Thailand Business Forecast Report Q2 2014, New Report Launched

Thailand’s political stalemate has had a devastating impact on economic growth, and with no signs of a possible resolution in the near term, we expect economic activity to remain depressed in 2014. The risk of a sustained contraction in GFCF over the coming quarters presents the biggest threat to Thailand’s economic outlook as confidence in political stability is shaken.

  • We believe that the Bank of Thailand (BoT) will keep its policy rate on hold at 2.25% throughout 2014. We caution that should Thailand’s political situation deteriorate rapidly over the coming months, this could eventually force the BoT to ease monetary policy in a bid to support growth. However, for now, we believe that the risk of triggering major foreign capital outflows and the negative impact on the Thai baht will continue to weigh more heavily on the BoT’s stance on monetary policy.
  • We hold a relatively neutral view on the Thai baht over the coming months following the recent 14.0% peak-to-trough decline in the unit.
  • On one hand, the political and economic situation in the country is baht negative, with no meaningful end in sight to the ongoing political impasse, and foreign and domestic investment likely to struggle in 2014. On the other hand, the technical picture of the baht is stabilising, while a shift in protests away from central Bangkok should provide some relief to the economy following months of partial shutdown.
  • The currency’s tight correlation with regional FX also suggests that the baht will follow regional trends. We believe the latest move by the National Anti-Corruption Commission (NACC) to charge caretaker Prime Minister Yingluck Shinawatra for alleged negligence could potentially tip the balance in favour of the People’s Democratic Reform Committee (PDRC) as the political stalemate in stretches into its fourth month. Should the NACC’s charges fail to remove Yingluck and her caretaker government from power, however, we believe that the political stalemate could drag further into H214

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Major Forecast Changes

We have downgraded our real GDP growth forecast for Thailand from 3.8% to 3.2% for 2014. With no signs of a possible resolution to the political impasse and violent protests,

Key Risks To Outlook

The main downside risks comes from a renewed escalation of violent protests by those opposed to the current government If this occurs we could see a violent backlash by pro-government red-shirt supporters, which could lead to a rapid escalation. The army has recently cautioned about the growing risk of a civil war, and has stressed its reluctance to step in to restore peace.

We believe the latest move by the National Anti-Corruption Commission (NACC) to charge caretaker Prime Minister Yingluck Shinawatra for alleged negligence could potentially tip the balance in favour of the People’s Democratic Reform Committee (PDRC) as the political stalemate in stretches into its fourth month. Should the NACC’s charges fail to remove Yingluck and her caretaker government from power, however, we believe that the political stalemate could drag further into H214.

Thailand’s political situation will remain highly volatile, and it is difficult to envision political stability over the next few years. In the event of prolonged social unrest, we do not preclude another military coup occurring, although this would by no means resolve matters.

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We have downgraded our real GDP growth forecast for Thailand from 3.8% to 3.2% for 2014. With no signs of a possible resolution to the political impasse and violent protests, the risk of a sustained contraction in gross fixed capital formation over the coming quarters presents the biggest threat to Thailand’s economic outlook in 2014 and 2015.

We forecast Thailand’s fiscal deficit to widen from 2.4% of GDP in 2013 to 2.5% in 2014 amid increasing evidence that the political impasse could drag into H214. Meanwhile, the government’s rice policy is proving to be a costly mistake, and we believe that scrapping the rice policy completely (or making major changes to it), is crucial to government efforts to bring the fiscal budget back in balance.

We believe that the Bank of Thailand (BoT) will keep its policy rate on hold at 2.25% throughout 2014. We caution that should Thailand’s political situation deteriorate rapidly over the coming months, this could eventually force the BoT to ease monetary policy in a bid to support growth. However, for now, we believe that the risk of triggering major foreign capital outflows and the negative impact on the Thai baht will continue to weigh more heavily on the BoT’s stance on monetary policy.

The Thai economy should expand fairly robustly until 2022 but continued political uncertainty means that its full growth potential is unlikely to be reached. Aside from the political turmoil, a greater focus on improving human capital and transport infrastructure is needed to ensure that Thailand remains competitive.

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United Arab Emirates Business Forecast Report Q2 2014, New Report Launched

Our baseline scenario sees relatively solid growth over the coming quarters, with real GDP forecast to expand 3.9% and 4.1% in 2014 and 2015 respectively. The outlook for Dubai has become more promising relative to that for Abu Dhabi, with the former benefitting from increased activity in the trade and tourism sectors, in addition to our expectation that the all-important real estate industry is now on the road to recovery. Credit growth to the private sector will remain anaemic through 2014 as commercial banks continue to increase provisioning against potential loan losses due to the debt funding cliff.

