Thailand: Thai military makes economic growth key priority following coup d'état
June 18, 2014
The Thai military took control of the country on 22 May and declared a military coup following six months of political unrest that left at least 28 people dead and forced the government of former Prime Minister Yingluck Shinawatra to step down. In a matter of days, the military government—namely the National Council of Peace and Order (NCPO)—annulled the constitution and dissolved the Parliament, giving the military full lawmaking power. The military government declared that chances are high that new elections will not be held for at least for a year. However, a new interim government will be set up by end of August or the beginning of September. Meanwhile, the Junta will draft a new constitution and will introduce a series of economic reforms in order to revive the Thai economy.
On 16 June, the military government ended a controversial rice subsidy scheme, which was a central policy of Yingluck’s government. The scheme, which left about 800,000 of farmers unpaid and millions of tons of unsold rice in warehouses, was a key drag on the economy. After paying all the farmers, the military government will evaluate the quantity and quality of the extra stocks of rice collected by the previous government and then sell them in the international market. On 18 June, the NCPO announced that the rice subsidy scheme will be replaced by a less costly cultivation subsidy in order to help farmers cut production costs and give them low-interest loans. The sudden increase in rice supply will eventually decrease global prices; however the new scheme, along with an expected increase in demand from traditional buyers, will provide a cushion for falling prices. By 2015, Thailand is expected to once again be the world’s largest rice exporter.
The junta will also implement price caps on consumer goods prices as well as on gas prices in order to keep the inflation rate under control. The military government is planning to offer new home loans at low costs, extend several tax incentives and give loan guarantees for small firms as a measure to revive investment. In addition, they announced that the 2015 budged will be delivered on time. The announcement and subsequent implementation of these economic measures have helped to boost consumer confidence, which reached a 14-month high of 70.7 points in May (April: 67.8 points).
Growth forecasts for the Thai economy have been downgraded systematically since the political crisis began last November. However, some economists think that the outlook will improve after the Junta implements all of the measures. Thanomsri Fongarunrung, economist at BofA ML-Phatra Sec., comments on why they upgraded their GDP forecast for this year:
“We have upgraded 2014 growth due to the improved political situation. […] government investment expenditure that was thought to be delayed will in fact get spend, boosting GDP in 2H14. Moreover, we expect some improvement in overall sentiment and tourism.”
While the overall projection from ANZ Research was downgraded, Weiwen Ng, economist with ANZ acknowledges:
“The military coup is starting to look like the circuit breaker that will finally end almost eight months of political ineffectiveness and fiscal policy stalemate. Likelihood of a technical recession in Q2–which was never our base case–has receded with signs of stabilisation in economic activity. The unlocking of fiscal spending should manifest itself in a V-shaped recovery for Thailand in the H2 2014, with a pipeline of infrastructure investments materialising after being delayed by the political gridlock.”
On the other hand, some economists believe that it is still too early to tell if the economic reforms will be successful enough to revive the economy. Euben Paracuelles, economist at Nomura, remains skeptical over the measures adopted by the NCPO:
“While these steps look good on paper, the short-term fiscal measures are too small to have a material impact. […] The infrastructure plan will again likely face delays simply because we are still in the midst of a political transition, and more than half of the new plan is for new projects. These factors all indicate that fiscal spending is unlikely to lift private sector sentiment from still-depressed levels. There are other real constraints, like highly leveraged households, an underperforming export sector and plenty of spare capacity”.
Author: Dirina Mançellari, Senior Economist