Political Unrest Dragging On The Economy ; Thailand’s real GDP surged by 5.8% year-on-year (y-o-y) in Q409, snapping four quarters of negative growth and confirming a full-year contraction of 2.5%. On our part, we have become slightly more upbeat about Thailand’s economic prospects in 2010, highlighting upside risks to our 3.6% real GDP forecast for the year given the plethora of positive data releases over the last few months.

That said, the as yet unresolved political unrest will be a considerable drag on the economy. We remain wary about the trajectory of the global economy beyond H110, especially as the ongoing eurozone sovereign debt crisis unfolds. Moreover, our global macro team is currently expecting a dip in the US and Chinese economies going into 2011, which would undoubtedly affect Thailand. We are therefore maintaining our projection that real GDP growth will remain somewhat muted at 3.7% in 2011.

A conflict of interest between the pro-Thaksin Shinawatra Red Shirts, anti-Thaksin Yellow Shirts, the military and Thai Prime Minister Abhisit Vejjajiva has severely dented the possibility of a quick resolution to Thailand’s political woes. In our view, Abhisit is running out of time and options to end the ongoing street protests held by the opposition Red Shirts for over two months. Indeed, previous attempts by Abhisit to capture the leaders, move the protestors by force and even offering a road map to elections on November has not been met with much success. With patience likely to be running low on all sides, we fear that Abhisit might be compelled to use force, or the Yellow Shirts might take to the streets, leading to further violence in the coming months.

Regarding policy rates, political uncertainties and benign inflation will keep the Bank of Thailand (BOT ) from hiking rates before Q310.

Indeed, consumer price inflation is still relatively low, coming in at 3.0% y-o-y and 0.6% month-on-month in April. However, given that the producer price inflation has been rising sharply, averaging 11.0% y-o-y and 1.1% m-o-m for the three months ending April, pointing to looming price pressures, we expect the BOT to start normalising policy in early Q310, taking the benchmark repo rate from the current 1.25% to 1.75% by end-2010.

Thailand’s economy is dragged down by the turbulent political situation that has stemmed the flow of foreign investors. More recently, the stalled projects at the Map Ta Phut industrial estate has further dampened investor confidence in the country. Although Thailand scores a decent 62.2 in The business environment rating, ranking it fourth (out of 16) in its regional peer group, we note that this score does not fully take into account the headwinds posed by the political situation and the loss of confidence in Thailand as a preferred foreign direct investment destination.

via Thailand Business Forecast Report Q3 2010 Country Profile.

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