Thailand is in deep mourning as the passing of King Bhumibol Adulyadej ends a glorious reign of 70 years during which Thailand fended off immense external threats and internal instability, while transforming itself from a poor agrarian country into a middle-income Asian tiger. There is little question that the king’s long years of devotion to his people elicited an extraordinary level of public adulation. Consequently, his departure from the scene is bound to cast a pall of uncertainty and sadness over the Thai economy. Even before the announcement of his death, the Bank of Thailand had warned that the economy would slow in 3Q while the Purchasing Managers’ Index for September showed clear signs of deceleration, including a sharp drop in new business orders.

Our assessment is that, while 2H2016 will show a deceleration, the Thai economy is likely to be resilient over time, particularly as some of the factors that have exerted a drag on the economy fade away. Much will depend on politics, though — how the transition to the new reign is managed in the short term and, over the longer term, how the long political crisis is finally resolved.

Near term: A recovery temporarily interrupted
Until the September purchasing managers’ surveys showed a loss of momentum, Thailand had seemed to be overcoming the malaise that enveloped it during the years of political instability culminating in the military coup of 2014. The economy was gaining steam as seen in a range of indicators:

  • Buoyant economic growth: GDP growth trended upwards in 1H2016 on the back of a robust tourism sector and strong public investment.
  • Overseas shipments were beginning to pick up: The long export decline has reversed; external shipments rose 2.7% y-o-y in August after a disappointing 5% fall in the month before. However, export performance has been stop-start and needs to be more robust for a sustainable economic upswing to occur.
  • Consequently, industrial production is also firming: Value-added production rose 3.1% y-o-y in August, up from a decline of 5% in July, and stands at its highest level since April 2013. A solid export recovery will give further impetus to the manufacturing sector.
  • Tourism has been mercifully resilient to the recent wave of terrorist attacks: Tourist arrivals were up 9.9% in August to 2.87 million. With the government rolling out new initiatives such as promoting unique local markets in various regions to enhance Thailand’s attractiveness as a tourist destination, tourism is expected to undergird economic growth, going forward, once the short-term impact of the mourning period is over.
  • Farm incomes recovering after a long decline: Improving weather and rising prices for produce are helping to turn around rural incomes. Although the improvement is currently concentrated in a few sectors, we expect the rebound to spread over the coming months.
  • Private consumption continues to hold up well in light of recovering farm incomes and a tight job market: Consumer sentiment is also buoyed by supportive government policies — the Consumer Confidence Index by the University of the Thai Chamber of Commerce rose to 74.2 in September, up from 73.2 in August, 72.5 in July and a 25-month low of 71.6 in June.

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