November 2012 April 2012 Economic Outlook Supavud Saicheua Emerging Asia Economist Phatra Securities Refer to important disclosures at the end of this report. 1
2013 risks remain on downside April 2012 § Recent data in US and China raise hope for improving economic situation GDP growth for major countries Ø US: improving housing sector, employment Ø China: pick up signs of IP, retail sale, exports § Global growth has slowed and risks remain on the downside. Ø Europe is in a prolonged recession Source: Bo. AML Ø US faces risk of fiscal drag of as much as 4. 6% of GDP by end 2012. § Fiscal stimulus: constrained in advanced economies. China and EMs has room to ease § Central banks will ease further. More QEs in advanced economies “ 2013: Low growth with high liquidity and still volatility” Refer to important disclosures at the end of this report. 2
April 2012 US Fiscal cliff § The prospect of split govt post election means significant downside growth concerns from the fiscal cliff remain. § The negotiation process to be messy and the ultimate solution is likely a few weeks away. Refer to important disclosures at the end of this report. 3
April 2012 Fed QE 3+4 § The slow recovery in the labor market is likely to lead the Fed to extend QE 3 into 2014 at least and hold policy rates near zero through late 2015. § The Fed will likely announce a new Treasury QE program at the Dec. $45 bn Treasury buying to replace expiring Twist, means ($40 bn + $45 bn) x 12 months = $1020 bn/year § In 2008, Fed balance sheet was $870 bn. Now it is $2. 8 trn. If QE 3 goes as expected, balance sheet will expand to $5. 5 trn by mid 2015. § Some doubt effectiveness of QE 3 in reviving the real economy. However, QE 3 is meant to “buy time” and be the antidote to the risk of fiscal cliff. § More likely, QE 3 would boost commodity prices, EM inflation, and capital flows into EMs. Refer to important disclosures at the end of this report. 4
April 2012 US corporate: high cash but not investing Corporate investment was weak Corporate has high cash balance Source: Census Bureau, Bof. A Merrill Lynch Global Research Refer to important disclosures at the end of this report. 5
US: fiscal outlook is grim April 2012 Spending components (% of GDP) Govt revenue and spending (% of GDP) Medicare Total noninterest spending Social security Medicaid Revenue Source: CBO, Bo. AML Deficit projected in CBO’s baseline and scenario (% of GDP) Source: CBO, Bo. AML Gross federal debt to GDP Source: CBO, Bo. AML Refer to important disclosures at the end of this report. 6
April 2012 Europe: Key points OMT: buys time but is no end game § Provides a backstop to sovereign risk, but is not an end-game solution § Conditionality implies volatility § Reluctance from Germany and Spain to use the instrument End game: from banking union to budgetary union, little progress leaves room for uncertainty § No appetite for budgetary union before 2014 § Limited appetite for banking union: debate focuses on EU 27 vs EMU 17 and scope of banks (all vs large systemic only), the process will be slow § Still no debate and convergence on next permanent step for the EZ; no solution for Greece Economic outlook penalised by uncertainties – zero growth § Ongoing fiscal adjustment and bank deleveraging: negative for internal demand § No permanent solution to EZ construction flows: deters investment § Exports: firms need to build up capacity Refer to important disclosures at the end of this report. 7
April 2012 ESFS/ESM support Refer to important disclosures at the end of this report. 8
Euro zone: Competitiveness and structural problems April 2012 400 Eurozone: Current account ($ bn) Current account deficit to GDP 300 200 100 -200 -300 -400 Source: IMF Unit labor cost Source: IMF, BIS Government deficit 2012 (% of GDP) Source: The economist poll, EIU Refer to important disclosures at the end of this report. 9
April 2012 China: leadership change § “If we fail to handle this issue well, it could prove fatal to the Party and even cause the collapse of the Party and the fall of the State” Hu Jintao, President of China speaking that the 18 th Communist Party Congress on the issue of corruption, 9 November 2012 § Xi Jinping who will replace Hu as President in March 2013 will inherit a recovering Chinese economy (2013 GDP growth estimate 8. 1%) but will have to sustain this growth while introducing reforms that combat corruption. § China has become more assertive about its claims in the South China Sea which stir nationalist sentiment that shore up support for the government. § However, other countries in the region – Japan, Australia, Korea and some ASEAN countries – have become nervous. US is taking advantage of the situation with Pres Obama visiting Myanmar and joining the ASEAN Summit. § Good news on Oct export growth of 11. 6% (while import grew 2. 4%) show that China is reliant on exports. But China needs to rely more on private enterprise and consumer spending which means curbing the power of SOEs and land grab by corrupt local officials. Refer to important disclosures at the end of this report. 10
