.Mean
KBankSCapital Markets Perspectives
Headline Q1 GDP number = positive…Reality = NOT
Thailand’s Q1/15 GDP came in line with markets’ expectation; the
reading offers some upside surprise on QoQ momentum
GDP in Q1 expanded 0.3%QoQ sa (vs. consensus -0.5%), from
1.1%QoQ sa in the previous quarter; from a year earlier, GDP rose
Strategies on
Macro / FX/ Rates
18 May 2015
Pareena Phuangsiri–Kasikornbank
pareena.p@kasikornbank.com
Pornwalee Pilavun –Kasikornbank
pornwalee.p@kasikornbank.com
3.0%YoY (vs. consensus +3.4%), from 2.1%YoY in the Q4
Although the headline number shows that growth momentum has
picked up from Q4/14, we think the reading mainly reflects the
distortion by some technicality BUT NOT the reality
Exports saw a contraction from the previous quarter, both in terms
of goods and services
The rebound in tourism and public investment from last year were
significant, but it represents a pick up from low base in 2014 when
political instability was Thailand’s key issue
As for the outlook, NESDB downgrades Thai GDP for 2015 to 3.04.0% and see export growth at only 0.2%. Yet, NESDB is upbeat on
public spending as it upgrades forecast to 15.8% (from 9.8%)
GDP reading suggests that Thailand’s risk to growth remains
present; we expect MPC to keep policy rate on hold at 1.50% for
the rest of 2015 and lean towards easing via FX market instead
We maintain our 3Q and year-end USD/THB target at 33.50 and
34.00
Headline number = positive…Reality = NOT
Thailand’s GDP in Q1/15 came quite in line with markets’ expectation with some
upside surprise from QoQ momentum. NESDB release suggested that GDP
expanded 0.3%QoQ sa, better than consensus of a contraction of -0.6%QoQ sa,
following +1.1%QoQ sa seen in the previous quarter. Compared to a year ago, the
economy grew 3.0%YoY following a revised 2.1% growth in Q4/14. The market estimated
the Thai economy to have grown by 3.4%YoY.
Although the headline number shows that growth momentum has picked up from
Q4/14, we think the reading mainly reflects the distortion by some technical issues
including 1) the revision of GDP calculation methodology and 2) the growth downgrade in
the last quarter of the year to 1.1%QoQ sa from the initial reading of 1.7%QoQ sa. For
the first issue, we had earlier noted in our GDP preview piece released last week that the
new methodology for GDP calculation, on average, pushed GDP higher by 0.2% each
quarter from Q1/1993 to Q4/2014 (88 quarters). Therefore, taking into account these
issues, we should not be much excited about the upside release.
1
Disclaimer: This report
must be read with the
Disclaimer on page 6
that forms part of it
Fig 1. Thailand’s quarterly GDP growth (YoY and QoQ
basis)
Fig 2. Share of Thailand’s annual GDP (in 2014) from
expenditure perspectives
19.1
20
Inventories
0%
Net exports
7%
15
11.8
10
3.1 2 .5
2 .9
0.4
Gross fixed capital
formation
25%
5.4
4.4
5
2.9
1.2
0 .4
2.7
1.0
1.2
0 .2 0.6
0.4
1.2
0.6 1.1
3
2.1
0 .3
Private
consumption
52%
0
-0.5
- 1.9
- 1.1
-5
1Q12
3Q12
1Q13
3Q13
GDP % QoQ SA
1Q14
3Q14
Government
expenditure
16%
1Q15f
GDP % YoY
Source: Bloomberg, KBank
Source: Bloomberg, KBank
Looking at the individual component of GDP, the development still does not
suggest much of the pick up in economic activities. The main growth driver like
exports of goods and services saw a contraction of 3.6%QoQ sa (in THB term), including
a contraction 4.2%QoQ sa and 2.4%QoQ sa in goods shipment and service
respectively). At the same time, government spending slowed and came in with a decline
of 1.3%QoQ sa. Some components including private consumption and overall investment
picked up slightly from the previous quarter by 0.6%QoQ sa and 7.2%QoQ sa. It should
be noted that most investment seen in Q1 was driven by public sector whose capital
expenditures expanded as large as 23.7%QoQ sa; and most of the growth came from
increasing construction activities.
