1

April 2012

Supavud Saicheua

Thanomsri Fongarunrung

Emerging Asia Economist

Phatra Securities

Thailand Economic Update

Thailand: The next steps

11150212

April 2012

Phatra Securities does and seeks to do business with the companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.

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April 2012

World has stepped back from the brink but three major vulnerabilities remain.

Euro area public sector and bank debt rollover is 23% of GDP in 2012.

Rising oil price is a threat to global growth.

Growing risk of slowing EM in medium term Asia +7.3% in 2012. Euro area -0.5%; US 1.8%; China 8.2%.

BoAML’s view

ECB’s LTRO prevented a euro area banking liquidity crunch.

Mild recession in Eurozone

Moderating inflation

US economy will lose momentum; 50% chance of QE3 by 3Q

GEM monetary easing window is closing

IMF: “Optimism must not lull us into a false sense of security”

2010 2011 2012F 2013F 2012F 2013FWorld 5.2 3.8 3.3 3.9 –0.7 –0.6Advanced economies 3.2 1.6 1.2 1.9 –0.7 –0.5US 3.0 1.8 1.8 2.2 0.0 –0.3Euro 1.9 1.6 –0.5 0.8 –1.6 –0.7Germany 3.6 3.0 0.3 1.5 –1.0 0.0France 1.4 1.6 0.2 1.0 –1.2 –0.9Italy 1.5 0.4 –2.2 –0.6 –2.5 –1.1Spain –0.1 0.7 –1.7 –0.3 –2.8 –2.1Japan 4.4 –0.9 1.7 1.6 –0.6 –0.4UK 2.1 0.9 0.6 2.0 –1.0 –0.4Devloping Asia 9.5 7.9 7.3 7.8 –0.7 –0.6China 10.4 9.2 8.2 8.8 –0.8 –0.7India 9.9 7.4 7.0 7.3 –0.5 –0.8ASEAN-5 6.9 4.8 5.2 5.6 –0.4 –0.2Latin America 6.1 4.6 3.6 3.9 –0.4 –0.2

Dif from Sept proj.

“

Source: IMF, January 2012

Chart 1: GDP growth forecast

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April 2012

Data stronger; investor sentiment improving

Chart 2: Europe: LTRO brought down bond yield

Chart 3: US: Employment increases

Chart 4: PMI Manufacturing is improving

Source: Fed database

Source: Bloomberg

US 52.4 54.1 -1.7 Expansion Source: Haver Analytics, BAML, Fed

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April 2012 Central bank: Quantitative Easing

Chart 5: G4 central bank balance sheets (% of GDP)Chart 6: Europe: Real credit growth still weak

ECB will be on hold, to evaluate the impact of LTRO on real economy.

QE3 not ruled out but Fed not promising further easing either.

ML believes QE3 still likely in September.

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April 2012

Chart 9: Europe oil as a percent of GDP is rising again

Oil price risk

BAML forecast: 2012: Brent $118/bbl, and WTI $106/bbl; 2013: Brent $120/bbl and WTI $111.

Oil could hit $140/bbl this year due to high liquidity, improved demand, and tight supplies.

Critical threshold is Brent $135 in which oil would account for 9% of world GDP

Complete disruption of Iranian exports or shut-down of the Strait of Hormuz could raise oil price another $100/bbl.

Chart 7: Probability of US or Israel air strike against Iran

Chart 8: Energy prices are already close to 9% of global GDP

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April 2012 Vulnerabilities from higher oil price

Chart 10: Some market like Russia may be more resilient Chart 11: Oil import dependency

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April 2012

% of GDP 2006 2007 2008 2009 2010 2011 2012 2013Spain CA -9.0 -10.0 -9.6 -5.2 -4.6 -3.8 -3.1 -2.8

Govt debt 39.6 36.1 39.8 53.3 60.1 67.4 70.2 72.8Fiscal bal 2.0 1.9 -4.1 -11.1 -9.2 -6.1 -5.2 -4.4

