Escalating Crisis To Hit Infrastructure Hard

BMI View: The ongoing political crisis in Thailand continues to weigh heavily on our outlook of the country's infrastructure sector, with delays to key public infrastructure plans and Q114 figures on construction supporting this outlook. We believe we have yet to see the apex of the crisis, and this presents significant scope for the crisis to limit the growth potential in the infrastructure sector.

Since November 2013, Thailand's infrastructure sector has been heavily affected by the political turmoil gripping the country, and our outlook for the country's infrastructure sectors remains poor and highly uncertain based on the state of the country's business environment. Latest data from the Thailand National Economic and Social Development Board reflects this outlook. Thailand's construction sector has contracted in real terms by 12.4% year-on-year (y-o-y) in Q114, the deepest quarterly contraction since the global financial crisis, which reached 12.8% in Q408.

Looking ahead, we believe we have yet to see the apex of the political crisis and this presents significant scope for the crisis to limit the growth potential in Thailand's infrastructure and construction sectors. This, combined with the severe contraction in construction activity in Q114, has prompted us to revise down our 2014 forecasts for the construction sector (our construction forecasts include our outlook for the country's infrastructure sector, a major component of construction). We are now forecasting the construction sector to contract in real terms by 3.8% in 2014, compared to our previous forecast of 1.9% growth.

Recession To Persist
Thailand Quarterly Construction Industry Value Real Growth, At 1988 Prices, % chg y-o-y

Escalating Crisis To Hit Infrastructure Hard

BMI View: The ongoing political crisis in Thailand continues to weigh heavily on our outlook of the country's infrastructure sector, with delays to key public infrastructure plans and Q114 figures on construction supporting this outlook. We believe we have yet to see the apex of the crisis, and this presents significant scope for the crisis to limit the growth potential in the infrastructure sector.

Since November 2013, Thailand's infrastructure sector has been heavily affected by the political turmoil gripping the country, and our outlook for the country's infrastructure sectors remains poor and highly uncertain based on the state of the country's business environment. Latest data from the Thailand National Economic and Social Development Board reflects this outlook. Thailand's construction sector has contracted in real terms by 12.4% year-on-year (y-o-y) in Q114, the deepest quarterly contraction since the global financial crisis, which reached 12.8% in Q408.

Recession To Persist
Thailand Quarterly Construction Industry Value Real Growth, At 1988 Prices, % chg y-o-y

Looking ahead, we believe we have yet to see the apex of the political crisis and this presents significant scope for the crisis to limit the growth potential in Thailand's infrastructure and construction sectors. This, combined with the severe contraction in construction activity in Q114, has prompted us to revise down our 2014 forecasts for the construction sector (our construction forecasts include our outlook for the country's infrastructure sector, a major component of construction). We are now forecasting the construction sector to contract in real terms by 3.8% in 2014, compared to our previous forecast of 1.9% growth.

Hit By Political Instability
Thailand Construction Industry Forecasts

Uncertainties Increase For Infrastructure

The May coup marks the third time in 13 years that power has been taken away from the PTP by court rulings or coups, and the military junta has announced its intention to install an unelected government to conduct political reforms and carry out public expenditure plans ( see ' Military Coup Raises Civil War Threat', May 23 2014).

Therefore, there is a strong possibility for additional protests and violent confrontations to take place in Thailand. Should this be the case, the extended period of political instability will likely lead to fresh delays in project execution and dampen foreign interest in long-term investments such as infrastructure.

The installation of a new unelected government could also lead to a review of infrastructure projects approved by the previous incumbent. A change in government typically results in new feasibility studies and financial schemes being conducted and crafted respectively, which could lead to project delays, revisions, or worse, cancellations.

The loss of political stability has already affected infrastructure plans in Thailand, and we could see additional delays to these projects. We have seen delays to the projects under the PTP government's long-term water management and flood prevention scheme, the urban railway projects in Bangkok as well as delays to the government's plans to build 5,000MW worth of new-gas fired power plants ( see 'Long Term Weakness For Infrastructure Construction', March 23 2014).

Lucking Out
Thailand Infrastructure Investment Plan 2013-2020, THBbn, By Sector (LHS); and By Year (RHS)

Infrastructure Plan At An End

Most importantly, on March 12, Thailand's Constitutional Court ruled that the bill to allocate funds for PTP's THB2trn (USD62bn) infrastructure plan was illegal and violated the constitution (opponents to the PTP had filed the legal challenge to the borrowing bill after the upper house passed the bill in November 2013). In our opinion, this verdict, combined with the change to a military-backed government, will have major negative implications for the outlook of Thailand's infrastructure sector as it could spell the end of the infrastructure plan. Our view is based on financing and political considerations.

Financing Considerations: The proposed borrowing bill was to be used to develop several large-scale transport infrastructure projects from 2013 to 2020. With its cancellation, the projects under the PTP's THB2trn infrastructure plan will now need to be financed by the country's annual budget, borrowing under the public debt law, and/or private investment. As previously highlighted, this will most likely mean a reduction in the scale of these infrastructure projects ( see 'Construction Outlook Deteriorated By Political Environment', December 19 2013). This is because the government's fiscal position is already stretched by expensive subsidy programmes, and the private sector remains cautious in financing projects given the current political situation.

Political Considerations: Some of the large-scale projects under the PTP's infrastructure plan were aimed at improving transport links to regions that are key support bases for the PTP. A key example is the high-speed railway projects under the plan. Prior to the general elections in July 2011, Thailand's high-speed railway programme was supposed to kick off with a railway project that would form part of a regional high-speed railway line linking China with parts of the South East Asia region. The electoral victory by the PTP saw a policy shift to prioritise the northern region, with the upgrades in infrastructure aimed at consolidating its support in the region ( see ' High Speed Rail Aspirations Hampered By Political Risks', October 19 2011). With this latest change of government, we could once again see another change in direction for Thailand's high-speed railway plans.

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