South-east Asia’s second-largest economy with a GDP of $366bn and a per capita income of $5168 in 2012, Thailand has the potential to become the world’s 23rdlargest economy by 2050, according to HSBC, up from 34th now. A diversified and competitive export base accounting for 62.3% of GDP in 2012, ranging from agriculture to high-end manufactured goods, and strong domestic demand, albeit from an ageing population of 69m, drove Thailand to upper-middle-income status by 2011. As the country moves towards closer regional integration with the introduction of the ASEAN Economic Community in 2015, the government – whichever administration is in power – faces the key challenge of avoiding what is often termed the middle-income trap. Thailand has competitive strengths to draw on, including a central geographical location, a regional manufacturing centre for a broad array of goods and a relatively solid infrastructure base.

The country is already playing a growing role as a conduit for trade and investment in the greater Mekong subregion, encompassing Cambodia, Laos, Myanmar and Vietnam (CLMV). Yet to evolve into a higher-value economy, the public and private sectors will need to invest more in infrastructure and human capital. Fortunately, the country’s political volatility has usually been disconnected from its consistent investment policy, dating back to the creation of the first industrial estates in the late 1970s. However, prolonged political unrest tends to obstruct the implementation of longer-term development plans and what the Ministry of Finance sees as Thailand’s potential for consistent 4.5% annual growth. “Thailand needs to enter its first investment cycle since the 1997 crisis,” James Moss, ASEAN banking analyst at Capital Nomura Securities, told OBG. “Its natural growth rate of 5% should be boosted to 7-8% with higher investment.” Amidst ongoing debate over plans for public infrastructure spending, monetary policy will need to continue to strike a balance in 2014.

From Peak to Trough

Thailand’s economy has proven remarkably resilient to exogenous and local shocks since 2006, and despite political unrest from the fourth quarter of 2013 onward that curbed the year’s growth, it could achieve another rebound in 2014 if the political environment stabilises. The economy quickly returned to form after the fall in exports linked to the 2009 global financial crisis, with growth rebounding from -2.3% to 7.8% in 2010. Domestic demand bounced back sharply from political protests in 2008 and 2010, buoyed by fiscal stimulus from both major political parties. Thailand’s industrial base also recovered rapidly from the worst floods in the past halfcentury, which shut down roughly a thousand factories key to global supply chains for everything from hard drives to automobiles in the fourth quarter of 2011.

Despite an average 4.3% growth rate over the past decade, according to Japan’s Capital Nomura Securities, the consistent performance of the early 2000s have given way to large swings exacerbated by seasonal fluctuations. “Thailand is a highly seasonal economy with traditionally higher growth in the first and last quarters,” Moss told OBG.

Growth has fluctuated significantly since 2008 in particular – even quarter-on-quarter (q-o-q) – making it difficult to extrapolate longer-term trends. GDP grew by 7.8%, -0.1%, 6.5% and 3% (median forecast), respectively, in the four years to 2013. The diversified nature of its economy is part of the explanation for Thailand’s resilience. While q-o-q economic growth turned negative from the first quarter of 2013, causing Thailand to enter a technical recession, this was largely due to the effects of the high GDP growth base in 2012.


As key government domestic consumption stimulus measures wound down and banks began to tighten consumer-credit approvals in 2013, the economy contracted 1.7% q-o-q in the first quarter and 0.3% in the second quarter before rebounding by 1.3% in the third, although the economy still achieved overall expansion of 2.7% year-on-year (y-oy). “The recession in 2013 was purely a technical one prompted by the base effect of abnormal growth in 2012 and seasonal fluctuations,” Porametee Vimolsiri, deputy secretary-general of the National Economic and Social Development Board (NESDB), told OBG.

Export Lead

The world’s leading exporter of rice (up to 2011), rubber, hard drives and pick-up trucks, Thailand is more exposed to fluctuations in global demand than, for example, Indonesia, whose exports account for less than one-third of GDP. Thailand’s export sector is broad and diversified; according to the Board of Investment (BOI), it was the world’s 17thlargest manufacturer, 14th-largest agricultural producer and 35th-largest services provider in 2012. Although severe floods in 2011 affected key nodes in multinationals’ global supply chains, particularly in industrial estates north of Bangkok, causing BT1.01trn ($32.9bn) in losses to the manufacturing sector out of a total of BT1.43trn ($46.6bn), according to the World Bank, a sharp recovery in 2012, led by a 30% investment spike to replace machinery, rebuilt damaged capacity. Yet anaemic growth in its key export markets of Japan, the US and the EU, which accounted for 10%, 10% and 9% of exports in 2013, respectively, constrained export growth, which fell from 27.1% y-o-y in 2010 to 14.3% in 2011 and only 3.2% in 2012, according to Asian Development Bank figures.