Italy CA -2.6 -2.4 -2.9 -2.1 -3.3 -3.5 -3.0 -2.5Govt debt 106.6 103.6 106.3 116.1 119.0 121.1 121.4 120.1Fiscal bal -3.3 -1.5 -2.7 -5.3 -4.5 -4.0 -2.4 -1.1

Port CA -10.7 -10.1 -12.6 -10.9 -9.9 -8.6 -6.4 -5.3Govt debt 63.9 68.3 71.6 83.0 92.9 106.0 111.8 114.9Fiscal bal -0.4 -3.2 -3.5 -10.1 -9.1 -5.9 -4.5 -3.0

Greece CA -11.2 -14.4 -14.7 -11.0 -10.5 -8.4 -6.7 -6.0Govt debt 106.1 105.4 110.7 127.1 142.8 165.6 189.1 187.9Fiscal bal -6.1 -6.7 -9.8 -15.5 -10.4 -8.0 -6.9 -5.2

Euro periphery: excess spending problem

Source: IMF (Sept 2011)

Chart 12: Current account and fiscal position

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April 2012 US could slow down in 2H 2012

Good employment data and spending in 1Q was due to unusually warm winter. 2Q data could start to disappoint.

Fiscal drag equal to nearly 4% of GDP in 2013 threatens to slow US economy down during 2H 2012.

Important fiscal decisions postponed to after Nov elections under lame-duck Congress. Fearing division and inaction would cause economy to falter in 2012.

Decisions needed to: renew Bush tax cut ($240bn); extend unemployment benefits and payroll tax ($130bn); sequestration ($150bn).

BoAML still expect QE3 by end of 3Q.

Chart 13: Post election fiscal shocks

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April 2012 US economy: Fiscal time bomb

Chart 14: Projected spending and revenue (% of GDP)

Source: CBO, Long-Term Budget Outlook, Jun 2011

Chart 15: Unsustainable rise in entitlements

10

April 2012 China and India slowing down

China: Wanting to slow down

Chinese leadership will accept slower GDP growth to bridge the gap between rich and poor and preserve political stability. Growth target 7.5%.

More emphasis on consumption; less on investment

Tight monetary conditions to persist to bring down home prices even if this could hurt growth. Fiscal policy will support growth.

Jan-Feb exports weakened which in part was the result of slowdown especially in Europe.

India: Being forced to slow down

Budget deficit in FY ending March is 5.9% of GDP vs. 4.6% projected. This is forcing fiscal tightening with 2013 deficit target of 5.1% of GDP.

Cutting energy subsidies would raise inflationary pressures and reduce room for RBI to cut interest rates.

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April 2012 China economic data

Chart 16: IP and power production Chart 17: Retail sales vs exports

Chart 18: Local investments will be the key Chart 19: Money supply and loan growth

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April 2012

China “the worst is almost over” – Ting Lu

“Unlucky" Jan and Feb: hit by weaker external demand, coldest winter in 27 years, political disturbance, destocking in response to falling home sales, and laziness of banks (complacent about their surging earnings).

Worst is almost over. Fight for political succession done. Leaders will focus on stable growth; banks are cutting lending rates; and new home sales rebounded as mortgage rates for first-time home buyers are cut.

We expect pick-up in Mar industrial output (esp. steel and cement). Subdued inflation provides room for price hikes of fuel, power and other utilities.

GDP growth in 1Q12 slow to 8.3% YoY from 8.9% in 4Q11. QoQ growth (sa) could slow to 1.7% in 1Q12 from 2.0% in 4Q11. We maintain our 8.6% GDP growth forecast for 2012.

No rate cuts and 100bps cut in RRR in 2012. PBoC to encourage banks to cut their lending rates and govt will step up efforts on social housing.

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April 2012 Thailand 2012: GDP growth 5.7%

Post-flood recovery could raise GDP growth this year to 5.7%.