Compared to the previous year, the activities seem to portray improvement. Again,
we think that also reflects some distortion; this is because Thai economy hit the
bottom in Q1 of last year, when political instability created hurdle for economic
activities, thus it is natural to see improvement in Q1/15. Even though the big picture
might be distorted, it is still beneficial to look at the development. There were rebound
from activities that were the most by politics, including exports of service (i.e. tourism)
and public investment. Public investment surged by 37.8%YoY in Q1 after it had
recorded a drop of 0.5%YoY in Q4/14. At the same time, while overall exports of goods
and service (in THB terms) saw only small growth of 1.0% in the first quarter, exports of
service accelerated by 14.3%YoY, compared to the previous quarter growth of
11.7%YoY. Private consumption growth picked up the pace from 4Q/14 slightly to record
growth of 2.4%YoY (vs. 2.1%YoY in 4Q/14).
Fig 3. Domestic demand vs. exports
Fig 4. Total exports by types
YoY
8%
YoY
25%
6%
20%
14%
15%
4%
10%
2%
11%
8%
6%
1%
5%
0%
2%
2%
4%
1%
0%
0%
-2%
-5%
-4%
-10%
-2% -1%
1Q13
2Q13
3Q13
Export
Source: NESDB, KBank
4Q13
1Q14
2Q14
Domestic demand (C+I+G)
3Q14
4Q14
1Q15
-4%
-10%
-15%
-6%
2
21%
18%
17%
1Q13
2Q13
3Q13
4Q13
Total exports of goods and services
Source: NESDB, KBank
1Q14
2Q14
Exports of goods
-12%
3Q14
4Q14
1Q15
Exports of services
Judging from production side, both Thai agricultural and manufacturing sector
returned to a contraction again in the first quarter with the decline of 1.7%QoQ sa
and 0.4%QoQ sa (vs. +0.3% and +0.2% seen in the last quarter). Trade sector expanded
but at a slower pace of +0.7%QoQ sa from +1.5%QoQ sa. From year-over-year
perspective, agricultural sector stayed in contraction for the third consecutive quarter; the
pace of decline in Q1 is 4.8%YoY after -3.2%YoY in Q4. As for manufacturing sector,
growth rate accelerated to 2.3%YoY, from 1.4%YoY in the previous quarter. Sectors that
managed to show impressive growth were construction (+25.4%YoY vs. 1.3%YoY in Q4)
and hotel and restaurant industry (+13.5%YoY vs. 3.3%YoY in 4Q).
Fig 6. export size is about 17 times larger than credit
market
Fig 5. Quarter-on-quarter growth by sector
% QoQ SA
15
9.8
7.3
10
5
1.6
3.8
2.3
1.1
0
-0.7
-4.2
3Q14
4Q14
1Q15
Finance
Construction
Utilities
Manufacturing
Mining
Agriculture
Source: NESDB, KBank
2Q14
Transport
1Q14
-10.5
-15
Hotel&restaurant
-10
Trade
-5
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
Jan-12
Jul-12
Jan-13
Jul-13
12 mth exports / 12 mth credit change
Source: CEIC, KBank
All in all, “don’t judge the book by its cover” is the perfect saying for Thailand’s
GDP in this quarter. While the headline reading seems to provide some
encouraging picture, the reality of Thailand’s growth remains rather bearish in our
view. GDP reading today suggested there remain headwinds for the Thai economy.
Despite gradual global economic recovery, but subdued activities in international trade
creates challenges for Thailand. Although exports of service –tourism- posted an
impressive rebound, it could not compensate the deceleration in other components. As
for domestic demand, private consumption is expected to be weigh down by highlyleveraged households who cannot afford to spend more than what they had, especially
amidst deteriorating confidence. Public spending is therefore set to be main growth
engine this year, though previous months’ performance showed that there is also
downside risk on government spending delay.
In terms of outlook, NESDB expected Thai economic growth to grow 3.0-4.0%YoY
in 2015, compared to the previous forecast range in February of 3.5-4.5%YoY. The
new forecast was based on the downgrade in all GDP components except
government investment, which is expected to grow as large as 15.8% (up from 9.8%
seen in February). Meanwhile, export in 2015 is projected to register a minimal growth of
0.2% (in USD term), representing a downgrade from 3.5% seen earlier. Given NESDB’s
upbeat outlook on public spending, we see the downside risk to NESDB forecast.
