Thailand’s economic growth and corporate financial health: Is there a trade off?

While ASEAN economies have been growing fast in the last few years, Thailand’s economic performance has been underwhelming compared to the rest. The interesting issue is that Thai corporates are the healthiest among ASEAN, according to our Natixis ASEAN Corporate Monitor 2017, which covers 1,200 largest ASEAN listed companies and compares them with global peers.

Delving deeper into the reasons for Thai corporates’ financial health, we find that their excellent repayment ability and low leverage hinge on two main factors: stagnant capital expenditure (for the former) and very low interest rates (for the latter). The question, thus, is whether corporates financial health may actually be hindering higher growth in the future.

Our bottom up analysis points to some kind of trade-off between corporate financial health and economic growth, at least in the short run. In reality, more than a trade-off, the above negative relation points to the need for corporates to take some risk – and invest – for an economy to foster higher growth in the medium term. The key issue, of course, is that capex is directed towards profitable projects.

The fault for such meager capex should not be sought in the Bank of Thailand (BoT) monetary policy, which has been quite accommodating and effective at lower funding costs. Still, credit growth has remained subdued. But private sector investment remains subdued in the past five years. With banks’ asset quality worsening, corporates will likely continue to be cautious, as not all projects – even if scarce – are successful.

We expect the BoT to continue to keep policy rates low to support the economy and, more specifically, Thai corporates’ ability to service debt. Still, we do not think that ample liquidity will be enough to shore up corporates’ interest in investing. The reason may be found in the many idiosyncratic risks that Thailand is undergoing. All in all, this lack of investment enthusiasm does not augur well for future Thai economic growth.

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