But the really important questions are:

1. Will the post-flood reconstruction make Thailand better? Or the same

2. Coordination of fiscal and monetary policies

3. Can Thailand cope with much higher oil prices?

Quarterly GDP growth

Economic Forecast

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April 2012

Recovering gradually from the floods

Source: OIE

Capacity utilization: sharp recovery in autos Full recovery by 3Q

Auto sector recovering faster

About 51,000 unemployed; 30,000 from the seven industrial estates

Electronics recovery lagging

Most will remain in Thailand

Capacity utilization

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April 2012 Water management plan

Flood reconstruction to cost Bt350bn to return Thailand to pre-flood status quo

Plant more trees (Bt10bn)

Better land use and management (Bt50bn)

Build 17 water catchment areas and a dam (Bt50bn)

Turn 2mn rai of agricultural land into flood plains (Bt60bn)

Build floodways to divert water from industrial areas and Bkk (Bt120bn)

Improve floodwalls along river banks (Bt7bn)

Better forecasting and information (Bt3bn)

Subsidize construction of flood walls for industrial estates (Bt5-6bn)

Bt50bn insurance fund for SMEs and households

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April 2012 Project details from the government

Immediate action plan of Water Management (2012-3) Action plan of Integrated Flood Mitigation in Chao Phraya River Basin (2012-3)

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April 2012 Thailand’s flood strategy

Bangkok

Source: KrungThep Turakit newspaper, 27 Feb 12

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April 2012

Source: Strategic Committee for Water Resources Management, The Nation newspaper

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April 2012

Flood prevention does not raise productivity

Bt350bn flood prevention spending is meant to restore Thailand to pre-flood status. It does not increase the country’s long term potential growth, however.

Examples of “real growth enhancement”

Thai auto sector said it needs to employ another 150,000 (from 450,000) to produce 2.5mn cars. But Thailand is not producing enough technicians.

Manufacturing employment is currently 5.7mn. Thailand has 12mn workers in low paying non-agri sectors that must be retrained.

Thailand needs to invest Bt65bn to expand Lam Chabang deep sea port by 2019. But EIA and HIA approval will likely take two years.

Participate actively in GMS which is becoming a reality as Myanmar opens up

0

300

600

900

1,200

1,500

1998 2000 2002 2004 2006 2008 2010 Jan-12

0

1

2

3

4

5

No. of unemployed % of total

'000 %Unemployment rate is less than 1%

Employment by sector

Source: NSO

Labor force 38.6mn persons

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April 2012 Investment remains solid

Thai direct investment surgesInvestment expansion remains solid

Thai direct investment by destination

Source: BoISource: BoT

Source: BoT Source: NESDB

Savings-Investment gap

Others

Others

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April 2012 Thailand’s main crop prices

05

101520253035

1-Ja

n-07

1-Ja

n-08

1-Ja

n-09

1-Ja

n-10

1-Ja

n-11

1-Ja

n-12

Sugar (US cent/lb)

0100200300400500600700

1-Ja

n-07

1-Ja

n-08

1-Ja

n-09

1-Ja

n-10

1-Ja

n-11

1-Ja

n-12

Rubber (US$)

0200400600800

1,0001,200

1-Ja

n-07

1-Ja

n-08

1-Ja

n-09

1-Ja

n-10

1-Ja

n-11

1-Ja

n-12

Rice ($US/tons)

Source: Datastream

Source: Datastream Source: Datastream

Source: BoT

%YoY 2010 2011 1H11 2H11 Jan-Feb12Farm income 24 15.7 33.1 1.7 -14

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April 2012

Monetary policy and inflows of “hot money”

BoT is very clear that it is already very accommodative with “neutral” monetary policy plus Bt300bn soft loans

BoT is concerned that risk-on trade could mean massive inflows of hot money

It is likely that BoT will intervene less to “stabilize” the baht this time

This could limit exports as an engine of growth but the economy would likely have to significantly underperform before BoT changes its view

