Thailand’s Teflon reputation is coming unstuck

IFR Asia 905 - August 8, 2015
6 min read

Having examined the crisis in Malaysia in this column last week, I’m now turning my attention to Thailand. There is no turmoil on the streets or political crisis to rival the magnitude of recent events in Malaysia, but the Kingdom is steadily undergoing an erosion in international investor confidence after years of apparent disregard for intense and often bloody internal strife.

I visited Bangkok recently, and returned with a sense that the city’s vibrancy has dimmed. Hotels seemed barely occupied. The street hawkers on Silom road had been culled back, and I discerned less of the famous Thai smile on the thoroughfares. Of course it’s low season, but past visits have never seemed quite this low. It was as if someone had dimmed the lights to save on their electric bill.

It’s not just about anecdotal evidence. The Thai baht has fallen this year against the dollar to its lowest level in six years, and the country’s stock market has reeled amid talk of mass capital flight. Offshore real money pulled almost US$800m out of Thai stocks last month. Local bankers cite declining corporate earnings for the offshore institutional selling, although the real issue seems to be the sense of an impasse in government policy.

The military-led government which assumed power last year has promised to kickstart the economy via infrastructure spending, but so far little of the earmarked funds have been disbursed. Meanwhile various spectres loom in the form of the corruption trial of former prime minister Yingluck Shinawatra and the ailing health of Thailand’s revered king Bumibhol.

As far as offshore debt markets are concerned the epithet “Teflon Thailand” has often been used, and judging by the stability of Thailand’s credit default swaps – they have hovered at around 100bp for the cost of five-year protection for much of the year – perhaps that term still applies. And the appetite for Thai domestic debt among onshore institutional investors remains intact, again supported by ample onshore liquidity.

THE BAHT, MEANWHILE, looks to be on shakier ground, given that the ruling junta sanctioned in January a near 60% rise in the budget deficit from the next fiscal year commencing in October. I recall the attacks on Asian currencies issued by the countries which ran the biggest budget deficits during the 2013 “taper tantrum”. The Indian rupee and Indonesian rupiah were the main casualties, and offshore secondary debt spreads widened considerably on fears that debt service in a severely weakened currency would become onerous and lead to widespread defaults.

While Thailand has its own discrete problems, it’s tempting to suggest that the dismal performance of its equity markets and currency are to be lumped in with similar skittishness in other regional markets. Indeed this year could mark the second coming of the taper tantrum, which manifested itself when talk of the withdrawal of the Federal Reserve’s quantitative easing programme first emerged. It’s not tapering everyone’s worried about this time but the possibility that the Federal Reserve will raise rates this year.

Forward markets are pricing in two rate hikes from the Fed, with many market players expecting the first to come in September. This would represent the first rate tightening from the Fed in a decade, and although US economic data might look too patchy to justify the move, forward rates markets tend to make the right call. One can only assume Fed Chair Janet Yellen and her colleagues on the FOMC are well aware that raising rates next month carries considerable risks in the current flaky global market climate.

CHINA’S EQUITY MARKET collapse and the frenzied move to stem the bleeding from the country’s authorities is now the loudest noise in the background. But Greece has not gone away, nor has the fear of another, more treacherous leg down in Asian currencies on the back of a mass capital exodus. And the meltdown in commodity prices is of such a magnitude that were it to have happened to global equities the word crisis would have already been deployed.

These are dangerous times for markets. Indeed with geopolitical tensions thrown in as fears rise that Russia’s Vladimir Putin is eyeing expansion into the Baltics, and as the ASEAN community ups the pressure on China’s exploits in the South China Sea, I can’t recall a more dangerous mix for global capital markets.

But to return to the subject of Thailand, I will reiterate what I wrote in this column last week regarding Malaysia and its ongoing political crisis. I believe that we are witnessing the beginning of the end of the Asian economic miracle that has been rolling on for the best part of 40 years. Countries such as Thailand, which had grown blasé about high GDP growth year in year out, seem highly likely now to have to settle for something much less, perhaps in the low single digits.

Governments will face bigger budget deficits in an effort to prop up the whole system, and Thailand is a classic example. The rise of authoritarianism such as we are witnessing in Malaysia and Thailand seems to me the consequence of all this and political instability the new normal. These are interesting times indeed.

Jonathan Rogers_ifraweb