Conclusion: The Pheu Thai’s victory in the recent parliamentary elections paves the way for aggressive populism in Thailand over the long-term TAIL. To the extent such policies are implemented successfully, we can see a strong argument for being long-term holders of Thai equities. On the contrary, any slip-ups by the young prime minister and her party will likely result in a long-term bull market for Thai inflation and interest rates.
On Sunday, Yingluck Shinawatra watched her Pheu Thai party win 265 seats in Thailand’s 500-seat parliamentary election, giving her the title of Prime Minister – the first such honor for a female in Thai history. What’s in store for Thailand under her rule may not be so heartwarming; rather, it may be downright inflationary – particularly if she lives up to her billing as her brother’s “clone” (Thaksin Shinawatra, May 20, 2011).
Indirectly led by her older brother and exiled former leader Thaksin Shinawatra, the Pheu Thai party has made its populist intentions very clear from day one. Using promises of aggressive crop-price fixing, tablet PC giveaways, high-speed rail initiatives, and a new city, Yingluck and Co. were able to mobilize the support of Thailand’s lower class, which mostly resided in the country’s less urbanized north and northeast regions (~52% of Thailand’s 67M people). Also included in the Pheu Thai’s populist promises was a +36-89% increase (depending on province) in the minimum wage to 300 baht ($9.84) per day. That dwarfs the +2.4% average YoY gain since 1998, with the largest increase (+9.1%) coming in 2007-08, according to the Thailand Development Research Institute.
We can’t say for sure how quickly such policies will be implemented; only that rushing to complete them in short order is very likely to provide a substantial amount of upward pressure on Thailand’s consumer price inflation. In a perfect world, Yingluck and her fellow lawmakers will have time to gradually implement such populist initiatives. Unfortunately, the Thai political scene is far from perfect, with routine insurrections and oft-violent demonstrations a norm within the streets of Bangkok. We are of the view that the ruling coalition (299 seats split between the Pheu Thai and four other small parties loyal to Thaksin) will be under increasing pressure to deliver on its lofty campaign promises from the start. As such, we remain bullish on Thailand’s CPI and expect that series to make higher-highs over the long-term TAIL.
Such a case is not without precedent in Thailand. In fact, under Thaksin’s former rule (premier from Feb. 9, 2001 through Sep. 19, 2006), populist fiscal policies ranging from a debt moratorium for farmers (~35% of population) to fuel and electricity subsidies supported a +570bps increase in Thailand’s YoY CPI rate during the Thaksin regime from February ’01 to its May ’06 peak. Easy monetary policy out of the Bank of Thailand also contributed to the pickup in Thai inflation rates during Thaksin’s stint as prime minister.
Perhaps learning from the policy blunders of previous Bank of Thailand boards, current central bank members have openly expressed concern about the potential for expansionary fiscal policy to supply upward pressure on Thai CPI growth rates and downward pressure on Thai GDP growth rates. In the speech accompanying its latest rate hike, assistant governor Paiboon Kittsrikangwan plainly stated, “the central bank is concerned that populist polices in the election will affect inflation and economic growth.” We share their concern, and, as such, we remain bullish on Thailand’s short-term interest rates over the long-term TAIL.
Digging deeper into the Thaksin’s administration, we see that his expansionary fiscal policies were indeed able to reduce poverty on both an absolute and a relative basis. According to World Bank statistics, from 2000-2004,Thailand’s national poverty headcount ratio fell from 20.7% to 11.5%, while the share of income earned by the bottom 20% of earners increased from 5.85% to 6.1%. That was supportive of a -0.7pt decrease in Thailand’s GINI Coefficient (a measure of income equality) from 2000-2004 to 42.5 (World Bank).
Such gains were not without costs, as growth in both government expenditures and tax receipts far outpaced previous and subsequent administrations. Still, “Thaksinomics” (as his policies have been popularly dubbed) were able to grow the Thai economy enough to reduce the country’s gross sovereign debt burden -1,583bps to 42% of GDP by his forced removal from office in late 2006.
For now, it looks as if Thailand’s political elite and military will let the Pheu Thai have its way. A recent shift to a more neutral stance out of the military and former Prime Minister Abhisit Vejiajiva’s late Sunday night resignation after conceding defeat in the election paves the way for a peaceful transition of power – an outcome we’d argue the market is anticipating based upon our proprietary quantitative analysis of the benchmark SET Index.
As always, political instability remains a near-to-intermediate term risk in Thailand, though certainly not at the level we once perceived it to be. The real risks to the Thai economy lie over the long-term TAIL and they are generally regarding the implementation of a second round of “Thaksinomics”. For now, we’d be predisposed to wait and watch for more color on the new regime’s strategies, but we can certainly see a case whereby the successful implementation of such pro-growth policies proves bullish for Thai equities over the long-term TAIL.
By “successful implementation”, we mean in a way that encourages sustainable consumption growth and job creation with limited impact on inflation. It remains to be seen whether or not the young Yingluck can pull that off. At the bare minimum, we would not want to be short-and-holders of Thai equities (or any equities for that matter) due to the likelihood that the market bids up Thai economic growth. If we’ve learned anything over the last few years, it’s that investors are generally much less willing to distinguish between sustainable, organic growth and short-to-intermediate term, stimulus-driven growth en route to price discovery.