Thailand Referendum Key for Near-Term Outlook

Thailand Votes

The Southeast nation of Thailand is set to hold a constitutional referendum this weekend. Should it not pass, the road back to democracy will become murkier. Among the political uncertainty, the economy has shown to be resilient, but a “no” vote remains a vulnerability.

The ruling military junta led by General Prayuth has proposed constitutional reforms that would essentially guarantee the military greater political influence.  It is important to note that any campaigning for a “no” vote has been banned in the country. With less than a week to go, polls are showing a high percentage of undecided voters, making the referendum even tougher to call.

“We lean towards a “no” vote,” Win Thin, global head of emerging market currency strategy with Brown Brothers Harriman wrote in a note to clients this week. “Thaksin [former Thai Prime Minister] and his surrogates have been voted into power numerous times with solid support. If we assume that Thaksin supporters will vote “no” to the new constitution, then that would suggest a likely failure to pass. Indeed, former Prime Minister Yingluck (Thaksin’s sister who was toppled in 2014) said she will vote against new constitution. We think a “no” vote would hurt Thai asset markets.”

Regardless of the reforms, Thin explained, consensus is that the military government has not addressed the deep schisms in the country that led it to take power in the first place. Like many other countries today (emerging and developed), Thailand’s society remains highly polarized. The urban elite (Yellow Shirts) and the rural poor (Red Shirts) fought in the streets in 2014 and still remain at opposite ends of the political spectrum. No constitutional referendum can paper this over.

Thai Economic Outlook

The economy has picked up a bit. GDP growth is forecast to accelerate modestly to around 3% in 2016 and 3.2% in 2017 from 2.8% in 2015. GDP rose 3.2% y/y in Q1, the strongest rate since Q1 2013.  Investment remains restrained due to the ongoing political uncertainty. If the constitutional vote fails, we would expect the economy to face stronger headwinds as confidence slumps. Price pressures are still non-existent, though, with CPI rising 0.1% y/y in July. This is the lowest rate since April, and suggests that the next move is likely to be a cut. With inflation still below the 1-4% target range, easing seems likely in H2.

The central bank next meets on August 3 and no change is expected then. The central bank has been on hold since the last 25bp cut back in April 2015, which took the policy rate to the current 1.5%. In addition, the country’ fiscal policy has remained fairly prudent. The budget deficit came in around -3% of GDP in 2015. It is expected to narrow slightly to around -2.5% in both 2016 and 2017. “However, the deficit has grown significantly in H1 as expenditures outstripped revenues, and so we see upside risks to these forecasts,” Thin said.

Photo Credit: Thailand’s Prime Minister Prayuth Chan-ocha/Reuters

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