Thai Politics Get Even Messier

Elections will be held in Thailand on March 24. These will be the first since the 2014 coup brought a military junta to power. The country remains deeply divided, with the recent candidacy and quick disqualification of Princess Ubolratana further muddying the waters.

POLITICAL OUTLOOK

Thai politics were upended by the surprise announcement that Princess Ubolratana would run for Prime Minister. The royal family is supposed to be apolitical and a royal has never run for office before. She is the sister of King Vajiralongkorn and would be the candidate of the Thai Raksa Chart Party that is linked to former Prime Minister Thaksin.

Princess Ubolratana is the daughter of revered King Bhumibol, who reigned from 1946 until his death in 2016. He had four children. Princess Ubolratana is the eldest, followed by current King Vajiralongkorn, Princess Sirindhorn, and Princess Chulabhorn.

Just as quickly, the election commission disqualified Princess Ubolratana from the elections. The commission said it made the decision after King Vajiralongkorn expressed his opposition, even though the Princess had given up her official royal titles when she married an American back in 1972.

Thai Raksa Chart officials said the party would comply with the disqualification. However, the party cannot nominate a new candidate since the deadline has now passed. The election commission also said that it may recommend dissolving Thai Raksa Chart for violating electoral law with its nomination of Princess Ubolratana.

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. This new version guarantees that the military will maintain a dominant role in running the country, regardless of who wins the elections. Current junta leader Prayuth and his Palang Pracharath party are back to being clear front-runners now that Princess Ubolratana has been disqualified.

Thai voters will elect all 500 seats in the lower house of parliament. On the other hand, all 250 seats in the upper house are appointed by the junta and top military leaders. The Prime Minister will now be elected by both chambers and so the upper house (and therefore the military) takes on a much greater and almost dominant role in this choice.

We see rising political risks ahead of and most likely past the elections. Thaksin supporters have seen too many of their candidates and parties marginalized by the powers that be. Remember, Thaksin and Thaksin-linked leaders have won every election since 2001 and yet continue to be forced to the sidelines.

 

A BRIEF HISTORY LESSON

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 so-called Yellow Shirts) gained strength and 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 that vote, Thaksin headed up a provisional government until fresh elections were called for 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 when 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 (the so-called Red Shirts) began a campaign of protest that at times became violent. These tensions intensified going 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.

 

ECONOMIC OUTLOOK

The economic outlook remains solid, if uninspiring. GDP growth is forecast by the IMF at 3.9% in 2019 and 3.7% in 2020 vs. an estimated 4.6% in 2018. GDP rose only 3.3% y/y in Q3, the weakest since Q4 2016. Monthly data so far suggest growth decelerated further in Q4 and so we downside risks to the growth forecasts.

Price pressures remain low. CPI rose 0.3% y/y in January, the lowest since August 2017 and well below the bottom of the 1-4% target range. PPI has contracted two straight months, at -1.1% y/y in January. This portends further deceleration in CPI inflation.

Yet the Bank of Thailand started a tightening cycle in December with a 25 bp hike to 1.75%. It has expressed concerned with financial stability and has noted that monetary policy remains accommodative. In our view, the Bank of Thailand is in no hurry to hike rates. Indeed, the market does not fully price in the next 25 bp hike until year-end.

The fiscal outlook bears watching. We thought it likely that the junta boosts spending ahead of the elections next month, but so far, expenditure growth has been limited. The budget deficit came in at around -3.5% of GDP in 2017 and narrowed to an estimated -2.8% in 2018. Bloomberg consensus sees further narrowing to -2.6% of GDP this year.

The external accounts remain in good shape but bear watching. The current account surplus was 10% of GDP in 2017 and an estimated 9% in 2018. The IMF expects the surplus to narrow modestly to 8% of GDP in both 2019 and 2020. Export growth has slowed sharply, and trade tensions pose downside risks here, and so we see downside risks to the external accounts.

Foreign reserves have risen back to near all-time highs. In January, reserves stood at $210 bln and were just below the record $215.6 bln in March. They cover over 9 months of imports and are equivalent to about 3 1/2 times the stock of short-term external debt. Lastly, Thailand’s Net International Investment Position (NIIP) is around -5% of GDP, the lowest in ten years. Overall, Thailand’s external vulnerabilities are low.

 

INVESTMENT OUTLOOK

The baht continues to outperform. In 2018, THB was up 0.1% vs. USD and was the best EM performer. Only MXN was close (flat). So far in 2019, THB is +4% and is behind only the best performers RUB (+6%), CLP (+5%), ZAR (+4%), and COP (+4%). Our EM FX model shows the baht to have VERY STRONG fundamentals, and so we expect this outperformance to continue.

USD/THB traded at a cycle low on January 31 around 31.183. With renewed pressure on EM expected to continue, we see this pair moving higher. Key retracement objectives from the October-January drop come in near 32 (38%), 32.25 (50%), and 32.50 (62%). The 200-day moving average comes in near 32.60 currently.

Thai equities are underperforming after outperforming in 2018. In 2018, MSCI Thailand was -8.5% vs. -17.5% for MSCI EM. So far this year, MSCI Thailand is up 5.5% YTD and compares to up 9% YTD for MSCI EM. Our EM Equity Allocation Model puts Thailand at OVERWEIGHT, and so we expect Thai equities to begin outperforming.

Thai bonds have underperformed within EM. The yield on 10-year local currency government bonds is -5 bp YTD. This is behind only the worst performers Colombia (+13 bp), India (+8 bp), Korea (-2 bp), and Taiwan (-4 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 start to outperform more.

Our own sovereign ratings model showed Thailand’s implied rating rising a notch to A/A2/A. As such, there is growing upgrade potential for actual ratings of BBB+/Baa1/BBB+.