which should start incorporating the drag caused by higher energy prices, we are comforted by the fact that recent negative news failed to push the market lower. Near record oil prices, political jostling, a drought and a potential scandal in relation to the amounts paid for x-ray machines for the new airport, had smaller than expected impacts on the market, which indicate that the market is well supported by attractive valuations and has discounted more than its fair share of bad news. This should become apparent by the end of September, as the SET Thai Focus day brings interest back into this market when the government uses this event as a stage to emphasize the themes of infrastructure spending, energy and automobile manufacturing.