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Matthews Asia Weekly

Thailand's Transition to a New Era

Week of October 17, 2016

The passing last week of Thailand’s King Bhumibol Adulyadej—the world's longest-reigning head of state—marked a sad day for Thais who had an exceptionally close bond to their monarch. We offer our sincere condolences to the people of Thailand.

King Bhumibol, also referred to as King Rama IX, had reigned since 1946, and is expected to be succeeded by his son, His Royal Highness Maha Vajiralongkorn, Crown Prince of Thailand. However, the Crown Prince has indicated he would like the process of his accession to the throne to be postponed in order to grieve with the nation.
The King’s death and the royal succession will have little impact on governance in Thailand, which currently has an unelected military-led government. Prime Minister Prayut Chan-o-cha, the former Commander in Chief of the Royal Thai Army, came to power during a 2014 coup. As part of its plan to return the country to democratic rule, the Thai junta drafted a new constitution, which was ratified by a national referendum in August 2016. This set in motion a process that will culminate in a general election that was originally anticipated to occur in late 2017. But, given the official one-year mourning period for King Bhumibol, the election timeline appears likely to lengthen into the first half of 2018.
On the political front, many had questioned the potential for instability given the long-running social and regional divisions between the urban elite and the rural masses in the country’s North and Northeast areas. The root cause remains fiercely debated. But it is undeniable that Thailand has a wide inequality gap; by one estimate, the richest 0.1% of Thais owns nearly half of the nation’s assets, according to Bloomberg. This divide was exemplified most recently in the November 2013 “Bangkok Shutdown” rallies against the then-incumbent Yingluck Shinawatra government that was seen to more closely represent the rural populace.
The impact on the economy and sentiment may take longer to assess. An extended mourning period, during which the population might refrain from conspicuous consumption, could result in temporary weakness in economic activity. Discretionary spending (on property, autos and other durables) and entertainment and liquor-related spending are likely to be most affected, given expected general restraint among the populace during the mourning period, particularly in the first 30 days. Consumer-related companies could also be affected by postponed product launches. Hospitality and airline operators are likely to see pressure as well, although visitor arrivals should rebound after an initial period of mourning following the many unique cultural events and ceremonies over the coming months. Advance bookings ahead of the tourism high season beginning in November appear robust, and the question is to what degree current events could lead to cancellations. Most likely, if internal security remains well-controlled and entertainment bans are not extended, bookings may see little attrition.

Apart from these sectors, generally weaker sentiment could affect demand more broadly. But, significant accelerated public spending in the form of additional stimulus and infrastructure project launches may also occur after the royal funeral and initial 30-day mourning period, as a means of restoring confidence to investors and the Thai public. Fiscal flexibility is adequate with public debt-to-GDP at around 43% and no headline deficit limits. The current macro backdrop features a modest farm income recovery that is set to broaden in 2017 on the back of the highest crop output in several years, a stimulus package that is primarily aimed at reducing low income debt and debt service burdens, and ramping public infrastructure-related activity.

Overall, we continue to view Thailand as a relatively slower growth economy in ASEAN albeit with strong buffers in the form of a large current account surplus and very low inflation. Although the stock market in aggregate does not appear cheap, there remain long-term growth opportunities for stock pickers in themes ranging from consumer, financials and health care to tourism and infrastructure, which also leverage Thailand’s geographical proximity to the fast-growing economies of the Greater Mekong sub-region. While early restoration of a more democratic and open governance system is to be desired from an investor perspective, the military’s oversight offers the prospect of a stable transition to a new monarch and elected government. Thailand is at a crossroads; with mourners coming to terms with the loss and the market now also gaining closure in the passing of the beloved King, the next few years will determine whether the nation can build from its current platform toward a more equitable and prosperous future.

The views and information discussed in this article are as of the date of publication, are subject to change and may not reflect the writers' current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of any securities or any sectors mentioned herein. 

The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information.