June 15, 2015 1:00 pm JST
Atikrai "Jeep" Chatikavanij

Beneath the Teflon, the real Thai economy story

     Veteran investors in Thailand today might have a sense of deja vu from a decade earlier. Back then, investors were shunning the Thai market for bigger and "sexier" emerging markets such as Brazil, Russia, India and China, collectively known as the BRICs. In the wake of the 1997-98 Asian financial crisis, Thailand became too small and irrelevant for most of the big investors. But the annualized returns generated by the Stock Exchange of Thailand exceeded that of the BRICs between 2005 and 2015, 11% to 7%, proving that Thai equities truly belonged in any serious emerging markets regional or country portfolios.

     Like most other emerging markets, Thailand's economic growth path has recently slowed, with the economy struggling to grow more by than 4% a year since 2009. The country's troubles are well documented, ranging from dysfunctional politics and struggling exports to massive household debt levels. But critics should bear in mind that the impressive stock market returns generated in the decade to 2015 coincided with a political "lost decade" that started in 2005, just after Prime Minister Thaksin Shinawatra's Thai Rak Thai party won a landslide re-election victory.

     In those years, months of street protests mounted by both sides of the political divide followed, Bangkok's international airport was seized by demonstrators, and the capital's main commercial district was routinely occupied. Since then, Thailand has endured two military coups and has had seven different prime ministers, including Thaksin's second administration to 2006. Yet, the economy has largely continued to hum along.

     This curious pattern of growth in times of adversity has led many technocrats to assume that the current slowdown is entirely due to the severe political unrest surrounding the successful military coup of May 22, 2014. The military-led government is no exception. Its leaders wrongly assumed that economic activity would automatically pick up once order was restored, and projected a rosy recovery. Even officials at the Bank of Thailand missed all the signals that something more serious is happening.

     The truth is that the Thai economy, once dubbed "Teflon-coated," is in transition mode. The twin growth engines of strong exports and surging foreign direct investment that were the key to Thailand's miraculous recovery after 1997-1998 are no longer serviceable. The game is changing, and the current slowdown is not the result of unstable politics but of a structural issue. Thai exports grew from less than 40% of gross domestic product before the Asian financial crises to peak at over 70% a few years ago. Such growth is well and good as long as it continues at a clipped pace, but when it stalls, the slowdown creates a big drag effect - as we have seen, for example, in the steady decline since 2011. Thailand also saw a new phenomenon of outward investment eclipsing inward flows for the first time in 2011. While the export slump has created some domestic angst, it should have been obvious that exports were not going to grow forever, and that previous robust inflows of foreign direct investment might falter.

     However, if you ignore the economic surface noise and look at what has really been happening over the past decade, you can get a glimpse of the future. The silver lining of the aftermath of the Asian financial crisis was not the boom in exports or the rise in FDI, it was something much less obvious and much more important: the leveling of the playing field as new entrepreneurs emerged to take advantage of the rise to maturity of a new economic driver -- the Thai middle class.

     Middle class people everywhere pursue the same goals: they want to get on the property ladder, make sure their health is looked after, and enjoy their leisure time. Businesses that cater to these needs have made a fortune for themselves and their shareholders. An example here is L.P.N Development, a pioneer of Thailand's low-cost condominium industry. The company began offering first-time property buyers an opportunity to purchase its properties with monthly mortgage payments that were the same as the rental fees. From relative obscurity, the company's market capitalization grew from $70 million in 2003 to peak at over $1 billion in 2013.

     In another case, Bangkok General Hospital created tremendous shareholder value as it grew from one hospital asset in 2003 to 40 in 2014, in the process seeing its market capitalization increase from $180 million to $9 billion in a similar time span

     That was the real Thai story, and many people did not see it because they chose not to. Now they are missing the real story again: What happened in Thailand is just starting to take hold in the frontier economies to the country's east and west. These economies: Cambodia, Laos, Myanmar and Vietnam (or CLMV as the region has been dubbed), are growing at 6-8% a year, a pace that looks sustainable for at least the next decade.

     As they grow they will want the same things that middle class people everywhere take for granted. When a small unknown Thai leasing company, Group Lease, expanded into Cambodia a couple of years ago, buying a motorcycle on credit was an alien concept The company started slowly and only sold a dozen or so Honda bikes per month. In a little over two years, sales are booming, with more than 2,000 bikes sold per month. The company is expanding into Laos and will have more than a dozen branches by end of June this year.

     Or else take Carabao Group, a Thai energy drink manufacturer. Its flagship drink, Carabao Dang, exploded onto the domestic market less than 10 years ago and now commands the second-biggest share of the energy drinks market after M-150, privately owned by the Osathanugrah family. Carabao has also made huge inroads in the region through its savvy marketing techniques and smart logistics, securing market leadership in Cambodia within three years of entering that country. The company is now entering Myanmar, which is just opening up its borders to imports. The buyers of these products are at the very beginning of a consumer society, not too dissimilar to where Thailand was 20-30 years ago, and as they grow in size and affluence, their demands will become more sophisticated.
 
     Compared with the BRICs, the CMLV region is not much of a story on its own. But when you add Thailand to the mix, remove the borders and start connecting the dots, you see a completely different story. The new picture gives you a thriving economic zone centered around the Mekong River, with Thailand at the center providing capital, knowhow, goods and connectivity. For good measure, you can connect northern Thailand to southern China, which is now accessible by road, and you can then see an even more illuminating picture of a thriving trading region.

     The story of the Greater Mekong Subregion had been long over-shadowed by the much hyped ASEAN Economic Community, the free trade zone of the Association of Southeast Asian Nations due to launch on Dec. 31. But a region which other than Thailand and the CLMV countries also includes southern China, mainly Yunnan, is where the future lies - not just in its 300 million-plus aspiring consumers and in terms of trade and logistics, but also in cross-border tourism. During Vietnam's recent Tet new year holiday, you could spot many Vietnamese walking around Bangkok shopping malls - a new but increasingly common sight. And it will only grow from there.
 
     Thailand in the next decade will be different from today and from 10 years ago. But the real story is a tale of a rapidly growing region, with Thailand standing at the center. The Thai economy may or may not be "Teflon-coated," as many contend. But change is coming regardless - and Thailand can prosper by riding the wave of growth among its neighbors.

Atikrai "Jeep" Chatikavanij is founder and portfolio manager of Bangkok-based Ton Poh Fund.

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