Bank of Thailand on Hold as Junta Benefits From Strong Economy Ahead of 2019 Elections

The Bank of Thailand meets Wednesday and is expected to keep rates steady at 1.5%. The economy remains robust, but policymakers are likely worried about the global backdrop. The ruling junta goes into the 2019 elections in a very strong position.


General elections are expected in H1 2019. The ruling military junta has maintained firm control of the nation since the coup in 2014. Elections have been delayed several times as a new constitution was promulgated. However, there are no longer any reasons to delay the vote. If nothing else, the new constitution guarantees that the military will maintain a dominant role in the

The constitutional referendum was held in August 2016 and passed by a comfortable majority of 61%. However, turnout was relatively low at around 55%. The new constitution basically cements the military’s continued influence over government even after the next ballot. It creates a 250-seat Senate that is entirely appointed by a panel dominated by the military. The Senate in turn will select judges for the Constitutional Court, and would also help choose a Prime Minister that is no longer required to be a lawmaker.

The transition to King Maha Vajiralongkorn was smooth. After the death of long-standing King Bhumibol in 2016, some were concerned that his successor and son King Maha would be divisive and unpopular. While this is a largely ceremonial post, royal approval is still seen as very important within the political realm.

Thailand scores very well in the World Bank’s Ease of Doing Business rankings (26 out of 190). The best components are getting electricity and protecting minority investors, while the worst are registering property and paying taxes. Thailand does less well in Transparency International’s Corruption Perceptions Index (96 out of 180 and tied with Brazil, Colombia, Indonesia, Panama, Peru, and Zambia). 


Thailand is the only country in Southeast Asia that was not colonized by the European powers. It is believed that France and the UK wanted Thailand to remain a neutral territory in order to avoid proxy conflicts in that region during the colonial era. At one time, the UK held Burma, India, and Malaya while the French held Vietnam, Cambodia, and Laos. Despite being neutral, Thailand found itself losing much of its territory as the colonial powers chipped away with various treaties and agreements.

Modern Thailand should be defined by the period after the so-called “Siamese Revolution” of 1932. A group calling themselves Khana Ratsadon seized power from King Prajadhipok. The group was rather diverse, made up of military officers and intellectuals. An absolute monarchy was replaced by a constitutional monarchy, with King Prajadhipok remaining on the throne.

A counter-coup was launched by royalists in 1933, ushering in a period of civil war. Khana Ratsadon quickly collapsed under the weight of its own diversity, as different factions sought dominance. After several years of chaos, the military finally stepped in to establish control. Since the 1932 coup, historians generally believe that Thailand has seen somewhere between 20-30 successful military coups and attempted coups.

The country remains deeply divided. Telecom tycoon Thaksin Shinawatra was elected Prime Minister in 2001. Thaksin was able to complete a full term in office and was reelected by a landslide in February 2005. While he was very popular with the rural poor due to his populist policies, the so-called urban elite did not approve of him.

An anti-Thaksin movement (the People’s Alliance for Democracy or the Yellow Shirts) gained strength and eventually accused Thaksin of corruption and abuse of power. In response, Thaksin dissolved parliament in February 2006 and called snap elections for April 2006. Because the opposition boycotted it, Thaksin headed up a provisional government until fresh elections were held in October 2006. This was rendered moot after the Army seized power in September 2006 while Thaksin was attending a UN meeting in New York. Thaksin was barred from politics, his Thai Rak Thai party was dissolved, a new constitution was promulgated, and new elections were scheduled for December 2007.

Many lawmakers from the Thai Rak Thai party joined the People’s Power Party (PPP). Due to Thaksin’s enduring popularity, the PPP did well in the December 2007 elections and formed a ruling coalition with several smaller parties. However, this government was also brought down. The Constitutional Court found the PPP guilty of electoral fraud and dissolved the party in late 2008. With some in the PPP defecting, the opposition Democrat Party was able to form a working government in December 2008.

Tensions ratcheted up as the pro-Thaksin National United Front of Democracy Against Dictatorships (UDD or the Red Shirts) began a campaign of protest that at times became violent. These tensions led into the July 2011 elections. Thaksin was still barred from politics and so his sister Yingluck took the baton. Her Pheu Thai Party won in a landslide, winning 265 seats in the 500-seat lower house. However, tensions picked up again in late 2013.