April 2012 Rising supply and wage cost Refer to important disclosures at the end of this report. 11
April 2012 Manufacturers under pressure esp mid-up stream cos Refer to important disclosures at the end of this report. 12
April 2012 Exposure to property is significant & rising Source: CEIC, Bo. AML Refer to important disclosures at the end of this report. 13
April 2012 Thailand: GDP Growth Avg real GDP growth (2000 -10) = 4. 4% GDP Per cap as of 2011=$5, 395/year Refer to important disclosures at the end of this report. 14
April 2012 GDP by sector Refer to important disclosures at the end of this report. 15
GDP by expenditure April 2012 Share (%)-2011 Growth (%yoy) Refer to important disclosures at the end of this report. 16
April 2012 Investment Refer to important disclosures at the end of this report. 17
April 2012 Exports Refer to important disclosures at the end of this report. 18
April 2012 Exports Refer to important disclosures at the end of this report. 19
April 2012 Government Refer to important disclosures at the end of this report. 20
April 2012 External debt Refer to important disclosures at the end of this report. 21
April 2012 International reserve Refer to important disclosures at the end of this report. 22
April 2012 Employment Refer to important disclosures at the end of this report. 23
April 2012 Production: nearly back to pre-flood § Automobile production back to normal earlier than expected § Recovery in electronic and electrical appliances lagging § Labor-intensive sector was weak, affected by wage increases. Relocation to neighboring countries was evident. Manufacturing production index by sector Source: OIE Refer to important disclosures at the end of this report. 24
April 2012 Domestic recovery Strong pent-up demand for durable goods Source: Toyota General consumption pick up as well Source: Bo. T Capital investment: replacement from flood damage Source: Bo. T Refer to important disclosures at the end of this report. 25
April 2012 Investment and releveraging Direct investment Strong retail lending Source: Bo. T Refer to important disclosures at the end of this report. 26
April 2012 Exports underperform Export growth: agriculture exports fell nearly 40%yoy Thailand exports’ market Share (% of total) % growth Source: Bo. T Rice export: sharp fall in quantity Source: Bo. T Source: Mo. C Refer to important disclosures at the end of this report. 27
April 2012 Fiscal balance (Bt bn) Govt. : spending delay, policy costs § Government spending is slower than expected. § In first 10 MFY 12, govt disbursement was 74. 7% of total budget. § 46% of investment budget spent so far § Downside risk on tax revenue from tax cut and tax refund (Table below). Source: Mo. F § Rice pledging program is contingent liability. Loss to govt. could be Bt 70 -100 bn this year. Cost of main policy (Bt bn/per year) Source: Government, Phatra Securities Refer to important disclosures at the end of this report. 28
April 2012 Government annual budget plan (Bt bn) FY 13 budget, Public debt § Budget deficit is set at 2. 6%of GDP, less than FY 12. § Adding flood prevention spending, net stimulus to be 3. 5% of GDP (assuming half is spent in FY 13). Source: Budget bureau Public debt outstanding § Public debt on the rise from government populist policy and infrastructure plan. § As of Jun, public debt rose 12% from Dec last year to Bt 4, 791 bn. Source: PDMO Refer to important disclosures at the end of this report. 29
April 2012 Thailand flood prevention plan Govt wants to drive growth § Bt 350 bn emergency decree for flood prevention investment has not been spent. So far, Bt 40 bn approved. § Bt 350 bn must be committed by June 2013. § Govt. set to hire consortium to draw up conceptual plan which should be approved by early next year. Then spending could begin. Thailand long-term infrastructure plan § For longer term, Bt 2. 3 trn govt. investment plan is meant to “transform Thailand” with broad-based infrastructure building. § Govt wants Bo. T help to release liquidity and cut financing costs. § Govt expediting four high-speed train lines centered in Bangkok to start in early 2013 § The high-speed trains cover 3, 100 kms, costing Bt 980 bn. First phase Bt 480 bn. Refer to important disclosures at the end of this report. 30
April 2012 Inflation is under control Source: Mo. C Inflation expectation is higher than policy rate Inflationary pressure declines…but risk from oil prices Cost pressure declines Source: Mo. C Inflation is driven more by fuel prices Source: Phatra Securities calculations Source: Bo. T Refer to important disclosures at the end of this report. 31