Despite an uptick in demand for electronics, automotives and petrochemicals, in the second half of 2013 exports contracted 4% y-o-y by November, according to Bank of Thailand (BOT) figures, given lower sales of staple exports from rice to fisheries due to supply-side constraints.

Indeed, while the government’s rice-subsidy scheme shut-in large shares of potential exports, an outbreak of shrimp early mortality syndrome in 2013 temporarily halted seafood exports. Regional trade has provided a welcome fillip over the past two years, however, helping to partly offset slower Chinese growth, with trade with the ASEAN-5 (Brunei, Indonesia, Malaysia, the Philippines and Singapore) accounting for 16% of Thailand’s exports and that with CLMV for 8%, according to Ministry of Commerce data.

“To mitigate the negative impacts of China’s slowdown, we are attempting to diversify our trade and investment toward new emerging markets, such as our neighbouring countries in ASEAN as well as Africa,” Kittiratt Na-Ranong, the deputy prime minister and finance minister, told OBG. While exports to the ASEAN-5 contracted 10.3% y-o-y by November 2013, those to CLMV continued to grow, with exports to Laos expanding by 13%, those to Vietnam by 6%, to Cambodia by 7.8% and to Myanmar by 20%, according to data from the Ministry of Commerce (see Trade & Investment chapter). While Thailand’s exports remained flat in 2013, analysts from Kasikorn Research Centre forecast 5% growth for the export sector in 2014 on the back of key trading partners’ recoveries and the boost to competitiveness from a lower exchange rate.

Subsidised Shut-In

A key factor in lacklustre exports stems from lower exports of main agricultural goods, particularly rice, given a new domestic rice subsidy policy. Successive governments have provided financial support to rice farmers over the past decade, as, for example, the Democrats provided income support based on planted acreage, while Pheu Thai set a fixed purchasing price per tonne of paddy. A key 2011 election promise, the rice pledging scheme set a price of BT15,000 ($491) per tonne of white paddy rice and BR20,000 ($654) for jasmine rice, around 35-50% above world prices. A leading exporter of rice, rubber and sugar cane, Thailand’s agricultural sector accounts for 12% of GDP but 35% of employment, according to the OECD. With an off-budget programme handled through the state-owned Bank for Agriculture and Agricultural Cooperatives (BAAC), the government built up rice stockpiles of some 15m tonnes. Having spent BT670bn ($21.9bn) on buying crops by November 2013, the Ministry of Commerce has been reticent to sell at lower world prices, having already recorded a BT136bn ($4.4bn) loss on crops in 2011/12. The cost is thus much higher than for all other agricultural subsidies combined, which account for BT40bn ($1.3bn) annually, according to the World Bank. Since September 2013 the second-largest agricultural subsidy is for rubber, although as it is disbursed according to area planted, it does not distort export sales. At BT2520 ($82) per rai (0.16 ha), the state budgeted BT21.2bn ($693.2m) for rubber subsidies annually.

The effective shut-in of rice exports at a time when India’s and Vietnam’s exports are rising meant that Thailand lost its position as the world’s largest rice exporter in 2012, a title it had held for 39 years. Although the government expected lower Thai exports to spur higher global prices, they instead slid from around $580 per tonne closer to $500 over the year, with Thai rice exports selling for an average of $657 per tonne in 2013. While nominal farm incomes rose 5.8% y-o-y by November 2013 compared to a 5.3% rise in agricultural output, according to CIMB Bank Thai, total 2013 rice exports of 6.4m tonnes fell short of the target of 8m-8.5m tonnes. “The rice pledging scheme has increased farmers’ disposable incomes, but this tends to have less great an economic multiplier effect than exports, which have been lower under the scheme,” Yongyuth Chalamwong, research director at the Thailand Development Research Institute, told OBG. Meanwhile, in November 2013 the IMF criticised the build-up in contingent liabilities under the scheme, while ratings agency Moody’s named it credit-negative: when BAAC raised only BT37bn ($1.2bn) of the planned BT75bn ($2.5bn) in state-guaranteed bonds in November, it appeared liabilities would be brought on balance sheet earlier than expected. Following this, in February 2014, Thailand announced that China had cancelled a deal to purchase 1.2m tonnes of rice due to an ongoing corruption probe.

