Neuberger Berman’s Prashant Singh and Puay Yeong Goh see underperformance in Thailand in wake of coup

Prashant Singh, lead portfolio manager (Asia) and Puay Yeong Goh, senior economist at Neuberger Berman see the recent coup in Thailand as another factor that is likely to keep performance from the Thai market relatively poor in the medium term.

In the wake of Thailand’s military takeover, what can we expect from the country’s economy and fixed income market?

As widely reported, Thailand’s military engineered a coup d’état late last week, two days after the imposition of martial law. This followed seven months of political demonstrations, and, in recent weeks, further escalation of tensions between the government and its political opposition. The military is generally expected to appoint an interim prime minister and government in the days ahead. Although rating agencies have so far maintained a stable outlook on Thailand’s credit rating, Moody’s has said that the coup is credit-negative, while Standard & Poor’s has noted that risk levels have risen.

Leaving aside moral or political views, we think the military intervention is likely to provide short-term stability, keeping protestors in check and minimizing violence. The coup is viewed by some observers as a potential catalyst towards the resolution of the current political gridlock. Given the deep differences between the opposing groups, political reconciliation will not be straightforward or quickly achieved. Amid these ongoing political struggles, we doubt that an interim government with limited scope will be able to lift economic activity significantly.

Economy is much weaker today

The street protests held since October 2013 have hurt consumer sentiment and tourism, and in conjunction with obstructions from institutions like the judiciary and environmental bodies, have prevented the government from conducting needed infrastructure projects. As a result, GDP contracted 0.6% (year-over-year) in the first quarter-the first negative GDP print since the country’s floods in 2011. In particular, domestic demand is in recession, having contracted for the third consecutive quarter. Meanwhile, net exports remain the only driver of growth, and that too is coming largely due to a collapse in imports.

Although arguably a short-term stabilizer, we believe that if martial law continues too long, it could prove to be an additional drag on economic activity, as private consumption and tourism are unlikely to pick up in an environment of continued political tensions. Adding to current pressures, Japan-Thailand’s biggest trading partner-is facing a potential consumption slowdown from a sales tax hike, which could hamper Thai exports in the coming months.

Bank of Thailand: Into the fray?

Unfortunately, other potential supports for the Thai economy are limited.
Foreign direct investment has declined on the back of political uncertainties, highlighted by a 45% drop in projects submitted for incentives to the Board of Investments during the first four months of the year. The lack of investment has meant that production capacity has not improved; and foreign investors are likely to remain cautious as politics have been a long-simmering problem.
Meanwhile, any interim government will likely focus on political reforms, and may not embark on large-scale infrastructure projects or stimulus. Also, the government’s pro-growth measures from 2011 will all roll off by the end of the fiscal year, in September. For example, Thailand’s value-added tax is moving from 7% to 10%, which will likely keep consumption weak.

This leaves the Bank of Thailand as the main source of potential support. Although the central bank is reluctant to react to weak GDP numbers (given the political antecedents of the slowdown), we cannot rule out a further reduction in policy rates to shore up the confidence of the private sector.

Constructive on bonds, cautious on currency

So far, the market’s reaction to the latest political developments has been muted, given the light foreign investor positioning in onshore Thai assets and the persistent FX intervention by the central bank.

At this juncture, we remain constructive on Thai domestic bonds. Growth-inflation dynamics, underweight positioning of foreign investors, light bond supply, the steepness of the yield curve and accommodative monetary policy are creating a favorable risk/return dynamic and should, in our current view, keep the bonds well-supported over next several months. Risks to our view come from a potential imposition of capital controls, rating downgrades and exclusion or weighting reduction of Thailand in bond indices-all of which we consider unlikely.

We are more cautious on currency, with a view that the baht could underperform over the medium term given the ailing domestic economy. That being said, we think that there are potentially mitigating factors that could make any significant currency weakness unlikely in the very near term. Thailand’s foreign reserves remain quite comfortable, and should allow the central bank to easily absorb any outflows from local equity or bond markets, which will likely be quite modest in any case. The current account surplus provides a natural support for the baht as well.

Bottom line

To conclude, we think that the extended political crisis, slow pickup in global demand, and lack of economic momentum in Thailand suggest that the country’s growth is likely to come in at the low end of the government’s 2014 forecast of 1.5%-2.5%. This environment could provide continued price support to baht-denominated bonds, even though the currency may underperform over the medium term.


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