Supavud Saicheua Thanomsri Fongarunrung Emerging Asia Economist Phatra Securities

1. April 2012 Thailand Economic Update Supavud Saicheua Thanomsri Fongarunrung Emerging Asia Economist Phatra Securities Thailand: The next steps Phatra Securities does and seeks to do business with the companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. 11150212

2. IMF: “Optimism must not lull us into a false sense of security” Chart 1: GDP growth forecast • World has stepped back from the brink but three major vulnerabilities remain. • Euro area public sector and bank debt rollover is 23% of GDP in 2012. • Rising oil price is a threat to global growth. • Growing risk of slowing EM in medium term Asia +7.3% in 2012. Euro area -0.5%; US 1.8%; China 8.2%. BoAML’s view • ECB’s LTRO prevented a euro area banking liquidity crunch. • Mild recession in Eurozone • Moderating inflation • US economy will lose momentum; 50% chance of QE3 by 3Q • GEM monetary easingwindow is closing Source: IMF, January 2012 “

3. Data stronger; investor sentiment improving Chart 2: Europe: LTRO brought down bond yield Chart 4: PMI Manufacturing is improving Source: Bloomberg Chart 3: US: Employment increases US 52.4 54.1 -1.7 Expansion Source: Haver Analytics, BAML, Fed Source: Fed database

4. Central bank: Quantitative Easing Chart 6: Europe: Real credit growth still weak Chart 5: G4 central bank balance sheets (% of GDP) • ECB will be on hold, to evaluate the impact of LTRO on real economy. • QE3 not ruled out but Fed not promising further easing either. • ML believes QE3 still likely in September.

5. Oil price risk Chart 8: Energy prices are already close to 9% of global GDP Chart 7: Probability of US or Israel air strike against Iran • BAML forecast: 2012: Brent $118/bbl, and WTI $106/bbl; 2013: Brent $120/bbl and WTI $111. • Oil could hit $140/bbl this year due to high liquidity, improved demand, and tight supplies. • Critical threshold is Brent $135 in which oil would account for 9% of world GDP • Complete disruption of Iranian exports or shut-down of the Strait of Hormuz could raise oil price another $100/bbl. Chart 9: Europe oil as a percent of GDP is rising again

6. Vulnerabilities from higher oil price Chart 10: Some market like Russia may be more resilient Chart 11: Oil import dependency

7. Euro periphery: excess spending problem Chart 12: Current account and fiscal position Source: IMF (Sept 2011)

8. US could slow down in 2H 2012 Chart 13: Post election fiscal shocks • Good employment data and spending in 1Q was due to unusually warm winter. 2Q data could start to disappoint. • Fiscal drag equal to nearly 4% of GDP in 2013 threatens to slow US economy down during 2H 2012. • Important fiscal decisions postponed to after Nov elections under lame-duck Congress. Fearing division and inaction would cause economy to falter in 2012. • Decisions needed to: renew Bush tax cut ($240bn); extend unemployment benefits and payroll tax ($130bn); sequestration ($150bn). • BoAML still expect QE3 by end of 3Q.

9. US economy: Fiscal time bomb Chart 14: Projected spending and revenue (% of GDP) Chart 15: Unsustainable rise in entitlements Source: CBO, Long-Term Budget Outlook, Jun 2011

10. China and India slowing down China: Wanting to slow down • Chinese leadership will accept slower GDP growth to bridge the gap between rich and poor and preserve political stability. Growth target 7.5%. • More emphasis on consumption; less on investment • Tight monetary conditions to persist to bring down home prices even if this could hurt growth. Fiscal policy will support growth. • Jan-Feb exports weakened which in part was the result of slowdown especially in Europe. India: Being forced to slow down • Budget deficit in FY ending March is 5.9% of GDP vs. 4.6% projected. This is forcing fiscal tightening with 2013 deficit target of 5.1% of GDP. • Cutting energy subsidies would raise inflationary pressures and reduce room for RBI to cut interest rates.

11. China economic data Chart 16: IP and power production Chart 17: Retail sales vs exports Chart 18: Local investments will be the key Chart 19: Money supply and loan growth

12. China “the worst is almost over” – Ting Lu • “Unlucky" Jan and Feb: hit by weaker external demand, coldest winter in 27 years, political disturbance, destocking in response to falling home sales, and laziness of banks (complacent about their surging earnings). • Worst is almost over. Fight for political succession done. Leaders will focus on stable growth; banks are cutting lending rates; and new home sales rebounded as mortgage rates for first-time home buyers are cut. • We expect pick-up in Mar industrial output (esp. steel and cement). Subdued inflation provides room for price hikes of fuel, power and other utilities. • GDP growth in 1Q12 slow to 8.3% YoY from 8.9% in 4Q11. QoQ growth (sa) could slow to 1.7% in 1Q12 from 2.0% in 4Q11. We maintain our 8.6% GDP growth forecast for 2012. • No rate cuts and 100bps cut in RRR in 2012. PBoC to encourage banks to cut their lending rates and govt will step up efforts on social housing.

