September 25, 2014

The newly-appointed Thai government will have to tackle a long “to-do” list in order to fulfill the goal of putting the economy back on track. Three months after taking control over the country in a non-violent coup d’état, military leader Prayuth Chan-Ocha was unanimously chosen as the new prime minister by the Thai National Legislative Assembly (NLA) on 25 August and was endorsed by the King. The result was widely expected as General Prayuth Chan-Ocha was the only candidate. Shortly thereafter, the PM chose a 32-member cabinet made up of military personnel and bureaucrats. The cabinet is meant to have an interim role because the new government plans to hold general democratic elections in late 2015. In the meantime, a new constitution will be written as Prayuth has promised a root and branch reform of the country.



The PM delivered his first policy statement to the NLA on 12 September pledging to bring all-around change. Prayuth detailed an 11-point statement of intent which contains the government’s policy priorities in areas such as fighting corruption, promoting social welfare, cutting bureaucracy and reforming the education system. However, the main focus of the new government is still the economic revival. A large proportion of economic stimulus comprises disbursements to finance public infrastructure investments, which would boost economic activity in both the medium- and long-term. Additional short-term measures to stimulate private consumption and promote exports are expected to be implemented. The government is committed to fiscal discipline, however, the need to spend to support the economy could widen the fiscal deficit.



On the revenue side, when delivering his statement of intent, Prayuth gave special emphasis to restructuring the taxation system. The government will introduce property and inheritance taxes and it also hinted about scrapping tax deductions on long-term and retirement mutual funds. On 16 September, the cabinet approved a 2.58 trillion baht (USD 81.1 billion) budget for next year, in which the government boosted spending on defense and education over the amount allotted in this year’s budget.



Since the military took over the country in late May, the economy has experienced improvements; however the situation remains precarious. Data in July point to an improvement in private consumption. While the private consumption index elaborated by the Central Bank rose 0.9% over the previous month (June: -1.3% month-on-month), the private investment gauge was more subdued. The index fell 0.4% over the previous month in July (June: -0.2% mom). Meanwhile, in August, the consumer confidence reading reached a 14-month high of 80.1 points (July: 78.2 points). Looking forward, the efficiency of the new government in implementing its reforms is crucial to ensure a sustainable economic recovery. Deyi Tan and Zhixiang Su, economists at Morgan Stanley comment:



“Whilst coups arrest the downside risks associated with the political disorder by lending a certain degree of certainty, we note that the domestic demand recovery in a post-coup environment, such as that seen after Sep-06 coup, tends to be more subdued compared to a regular growth cycle. […] Upside/downside risks stem from: (a) global growth and pace of export recovery; (b) path and duration taken to return to a democratically elected and functioning civilian government and the impact of that on private sector domestic demand; (c) the extend of policy stimulus. “

Taking the latest developments into consideration, FocusEconomics panelists downgraded their growth forecasts for this year, although they expect the outlook to improve next year. For 2014, the panel expects the economy to grow 1.4%, which is down 0.1 percentage points over last month’s estimate. The panel projects that the economy will pick up and sees GDP growing 4.3% in 2015.