April 2012 Real deposit rate is near zero Monetary policy: room for easing Output gap is nearly closed 1 Q 08 Source: Mo. C, Reuters Policy rate and inflation Source: Mo. C, Bo. T 1 Q 09 1 Q 10 1 Q 11 1 Q 12 1 Q 13 1 Q 14 Source: Bo. T (inflation report Aug 12 ) Foreign holdings of Thai bonds Source: Thaibma Refer to important disclosures at the end of this report. 32
April 2012 The optimistic scenario § Opening-up of Myanmar holds great potential for the “ASEAN mainland” § For Dawei to happen, needs not just Myanmar-Thai MOU but full participation from Japan. § Govt. spending on infrastructure would complement the ASEAN mainland boom § Top-line growth would be boosted so that costly populist policies can be absorbed § However, sustainable growth may need genuine reforms: better education and training; reduced corruption; less distortion of the free market Refer to important disclosures at the end of this report. 33
April 2012 Source: ADB Refer to important disclosures at the end of this report. 34
April 2012 Thailand: Economic Forecast Source: NESDB, Bo. T, Mo. F, Consensus, Phatra Securities (as of Oct. 12) Refer to important disclosures at the end of this report. 35
April 2012 Thailand background (1) Political and Regulatory regime: Generally benign neglect § Government generally refrain from intervention and it is written in the current constitution that the government should promote free markets and is not allowed to compete with the private sector except for national security reasons and the provision of public goods. § Minimum wage has become a populist tool to win votes. The government will raise minimum wage by 40%, applying it throughout the Kingdom starting 1 Jan 2013. Other populist policies include price support for rice, debt relief for farmers, easy credit for villagers, and universal health and free education. § Banks and insurance are regulated with limited room foreign participation. Other domestic industries also provide limited access to foreigners such as retail trade and telecoms. Foreign participation is welcomed for export industries such as automobiles. Refer to important disclosures at the end of this report. 36
April 2012 Thailand background(2) Economic regime: an open economy § Thailand is a middle income country with per capita income of about $5500. Exports of goods and services account for 70% of GDP. Public debt is low at 43% of GDP but rising as the budget deficit is expected to average about 3 -4% per year given ambitious infrastructure investment plans estimated to cost about Bt 2. 2 trn ($70 bn) over the next 5 -7 years. § Good record of fiscal and monetary discipline. Since inflation targeting monetary policy regime was adopted in 2000, inflation averaged 2% per year. There is legislation to explicitly protect Bank of Thailand’s independence and core inflation ceiling set at 3% has been endorsed by the government. Government revenue amounts to about 18 -18% of GDP. § Private consumption has averaged a steady 55 -57% of GDP while private investment about 20% of GDP. Income and wealth distribution is uneven. Agricultural output is 10% of GDP but employs about 40% of the labor force while manufacturing is 40% of GDP but employs 15% of the labor force. Refer to important disclosures at the end of this report. 37
April 2012 Thailand background(3) Socio-Demographic § Birth rates peaked in 1974 and has since declined to 1. 3% at present. It is estimated that Thailand’s labour force will trough around 2015 after which Thailand’s dependency ratio will rise steadily. § Social welfare and pension system is not comprehensive, having been started in the 90 s. There is a pension scheme for the 2 million civil servants and private pension schemes exist for most of the industrial workforce and other modern sectors (banking, state enterprises). However, no such facilities exist for the farming sector and informal services sector accounting for 2/3 of the labor force. § Universal health care was introduced in 2001. Costs have been rising especially for civil servants and the government is working to contain the rising costs. Refer to important disclosures at the end of this report. 38
April 2012 Thailand background(4) Technology and media § Mass media is largely free, particularly printed media. Internet restrictions have been few except for recent crackdown related to les majeste offences. Expansion of mobile phones had been constrained by the politicization of the sector. Thailand is expected to grant 3 G licenses to 3 operators by the end of 2012 after many years of delay. § Radio and television had been largely under the control of the government and the armed forces because historically it was thought to be critical for national security. The army still controls many free TV stations and all major radio stations. Cable TV and the emergence of community radio stations have further dilute the government’s hold on this media. § Spending on R&D has been marginal, estimated at less than 0. 24% of GDP. Thailand has few well known brands. Only Jim Thomson Silk and Red Bull readily come to mind. Refer to important disclosures at the end of this report. 39
