Thailand should continue to attract foreign investors - BBH

BBH Global Currency Strategy Team suggest that Thailand’s economic outlook remains solid.  Political risk seems minimal now, and so foreign investors have been pouring money back into Thailand.

Political outlook

• The ruling military junta has maintained firm control of the nation since it took over in 2014. 
• The constitutional referendum was held last August and passed by a comfortable majority of 61%.  However, turnout was relatively low at around 50%.  Passage of the referendum suggests that the public was satisfied with the military-led National Council for Peace and Order.  It will reportedly go into effect this week once it is endorsed by King Maha. 
• General elections were slated for 2017, but have since been pushed back to 2018 after King Maha requested some changes to the constitution.
• The Islamic insurgency in southern Thailand continues to simmer.  Regular attacks on police forces in the southern states of Yala, Pattani, and Narathiwat have continued.

Economic outlook

• Now that the new constitution is practically in place, boosting the economy has become the main focus of the junta.  GDP growth is forecast by the IMF to accelerate modestly to 3.3% in 2017 and then to 4.0% in 2018 from 3.2% in 2016.
• Price pressures are rising, though CPI decelerated to 0.8% y/y in March from the cycle high 1.6% in January.
• This would seem to support the case for steady rates.  However, we think the March reading was an anomaly and look for re-acceleration in Q2.  If so, the central bank should tilt more hawkish as the year progresses. The Bank of Thailand last cut 25 bp to 1.5% in April 2015 but has been on hold since.  

Investment outlook

• The baht continues to outperform.  In 2016, THB rose 0.5% vs. USD and was one of the top ten currencies in EM.  So far in 2017, THB is up 4% YTD and remains one of the top ten currencies in EM.  Our EM FX model shows the baht to have VERY STRONG fundamentals, so this outperformance is to be expected.
• USD/THB made new lows for the cycle this week near 34.25.  A break below the 34.00 area would set up a test of the April 2015 low near 32.32.  Note that Thailand’s Real Effective Exchange Rate (REER) as measured by the BIS is at the highest levels since August 2015.  
• Our own sovereign ratings model shows Thailand’s implied rating at A-/A3/A-.  This points to some upgrade potential to actual ratings of BBB+/Baa1/BBB+.