3
Jan-14
Jul-14
Jan-15
Fig 7. GDP forecast by NESDB
(unit : % YoY or otherwise indicated)
2013
2014
2015
Q3
Q4
Annual
Q1
2015F
GDP (CVM)
2.8
1.0
2.1
0.9
3.0
3.0-4.0
Total investment
-0.8
2.6
3.2
-2.6
10.7
6.2
Private
-0.8
3.2
4.1
-2.0
3.6
3.8
Public
-1.0
0.9
-0.5
-4.9
37.8
15.8
Private
0.8
2.5
2.1
0.6
2.4
2.3
Public
4.7
-1.3
3.6
1.7
2.5
3.8
-0.1
-1.7
1.5
-0.3
-4.3
0.2
0.2
-1.4
2.7
0.7
-2.6
1.2
Imports of goods (USD)
-0.2
-0.8
-5.7
-8.5
-7.2
-0.8
Imports volume
Current account as % of GDP
1.6
-0.8
-0.4
-0.5
-0.5
8.4
-6.8
3.3
4.1
9.6
3.2
3.9
Inflation rate
2.2
2.0
1.1
1.9
-0.5
(-0.3)-0.7
Total consumption
Exports of goods (USD)
Exports volume
Source: NESDB, KBank
Note: More details can be found here: http://www.nesdb.go.th/Portals/0/eco_datas/economic/eco_state/1_58/PressThaiQ1-2015.pdf
Policy implication: Outlook for interest rate and USD/THB
The stronger-than-expected reading on quarter-on-quarter growth momentum
should alleviate the pressure on the MPC to ease monetary policy further. As
mentioned earlier, the number however only represents the technicality but not the
reality. Despite Thailand’s persistent risk to growth, we expect the MPC to maintain
policy rate at 1.50% for the rest of 2015. The MPC has already cut the policy rate
twice, coupled with the announcement on measures to curb capital outflows; we expect
the monetary committee to now wait-and-see how those efforts have played out for the
real economy. It should be noted that the policy space has becoming more limited as the
current policy rate is now edging closer towards the lower bound seen in the financial
crisis in 2009-2010 at 1.25%. While Thai economic outlook is expected to fare better with
positive growth this year (while in 2009, GDP was -2.3%), the current policy rate is
already deemed accommodative environment to support growth. Particularly, we
support the stimulus via FX market more than credit market; this is because we
believe that it should be more effective. Looking at the size of export value in
relative to credit value, one can see than export is about 17 times larger, and thus
should have a broader positive impact.
On FX side, Thai baht has already dropped 1.66% against the dollar since the last rate
cut, probably because markets deem the Bank of Thailand’s action as a shift in policy
stance towards more easing. When comparing with a basket of major trading currencies,
THB has depreciated by around 2% (5% decline from the peak in March). The retreat in
KBank NEER, which can be tracked daily and moves in lockstep with the BOT’s NEER,
implies the regain in Thailand’s export competitiveness, which seems to be in line with
the MPC’s intention. If the weakening trend in Thai baht continues, we expect this to keep
the pressure for MPC to cut rate further subdued, at least in the short-term.
The recent rise in USD/THB to touch 33.85 earlier this month has proven to be too
excessive, driven mainly by sentimental rather than fundamental factors. Without the
4
fundamental change, we think our 3Q and year-end target remain reasonable at
33.50 and 34.00 respectively. We remain bullish on the dollar as the U.S. economic
outlook, which is set to bounce back strongly in spring; such improvement would set the
stage for the Federal Reserve to start normalization in September. With this mind, the
upward trajectory of returns on USD-denominated assets would reduce the attractiveness
of those of THB-assets. For instance, we have now observed offshore investors
beginning to reduce their positions in Thai bonds holding around THB50bn so far this
year (Holding position recorded THB707bn in the beginning of 2015 vs. the current
position of THB648bn). In our view, the reallocation of assets back to the U.S. remains
the key risk for Thailand’s growth and USD/THB in the period ahead, especially if it is
done rapidly and abruptly.
5
Disclaimer
For private circulation only. The foregoing is for informational purposes only and not to be considered as an offer to buy or
sell, or a solicitation of an offer to buy or sell any security. Although the information herein was obtained from sources we
believe to be reliable, we do not guarantee its accuracy nor do we assume responsibility for any error or mistake contained
herein. Further information on the securities referred to herein may be obtained upon request.
6