HSBC launches Thailand Election report "New Prime Minister, new spending"

Three months after the May election, the National Assembly has chosen Srettha Thavisin of the Pheu Thai party to be Thailand's 30th Prime Minister. The incoming government is a coalition led by Pheu Thai and three conservative parties: Bhumjaithai, Palang Pracharath and the United Thai Nation.
 
Economics: Frontloaded spending

Aris Dacanay, Asean Economist at HSBC, revealed, "We raise our fiscal deficit forecast for FY2024 to 4.4% of GDP (previously 4.1%) and lower our current account forecast for 2024 to 2.2% of GDP (previously 2.8%). During the campaign season, Pheu Thai promised fiscal stimulus in the form of THB10,000 digital cash handouts. Due to the risk of the government changing on May 11, 2024, the day when the rules change on electing the Premier, we expect the incoming government to frontload its proposed policies and concentrate its spending in 1H2024. This will likely boost domestic demand but the risk is the central bank may resume its tightening cycle if inflation rises faster than expected. Investor sentiment may improve, but remain mostly in a 'wait-and-see' mode ahead of May 2024."

With a government in place, the budget can finally be set. However, this is not without repercussions – the budget is unlikely to be passed until after the start of fiscal-year 2024 (which starts in October 2023). Time is tight and the budget needs to be proposed by the new government and deliberated by parliament. As a result, we think government spending will still be subdued in 4Q 2023, creating a drag for growth which has already surprised to the downside by growing only by 1.8% y-o-y in 2Q 2023 (External and domestic woes, August 22, 2023).

Aris Dacanay, Asean Economist at HSBC

Despite being late, we expect the budget to be expansionary once set. During the campaign season, all political parties proposed similar forms of cash handouts and subsidies, at sizes large enough to stoke concerns around fiscal sustainability and inflation (Thailand's off to the polls, May 1,2023). Pheu Thai's main campaign promise was to provide a THB10,000 digital cash hand-out to all Thais aged 16 and above, which we estimate to cost around 3.1% of GDP. Other promises were tripling the incomes of farmers and a household income guarantee of THB20,000 per month.

Given these promises, we expect the fiscal deficit for FY2024 to be 4.4% of GDP (previously 4.1% of GDP), or THB840bn. Before the election season came, the incumbent government proposed a THB3,350bn budget with an assumed deficit of THB600bn or 3.0% of GDP. To get to 4.4% of GDP, we add the cost of the THB10,000 digital cash hand-out but assume that other welfare policies will be discontinued to free-up resources, such as the THB300 monthly subsidy to low-income earners, monthly payments to the elderly, and diesel subsidies. We note, however, that this estimate is a conservative one given uncertainty around being able to rationalize existing policies.

We then expect government spending to be concentrated in 1H2024, boosting both government and private consumption. Key to this assumption is the risk of the political landscape changing in May 11, 2024. On that day, the Senate loses its power to vote for the Prime Minister and the Premiership will be solely down to the Lower House where the opposition, the Move Forward Party, has the most number of seats. The incoming coalition, led by Pheu Thai, may thus opt to execute many of its campaign promises before the day the government potentially changes.

With rising domestic demand, and thus, import demand, we lower our 2024 current account forecast to 2.2% of GDP (previously 2.8%). Our 2023 forecast remains unchanged at 2.0%.

Inflation may also need to be monitored. Apart from a large fiscal boost, Pheu Thai also proposes to incrementally increase minimum wages to THB600 a day by 2027 from THB340 now. We forecast headline CPI to rise 2.7% y-o-y in 2Q 2024. If inflation accelerates more than we expect on the back of an expansionary fiscal policy and rising wages, there is a risk of the Bank of Thailand (BoT) resuming its tightening cycle and hiking by 25bp to 2.50%. For now, our base case scenario is for the BoT to keep its policy rate steady at 2.25% until 2025 at the least.

Rates: Bracing for fiscal stimulus

"The new government's fiscal push could lead to a rise in net bond supply, but there are key unknowns constraining the accuracy of bond supply estimates at this juncture. We continue to favour swap curve steepeners in Thailand, as fiscal concerns may be more readily priced into the swap market than the bond market. At this juncture, the forward swap curve is implying a 30% probability of another 25bp policy rate hike by the central bank to 2.5% by the end of 2023, though HSBC's base case is for the central bank to keep its policy rate steady at 2.25% until 2025 at the least," Aris Dacanay added.

FX: Trying to move forward regardless

Dacanay said The THB has outperformed other Asian currencies recently as post-election uncertainty has started to ease. This is in line with our base case that the THB will recover in 2H23. That said, over the past couple of years, USD-THB has shown a tendency to both overshoot and undershoot the USD index and the average USD-Asia pair. It is possible the THB's recovery may run into new sources of friction, considering its negative yield differential, sluggish growth, and reliance on Chinese tourism.

We go through the three arguments supporting a post-election THB recovery below:

1.     A decline in uncertainty could pave the way for a resumption of portfolio inflows by foreign investors. For example, during the last election in 2019, there were nearly USD5bn of portfolio inflows in the two months after the official result was announced, which more than made up for the USD2.5bn of outflows that occurred in the months earlier.

2.     As the new government focuses on supporting the economy, foreign direct investments may also pick up while residents' equity outflows may slow down. On the latter, we note that residents bought USD3.7bn of foreign equities – the most since 1H21 – against the underperformance of Thai equities. But in 3Q-to-date, the SET index is up c2.5%, compared to a c2% decline in the FTSE World index.

3.     A lower risk of disruptive protests means that the THB can fully reap the benefits of the tourism 'high season' between November and February. Despite the seasonality, Thailand's tourism trade surplus was rather modest in 1Q23 (USD5.4bn, 42% of 1Q19 levels) because outbound departures by residents normalised (to 85% of 1Q19 levels) ahead of inbound arrivals by foreigners (60% of 1Q19 levels going by the number of tourists, and just 50% of 1Q19 levels going by revenue). The good news is that this gap is closing – foreign tourist arrivals have recently recovered further to 75% of July 2019 levels. Indeed, the Bank of Thailand and the government forecast the current account balance to flip from USD15bn deficit in 2022 to a USD6-7bn surplus in 2023 (assuming 28-29m tourists), with most of the expected recovery back-loaded in 2H (1H23: USD1.6bn surplus, 13m tourists). HSBC Economics Research is even more bullish, expecting a USD11bn surplus.