Thailand: King's death jeopardizes fragile economic acceleration in H1
October 17, 2016
On 13 October, Thailand’s beloved King Bhumibol Adulyadej died after a 70-year reign and his successor, Crown Prince Maha Vajiralongkorn, has declared his wish to wait until he ascends the throne. This leaves a void in national leadership which could have downside implications for the country’s economy, dragging on the fragile acceleration seen in H1. The tragedy will likely weigh on consumer spending and cause downbeat sentiment in both the private sector and the financial markets.
Consumer spending looks set to suffer as the government has announced a one-year morning period and called for 30 days of intense morning with a halt to ‘joyous activities’. We expect to see this reflected in high frequency indicators such as retail sales, since consumer spending has been fueled by fiscal stimulus and household debt, making it vulnerable to exogenous shocks. Overall, domestic demand in H2 is expected to decelerate.
Meanwhile, the financial markets reacted with Thai currency and equity sell-offs on 12 October, when the news broke that the king’s state of health was deteriorating. This reflects investors’ hesitancy regarding the country’s future, though the markets have partially recovered since then.
Looking beyond the immediate future, many of the medium-term implications for the economy will depend on how the political situation evolves. The succession of the King comes at a time when the government is in transition, with the military junta promising democratic elections next year and persistent tension in a politically divided nation. If the palace and the military government manage to provide a smooth and peaceful transition, the effects on the economy are likely to be moderate. In this scenario, the insecurity stemming from the loss of the King, who was seen as a unifying figure, could impede private domestic and foreign investment to a certain extent, but severe headwinds would be unlikely.
However, serious risks to political stability remain. Given the ongoing tensions with rebels in the South of Thailand, political turmoil and protests could emerge which would hamper consumer sentiment, deter tourist arrivals and provide a further drag on investment. The elections, announced for late 2017, could be further delayed, which would prolong the period of non-elected government. This could prompt the opposing Thaksin group and the rebels in the South to attack the status quo, which would, in turn, risk tempting the military government to tighten its grip without surveillance from the palace.