TRIS Rating said today that the imposition of martial law in Thailand could hurt the operating performance of companies in the short term. Martial law was imposed on 20 May 2014, followed by a military coup d’etat on 22 May. Despite a short term drop, the economy could benefit in the long run if the coup leads to an end of the prolonged political conflict.
The lingering political turmoil has had a significant effect on the economy. All sectors of the economy have gradually deteriorated since the past year. The turmoil caused a loss in consumer confidence and also delayed the government budget, which contains large appropriations earmarked for infrastructure. Business sentiment also suffered. In the first quarter of 2014, the combined level of investment by the public and the private sectors dropped by 9.8% year-on-year (y-o-y). In addition, the value of new investment projects approved by the Board of Investment (BOI) tumbled in the first four months of 2014. The value of approved projects plunged by 87% y-o-y, from approximately Bt328.5 billion in the first four months of 2013 to only Bt43.5 billion in the first four months of this year.
In TRIS Rating’s view, the tourism and the airline industries will be the most affected sectors by the declaration of the martial law and the coup, at least in the short run. However, these industries are expected to recover quickly. The tourism and the airline industries will receive boosts from the continued demand for travel and the growing role that low-cost airlines play in driving tourism. Some industries may not be affected immediately, but will feel the effects later. In the medium term, the property development, engineering and construction, and building material sectors may be affected. However, many firms in these industries had substantial backlogs of projects on their books at the end of 2013. Any negative effects would start to be felt in 2015, when most of the project backlogs will have been erased. The banking sector is expected to see a rise in non-performing loans (NPLs) from both retail and small- to medium-size enterprise (SME) borrowers. At the end of March 2014, the composite NPL to total loans ratio of 11 listed banks slightly increased to 3.02%, from 2.88% at the end of 2013. However, TRIS Rating believes that the banks have sufficient reserves to absorb the deterioration in their asset quality. At the end of the first quarter of 2014, the composite loan loss reserves to NPLs ratio of 11 banks stood at 133%.
However, TRIS Rating expects the domestic economy may recover more slowly than the pace of recovery witnessed after the 2006 coup d’etat. This time, the recovery will be slower because the level of household debt is significantly higher: 82.3% of gross domestic product (GDP) at the end of 2013, compared with only 47.6% at the end of 2006. The government budgetary process will be delayed due to the lack of an official government for a longer period. Lastly, exports will grow more slowly than in 2006. The value of exports in the first quarter of 2014 contracted by 0.8% y-o-y. The National Economic and Social Development Board (NESDB) projects the export sector will grow by only 3.7% y-o-y in 2014, compared with a 17% y-o-y growth in 2006. -- End
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