Foreign net buy of Thai equities (MB/month)

Foreign net buy of Thai bonds (MB, 1month rolling)

Source: SET

Source: Thaibma

-50,000

0

50,000

100,000

150,000

200,000

Ma

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Ap

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Ma

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Oct

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April 2012 Sovereign and BoT bonds

Bt bn 2006 2007 2008 2009 2010 2011 Feb-12Government bond 1,511 1,760 1,851 2,156 2,523 2,627 2,713 SoEs bond 333 342 379 372 342 323 316 BoT bond 897 1,351 1,392 1,789 2,381 2,642 2,725 FIDF bond 320 244 167 154 78 48 48 T-Bil l 218 114 81 207 72 - - Others 10.7 0.7 0.7 - - - - Total 3,300 3,813 3,870 4,678 5,396 5,639 5,803

Bonds Outstanding (Jan 2012) BoT monetary instruments

Money base and broad money

Source: Thaibma

Source: BoT

Source: BoT

1

2

3

4

5

6

7

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012TH10Y US10Y

%

02468

1012141618

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Mbase Broad money

%YoY,3MMA Government bond yield (Thai vs US)

Source: Thaibma

-500

1,0001,5002,0002,5003,0003,5004,0004,500

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

BoT bond BoT repo

Bt bn

2.7trn

1trn

1-Year rolling correlation = 70%

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April 2012

Thailand is vulnerable to high oil prices

Thai inflation is more correlated to high oil prices than high food prices

The government is unable to afford much more energy subsidies (now costing 1.2% of GDP per year).

If oil price spike causes a current account deficit and weakens the baht, the BoT could even hike rates (hopefully not until next year)

Thailand inflation correlates with fuel prices

Source: Phatra calculations

Source: MoC

Weight in CPI 2003-J an 2012 2006-J an 2012

CPI vs Food prices 33.00% 0.35 0.35

CPI vs Fuel prices 5.30% 0.78 0.79

Correlation for the period

Weight in CPI 2003-J an 2012 2006-J an 2012Food price index 33.0% 0.35 0.35Fuel price index 5.3% 0.78 0.79

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April 2012 Myanmar: the game-changer

The opening up of Myanmar is the missing piece that completes the Greater Mekong Sub-region as an economic zone from the South China Sea to Andaman Sea.

250mn new consumers and workers with rich natural resources to back them.

Dawei (Tavoy) is like Map Ta Phut, only 8-10 times larger.

But in his book “Burma and the new crossroads of Asia: Where China meets India”, Thant Myint-U wrote:

“In October 2010, the governments of Burma and Thailand revealed plans for the development of a massive industrial complex…$8.6bn will be invested in basic infrastructure. Another $58bn in investments (that).… will include a deep-sea port, steel, fertilizer and petrochemical plants, and an oil refinery. A new highway will cut through the mountains to Bangkok. There will be tourist resorts as well, on a giant scale. Tavoy will be ground zero….There are justifiable worries that all this will devastate the environment. And indeed, the Thai government has said that its prime motivation in supporting the project is to move environmentally damaging industries from Thailand to Burma.”

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April 2012 Greater Mekong Sub-Region

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April 2012

Politics: A ceasefire waiting for a solution

A stalemate during the “twilight years” could last a long time and could prove costly to Thailand

It is a zero sum game: realignment of political power is likely to produce losers and winners

Three main political issues that reflect the ongoing search for a solution:

1. Amendment of the constitution to give more power to those elected by the people

2. The talk of judicial reforms and inevitable realignment in the military

3. Govt. will push for a national reconciliation law

After constitutional amendment, new elections to confirm Pheu Thai’s dominance next year is possible

However, any shortcomings of the govt on the economy could cause political stability to unravel as it may be seen as a failure of democracy.

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April 2012 Important Disclosures

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