Domestic Demand

n 2013 the economy also faced cooling growth in domestic consumption following two years of rapid expansion stimulated by key 2011 election policies. While delayed by the 2011 floods, the incoming government enacted three major policies in 2012 that were aimed at stimulating domestic consumption and insulating growth from the lacklustre performance in export markets. These policies capitalised on a growing yet constrained middle class that has emerged over the past decade. Although poverty levels fell sharply from their post-Asian financial crisis peak of 42.6% in 2000 to reach 13.2% by 2012, according to the World Bank, income inequality remains high with a consistent Gini coefficient of 0.45 in the past decade. While the most affluent 20% earn around 60% of GDP, the poorest 20% account for just 4%. Raises in the minimum wage have trailed inflation in the decade to 2011, according to the International Labour Organisation. Meanwhile, rising international oil prices in the past decade disproportionately affected working- and middle-class employees in Thailand, which is reliant on imported petroleum for 60% of its needs.

“In an economy dominated by the middle class, where roughly 40% of GDP comes from Bangkok and 30% from the eastern seaboard (where some 85% of manufacturing is based), rising oil prices since 2003 really hurt middle-income earners,” Nomura’s Moss told OBG. “Oil imports rose from 6% of GDP in 2003 to 14% by 2008, essentially wiping out 8% of GDP.”

While petrol prices are not subsidised, natural gas and ethanol blends benefit from price support. Although retail liquefied petroleum gas (LPG) prices for vehicles underwent a managed float from January 2012 and those for cooking gas will rise 38% to BT25 ($0.82) per kg in the year to August 2014, subsidised LPG, gasohol and diesel remain 15-66% below world market prices, according to the Energy Fund Administration Institute, which estimates energy subsidies cost the government BT165m ($5.4m) daily.

Alongside rice subsidies targeting its political base in northern areas, the government enacted a value-added tax refund on first-time purchases of cars with engines under 1500 cc and tax refunds of as much as BT500,000 ($16,350) on property worth up to BT5m ($163,500) for first-time homebuyers. Vehicle sales surged 82.6% to 1.43m in 2012, according to Toyota Motor, which publishes consensus industry figures. The effect on home sales was more muted, however, with no significant spike in sales, given a similar programme under the Democrat Party government in 2009. The third key policy consisted of a staggered minimum wage hike to BT300 ($9.80) a day, in seven provinces including Bangkok in 2012 and nationwide from 2013, alongside a BT15,000 ($491) a month starting salary for university graduates. Taken together, these policies drove a 21.6% rise in personal loans in 2012, the fastest since 2005 and outpacing bank credit growth of 13.9%, according to the BOT. While remaining around the 100% mark over 2000-06, Thailand’s private sector debt-to-GDP ratio reached 148% by January 2013, second only to China, according to Fitch.

Cooling Off

The central bank has steered banks towards greater conservatism, publishing figures showing household debt rising from 55% of GDP in 2009 to 78% by June 2013 and 80.1% by October 2013. These figures are somewhat inflated, however, given that credit to many self-employed and entrepreneurs is categorised as “household”, while a policy targeting loan-shark lenders under the previous Democrat government had formalised over 1m borrowers through state-owned banks like the Government Savings Bank. Nonetheless, the BOT raised concerns over the pace of growth in indebtedness – by June 2013 the debt servicing ratio had risen to 33.8% of households’ income, according to NESDB. A slight uptick in non-performing loans from the second quarter of 2013, linked particularly to the used-car market depressed by the flood of new cars, contributed to more conservatism by banks (see Banking chapter). As banks increased their counter-cyclical buffers and tightened credit approvals – and combined with the high 2012 base effect – sales of durable goods fell back to trend, with new car sales dropping 25% y-o-y by July 2013, according to Toyota. “With the relatively high leverage of Thai households, in 2013 we are seeing a drop in consumption in durable good items in particular,” Nuchjarin Panarode, Nomura’s head of investment research, told OBG.

