Thailand/Philippines’ Second Half Second Guessing

After double-digit gains through July to lead ASEAN, Thailand and the Philippines stock markets entered the second half with slower growth on both domestic and external account slippage, despite good currency performance and ruling party post-election affirmation.  Thailand’s economic expansion forecast this year was cut to 3%, and the Philippines’ will be double that increase on business and consumer pullbacks at home and abroad. The baht and peso were among the few emerging market units to rise against the dollar, with the former leading the pack with a 5% rise. Thai Prime Minister Prayuth Chan-ocha finally assembled a cabinet after a controversial poll win on his military-backed constitutional and financial advantages, while President Rodrigo Duterte’s allies scored handily in their contests, sloughing off infrastructure project budget delay and international outcry over the anti-drug crusade claiming thousands of lives. Both leaders followed the region into an anti-slowdown strategy of interest rate reduction and fiscal stimulus, while they contend with their own threats including household debt and remittance restraint.

Thailand’s new government took office amid the worst quarterly growth in five years at less than 2.5% slashing the full 2019 estimate to 3%. Almost every category was down with agriculture off 1% after drought and auto and electronics exports 6% with the strong baht, which also kept tourism flat and knocked manufacturing 5% in June. The central bank acknowledged weakness on subdued 1% inflation with a 25 basis point nudge in the benchmark rate to 1.5% in August, with further reduction expected as the governor declared US-China trade protectionism “far from over.” The first half current account surplus was relatively unchanged as oil import prices also fell, with this year’s consensus figure at 6.5% of GDP. Although international reserves are ample at $250 billion, intervention has been limited to “disorderly movement” following the International Monetary Fund’s recommendation, although rules were tightened on non-resident baht account balances and reporting, and local pension funds and insurers may be permitted to invest more overseas. Despite appreciation against the dollar, the balance of payments excess may add the country to the US Treasury Department’s manipulation “watch list.”

In the immediate aftermath of the poor results, Finance Minister Uttama Savanayana unveiled a $10 billion spending bill aimed at farmers, the poor and domestic tourists. Family and low-income earner subsidies will be hiked and landowners get debt relief. Thai travelers are eligible for an allowance to travel outside their provinces, but a proposal for China and India visitor visa-free entry was dropped over security concerns. The package accompanied the larger $15 billion deficit planned for the 2020 fiscal blueprint, within overall direct government debt at 40% of GDP. It stresses public-private partnerships in road and transport, and mortgage restructuring within designated state and private bank programs to shrink homeowner leverage. The central bank increased monitoring in this segment as the bad loan ratio approached 5%, and it tapered credit growth to single digits. While foreign investors have been keen buyers of Thai government debt even at yields barely above 2% with the currency kicker, they avoided corporate debentures after two well-publicized defaults by an animal feed producer and energy company. They were a tiny amount of the total outstanding, but the bond market association called on the securities regulator for faster action on auditing and governance lapses.

Philippines’ GDP growth came in at 5.5% in the first half, as officials assured the decline was “temporary” and that budget postponement may have shaved off half to a full point. With outlays now scheduled under the President’s “Build” highway and port envelope the second half forecast is 6.5%, with domestic demand aided by bank reserve requirement and policy rate reduction as monthly inflation at 2.5% is in the target range. However the 3.2% of GDP budget gap goal will likely be breached according to HSBC research, as national debt, two thirds domestic and one-third foreign, jumped 8% this year. On the external ledger, a rare balance of payments gap was registered in June, as remittances were 3% lower than the same month in 2018. The setback came after foreign direct investment net inflows through May were only $250 million, one-sixth last year’s sum. New pledges rose 25% through July, but may not materialize despite the administration’s infrastructure and political buildup.

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