Business Optimism Index - Thailand

Quarter 2 2014 www.dnb.co.th

The pace of economic growth in the last quarter of 2013 plummeted from 2.7% p.a. in Q3 to only 0.6% p.a. or the slowest in almost two years (0.4% in Q1 2012). This sharp drop was largely due to strong political dispute and widespread demonstrations since November 2013. It is thus unsurprising that confidence of most units weakened to such an extentthat considerable contraction occurred in not only household consumption (-4.5% p.a.) but also domestic investment expenditures of both public (-4.7% p.a.) and private (-13.1% p.a.) sectors. Two other causes of reductions in private spendingwere swelling household debts (from 77.3% of GDP at the end of 2012 to 88.3% at the end of 2013) and growing precautions on the part of lenders or commercial banks. Worse yet, export earnings sank 1% p.a. as a result of supply constraints as well as uncertainties in global demands and wide variations of prices together with exchange rates.

Continual deceleration of economic activities in every quarter of 2013 led to a gloomy conclusion of the year. As shown in Table 1, the real GDP growth rate in 2013 (2.9%) was less than half of 2012 (6.5%). Such downturn was principally attributed to shrinkage of investment expenditures (-1.9%) of both private and public sectors. Total consumption came to an almost standstill since worries about political uncertainties were prevalent. Fortunately, import spending slackened while export earnings grew slightly, resulting in a current account deficit/GDP ratio at a manageable level (-0.6%) given that the Central Bank held sizeable international reserves (US$ 181.6 billion in 2012 or equivalent to 3.12 times short-term external debts).

In addition, price stability improved as CPI inflation fell from 3.0% in 2012 to 2.2% in 2013.

However, the outlook for 2014 remains rather unpromising for three primary reasons. First, on March 12 the Constitutional Court rejected the 2-trillion-baht bill proposal by the government to support huge infrastructure projects (on transportation and water management) in preparation for upcoming AECintegration. Such negative decision was based on the ground that the 2-trillion-baht borrowing will conflict with the public debt law which allows state agencies to obtain loans of up to 20% of each year’s annual expenditure or borrow foreign currencies up to 10% of annual expenditure. Second, on March 21 the Constitutional Court decided to nullify the February-2 election on the grounds that it was not uniformly held on the same day nationwide. Therefore, a new election has to be carried out. Third, severe drought (the worst in 8 years) is hitting a large number of provinces, thus hindering agricultural production to a critical extent.

Though the first reason may be valid on a legal and public finance basis, it considerably lessens the degree of confidence among both domestic and foreign investors regarding the country’s economic potential. The second reason prolongs the period of political strife as a new election has to be undertaken before the formation of new government. Due to these uncertainties, consumers and investors have become increasingly hesitant before making any definite commitments. The third reason definitely causes strong adverse impact to the Thai economy.

Political Uncertainties Deter Most Economic Activities in Thailand

- Key Highlights• All Optimism Indices register decreases (y-o-y)

Optimism for New Order decreases by 48 percentage points (y-o-y) to a 4 –quarter low of 18%

Optimism for Volume of Sales decreases by 42 percentage points (y-o-y) to a 4 –quarterlow of 3%

Optimism for Net Profit decreases by 41 percentage points (y-o-y) to a 4 –quarter low of -6%