Growth in consumer loans cooled from a peak of 28.9% in the fourth quarter of 2012 to 16.7% in the third quarter of 2013, according to figures from the Bank of Tokyo-Mitsubishi-UFG (BTMU), leading to a 1.2% y-o-y drop in private consumption. Political protests in the fourth quarter of 2013 compounded weaker demand, with a 6.1% decline in the private consumption index, compiled by the University of the Thai Chamber of Commerce, in September and 2.4% in November. Despite support to the services industry, including the tourism sector (the world’s 13th largest by receipts and accounting for roughly 10% of GDP, according to NESDB), private investment remained weak. “Some businesses awaited clearer signs of private demand recovery as well as implementation of public investment in infrastructural projects,” the BOT’s monetary policy committee noted in December 2013. Private investment contracted 5.7% y-o-y in the third quarter of 2013, according to BTMU, driven by lower spending on transport equipment, even as the labour market remained tight with unemployment at 0.6%.

Taper Talk

Thailand’s financial markets have also faced challenges of high global volatility common to other emerging markets, driven by the signalling of looming tapering of the US Federal Reserve’s bond-buying programme (quantitative easing) in May 2013, although the eventual decision was delayed to December. Following two years of rapid growth that saw Thailand’s stock exchange rise 47% from January 2012 to April 2013, 10-year government bond yields falling from 4%-6.5% to around 3% and the baht reaching a 16-year high in April 2013, portfolio investment flows reversed sharply from May 2013. The stock exchange recorded net outflows of BT140bn ($4.6bn) in three months to September. “Thailand, like other countries in the region, faces the effects of the global economy in 2013, including a slowdown in exports and capital outflows,” NESDB’s Porametee told OBG. Thailand remains less exposed to outflows from its bond market than other ASEAN economies, however, with the share of government bonds held by foreign investors at 15.8% in 2013, compared to over 30% in Indonesia.

While Thailand suffered some regional contagion – with investors pulling out of Thai stock and bond markets that were the region’s most liquid in 2013 as part of ASEAN-wide selling – fund-managers also raised concerns over twin fiscal and current account deficits, albeit much smaller than Indonesia’s or India’s. Despite resilient inward foreign direct investment (FDI) after the 2011 floods, which rebounded from $12.6bn in 2011 to $20.7bn in 2012 and $23.6bn in the first three quarters of 2013, according to BOI data, Thailand’s current account and net FDI combined swung from 9.7% of GDP in 2007 to 0.9% in 2012, as per BTMU figures.

Revised figures revealed a current account deficit of 0.4% of GDP in 2012. While the budget deficit remains small, the current account swung into $5.3bn deficit in the year to November 2013.

As the world’s largest jewellery manufacturer and a large importer of gold, Thailand’s trade balance is exposed to volatile gold prices. “While the current account swung into deficit in the second quarter of 2013, much of this volatility was driven by high gold imports and seasonal effects,” Tientip Subhanij, the head of balance of payments at the BOT, told OBG.

Although tourists in popular holiday destinations outside of Bangkok remained unscathed by political protests in late 2013, portfolio investors cut their exposure sharply, with a net outflow of $2.8bn from stocks and $1.2bn from bonds in the last two months of 2013, according to CIMB figures. The sell-off prompted an over 5% y-o-y slump in the baht to the BT33:$1 mark by early 2014, its lowest point since early 2010 and the sharpest decline since 2005. Thai corporates remain more insulated from the impact of currency swings than in 1997 given their greater reliance on baht-denominated funding. “Thai corporates do not face as significant a currency mismatch as in India or Indonesia,” Andrew Wong, credit analyst at Standard & Poor’s (S&P) in Singapore, told OBG. Yet although a lower currency has worked to curb imports and provided some support for exports, authorities have raised concerns over the potential feed-through into imported inflation, in energy prices particularly. Although the BOT had resisted political pressure from the Ministry of Finance to ease rates when the baht hit a 16-year high of below BT29:$1 in April 2013, it has cautiously eased monetary policy since to support domestic growth.

