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Thai economy, though strong, may soon be lagging behind

At a glance, Thailand's economy remains resilient to political turmoil that has led to five months without permanent government and no sign of an election date to bring an end to the power vacuum.

Shopping districts and malls are still crowded. Long queues outside popular restaurants are still a familiar sight. Traffic in Bangkok remains as congested as ever, as motorists shrug off the rising fuel prices.

Even Moody's, which rates financial health around the world, says that Thai economic fundamentals are strong enough to withstand political fallout. Its latest report notes that Thailand's credit strength is enough to cushion the damage. The government's debt structure is a key strength in this regard. This is thanks to the range of maturities of government bonds. Notably, Thailand is one of the few countries in the world to issue 50-year bonds. Other Thai strengths include prudent monetary, macroeconomic and debt management, sustained external strength despite erosion of the post-Asian financial crisis current-account surplus, a relatively strong growth outlook and an overall healthy banking system.

"Thailand's fundamentals and existing buffers compare favourably to other Moody's-rated sovereigns that have recently experienced revolutions, or are undergoing political crisis," noted Moody's report.

Compared to other emerging markets, Thailand's economy is expected to remain strong, Moody's said in a separate report. In the Emerging Markets Sovereign Research Series on "external vulnerabilities, exposures, mitigants and credit supports", the rating agency noted that recent financial market volatility and pressure on their currencies have underscored the potential vulnerability emerging markets face during an extended period of uncertainty. Those with external imbalances, a reliance on external funding, and weak policy frameworks will remain vulnerable to sentiment changes, capital flow adjustments, or disorderly market reactions.

Thailand's current account deficit is forecast to be 0.6 per cent of GDP this year. Meanwhile, the "vulnerability indicator" is estimated at only 45.7 per cent, against 610.5 per cent for Venezuela, 300 per cent for Ukraine, 171.3 per cent for Turkey, 159 per cent for Hungary, and 127 per cent for Chile.

Despite subsidy programmes, Thai government debt is relatively small at 33 per cent of GDP, while wider public-sector debt is less than 10 per cent of GDP with low contingent liabilities; financing costs remain low, with 10-year government bond yields below 4 per cent - less than their long-term (since 2001) average of 4.3 per cent; and inflation expectations are well anchored thanks to a credible monetary policy framework.

Things look positive, particularly when most businesses are still doing fine and not laying off workers. As of September 2013, 264,000 people were unemployed - just 0.7 per cent of the workforce. Export-oriented businesses are optimistic that orders will increase in line with recovery in advanced economies, while smaller firms expect a rebound in domestic consumption. Optimism prevails, though economic houses take turns to chop their GDP forecasts.

Yet, this optimism could be easily killed. In its emerging markets series report, Moody's notes that the ongoing political crisis is slowly undermining some of Thailand's traditional buffers.

"Disruptions associated with anti-government protests which remain largely confined to certain areas in Bangkok but have been dragging on for about five months are affecting investor sentiment. The currency depreciated more than 10 per cent over the course of 2013. The foreign reserves declined to US$158 billion in early January to their lowest level since September 2010, but have stabilised since then. Meanwhile, growth will be negatively affected in 2014, primarily because planned public investment will be further delayed with some negative spillover into private investment. Amid the impact on confidence, we expect domestic demand will remain weak for at least the first half of 2014."

Also, we need to remember that the world doesn't stand still. Even if our strengths remain the same, we can easily fall behind if other countries out there show improvement. For now, the Thai stock market is rising in tandem with other emerging markets, the index once more passing the 1,400 points level. Yet, this money can easily leave for other markets that show a better performance.

Indonesia continues to show improvement in its debt profile, which mitigates currency and refinancing risks and supports creditworthiness. South Korea's strong current account surplus, low level of government foreign-currency debt and low domestic-currency external debt will also cushion any possible impacts from the global financial market turmoil and exchange rate volatility.

Vietnam is entering its third year of broad macroeconomic stability following an era of heightened imbalances. While lower than its historical trend, Vietnam's real GDP growth continues to be higher than similarly rated countries and provides support to credit. Foreign exchange reserves are near multi-year highs. Consequent exchange rate stability has also contributed to benign inflation over the past two years.

Importantly, as our neighbours gear up for the Asean Economic Community, Thailand has been left without a government to quicken the pace of preparations. It should thus come as no surprise if other Asean nations move up the IMD's next competitiveness rankings as Thailand falls behind.




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