Political Crisis Weighing On Infrastructure

BMI View: The ongoing political crisis in Thailand continues to weigh heavily on our outlook of the country's infrastructure sector, with the crisis looking set to intensify before a resolution can be reached. This has already resulted in delays to the government's ambitious infrastructure plans, and could further limit 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 we believe that the outlook for the country's infrastructure sectors remains poor and highly uncertain based on the state of the country's business environment. This outlook is reflected in our forecasts (we currently only provide forecasts for the broader construction sector). Real growth for Thailand's construction sector is expected to be an unimpressive 1.9% in 2014 (previously 3.5%) and to average 2.4% per annum between 2014 and 2023, lower than the average real growth of 2.5% per annum between 2004 and 2013.

Political Crisis Unresolved

Hit By Political Instability
Thailand Construction Industry Forecasts

Political Crisis Weighing On Infrastructure

BMI View: The ongoing political crisis in Thailand continues to weigh heavily on our outlook of the country's infrastructure sector, with the crisis looking set to intensify before a resolution can be reached. This has already resulted in delays to the government's ambitious infrastructure plans, and could further limit 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 we believe that the outlook for the country's infrastructure sectors remains poor and highly uncertain based on the state of the country's business environment. This outlook is reflected in our forecasts (we currently only provide forecasts for the broader construction sector). Real growth for Thailand's construction sector is expected to be an unimpressive 1.9% in 2014 (previously 3.5%) and to average 2.4% per annum between 2014 and 2023, lower than the average real growth of 2.5% per annum between 2004 and 2013.

Hit By Political Instability
Thailand Construction Industry Forecasts

Political Crisis Unresolved

Our bearish outlook can be attributed to the lack of, and the difficulty with reaching a meaningful end to the ongoing political turmoil in Thailand.

A date for fresh elections has yet to be set since Thailand's Constitutional Court voided the results of the February elections on March 21. Without a full government - Thailand currently does not have a parliament and is governed by a caretaker administration headed by the Puea Thai Party (PTP) - the present administration is unable to meet its financial obligations or fully implement its expenditure plans. Under Section 181 (4) of the Thai constitution, a caretaker administration is prohibited from using state agencies' resources to affect an election outcome. Even if elections were to take place, they could once again be disrupted as opponents to the PTP have vowed to prevent a successful election and are demanding for the formation of a 'people's council' to oversee political and electoral reforms in Thailand.

In addition, the PTP, led by caretaker Prime Minister Yingluck Shinawatra, is facing legal cases from the National Anti-Corruption Commission (NACC) and more recently, from the Constitutional Court. We believe any outcome from either or both legal cases is unlikely to end the political crisis. This is because either the supporters or opponents of Yingluck would be left unsatisfied with the outcome and would continue to protest publicly - if either case is ruled against Yingluck and the PTP, it would remove them from office. To be sure, following the Constitutional Court's verdict on the February elections, several media reports indicated a string of grenade attacks across a number of major Thai cities, with most but not all targeting opponents of the government.

Crisis To Intensify

Therefore, even though solutions to the ongoing political impasse exist, we believe it is highly likely that the political crisis in Thailand will have to get worse before a resolution can be reached ( see 'Weighing Up The Political Scenarios', March 19). This view is already starting to take shape. On April 2, the Constitutional Court agreed to hear a petition accusing the PTP of violating the Thai constitution in 2011. Meanwhile, opponents of the PTP are still conducting mass protests across Thailand, with violent clashes and the occupation of government buildings still taking place as of mid-April.

An extended period of political instability will most likely lead to delays in project execution, as well as dampen foreign interest in long-term investments including infrastructure. Political stability, which allows for continuity in government policies, is critical in ensuring the viability of infrastructure investment. This is because political unrest typically increases security threats to project sites, and requires the government to divert considerable resources and attention away from the infrastructure sector to resolve the crisis. These scenarios often result in construction works and project negotiations being stalled or cancelled.

Severe political unrest could also result in a change in government, which could lead to a review of infrastructure projects approved by the previous incumbent. This typically results in new feasibility studies and financial schemes being conducted and crafted respectively, which could lead to project delays, revisions, or worse, cancellations. Such a scenario already has precedence in Thailand, when the PTP came into power in 2011 and shelved the previous incumbent's high-speed railway plans ( see 'High Speed Rail Aspirations Hampered By Political Risks', October 19 2011).

Infrastructure Delays Surfacing

As it stands, we believe the loss of political stability has already affected infrastructure activity in Thailand. On March 12, Thailand's Constitutional Court ruled that the bill to allocate funds for the 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). This verdict, combined with the current lack of a full government, significantly increases the scope for extensive delays to the PTP's THB2trn (USD62bn) infrastructure plan, particularly for the more costly aspects of the plan such as the high-speed and urban railway projects - the borrowing bill was to be used to develop several large-scale transport infrastructure projects from 2013 to 2020.

To be sure, the Thai bureaucracy is currently preparing new timeframes and goals for the projects under the PTP's THB2trn infrastructure plan. This is because the projects under the 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 scale-down in the THB2trn infrastructure plan ( see 'Construction Outlook Deteriorated By Political Environment', December 19 2013). This is because the government's fiscal position is already stretched by its need to sustain its expensive subsidy programmes, while the current political situation is likely to keep the private sector cautious in providing large-scale investment over the near-term ( see 'Political Impasse And Mounting Losses On Rice Policy To Undermine Outlook', February 21).

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

In addition, the Ministry of Transport (MOT) revealed on March 29 that the protracted political situation has delayed the disbursement of the ministry's budget for 2015 (cited from state-owned news agency, the National News Bureau of Thailand [NNT]). This delay has affected the implementation of the urban railway projects previously approved by the PTP government such as the Red, Green, Blue and Purple lines of the Bangkok metro rapid transit (MRT) system.

The loss of political stability has also affected progress on the PTP government's long-term water management and flood prevention scheme. In June 2013, the government approved the THB314bn loan and the parties selected to implement the projects under the water scheme ( see 'Water Scheme Offers High Risks, High Rewards For K-Water', June 19 2013). Since then, contracts for the projects have yet to be signed, while environmental studies and public hearings for the projects have been disrupted by the political unrest in Bangkok.

We also previously highlighted that the political crisis could disrupt ongoing project tenders in the urban railway and power plant sector as these projects need approval from a full government. This appears to be the case. In the same news report from the NNT, the MOT revealed that tenders for the Pink and Yellow lines of the Bangkok MRT system project must wait for the approval of a new government. These projects were previously scheduled to be tendered out in 2014. Meanwhile, Thailand's Energy Regulatory Commission has been conducting its third round of bidding for the construction of 5,000MW worth of new gas-fired power plants since 2013, but has only awarded one full-turnkey contract for a 977MW gas-fired power plant to Mitsubishi Heavy Industries and Electricity Generating Authority of Thailand in August 2013.

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