Monetary Balance

The slowdown in growth and reversal of portfolio inflows in 2013 turned the tables in an economic debate that had seen public disagreement between the Ministry of Finance and the BOT in the two years since the 2011 elections. Despite an explicit commitment to central bank independence and relatively stable inflation of 2% on average since the BOT adopted an explicit inflation-targeting framework in 2000, the Ministry of Finance has since 2011 voiced concerns over monetary policy as the BOT preserved its room for manoeuvre. The BOT had proved reticent to cut rates amidst expansionary fiscal policies, while the Ministry of Finance argued for monetary easing as the stronger baht constrained exports.

Although the gradual cut in LPG subsidies, increases in electricity and toll road prices in September 2013, and the minimum wage hike caused inflation to edge up slightly from 1.59% y-o-y in August to 1.92% in November, full-year inflation of 2.2% remained within the BOT’s target range of 0.5-3% and well below the annualised 3.4% recorded in January 2013. The BOT surprised analysts by cutting benchmark interest rates by 25 basis points in November 2013 to 2.25%, the only central bank in the region to ease given downward pressure on Asian currencies, following similar cuts in October 2012 and May 2013. Then, in March 2014 the benchmark interest rate was cut again by 0.25 percentage points to 2%, its lowest level in three years.

Despite concerns over high household indebtedness levels, the BOT has encouraged higher counter-cyclical provisioning by banks and more conservative loan growth to offset any impact from lower interest rates. Faced with slower domestic demand in 2014 and subdued energy and food inflation, the consensus among analysts at the start of 2014 was for an inflation figure of 2.6% for the financial year, although outliers like CIMB and Phatra Securities expected 2.4%. With inflation slowing and concerns over growth drivers, particularly given delays in public infrastructure investments, analysts widely expect further easing in the first half of 2014 before any new tightening cycle resumes from mid-2015 at the earliest.

Despite an emerging current account deficit and foreign portfolio outflows, the BOT sat atop significant foreign currency reserves of $167.5bn as of November 2013, the world’s 14th largest, albeit down 2.78% on July 2013 levels. Using open-market operations to smooth over excess volatility in the currency rather than influencing its direction, the BOT has run a negative carry on its reserves given high exposure to US government securities in recent years.

Like other regional central banks, however, the BOT cut exposure to US debt in 2013 and has sought to boost exposure to other currencies, requesting an increase on its CNY7bn ($1.1bn) and $300m quota for onshore Chinese bond purchases under China’s Qualified Foreign Institutional Investor programme, for instance. Supported by the government, the BOT additionally relaunched plans in mid-2013 to establish a sovereign wealth fund, known as the New Opportunity Fund, by 2015. The goal is to increase yields on excess foreign reserves through other offshore investments and channel some funds towards long-term domestic investments, especially infrastructure.

Tax & Spend

While both major parties agree on the need to boost public investment in infrastructure, Thailand’s spending has lagged pre-1997 levels over the past decade, even though its logistics costs, at 15% of GDP, remain high compared to Malaysia and Singapore. The latest attempt, a planned BT2.27trn ($74.2bn) infrastructure fund financed primarily through local bonds, has been delayed due to political and legal opposition (see analysis). Amidst wrangling, the government sought to accelerate budget disbursement in 2013 and carry out campaign pledges to cut corporate and personal income taxes. It accelerated spending in the second half of 2013 to support growth, streamlining regulations to speed up tendering. While fiscal spending rose 4.1% y-o-y in September, it fell 13.2% y-o-y in October and 18.5% in November, according to CIMB. Despite delays in passing the fiscal 2014 budget and protesters’ occupation of key government buildings, landmarks and intersections in December 2013, which continued following the snap elections in February 2014, the government aims to disburse 95% of its BT2.017trn ($66bn) recurring budget and 82% of its BT441.9bn ($14.5bn) capital expenditure budget in fiscal 2014, up from an average disbursement of its capital budget of 63% in the eight years to 2012, according to Fitch. The government aims to balance its core budget by 2017, alongside higher off-budget spending, with its budget deficit declining from 2.4% in fiscal 2013 to a budgeted 1.9% in 2014, although Moody’s forecast a higher 3% in December 2013 based on lower growth projections. The government had aimed for a 2:1 split between reducing expenditure and expanding revenue by 2017, according to Fitch.

