Thailand market update

Domestic shares closed firmer in May, as concerns over political instability subsided after the military-appointed constitution tribunal ordered the dissolution of the former ruling Thai Rak Thai Party (TRT) on electoral fraud, and banned party executives from contesting elections for five years.

GDP growth rose by 4.3% year-on-year in the first quarter, with strong exports offsetting weak consumption and investment growth.

The Bank of Thailand cut its benchmark lending rate by 0.5% to 3.5% in early May to encourage consumption.

Exports underpin first-quarter growth

Economic growth for the first quarter exceeded expectations, boosted by robust exports, which remained resilient despite the baht's appreciation. Nevertheless, the National Economic and Social Development Board lowered its 2007 growth projection to 4%-4.5%, from a previous estimate of 4%-5%, on slowing consumer spending and business confidence. The revision is in line with similar growth downgrades by both the finance ministry and the Bank of Thailand.

Growth expansion policies

To revive consumer and business spending, the central bank has cut interest rates four times this year, the most recent one by 0.5% to 3.5%. In addition, a proposed 3% hike in the valued-added tax was delayed by another year, in light of the sluggish economic conditions. The postponement came shortly after the government unveiled a 44bn baht stimulus package to boost consumption and investment by lower income groups.

Credit rating unchanged

Fitch Ratings has reaffirmed the country's sovereign long-term credit rating at BBB+, citing its strengthening external financial position and improving public finances. However, the ratings agency cautioned that the outlook could become more 'problematic if the political situation remains unresolved for a protracted period, as the interim administration has not proven particularly adept in economic policy management.'

Still volatile political environment

Other medium-term risks remain, including questions surrounding the next move by former TRT executives banned by the court. Although a revival by the TRT appears slim, former politicians could still find ways of regrouping or have proxies elected in their place.

Quarterly results

March-quarter earnings results from our holdings were mixed: Ratchaburi Electricity Generating Holding, Thai Reinsurance, Siam Makro, Sammakorn, Thai Stanley Electric, discount retailer Big C, Bangkok Insurance and Minor International all reported healthy profits. Against this, companies that disappointed included PTT Exploration and Production, MFC Asset Management, Eastern Water Resources and Hana Microelectronics.

Portfolio News

During the month, we topped up our positions in Siam Makro and Advanced Info Systems.

Aberdeen Asset Management Asia Limited