Thailand: Risk Assessment
Country Risk Rating
Business Climate Rating
- Regional hub; long coastlines; proximity to fast-growing Asian markets
- Strong external accounts and substantial foreign exchange reserves
- Richly endowed in agricultural resources (natural rubber, rice, and sugar cane)
- Diversified exports: tourism, machines, car parts, electronic components, agri-food products, fish and shellfish
- Inadequate infrastructures
- Aging population and shortage of skilled labor
- Uncertain political situation; antagonism between rural and urban areas
- High corruption perception and large informal economy
- High household debt levels
Slowdown in foreign trade hinders growth
After a sharp slowdown in 2019, the Thai economy is likely to rebound only modestly in 2020, remaining below its potential level of growth. Exports (65% of GDP), which are being hurt by the strong baht, will also continue to be affected by the global slowdown, particularly among the country’s main partners (China, the United States, the Eurozone), given Thailand’s integration in value chains. As a result, the manufacturing sector will continue to see unfavorable momentum, particularly in the electronics, chemical and automotive industries. In spite of the unsupportive international economic situation, resilient domestic demand should enable growth to remain robust. Public investment will increase, with the launch of several transport infrastructure projects linked to the Eastern Economic Corridor initiative, a development plan to create a vast industrial and technological cluster in a region south-east of Bangkok. In addition, the government decided to relax its tax policy in late summer 2019, announcing a stimulus package worth about 2% of GDP and consisting of two sets of measures. The first aims to support consumption, with increased benefits for low-income earners, aid for farmers affected by the severe drought of 2019, and spending money for domestic tourists. The second intends to support FDI with new tax incentives designed to attract more production relocations from China. However, although the decline in central bank policy rates is expected to ease credit conditions slightly, private investment will remain severely constrained by uncertainties about protectionist risks and the global slowdown, which led to a deterioration in business confidence in 2019. Despite the announced budget support and contained inflation, household consumption will remain moderate, in particular due to the level of household debt (almost 80% of GDP) and waning consumer confidence. Tourism is still expected to make a significant contribution to growth, despite the strong baht and slightly slower visitor growth.
A more expansionary fiscal policy
In FY 2020, the public deficit is expected to increase, in line with the government’s commitment to support growth. Expenditure will increase by nearly 7% in value, particularly in social assistance, investment and defense. The education and interior ministries will receive the largest amounts. In addition, while the VAT hike from 7% to 10% is to be postponed again, revenues should still continue to increase thanks to recent tax reforms, such as the revision of the income tax code. Public debt remains contained and relatively low risk: it is almost entirely denominated in Thai baht and contracted in the medium and long term.
Turning to the external accounts, the current account surplus is expected to narrow again in 2020. After plummeting in 2019, exports of goods are not expected to rebound significantly this year, with external demand still depressed. This drop-in exports has a severe impact on imports of intermediate goods, dragging down total imports. Nevertheless, the resilience of household spending, supported by the tax stimulus, should ensure that imports of consumer goods continue to grow briskly, especially as the baht will remain strong. Therefore, while the trade surplus may decline, it will remain significant at almost 4% of GDP. In addition, the services surplus (5.5% of GDP) will be maintained, supported by the continued growth of tourism revenues. The income balance (-4.5% of GDP), conversely, will once again make a negative contribution to the current account, due to profit repatriations by foreign companies.
Elections maintain the army’s hold on power
Thailand has been a constitutional monarchy since 1932. It is plagued by chronic political instability and numerous army-led coups. The most recent one, which took place in 2014, had the king’s support and resulted in the appointment of General Prayuth Chan-o-cha as Prime Minister. After postponing parliamentary elections six times, the ruling junta finally held them in March 2019. Although a seven anti-junta party front claimed an absolute majority in the lower house, Mr. Prayuth stayed on as Prime Minister, supported by a new constitution adopted in 2017 that institutionalizes military power, increases the king’s power and gives little chance to opposition parties. In the new electoral process, the Prime Minister is elected by parliament, which is composed of 500 seats in the lower house and 250 seats in the senate. However, as the junta appoints all senators, pro-army parties only need a quarter of the seats to stay in power. A multi-party coalition supporting the Prime Minister was finally formed, but it has a very slim majority. This could affect the government’s ability to reform, forcing it to make compromises within its majority. However, the government has the support of the junta and the king, which ensures a certain degree of stability in the country.