Meanwhile, the government reformed the corporate and personal tax code, in part to offset the impact of minimum wage hikes, alongside incentives to boost private investment. While Thailand’s tax take is low, at around 20% of GDP, relatively low expenditure levels have offset budget deficits, which fell from 2.5% of GDP in fiscal 2013 to 1.9% in 2014, according to Fitch. Corporate taxes have been cut from 30% to 23% in 2012 and 20% in 2013, giving Thailand ASEAN’s second-lowest corporate rate, a move the government estimates will cost BT150bn ($4.9bn), or 1.1% of GDP, by 2014. For mid-sized firms with 50-1000 workers, for which labour accounts for around 14% of costs, the tax cut provided some respite. Meanwhile, in 2013 the government expanded the five personal tax brackets to seven, exempting incomes below BT150,000 ($4905) and reducing the top rate (incomes above BT4m, $130,800) from 37% to 35%. In August 2013 the government unveiled new BOI incentives for eco-friendly cars and an expanded credit guarantee scheme for small and medium-sized enterprises in a bid to spur private investment (see Trade & Investment chapter).

Funding Space

Despite rising contingent liabilities, Thailand remains well within its fiscal sustainability framework, which caps public debt at 60% of GDP and combined principal and interest servicing at 15% of annual budgets. Its debt-to-GDP ratio stood at 45.3% of GDP in January 2014, up slightly from 44.2% in July 2012, while debt servicing accounted for only 7.4% of the 2013 budget. Authorities have prudently managed their liabilities, extending the average maturity of debt from 5.7 years in 2000 to 7.9 by 2012, and issuing a landmark 50-year float onshore, while reducing the foreign-denominated share of debt from 20% to 1.5%, according to Fitch. Thailand’s indebtedness levels are expected to remain below those of Malaysia or the Philippines, whose debt-to-GDP ratios were 54% and 51%, respectively, in 2013, as per Moody’s data.

“While public debt is projected to rise from 44% of GDP currently to a peak of 50% in 2017 before declining to around 48% thereafter, we are still well within our debt ceiling of 60%,” Pisit Puapan, the director of the macroeconomic analysis division at the Fiscal Policy Office, told OBG. Additional debt-issuance space was created in 2012, when the Ministry of Finance transferred the BT1.4trn ($45.8bn) Financial Institutions Development Fund liability, a leftover of the Asian financial crisis, to the BOT, which levies a 0.47% levy on deposits to fund this. Despite this room, Moody’s and the IMF have raised concern over rising liabilities, with over $4.4bn in losses on the rice pledging scheme in two years since 2011, according to the IMF.

Although Thailand starts 2014 rated “BBB+” by Fitch and S&P and “BAA1” by Moody’s with stable outlooks, agencies have raised warnings over the impact of political protests on tourism, FDI and the implementation of public investment and their effects on the country’s growth and still strong credit fundamentals. Indeed, slower growth in 2014 will increase Thailand’s debt burden, even if off-budget infrastructure plans are delayed.


Thailand retains strong fundamentals for growth, with an established manufacturing and export base alongside a central geographic position that allows it to leverage regional expansion. Over the longer term the economy will need to boost highervalue-added production to drive growth and ensure it is spread more evenly among an ageing population. As the share of Thais over 65 rises from 9% in 2010 to 12.3% in 2020, when Bank of America expects its working-age population to decline for the first time, and 17.6% by 2030, according to Deloitte, concerted action by both the public and private sectors will be needed for Thailand to avoid the middle-income trap of productivity increases trailing wage inflation.

Although the February 2014 elections are estimated to have generated an extra BT40bn-50bn ($1. 3bn-1.6bn) in spending and added 0.3-0.4% to 2014 GDP growth, according to projections by the University of the Thai Chamber of Commerce, continued political instability has curbed growth forecasts for 2014. While these range from 4.1%, according to the consensus among private sector analysts (in December 2013), to 3.1%, according to the latest estimate by the Ministry of Finance, they are a sharp markdown on the 5%-plus rates forecast for the year earlier in 2013. Political stability will be key to sustaining the strong tourism performance and to the public investment so crucial for Thailand to achieve its longer-term growth potential.