Major Forecast Changes –

On the back of a stronger-than-expected recovery in Dubai’s residential property sector, we have revised up our 2014 average inflation forecast, and now project the headline print coming in at 2.0% this year.

Key Risks to Outlook –

Any attack by Islamist militants would result in a fundamental reappraisal of both the UAE’s, and the wider region, risk profile. A further uptick in tensions between the West and Iran could result in a deterioration in the UAE’s sovereign risk profile given the close proximity and deep trade ties between the two countries. Downside risks to oil prices in 2014 are elevated, which could undermine the UAE’s already fragile macroeconomic recovery.

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A potential deal between Iran and the UAE over Abu Musa and the Tunbs islands is a very positive step for the region in reducing geopolitical risks. The deal removes of the few external risks facing the UAE, while also indicating Iran’s change towards a more accommodative foreign policy.

The UAE is not without its challenges. However, it is one of the more stable Gulf states over the long term, with a small, wealthy population; no history of terrorism; and no sectarian tensions to speak of.

We maintain our bullish outlook on the UAE’s economies as a wealth of data points to continued growth. Consumer and business sentiment remains positive, underlining our particularly bright outlook for household consumption and fixed investment over the coming quarters.

We hold a bullish outlook on Dubai’s economy over the coming years as a whole host of sectors possess significant growth prospects. We expect the emirate to become an increasingly important growth driver in the UAE as the emirate records the fastest GDP growth rates on the back of the tourism, real estate and retail sectors.

Publisher expect Abu Dhabi to see a broad slowdown over the coming years as gains in the crucial oil sector become harder to maintain. We forecast Abu Dhabi’s real GDP growth to reach 3.5% in 2014 and 3.2% in 2015, following an estimated 3.6% in 2013. This forecast lags our expectations for the UAE as a whole as the non-oil sector will be unable to maintain the former growth reached by the larger oil sector.

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We maintain our bullish outlook for the emirate of Sharjah, largely on the back of our positive forecast for Dubai. Sharjah will benefit from rising housing costs in neighbouring Dubai which should push up demand for the former’s own housing sector. In addition, Sharjah’s growing shipping and tourism reinforce our sanguine outlook for the emirate.

In line with our expectations, inflation continues to tick higher in the UAE, with Dubai leading the price rise. We forecast inflation to average 2.0% in 2014, up from 1.1 % in 2013. The key driver of inflation in the UAE will be house prices, as the inflationary impact of food diminishes.

We expect 2014 to be a key year for the global Islamic finance industry as several new markets come to the fore. It has been our longheld view that rather than becoming an integrated global financial system, Islamic banking will see the creation of regional hubs. Even with this slightly fragmented outlook, we still expect significant growth for the sector.

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Central America Business Forecast Report Q2 2014, New Report Launched

Core Views –

  • The region’s economic trajectory remains divergent. Despite our expectations for slower real GDP growth in Panama in the next several years, it will remain the regional outperformer. On the other hand, we have a more mixed outlook for growth in the ‘northern triangle’ countries, with Guatemala likely to fare better than Honduras and El Salvador.
  • Central American will remain heavily dependent on the performance of the US economy, which remains a major source for remittance flows, and a destination for goods exports.
  • Drug-related violence and high levels of insecurity will remain the major concerns for most of the region’s electorate, although such concerns will be particularly elevated among the ‘northern triangle’ states of Guatemala, El Salvador and Honduras.

Major Forecast Changes –

Following the release of Q313 GDP data, we have revised up our 2014 real GDP growth forecast for Nicaragua to 5.1%, from 4.2% previously, based on our view for a continued strengthening of the country’s export performance. Indeed, we believe that economic growth will be driven by strengthening US demand for manufactured exports, and a modest uptick in coffee production following the recent renovation and rehabilitation of several major farms. While we have downgraded our GDP forecasts for Honduras after incorporating the latest data provided by the central bank, we expect that growth will pick up slightly in 2014, to 2.8%, compared to our estimate of 2.2% in 2013. The improvement will be based on a better performance in the export sector and greater confidence in the country as an investment destination as political risk subsides following the presidential election.

Key Risk to Outlook –

Downside Risk: We note downside risks to our 2014 real GDP growth forecast of 7.1% for Panama, in light of significant delays in the Panama Canal expansion project in recent weeks. Should work continue to progress slowly in the coming months, we could be encouraged to revise down our real GDP growth forecast for this year.

Downside Risk: Should Nicaragua’s export performance remain poor, the central bank may consider modestly accelerating the rate of the córdoba’s depreciation in order to bolster economic competitiveness. Indeed, given that the córdoba has appreciated in real effective exchange rate terms in recent years, a significantly weaker exchange rate could provide a boost to Nicaragua’s export sector, particularly its burgeoning textile manufacturing industry.

