It was the weakest expansion since the fourth quarter of 2014 and the slowdown was driven by weakness in external sectors with exports of goods contracting 5.4 per cent YoY and exports of services shrinking 3.6 per cent YoY.

Meanwhile, domestic demand stayed robust with private consumption rising 4.6% YoY and private investment expanding 4.4% YoY. Private investment, however, remained lacklustre at -0.1 per cent YoY.

Monthly economic indicators suggest that domestic demand momentum has stalled toward the end of the first quarter. Private consumption, the harbinger of growth over the past few quarters, is likely to decelerate over the remainder of the year amid falling farm income, deterioration in consumer confidence and political uncertainties.

Export growth has more pronounced downside risk as trade tension re-escalate after US threatened to raise tariffs on all imports from China. Meanwhile, tourism sector will likely remain lacklustre as China economy weakens and the Chinese yuan resumes its weakening trend.

Concerning the trade war, chances that China and the US will agree on a deal before June deadline is quite slim in our view as China’s policy tone has become tougher recently. The US authorities have already indicated their plan to impose tariffs on the remaining Chinese exports. If they do, the trade war would escalate to a level that causes significant economic impact on both sides as the list of products in question include mostly consumer goods such as smartphones, computers and textiles, and US consumers are more dependent on China for these goods.

With no sign of an improvement in external demand in sight, we maintain our below-consensus GDP growth forecast at 3.5% for 2019.

ContrIbuted by KOMSORN PRAKOBPHOL, head of TIsco Economic Strategy Unit (ESU)

The country’s major agricultural exports are fish, rice, fruit and rubber. Noting the increased competition from Vietnam, the office suggested that Thai increase its exports to other markets rather than become reliant on the Chinese market.

From January to March 2019, Thai-Asean trade was valued at Bt107 billion, a decrease of 4.56 per cent year on year. Exports were valued at Bt80 billion, a decrease of 3.08 per cent year on year, while imports were at Bt26.9 billion, down by 8.69 per cent over last year.

Of the Asean countries, Vietnam tops out as Thailand’s No 1 export destination, accounting for 22 per cent, followed by Malaysia at 17 per cent, Indonesia at 16 per cent and Cambodia at 12 per cent. In this period, Thailand had the largest trade surplus of agricultural goods, at Bt13.1 billion, followed by Malaysia at Bt10.1 billion, Indonesia at Bt7.69 billion, Cambodia at Bt5.89 billion and the Philippines at Bt5.56 billion.

In the first quarter, Thai exports of agricultural goods to the US, Japan and the EU improved, due to the weakening of the Thai baht. Meanwhile, the Kingdom’s agricultural exports to China were yet to recover due to the ongoing US-China trade war, according to the OAE.

Thailand should expand the marketing of key agricultural goods such as fruit groups to other countries, to reduce the sector’s dependence on China, said Chantanon Wannakejohn, deputy secretary-general of the OAE. Thailand has a key advantage over its key competitor, Vietnam, regarding the cost of transport to China.

Auto and air conditioning gains

The Office of Industrial Economics (OIE) reported that in April, the Manufacturing Production Index (MPI) expanded by 2 per cent, pushed by gains made in the automotive and air-conditioning sector.

The index found the production of cars and engines had grown by 13.6 per cent year on year for both passenger cars and pick-up trucks. Domestic demand for automotive continued to be strong, while there was also increased demand from Oceania, the Middle East, Europe and US markets, said Aditad Vasinonta, deputy director-general of OIE.

Air-conditioning and parts grew by 15.57 per cent overall year on year as domestic demand surged during the unusually hot weather. Furthermore, producers are switching to more energy efficient inverters, which are preferred by foreign markets. As such, year on year exports of air-conditioning and parts to Europe, Japan, India and neighbouring countries grew by 13.9 per cent.

Production of concrete grew by 10.25 per cent year on year in the first quarter, especially concrete used in construction and ready-mixed concrete. This was due to the demand from the construction of government infrastructural projects such as the Bang Pa-in to Nakhon Ratchasima Intercity Motorway Project (M6) and projects in the Eastern Economic Corridor (EEC). The real estate sector also drove increased demand for concrete.

Beer production also grew by 23.14 per cent year on year as various breweries that were temporarily closed last year resume operation. Additionally, manufacturers have been modernising their product packaging, leading more customers to purchase their goods.

The production of non-alcoholic beverages and drinking water grew by 11.88 per cent year on year in the first quarter, due to increased promotional activities and new product launches by various producers.

This change was in response to an Organisation for Economic Cooperation and Development (OECD) review of Thai tax regimes conducted last year.

The IBC will continue offering a number of tax incentives to businesses, in line with the Thai government’s aim to promote Thailand as a regional hub. Although the IBC incentives are less attractive than those provided under the previous regimes.