Deepening protests led Yingluck to dissolve parliament in December 2013 and call for new elections in February 2014. Voting irregularities led to the results being invalidated by the Constitutional Court. The ongoing political crisis led the military to take over in May 2014 and declare martial law. That is where we stand today as we have into elections next year, the first in nearly five years.


The economy remains robust. GDP growth is forecast by the IMF at 3.9% in 2018 and 3.8% in 2019 vs. 3.9% in 2017. GDP rose 4.8% y/y in Q1, the strongest since Q1 2013. Monthly data so far suggest growth accelerated in Q2 and so we upside risks to the growth forecasts. At its June policy meeting, the Bank of Thailand raised its growth forecasts for 2018 from 4.1% to 4.4% and for 2019 from 4.1% to 4.2%.

Price pressures remain low. CPI rose 1.5% y/y in July, matching the cycle high from May and the highest since January 2017. However, inflation remains near the bottom of the 1-4% target range. PPI inflation has accelerated to 2.2% y/y in July, the highest since March 2017. This may portend some modest acceleration in CPI inflation. The bank of Thailand raised its 2018 inflation forecast slightly from 1.0% to 1.1% at its June policy meeting.

Yet for now, the Bank of Thailand appears to be in no hurry to hike rates. It has been on hold at 1.5% since the last 25 bp cut back in April 2015. At its June 20 meeting, the bank said that monetary policy should remain accommodative. Bloomberg consensus sees the first rate hike in Q1 2019. We see no move at this week’s meeting.

The fiscal outlook bears watching. It’s possible that the junta boosts spending ahead of the elections next year. The budget deficit came in at around -2% of GDP in both 2016 and 2017, but the OECD forecasts it to widen to nearly -3% in both 2018 and 2019.

The external accounts remain in good shape. The current account surplus was 10.1% of GDP in 2017, and the IMF expects the surplus to narrow modestly to 9.3% of GDP in 2018 and 8.6% in 2019. Export growth is solid, but trade tensions pose some downside risks here.

Foreign reserves have dropped from the March peak but remain high. In July, reserves stood at $204.9 bln vs. $215.6 bln in March. They cover 10 months of imports and are equivalent to about 3.3 times the stock of short-term external debt. Lastly, Thailand’s Net International Investment Position (NIIP) is around -6.5% of GDP, the lowest in nearly ten years. Overall, Thailand’s external vulnerabilities are low.


The baht continues to outperform. In 2017, THB fell -7% vs. USD and was ahead of only the worst EM performer ARS (-14.5%). So far in 2018, THB is -2% and is behind only the best performers MXN (+6%), COP (+3%), MYR (-1%), and PEN (-1%). Our EM FX model shows the baht to have VERY STRONG fundamentals, and so we expect outperformance to continue.

USD/THB traded at a cycle high on July 20 around 33.526. With pressure on EM expected to continue, we see this pair moving higher. The July 2017 high near 34.208 Is the next target, followed by the May 2017 high near34.830. Break of 33.780 is needed to set up a test of the march 2017 high near 35.445.

Thai equities are outperforming after a subpar 2017. In 2017, MSCI Thailand was up 19% vs. 34% for MSCI EM. So far this year, MSCI Thailand is flat YTD and compares to -7% YTD for MSCI EM. Our EM Equity Allocation Model puts Thailand at OVERWEIGHT, and so we expect Thai equities to continue outperforming.

Thai bonds have performed in the middle of the EM pack. The yield on 10-year local currency government bonds is +40 bp YTD. This compares to the worst EM performers TRY (+744 bp) and ARS (+325 bp) as well as the best performers China (-43 bp) and Poland (-20 bp). With inflation likely to remain low and the central bank able to stand pat for the rest of this year, we think Thai bonds will outperform more.

Our own sovereign ratings model showed Thailand’s implied rating steady at A-/A3/A- after rising a notch last quarter. As such, there remains upgrade potential for actual ratings of BBB+/Baa1/BBB+.