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Angola Business Forecast Report Q2 2014, New Report Launched

Publisher expects economic activity in Angola to pick up over the coming quarters following a challenging 2013. Despite a pickup in oil production, we believe the non-oil sector will continue to be the main engine of economic growth, driven in large part by heavy state spending on infrastructure and a buoyant consumer segment. While the current account will remain in the black over next few years, we believe this surplus will decline as a percentage of GDP driven by a gradual weakening of the trade balance on the back of resilient import demand.

Publisher expects inflation in Angola to be relatively contained through 2014 and we are forecasting marginally lower average price growth compared to 2013. While we believe that conditions will continue to broadly support the authorities’ accommodative monetary policy stance over the coming months. Angola’s fiscal accounts will remain in the red over the next few years as an investment-driven development agenda and heavy current spending commitments see government expenditure outstrip revenue generation. We predict that the fiscal deficit will widen to 4.0% of GDP in 2014 from an estimated 2.2% in 2013.

Major Forecast Changes

Weaker than expected oil production in 2013 has prompted us to revise our current account forecasts. We now forecast a current account surplus of 5.9% of GDP in 2014 and 4.3% in 2015 (compared to our previous projections of 8.8% and 7.8% respectively). Also on the back of lower than anticipated oil production in 2013 and revisions to our oil production forecasts, we have adjusted our forecasts for economic growth. We now forecast growth of 6.8% in 2014 compared to 7.3% previously.

Key Risks to Outlook

Our forecasts, as always, remain subject to the myriad uncertainties associated with oil production and exploration in Angola, along with volatility in global oil prices. Given that our forecasts only include planned oil projects, the upside potential posed by the country’s vast and as yet unexploited subsalt reserves poses a major upside risk to our forecasts over the medium-to-long term.

Growing speculation over the health of President Jose Eduardo dos Santos, an increasingly vocal opposition and simmering antigovernment sentiment will see political and social tensions in Angola remain elevated over the coming months.

Although Angola has become one of the largest and fastest-growing economies in Sub-Saharan Africa, its transition over the past decade has not been complemented by a move towards a more open political system. The concentration of power, both political and economic, presents the key challenge to economic development and risk to political stability over the coming decade.

A rebound in oil production and robust non-oil sector growth will see economic growth in Angola accelerate over the coming quarters following a weaker-than- expected 2013. We are forecasting real economic expansion of 6.8% in 2014 and 6.6% in 2015.

Although Angola’s current account balance will remain in the black over the medium term, we expect this surplus to decline as a percentage of GDP due to resilient import demand and persistent deficits in the services, income and transfer accounts. We are forecasting a current account surplus worth 5.9% of GDP in 2014 and 4.3% in 2015.

We expect inflation in Angola to be relatively contained through 2014 and we are forecasting marginally lower average price growth compared to 2013. While we believe that conditions will continue to broadly support the authorities’ accommodative monetary policy stance over the coming months, we see only modest scope for further monetary easing due to rising demand pressures in the country.

Angola’s fiscal accounts will remain in the red over the next few years as an investment-driven development agenda and heavy current spending commitments see government expenditure outstrip revenue generation. We predict that the fiscal deficit will widen to 4.0% of GDP in 2014 from an estimated 2.2% in 2013.

Having averaged double digit rates of real GDP expansion since the end of civil war in 2002, we expect growth in Angola over the next 10 years to come at the more moderate, but still robust level of 6.5% per annum. The successfully implemented fiscal and macroeconomic reforms of 2009-2012 allied to vast, albeit moderating oil revenues, will support the government in its diversification efforts, with a major scaling-up of infrastructure investment – both social and economic – at the heart of its plans.

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Cambodia Laos and Myanmar Business Forecast Report Q2 2014, New Report Launched

Cambodia’s political scene has taken a turn for the worse over recent months. The crackdown by the government on protesting garment workers poses a risk to the sector’s otherwise positive medium term outlook. Meanwhile, it also raises the stakes in the ongoing impasse between the ruling Cambodia People’s Party (CPP) and the opposition Cambodia National Rescue Party (CNRP), with the opposition CNRP becoming increasingly emboldened by their growing support base, and Hun Sen’s CPP facing a tough task in maintaining the country’s stable business environment. On the economic front, while the tourism industry continues to show promise, the construction sector is likely to suffer over the coming quarters as the nation’s credit boom winds down. The current lending boom is resembling that which came to a rapid end amid the global financial crisis, and we believe that the country’s hot real estate sector could be in for a rude awakening.