•

•

•

Outlook for Q2 2014

1. Real GDP

2. Consumption

- Private

- Public

3. Investment

- Private

- Public

4. Exports of goods and services

5. Imports of goods and services

6. Current account (% of GDP)

7. Inflation (CPI)

Source: Ministry of Finance, NESDB

Table 1Dynamics of Thailand’s Economic Indicators and Projections

6.5

6.8

6.7

7.5

13.2

14.4

8.9

3.1

6.2

-0.4

3.0

2.9

1.0

0.2

4.9

-1.9

-2.8

1.3

4.2

2.3

-0.6

2.2

2.6

2.2

2.3

1.9

0.8

1.9

-3.1

4.4

3.8

1.1

2.5

2012 2013 2014

Business Optimism Index - Thailand

Quarter 2 2014 www.dnb.co.th

Thus far, most of the evidence point to an economic slump in Q1 2014. For instance, private consumption index fell 2.5% year-on-year in February, down from a 1.5% decrease in January. Meanwhile, private investment index tumbled 7.7%in February as the fourth consecutive month of sizeable contraction. On the production side, total index of capacity utilization declined to 59.2% in February from 62.1% in January and 64.4% in 2013. Worse yet, the tourism sector shrank 8.1% in February, down from a 0.1% dip in January. Fortunately, the external balance sheet was less distressing, as merchandise exports grew 2.2% in February, up from a 1.5% contraction in January, thanks to improving global demand. In the meantime, imports dropped sharply, resulting in a massive current account (which is a primary determinant of exchange rate) surplus of US$ 5.06 billion in February, up from US$ 263 million in January. Overall, there are solid signs of a downturn in Q1 2014.

In Q2 2014 outcomes of the BOI survey clearly indicate the upcoming deterioration of Thailand’s economic atmosphere in most aspects (e.g. volume of sales, net profits, new orders, and employment) to the worst in the past 4 quarters. Details of these pessimistic viewpoints are shown below. Among all economic sectors involved, finance seems to remain confident and secured in several regards such as volume of sales, net profits, and employment. On the other hand, the real estate, and wholesaling & retailing are the most vulnerable ones.

Amid the above-mentioned threats it is not surprising that the Central Bank lowered its target interest rate by 0.25% in March so as to provide financial cushioning to domestic enterprises. Whether such measure will be successful is still a question. The only unquestionable issue is the consensus among reliable research offices (e.g. the Bank of Thailand, Ministry of Finance, National Economic and Social Development Board) that the momentum of Thai economy in 2014 (2.6%) will slacken further from 2013 (2.9%) primarily because of enduring political conflicts.Expected growth rate of consumption (2.2%) and investment (0.8%) will remain very tardy, especially those of the public sector. Exports will be the only sector that shows a clear-cut sign of recovery owing to conspicuous revival of global economic atmosphere. According to the projection of IMF in April 2014, world trade volume will rise by 4.9% in 2014 (from 2.9% in 2013) while world economic growth rate will increase to 3.6% (from 2.9%). Such favorable prospect is largely attributed to anticipated recovery of advanced countries such as the U.S. (2.6% from 1.6%) and European Union (1.0% from – 0.4%). In contrast, the dismal outlook of Thai economy in 2014 corresponds to the forecast of the Asian Development Bank (ADB). As demonstrated in Table 2, Thailand’s economic growth will be the second lowest among the 10 ASEAN members this year. Political tension is creating formidable risks to most sectors and inflation is predicted to rise to 2.4% from 2.18% last year. Though the ADB projected a rebound of Thai economic growth to 4.5% next year, whether that is achievable largely depends upon the pace and format of political settlement.

Brunei

Cambodia

Indonesia

Laos

Malaysia

Myanmar

Philippines

Singapore

Thailand

Vietnam

Source: Asian Development Bank

Table 2:ASEAN Economic Prospects(Real economic growth, % p.a.)

Country 2015 2014

1.1

7.0

5.7

7.3

5.1

7.8

6.4

3.9

2.9

5.6

1.2

7.3

6.0

7.5

5.0

7.8

6.7

4.1

2.9

5.8

Business Optimism Index - Thailand

Quarter 2 2014 www.dnb.co.th

Around 37% of the respondents expect an increase in net profits during Q2 2014, while 43% anticipate the contrary. And the rest or 19% expect no change. The resultant Optimism for Net Profits falls to -6%, which is the lowest level in the past 4 quarters. The finance sector was the most optimistic (+45%), while the utilities sector was the most pessimistic (-34%).

