Weak economic momentum

Thailand's economy took a hit this year following months of political instability and protests against an elected government. Two months ago, Thailand's junta - which seized power in a coup back in May - approved plans for stimulus measures worth a combined 11.2 billion USD in a bid to revive growth.

However, while the military seems to have succeeded in stabilizing the economy, key sectors such as the tourism industry are still struggling. Moreover, government proposals to amend the Foreign Business Act could make it significantly more difficult for foreign businesses to have a majority stake in many sectors, which could deter foreign investors and even drive out some foreign businesses already established in Thailand.

The proposed new changes to the legislation also comes at a time when the Thai economy is very weak, with GDP forecast to expand by just 1.1 percent in 2014 and the country's other ASEAN neighbors are increasingly competing for foreign investment.

Rajiv Biswas, Asia-Pacific Chief Economist at the analytics firm IHS, says in a DW interview that if Thai government decides to pursue more protectionist policies designed to increase the hurdles for foreign businesses, this could effectively push foreign investors away from Thailand and will boost the attractiveness of other low-wage competitor nations in the region such as Vietnam, Philippines and Indonesia.

DW: How has the Thai economy performed under the military led government?

Rajiv Biswas: When the Thai military government seized power in May 2014, they inherited a very weak economy. The previous government led by the democratically elected PM Yingluck Shinawatra had been severely hamstrung since December 2013 due to ongoing protests and political turmoil that disrupted normal governance and left economic policy-making in limbo. The military government has since succeeded in stabilizing the economy, but growth momentum is still weak.

How has the current political situation affected the economy as a whole?

Since May, consumer confidence has gradually improved from its 2014 lows, helped by the stabilization of the political situation. In both the second and third quarters, the Thai economy posted quarter-on-quarter growth of 1.1 percent, but this has barely offset the sharp economic contraction in the first quarter, when political turmoil was at its height and the tourism industry was severely disrupted. However, the economy has stabilized and is showing signs of gradual improvement.

What are the major stumbling blocks to economic growth at the moment?

While the damage to the Thai economy from the political chaos in late 2013 and early 2014 is the most significant negative factor impacting on the Thai economy at present, there are other economic challenges.

One of them is the rising cost of labor relative to other low-cost competitors in ASEAN, such as Indonesia, Philippines and Cambodia, with Myanmar now an additional new competitor.

Steep increases in the Thai minimum wage in recent years have added to these pressures. If Thailand is able to resume GDP growth rates of 4 percent to 5 percent over the medium term, this will increase pressure on Thailand to move into higher value-adding sectors, which will create significant new challenges for the Thai government and businesses to accelerate the development of knowledge industries rather than low-wage manufacturing segments.

What measures has the military-led government undertaken to revive the economy?

Faced with an economy teetering on the brink of recession, the Thai military government announced a 11.2 billion USD stimulus package in October 2014. The measures will include some additional subsidies for rice farmers, as well as spending on infrastructure, agriculture, schools and hospitals.

These measures should begin to flow into real economic activity in the first half of 2015. The military government had already released subsidy payments owed to rice farmers that had remained outstanding under the previous government. This will help to boost consumer expenditure, which had been weak in the first half of 2014.

Thailand's Ministry of Commerce recently proposed tighter restrictions on foreign businesses operating in the country. What effect is this likely to have?

Under the Foreign Business Act currently in force in Thailand, there are significant restrictions on foreign companies having a majority stake in many sectors. At present, foreign businesses are generally able to retain management control of companies by appointing Thai nominees or by issuing preferential voting shares.

However, the Ministry of Commerce is looking into possible changes to the law to prevent such techniques being used by foreign companies to maintain managerial control. There have already been significant concerns raised by both foreign and local businesses about such reforms to the law, as it would risk driving many foreign firms out of Thailand.

The Ministry of Commerce intends to continue to hold consultations with businesses about this issue and will then make a recommendation to the minister.

What effect could this have on the economy at a time when Thailand's neighbors are becoming increasingly open for business?

Thailand faces an increasingly competitive regional landscape in ASEAN, with other Southeast Asian countries competing to attract foreign investment. Therefore, if Thailand pursues more protectionist policies that increase the hurdles for foreign businesses, this will increase the attractiveness of other low wage competitor nations in the region such as Vietnam, Philippines and Indonesia.

After a record year in 2013, when 26.7 million visitors came to Thailand, how has the Thai tourism industry performed so far?

The Thai tourism industry has suffered significant negative impact effects from the political turmoil in Bangkok in late 2013 and the first half of 2014. Total international tourism visits for the ten months of 2014 were down 8.7 percent on a year ago.

However, there are signs of an upturn beginning, with October tourism arrivals up 6.1 percent from the same period last year, the first month this year to show a positive rise compared to a year earlier. The Thai tourism industry accounts for around 10 percent of the nation's GDP, and is a key contributor to employment and exports.

While the growth prospects for international tourism to Thailand remain very positive based on industry fundamentals such as tourism attractions, excellent infrastructure and strong growth in tourism travel in China and Southeast Asia, risks of renewed political turbulence remains a key negative risk for the industry.

What is your forecast for the Thai economy for this and next year?

Due to the very weak economic performance in the first half of 2014, the Thai economy is forecast to only achieve weak expansion of 1.1 percent in the 2014 calendar year. Given that the potential growth rate of the Thai economy is around 4 to 5 percent per year, the lost GDP value added in 2014 due to the political situation amounts to around 11 billion USD.

The Thai population is paying the price of political instability through lack of economic growth and no improvement in per capita GDP this year.

With some signs of economic stabilization under the junta, GDP growth is expected to strengthen to 2.7 percent in 2015. Thailand is also one of the most significant beneficiaries among the East Asian oil importing countries from the sharp fall in world oil prices since the beginning of 2014. This will also help to boost recovery in GDP growth in 2015.

However, the medium term economic outlook remains subject to considerable risk of renewed political instability since there is no long-term political solution in sight and Thai society remains deeply divided politically.

Rajiv Biswas is Asia-Pacific Chief Economist at IHS, a global information and analytics firm. He is responsible for coordination of economic analyses and forecasts for the Asia-Pacific region.