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Deferred demand: the hidden power propelling Thai economy

Earlier this year, several research institutions were rather bearish towards Thai economic prospects: many forecast GDP would grow only 3-4% this year following a 2.2% contraction last year.

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Earlier this year, several research institutions were rather bearish towards Thai economic prospects: many forecast GDP would grow only 3-4% this year following a 2.2% contraction last year. Two concerns were behind their low projections: the fragility of global economic recovery and ongoing Thai political conflicts. During 1H10, events and conditions seemed to reinforce the bearishness: red-shirt demonstrations erupted into violence during April and May, seriously eroding the confidence of Thais and foreign investors alike.

But the impact from the violence turned out to be much smaller than anticipated (figure 1), evidenced by surprisingly strong economic figures. 1H10 GDP growth also came out better than expect at 10.6%. Thus, many institutions recently raised Thai full-year economic growth forecasts to 6-8%, which would be among the fastest in Asia. The contrast between earlier expectations and the actual outcome raises questions. What are the factors contributing to this surprising result and how long will they last?

Key Economic Indicators

Two key factors contribute to better-than-expected growth:

1) a 37% growth of exports in 1H10 on the back of a global economic revival and

2) inventory replenishments. In addition, the Thai economy has healthy fundamentals and resilience thanks to continuing reforms in the economic and financial sectors since the 1997 crisis, providing the economy with the capacity to withstand modest shocks.

In Krungsri Research’s opinion, a hidden force behind Thai economic revival is deferred demand accumulated during the past several years of political conflicts as Thailand reported unusually low consumption and investment growth during this period (figure 2).

Deferred demand will turn into actual demand when confidence is on the rise. A case in point is the recovery of durable goods such as domestic sales of auto and home appliances which have accelerated since early 2010 following several sluggish years of sales.

When the May riots were over, consumer and investor confidence made a quick recovery with the realization that the political violence had a limited impact, reflecting Thai economic resilience. With still-strong purchasing power, low unemployment, additional government stimulus, a tourism revival, and a healthy financial sector, domestic demand resumes, propelling the Thai economy and compensating for decelerating exports due to a global economic slowdown.

Thai domestics demand

Strong Thai economic growth this year will set a higher base for next year’s figure, making 2011 GDP growth look slower. Thus, Krungsri Research projects the Thai economy will grow 6.2-7.2% this year and 3.5-4.5% next year (figure 3). The key to maintaining local demand momentum is that confidence not be shaken by severe domestic political conflicts and global economic vulnerability going forward.

Real GDP Growth

ABOUT BANK OF AYUDHYA PUBLIC COMPANY LIMITED
Bank of Ayudhya Public Company Limited [symbol in SET: BAY], established on 27 January 1945, is the fifth largest commercial bank in Thailand with total assets of Baht 852 billion. BAY provides a full range of banking services to both its commercial and individual customers through 578 branches nationwide. On 3 January 2007, BAY and GE Money, a premier global consumer financial services firm, successfully became strategic partners.  GE Money and Ratanarak Group are now major shareholders with a 33% and a 25% stake in BAY respectively.  For more information, please visit the Bank of Ayudhya website, www.krungsri.com.
RESEARCH DEPARTMENT
BANK OF AYUDHYA PUBLIC COMPANY LIMITED
Press Release issued By:
Corporate Communications and Public Relations Group
Bank of Ayudhya PCL.
Tel: 02 296 3795, 02 296 2443-4
Fax: 02 683 1271
Email: jira.s@krungsri.com

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