Around 39% of the respondents expect the selling price of their products to increase during Q2 2014, while 16% anticipate a decline. The rest or 44% do not foresee any change. The resultant Optimism for Selling Price stays roughly at the lowest level (23%) in the past 4 quarters. Utilities and construction were the most optimistic (+50%), while transportation was the least (+12%).

Around 41% of the respondents expect volume of sales toincrease in Q2 2014, while 38% anticipate a decrease and 21% expect no change. The resultant Optimism for Volume of Sales thus falls to 3%, which is the lowest level the past 4 quarters. The finance sector was the most optimistic (+45%), while the real estate was the most pessimistic (-40%).

Business Optimism Index - Thailand

Quarter 2 2014 www.dnb.co.th

Around 22% of the respondents expect inventory level to increase during Q2 2014, while 35% anticipate a decline. The remaining 41% foresee no change. The resultant Optimism for Inventory Level falls to -13%, the lowest among the past 4 quarters. The smallest decrease (-6%) came from the manufacturing sector, while the largest (-100%) came from the construction sector.

Around 27% of the respondents expect their labor employment to increase during Q2 2014, while 18% anticipate a decrease. The remaining 55% foresee no change. The resultant Optimism for Employment falls to 9%, which is the lowest in the past 4 quarters. The finance sector was the most optimistic (+63%), while the wholesaling & retailing was the most pessimistic (-14%).

Around 44% of the respondents expect new orders to improve during Q2 2014, while 26% of the respondents anticipate new orders to decline. The remaining 29% foresee no change. The resultant Optimism for New Order falls to 18%, which is the lowest level in the past 4 quarters. The construction sector was the most optimistic (+66%), while the wholesaling & retailing was the least (+7%).

Business Optimism Index (BOI) ReportD&B Optimism Index report is recognized as a product, which measures the pulse of the business community and serves as a reliable benchmark for investors. The D&B Optimism Index is arrived at on the basis of a quarterly survey of business expectations. Over time, this quarterly survey has emerged as a leading indicator of turning points in economic activity in countries which it is published.

MethodologyFor the purpose of conducting the survey, a sample is randomly selected from D&B database, consisting of companies belonging to the following sectors including Agriculture & Fishing (Agri.&Fish.), Mining, Manufacturing (Mfg.), Utilities, Construction (Cons.), Wholesales & Retails (Whl.&Rtl.), Services (Svs.), Transportation (Trns.), Finance and Real Estate (R.Estate).

All the respondents in the survey are asked six standard questions regarding their expectations as to whether the following critical parameters pertaining to their respective companies will register an increase, decline or show no change in the ensuing quarter as compared to the same quarter in the prior year: Volume of Sales, Net Profits, Selling Prices, New Orders, Inventory Levels, and Employees. The individual indices are then calculated by subtracting the percentage of respondents expecting decreases from those expecting.

Analysis and Commentary by:

Asst.Prof.Pannarai Sangvichien, Pakorn Vichyanond, Ph.D., Ms.Sariya Nuchanong, Ms.Banjertsak Sannhapuckdee, Ms.Korrakot Vanakornkul, Mr.Somnuk Assadornviseth. (Faculty of Business Administration, Huachiew Chalermprakiet University, Thailand)

About Dun & Bradstreet® (D&B)Dun & Bradstreet (NYSE:DNB) is the world’s leading source of commercial information and insight on businesses, enabling companies to Decide with Confidence ® for 172 years. D&B’s global commercial database contains more than 225 million business records. The database is enhanced by D&B’s proprietary DUNSRight® Quality Process, which provides our customers with quality business information. This quality information is the foundation of our global solutions that customers rely on to make critical business decisions.

For more information, please visit www.dnb.com or contact our Customer Service Center at +662 657 3999 ext. 4200 or email us info@dnb.co.th

© Dun & Bradstreet, Inc. 2014. All rights reserved.