Thailand: Risk Assessment
Country Rating1
Rating: A3
Business Climate Rating1
Rating: A3
Risk Assessment2
Persistent internal divisions after the July 2011 elections
The Puea Thai, leaded by Yingluck Shinawatra, the sister of former Prime Minister Thaksin Shinawatra who was deposed in a military coup in September 2006, achieved a decisive victory in the general elections held in July 2011. With the support of the rural population (2/3 of the population), the pro-Thaksin party won 265 of the 500 seats in parliament. As Prime Minister, Yingluck will face major challenges in governing a deeply polarised society and her government's economic-policy plans have already proved contentious. Yingluck is expected to implement a number of populist economic policies, which include a higher minimum wage and guaranteed rice prices. These proposals have been criticised as the return of fiscally unsustainable and market distorting. Thus, internal political divisions are expected to remain strong and the political cleavage could intensify in the run-up to the succession of King Rama IX, now over 80 and in poor health. A respected moral authority, he has embodied political stability and continuity. The uncertainties surrounding the succession could further exacerbate the internal tensions in the country.
Satisfactory growth
After suffering a recession in 2009, the Thai economy achieved a significant rebound in 2010 thanks to the recovery of both foreign demand (especially from Asia) and domestic demand spurred by expansionary policies. Manufacturing (automotives, home appliances, capital goods) and construction (driven by infrastructure projects) performed well while services suffered from the slowdown in tourism (7% of GDP) and the decline in household confidence in the wake of the violent demonstrations in April-May 2010. Agriculture was affected by poor weather and a plague epidemic.
Economic growth may weaken in 2011 amid tightening economic policies and the decline in demand from the main trading partners (United States, Japan, European Union). Economic activity will nonetheless remain at satisfactory levels. Private consumption will benefit from an improved job picture and from the 5% increase in civil service wages scheduled to take effect in April 2011. Investment will moreover be buoyed by road construction and water distribution projects. Economic bottlenecks nonetheless persist: the investment rate is still too low and despite the projects announced, infrastructure development has been limited by postponement of reforms.
Solid financial position
After the improvement in public-sector finances in 2010 due to the exit of the stimulus plan, the fiscal deficit is expected to increase in 2011. However, the public debt will remain at sustainable levels.
Besides, the current account surplus declined in 2010 as a result of the recovery of imports fuelled by a rebound in domestic demand, a trend likely to continue in 2011. Thailand will nonetheless continue to enjoy significant financing capacity. Underpinned by large foreign exchange reserves (expected to represent 10 months of imports in 2011), the country will have the means at its disposal to defend the baht, even in the case of sudden capital flight.
The banking sector's weaknesses have eased as reflected by the decline in non-performing loans, the improvement in oversight, and the adoption of international risk management and transparency standards.
Strengths
- Diversified, high performance production in agriculture and industry
- Move upmarket in manufactured products
- Regional hub open to dynamic neighbors
- Strengthened banking system
Weaknesses
- Thai foreign trade subject to Chinese competition
- Excessively weak investment rate
- Lack of structural reform
- Business climate marked by persistent ties between the private sector and political circles
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Recurrent political Instability since 2006