13. Thailand 2012: GDP growth 5.7% Quarterly GDP growth • Post-flood recovery could raise GDP growth this year to 5.7%. • But the really important questions are: • Will the post-flood reconstruction make Thailand better? Or the same • Coordination of fiscal and monetary policies • Can Thailand cope with much higher oil prices? Economic Forecast

14. Recovering gradually from the floods • Full recovery by 3Q • Auto sector recovering faster • About 51,000 unemployed; 30,000 from the seven industrial estates • Electronics recovery lagging • Most will remain in Thailand Capacity utilization: sharp recovery in autos Capacity utilization Source: OIE

15. Water management plan Flood reconstruction to cost Bt350bn to return Thailand to pre-flood status quo • Plant more trees (Bt10bn) • Better land use and management (Bt50bn) • Build 17 water catchment areas and a dam (Bt50bn) • Turn 2mn rai of agricultural land into flood plains (Bt60bn) • Build floodways to divert water from industrial areas and Bkk (Bt120bn) • Improve floodwalls along river banks (Bt7bn) • Better forecasting and information (Bt3bn) • Subsidize construction of flood walls for industrial estates (Bt5-6bn) • Bt50bn insurance fund for SMEs and households

16. Project details from the government Action plan of Integrated Flood Mitigation in Chao Phraya River Basin (2012-3) Immediate action plan of Water Management (2012-3)

17. Thailand’s flood strategy Bangkok Source: KrungThep Turakit newspaper, 27 Feb 12

18. Source: Strategic Committee for Water Resources Management, The Nation newspaper

19. Flood prevention does not raise productivity Unemployment rate is less than 1% • Bt350bn flood prevention spending is meant to restore Thailand to pre-flood status. It does not increase the country’s long term potential growth, however. Examples of “real growth enhancement” • Thai auto sector said it needs to employ another 150,000 (from 450,000) to produce 2.5mn cars. But Thailand is not producing enough technicians. • Manufacturing employment is currently 5.7mn. Thailand has 12mn workers in low paying non-agri sectors that must be retrained. • Thailand needs to invest Bt65bn to expand Lam Chabang deep sea port by 2019. But EIA and HIA approval will likely take two years. • Participate actively in GMS which is becoming a reality as Myanmar opens up Employment by sector Labor force 38.6mn persons Source: NSO

20. Investment remains solid Investment expansion remains solid Thai direct investment surges Source: BoT Source: BoI Thai direct investment by destination Savings-Investment gap Others Others Source: BoT Source: NESDB

21. Thailand’s main crop prices Source: Datastream Source: Datastream Source: Datastream Source: BoT

22. Monetary policy and inflows of “hot money” Foreign net buy of Thai equities (MB/month) • BoT is very clear that it is already very accommodative with “neutral” monetary policy plus Bt300bn soft loans • BoT is concerned that risk-on trade could mean massive inflows of hot money • It is likely that BoT will intervene less to “stabilize” the baht this time • This could limit exports as an engine of growth but the economy would likely have to significantly underperform before BoT changes its view Source: SET Foreign net buy of Thai bonds (MB, 1month rolling) Source: Thaibma

23. Sovereign and BoT bonds BoT monetary instruments Bonds Outstanding (Jan 2012) Source: Thaibma Source: BoT Money base and broad money Government bond yield (Thai vs US) 1-Year rolling correlation = 70% Source: BoT Source: Thaibma

24. Thailand is vulnerable to high oil prices Thailand inflation correlates with fuel prices • Thai inflation is more correlated to high oil prices than high food prices • The government is unable to afford much more energy subsidies (now costing 1.2% of GDP per year). • If oil price spike causes a current account deficit and weakens the baht, the BoT could even hike rates (hopefully not until next year) Source: MoC Source: Phatra calculations

25. Myanmar: the game-changer • The opening up of Myanmar is the missing piece that completes the Greater Mekong Sub-region as an economic zone from the South China Sea to Andaman Sea. • 250mn new consumers and workers with rich natural resources to back them. • Dawei (Tavoy) is like Map Ta Phut, only 8-10 times larger. • But in his book “Burma and the new crossroads of Asia: Where China meets India”, Thant Myint-U wrote: “In October 2010, the governments of Burma and Thailand revealed plans for the development of a massive industrial complex…$8.6bn will be invested in basic infrastructure. Another $58bn in investments (that).… will include a deep-sea port, steel, fertilizer and petrochemical plants, and an oil refinery. A new highway will cut through the mountains to Bangkok. There will be tourist resorts as well, on a giant scale. Tavoy will be ground zero….There are justifiable worries that all this will devastate the environment. And indeed, the Thai government has said that its prime motivation in supporting the project is to move environmentally damaging industries from Thailand to Burma.”

26. Greater Mekong Sub-Region

27. Politics:A ceasefire waiting for a solution • A stalemate during the “twilight years” could last a long time and could prove costly to Thailand • It is a zero sum game: realignment of political power is likely to produce losers and winners • Three main political issues that reflect the ongoing search for a solution: • Amendment of the constitution to give more power to those elected by the people • The talk of judicial reforms and inevitable realignment in the military • Govt. will push for a national reconciliation law • After constitutional amendment, new elections to confirm Pheu Thai’s dominance next year is possible • However, any shortcomings of the govt on the economy could cause political stability to unravel as it may be seen as a failure of democracy.

28. Important Disclosures