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It is hard to be optimistic about the political outlook. Anti-government protesters blocked voting in roughly 11 percent of polling stations in the February 2 elections, and chances of a successful re-vote appear slim. In 28 districts, there were no candidates. Until voting can be held in all polling stations, no winning candidates can be declared, and a new Parliament will be unable to convene. The current government would be sent into legal limbo, with no clear constitutional way to choose a new government. In the meantime, anti-government street protests continue, and no signs of compromise between the government and its opponents have appeared. So let us assume, as prudent investors, that the political situation remains negative indefinitely.
Important But Not All-Important For the Economy
The economic implications of Thailand's political problems are important, but not all-important. Growth patterns the previous decade provide the evidence that politics do matter for the Thai economy. In the years of stable politics from 2000 to 2005, Thailand had the second-best consumption growth and best investment growth in ASEAN, but during the years of political turmoil from 2006 to 2010, growth in both areas lagged badly (Figures 1-4). Whereas GDP growth in other ASEAN countries accelerated in the 2006 to 2010 period, in Thailand growth slowed.
Transmission of political problems to the economy occurs through various vectors. Tourist arrivals weaken when protesters hit the streets. Tourism now accounts for 8-9 percent of GDP directly, and probably provides a low teens contribution including second-round effects. Fiscal spending and infrastructure build-outs slow when there are frequent changes of government. Consumer and business confidence suffer. No long-term structural reforms are implemented. That said, 2010 provides a telling example of how other factors can negate political downdrafts. Although April-May of that year saw the most political violence of any year since 1992, with 90 people killed in the streets of Bangkok, the economy grew 7.8 percent in its best performance since the Asian crisis. The political violence was a real drag on growth, but exports jumped 26 percent. With exports in most years 70 percent or more of GDP, that sort of external sector boost can easily overwhelm the negative impact of unstable politics.
Similar Story For The Market
The history of the past decade tells a similar story for the market. Politics has mattered, but has been just one of many variables moving stocks. Consider the Thai market's performance relative to its Asian peers during the years of political turbulence from 2006 to 2011. Thailand underperformed in 2006 when its political problems first appeared and in 2008 when protesters seized Government House (Thailand's White House) and the Bangkok airport, but it outperformed in 2009 and 2010 despite riots in April 2009 and the 2010 violence (Figure 5). As with the economy, the dominance of non-political factors explains the market's puzzling performance patterns. In April 2009, global equities began a V-shaped recovery from the Lehman's crisis, with correlations of global equities at unusually high levels. As a high-beta market with a high-beta economy, Thailand outperformed on the upside. In 2010, the V-shaped recovery in global trade gave Thailand's export-oriented economy an unusually big boost. Valuations also played an important role. In 2009, Thai stock multiples relative to the region were at post-Asian crisis lows. Great bargains were to be had.
2014: Top-Down Dull but Bottom-Up Interesting
This year the outlook is neither as clearly dire as 2008 nor as rosy as 2009-10. The top-down and bottom-up pictures differ. The top-down problem this year is not so much that political instability is hurting the economy as that other economic inputs are also weak this year. Exports should do better than last year's flat growth, but not by much. We expect just 6 percent growth after two straight years of almost no growth. High household leverage will limit consumption. Household debt-to-GDP has hit 80 percent, up from 54 percent five years earlier. Fiscal stimulus was looking troubled even before the political problems hit, and now fiscal contraction appears likely. We expect GDP growth of just 3 percent this year, which is disappointing after last year's similarly anemic 2.8 percent, on our estimates. If we expected better performance from exports or saw more scope for consumers to leverage up, the economy could glide past the political problems, as it did in 2010. Without any positive non-political drivers, the impact of instability is magnified.
Bottom-up, however, Thailand offers some interesting stocks. Big banks are trading on single-digit P/Es, well below Asian peer levels and historical averages, with some of the strongest balance sheets in the region. Telcos should see strong multi-year growth from lower regulatory costs regardless of the economic slowdown. Energy stocks are cheap compared with regional peers and have earnings streams largely insensitive to the domestic economy and politics. Tourism-related stocks are highly sensitive to political news flow, but Thai tourism has outstanding growth prospects due to Thailand's advantages on cost, tourist infrastructure, attractions and proximity to growth markets.
Political events will almost certainly give even these stocks a rocky ride, but long-term investors will likely see good gains on a 12-month view.
Dan Fineman has fifteen years' experience in finance and related fields. He spent five years in Bangkok as Jardine Fleming's Thailand and Southeast Asia Strategist, three years in Hong Kong and Singapore as JP Morgan's Asia Pacific Regional Strategist and five years with Credit Suisse in Bangkok. He has been ranked the #1 analyst in Thailand in Institutional Investor magazine for the past three years and was the #3 Asia Pacific strategist in 2000. He has worked two years as a senior analyst with the U.S. Federal Reserve and the U.S. Department of the Treasury. Dan holds a Ph.D. in Southeast Asian studies from Yale University and speaks, reads and writes fluent Thai. He is author of a book on Thai politics and diplomacy published by University of Hawaii Press.
Santitarn Sathirathai is a Vice President in the Emerging Markets Economics Research group. He is responsible for ASEAN economies specializing in Indonesia, Malaysia, the Philippines and Thailand, and regularly conducts cross-country comparative economic research for the Emerging Market Asia. He holds a Ph.D in Public Policy specializing in Macroeconomics and Finance from Harvard University and a Bachelor of Science in Economics from the London School of Economics. Prior to graduate school, he worked at Thailand's Ministry of Finance, the Government of Singapore Investment Corporation (GIC) and taught at the Faculty of economics, Chulalongkorn University.