Thailand statistical highlights (1) April 2012 Population § Population: 67, 091, 089) July 2012 est. ), country comparison to the world: 20 § Age structure: 0 -14 years: 19. 5% (male 6, 697, 165/ female 6, 386, 840) 15 -64 years: 71% (male 23, 575, 773/female 24, 071, 836) 65 years and over: 95% (male 2, 870, 445/female 3, 489, 030) (2012 est) § Median age: total: 34. 7 years male: 33. 7 years female: 35. 6 years (2012 est. ) § Population growth rate: 0. 543%) 2012 est. ), country comparison to the world: 148 § Birth rate: 12. 81 births/1, 000 population (2012 est. ), country comparison to the world: 154 § Death rate: 7. 38 deaths/1, 000 population (July 2012 est. ), country comparison to the world: 119 § Urbanization: 34% of total population (2010) Rate of urbanization: 1. 8% annual rate of change ( 2010 -15 est. ) Source: The World Factbook, IMF, NSO Refer to important disclosures at the end of this report. 40
April 2012 Thailand statistical highlights (2) Population § Maternal mortality rate: 48 deaths/100, 000 live births (2010), country comparison to the world: 110 § Infant mortality rate: 15. 9 deaths/1, 000 live births, country comparison to the world: 108 § Life expectancy at birth: 73. 8 years (male: 71. 4, female: 76. 3), country comparison to the world: 114 § Total fertility rate: 1. 66 children born/woman (2012 est. ), country comparison to the world: 174 § Health expenditures: 3. 88% of GDP (2010), country comparison to the world: 166 § Doctors: 0. 35 per 1, 000 (2011) § Beds: 2. 1 beds per 1, 000 (2011) § Literacy: 92. 6% of total population (definition: age 15 and over can read and write) § School life expectancy (primary to tertiary education): 12 years § Unemployment, youth ages 15 -24: 4. 3%, country comparison to the world: 125 Source: The World Factbook, IMF, NSO Refer to important disclosures at the end of this report. 41
April 2012 Thailand statistical highlights (3) GDP Fiscal § At purchasing power parity (PPP): $602. 2 bn(2011) § At market exchange rate: $345. 6 bn (2011) § Budget: revenues: $62. 85 bnn (FY 12 target) or 17. 2% of GDP) § Real GDP growth rate: 5. 4% (2012, Consensus forecast) 0. 1% (2011) 7. 8% (2010) -2. 3% (2009) § expenditures: $75. 5 bn (FY 12 target) § Budget balance: -3. 5% of GDP (FY 12 est. ) § Public debt: 43. 3% of GDP (Jun. 12) Inflation and interest rate § Per capita (PPP): $9, 398 (2011) § Per capita (Market rate): $5, 395 (2011 § Consumer prices index: 3. 38% (Sep. 12), average (20052011) = 3. 3% § GDP - composition by sector: agriculture: 13. 3%, industry: 34%, services: 52. 7% (2011) § Central bank policy rate: 2. 75% (Oct. 12), average (20052011) = 3. 07% Labor § Labor force: 40. 09 million (July 12) § Commercial bank prime lending rate (avg 4 largest banks): 7. 126% (Oct. 12) § Labor force - by occupation: agriculture: 40. 7%, industry: 13. 2%, services: 46. 1% (2011 est. ) § Commercial bank 12 months deposit rate (avg 4 largest banks): 2. 856% (Oct. 12) § Unemployment rate: 0. 56% (July 12) Exchange rate: Bt/US$1 § Population below poverty line: 8. 1% (2009 est. ) Source: The World Factbook, IMF, NSO Refer to important disclosures at the end of this report. 42
April 2012 Important Disclosures Copyright 2012 Phatra Securities Public Company Limited (“Phatra Securities”). All rights reserved. Any unauthorized use or disclosure is prohibited. For distribution outside of Thailand, the distribution will be restricted to only “institutional investors” or other similar types of investors as stipulated in each jurisdiction. In preparation of this research report, Phatra Securities has assumed and relied on the accuracy and completeness of all information or data supplied or otherwise made available to us including public available information. Phatra Securities assumes no responsibility for independent investigation or verification of such information and have relied on such information being complete and accurate in all material respect. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). Officers of Phatra Securities may have a financial interest in securities of the issuer(s) or in related investments. Phatra Securities or its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research report. This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this research report. Phatra Securities assumes no obligation to update or otherwise revise this research report. Investors should seek financial and investment advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this research report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investmentioned in this research report. In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk. Refer to important disclosures at the end of this report. 43
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