Thai Junta Faces Headwinds Reflating Economy

Although Thailand’s military-led government is under pressure to loosen the economic purse strings and get the economy moving, Somkid Jatusripitak, an adviser to the National Council for Peace and Order, said Wednesday that short-term stimulus is probably off the table for now, reflecting the innate conservatism at the top of the government.

That said, the junta, led by former Army chief Prayuth Chan-ocha, is finding reviving the economy more difficult than it had assumed. It had been thought that the end of demonstrations and disorder would bring a quick pick-up. But while there has been some, it has been slower than most forecasts.

Structural problems both at home and factors overseas suggest that sustained improvement will be hard to find. What that means for Thai politics remains to be seen but placing the blame on deposed Prime Minister Yingluck Shinawatra will wear thin.

The National Economic and Social Development Board has had to lower its full-year forecast to 1 percent from a range of 1.5-2 percent and although it is looking for a bounce to 3.5-4.5 percent next year, that could prove optimistic as it assumes a broader global recovery and strong pickup in tourism, which was hurt by the political unrest earlier in the year.

Also on the negative side, prices for most of Thailand’s commodity exports – notably rice and rubber – remain very weak and seem unlikely to improve much next year, with rubber highly influenced by oil prices, and rice, like other grains, in plentiful global supply. In the case of rice that is partly because of the stockpile accumulated under Yingluck and now being slowly sold at a loss.

Lower oil prices provide some compensation given that Thailand imports most of its oil and coal, but energy imports generally are growing as local natural gas production has peaked while consumption continues to rise with 20 percent of gas consumption met by imports. Generally lower commodity prices help middle-income car owners but further undercut rural incomes and consumption and add to government losses on stockpiles.

Tourism’s rebound from the political crisis is proving slower than following previous episodes. Numbers from China and India should continue to grow but the important Russian, Japanese and European markets, the former in particular, are being hurt by declines in their currencies. The baht is slipping too but by relatively modest amounts against the dollar.

Tourism also reflects a problem that has been becoming increasingly evident in recent years and reflects the fact that Thailand may well be in the so-called “middle income trap.” It is doing more of the same most years but without significantly raising value-added. Some growth can be achieved using more labor from rural areas and replacing the lowest income workers with imports, legal or not, from Myanmar and Cambodia.

The rural sector itself badly needs to see major gains in both land and labor productivity if price supports for farmers are not to become a permanent drain on government finances. Although the disastrous rice pledging scheme implemented byYingluck has been dropped, the new government is having to provide continuing support for rubber producers and interest-free loans for rice farmers, which may turn into overt subsidies if prices remain low. Government finances are anyway going to be under strain given commitments for major infrastructure projects, the health demands of an aging society and the need to improve educational levels if Thailand is to raise productivity.

The Yingluck rice scheme was a commercial and fiscal disaster but the military cannot back away from all subsidies without infuriating the farmers. Thailand’s potential for further urbanization – and hence economic growth – remains large. But it can only be achieved if farm productivity rises and demand for other goods and services keeps rising.

That in turn requires better income distribution. As the Asian Development Bank tirelessly points out, very unequal distribution, as in Thailand, throttles demand and impedes educational advance and hence is a key factor in the middle income trap. Although the Prayuth government’s deputy prime minister and chief economic policymaker Pridyathorn Devakula clearly recognizes this and hence the need for, among things, a property tax, a deeply conservative regime backed by heavyweight monied interests will find it hard to take significant steps towards a fairer and more productive tax system.

As it is, urban areas often have too high a proportion of newcomers working not in stable, salaried jobs but earning a pittance in the informal sector as street sellers or doing casual work. Some 38 percent of the workforce is in agriculture and only 13 percent in industry.

The income gap between Bangkok and the rest also has to be addressed. Better infrastructure is one way but there is a danger that the urgent need for higher-speed double tracked railways doesn’tt get diverted into hugely expensive, slow-to-construct high speeds trains which are not justified by the country’s population distribution.

Vanity projects are the last thing that Thailand needs. Capital has been plentiful for several years but there has more recently been a large outflow as companies which had grown very rich from privileged positions in the local market have gone on buying sprees overseas. Fiscal prudence has mostly been the norm but with public debt now at 46 percent of GDP there is limited room for it to rise faster than the economy. The big projects will need public debt financing – and probably delays and cost increases from rent-seeking.

After a decade or more of current account surpluses, the current account of the balance of payments has turned negative. It should not be a problem for the foreseeable future given the size of foreign exchange reserves and the diversity of Thai export earnings. Nonetheless, given the high import content of capital spending, the country will again have to become a capital importer not exporter.

Chinese largesse is available – but at a political cost the regime may not want to pay. Otherwise foreign private capital, though looking again at Southeast Asia after years of China focus, may find Indonesia and Vietnam more compelling growth stories.

The military regime has certainly put an end to short term instability and the effective freezing of government in the stand-off between an elected parliament and Yingluck and the anti-Thaksin forces dominating other state institutions. But whether they like the regime or not, investors and consumer alike remain wary that this could be the calm before another storm. And that even if this government or a facsimile of it remains in power for a sustained period it can accomplish the measures needed to reduce inequality and spur Thailand to a higher level of development.

Thailand’s own working-age (15-64) population peaks in 2015. According to UN estimates, the median age is now 38 compared with 26 in 1995. Rural communities in particular are aging fast while the availability of cheap and often abused unskilled and temporary immigrant workers eases the pressure for the higher wages which would make employers more conscious of productivity.

Question marks also exist over whether Thailand’s export manufacturing sector is losing ground. The auto industry is still attracting new investment, particularly from long established Japanese companies and exports are growing but competition is not getting easier. As for electronics there is little sign of upgrading at a time when competition is increasing.

On the brighter side, the attractions of Vietnam and now to a lesser degree Myanmar are bringing not only more cross border trade but the use of Bangkok as a service center for the region with both foreign and Thai service companies establishing Bangkok-based networks. But additional prosperity for the capital’s already prosperous middle class could be a mixed blessing given that the nation’s problems lie elsewhere.