Laos –

Despite acknowledging that urgent fiscal reforms are needed, Vientiane has done little to alter its excessive spending patterns with the fiscal deficit widening substantially to 5.8% of GDP in FY2012/13 from 1.3% in the previous year. Public expenditures swelled as a result of a surge in the public sector wage bill owing to a rapid expansion in the civil servant headcount and substantial raises in civil service wages. Revenues, meanwhile, were hurt by a fall in mining income as commodity prices were subdued and gold production fell. We believe that fiscal reforms are likely to dominate Laos’ political scene as the government continues to struggle to arrest a deteriorating fiscal position. While we have highlighted that Vientiane has not been able to alter its profligate spending patterns, some quarters of the government appear resolute to curb public spending. We also highlight that concerns towards the human rights situation in Laos are on the rise and further repressive acts by the government runs the risk of reversing the solid economic progress that has been made over the years. Unless Vientiane starts to make significant headway, it is unlikely to reverse a continued deterioration in its fiscal position.

Myanmar-

Myanmar faces a key test of its nascent reform drive as suggestions for the amendment of its highly flawed constitution are set to be announced. Of particular interest will be the military (Tatmadaw)’s suggestions, which will be the culmination of a review process undertaken earlier in 2013. One of the key questions that may be answered is whether or not the military will agree to a smaller presence in the country’s parliament, where it currently holds a mandated 25% of seats. Additionally, the constitutional review may provide the answer as to whether or not venerable opposition leader Aung San Suu Kyi will be allowed to run for president in the upcoming 2015 general election, which would be a major step towards the legitimisation of the elections as a free and fair process. While Myanmar’s economic growth potential remains enormous, the country’s entire development story will likely hinge upon the government’s ability to maintain reform momentum through 2015’s elections and beyond.

Several critically important countries are facing tests in 2014 that could determine their political and economic evolution for years to come. Iran perhaps offers the greatest opportunity for positive change, while the biggest systemic risk among ‘pivotal’ states is the Korean Peninsula.

As Cambodia’s political deadlock continues, both the ruling Cambodia People’s Party (CPP) and the opposition Cambodia National Rescue Party (CNRP) have tough choices to make, which could determine whether the country reverts back to a one party state or democracy is strengthened as reforms are undertaken.

Cambodia’s long-term political outlook largely depends on the ruling Cambodian People’s Party (CPP)’s ability to address widespread corruption and income inequality, which have been fuelling public dissent against the government in recent years.

Cambodia’s credit boom continues to roll on, and now exceeds the one that preceded the economic slump in 2009 by many measures. Inflation pressures are rising, which could force the National Bank of Cambodia (NBC) to tighten liquidity to cool the credit boom.

Despite the heightened levels of social unrest in Cambodia’s major cities following the disputed election result in July 2013, tourism inflows have continued apace, growing at 18.0% in 2013. We expect to see double digit increases in the country’s crucial tourism industry in 2014 largely on the back of improved transport linkages.

Fiscal reforms are likely to dominate Laos’ political scene as the government continues to struggle to arrest a deteriorating fiscal position. While we have highlighted that Vientiane has not been able to alter its profligate spending patterns, some quarters of the government appear resolute to curb public spending.

Laos’ long-term political outlook will depend heavily on how well the country balances the need to spur economic growth to achieve its millennium development goals and the need to address widespread corruption and dissent against the government.

Despite acknowledging that urgent fiscal reforms are needed, Vientiane has done little to alter its excessive spending patterns with the fiscal deficit widening substantially to 5.8% of GDP in FY2012/13 from 1.3% in the previous year. Public expenditures swelled as a result of a surge in the public sector wage bill owing to a rapid expansion in the civil servant headcount and substantial raises in civil service wages.

While the Lao government is reviewing a ban on new mining conce ssions that had been due to last until 2015, our sombre outlook on frontier mining continues to suggest that the country’s mining sector is set to suffer from falling investment over the coming years. In contrast to gold, we expect copper mining to prove more resilient as PanAust Ltd forges ahead with the expansion of its Phu Kham mine to 90ktpa by 2018.

Myanmar’s Joint Constitutional Review Committee has received over 28,247 recommendations for amendments to the country’s constitution, which was created by the former military junta and is riddled with extensive weaknesses. While we stress yet again that a genuine effort to amend the constitution would be a huge step in the right direction in terms of Myanmar’s political maturation, we note that incipient signs of potential inaction or stalling have emerged. Should the amendment process fail to yield any substantive results, we see downside risks for not only Myanmar’s political risk outlook, but also its already challenging business environment.

Myanmar remains one of very few Asian states to have withstood the tide of democratisation since the 1980s. Although Myanmar held its first elections in 20 years in November 2010, these were widely considered a sham, with the military-backed Union Solidarity and Development Party winning most of the seats.

Myanmar’s banking sector has made considerable progress over the past two years, with the provision of credit card and ATM services beginning to chip away at the economy’s formerly cash-only nature. However, both structural and policy-related headwinds continue to weigh heavily on the sector’s development potential, which in turn could limit the country’s broader economic growth outlook.

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