The Revenue Department (RD) indicated earlier this year that current beneficiaries of the previous headquarter regimes could continue to enjoy tax benefits until the original incentive period granted to the business elapsed.

However, the Thai Cabinet subsequently approved three draft Royal Decrees cancelling all tax incentives provided under these previous headquarter regimes with effect from June 1 for corporate income tax incentives and January 1, 2020 for personal income tax incentives. Incentives under ROH2002 will continue until the end of 2020.

The basis of the multiple cancellations is for Thailand to be compliant with the OECD-agreed timelines and prevent punitive countermeasures being applied by other countries.

Current beneficiaries of these previous regimes can convert into IBC before June 1, provided the relevant conditions are satisfied and an application for conversion is made to the RD. No corporate income tax incentives will, however, be available for ITC.

The IBC regime appears to encourage current beneficiaries of the old schemes to convert, as it provides a reduced minimum annual expense requirement of Bt15 million in case of conversion, as opposed to minimum annual expense of Bt60 million for new applicants.

On May 2, the RD released an IBC application form that must be submitted in hard copy to the Large Business Tax Administration Office. There is currently no online application process for IBC.

The RD has stated that the timeframe for approval of IBC applications will be 30 working days for new applicants. A shorter timeframe will apply to conversion cases. Conversion applications must be submitted and approved before June 1, to qualify for the reduced minimum annual expense requirement.

While the RD has been active in providing updates on IBC, given that this is new legislation there will inevitably be elements of ambiguity surrounding the transition to IBC and the mechanics of how the new regime shall apply to current beneficiaries of the existing regimes. It is important that the RD continues to provide clarification on IBC in order for taxpayers to make informed decisions.

Notwithstanding this ambiguity, June 1 is around the corner. Therefore, it is critical that beneficiaries of the previous headquarter regimes contemplate the availability of IBC, take action as soon as possible, and keep abreast of any further developments. Otherwise, businesses could suffer a loss of relevant tax incentives in the “limbo period” of not being in a headquarter regime. Of course, businesses which do not currently adhere to any headquarter regime should also consider the applicability and merit of IBC.

As developments are occurring at a rapid pace, we stress the importance of businesses closely monitoring the situation.

Contributed by TATIANA BESPALOVA, |a tax partner in International Tax Services, KPMG in Thailand.

A budget of Bt66.85 billion for the State Railway of Thailand (SRT)’s new double-track 355-kilometre Ban Phai-Nakhon Phanom line was also approved at its meeting yesterday.

Nattaporn Jatusripitak, spokesman for the deputy prime minister in charge of economic affairs, said that the SRT, as project owner, would now sign a contract with the winner CPH – a consortium of Charoen Pokphand Holding Co Ltd and its allies – for the high-speed rail project. It will connect the country’s three main airports – Don Mueang in Bangkok, Suvarnabhumi in Samut Prakan and U-tapao in Rayong, which is one of three provinces that is a part of the Eastern Economic Corridor (EEC).

The SRT will pay Bt149 billion to the consortium within 10 years or about Bt14.9 billion per year as agreed. The joint investment contract will last 50 years and, thereafter, the rights will be transferred to the state.

The government is expected to reap over Bt300 billion.

At the same meeting yesterday, the Cabinet approved a budget of Bt66.85 billion for the SRT’s new double-track rail – the 355-kilometre Ban Phai-Nakhon Phanom line. Electronic bids will be invited for the railway line.

Initially, the SRT expected to expropriate more than 7,100 plots of land for the double-track rail development, Transport Minister Arkhom Termpittayapaisith said after the Cabinet meeting yesterday.

A contractor will be found for construction of the double-track rail project by 2020 and construction must commence immediately, to be completed in about four years. Service is expected to commence in 2024 or no later than early 2025.

The double-track railway will run through six provinces – Khon Kaen, Maha Sarakham, Roi Et, Yasothon, Mukdahan and Nakhon Phanom.

Along the route, 30 new stations, one junction, three container depots and three container yards will be constructed.

The railway will also be connected to the EEC areas.

Meanwhile, Sawit Kaewvarn, secretary-general of the State Enterprise Workers Relation Confederation, yesterday led representatives from about 45 groups including the State Railway Workers’ Union of Thailand and over 100 affected villagers in the EEC areas to submit a letter to the prime minister. The letter was received by Sompas Nilphan, director of the PM’s Office’s Public Service Office.

The confederation has asked the government to implement the EEC projects and high-speed rail project with transparency and to allow people’s participation in decision-making.

Given concerns over their possible impacts, extending from agriculture, commerce, manufacturing, nature and the environment, to people in the EEC areas, the confederation has proposed four key points for consideration in approving projects for the EEC, Sawit said.

While the project must not have a negative impact on the lives of people in the project area with regard to relief measures for possible damage, the government must proceed with the projects with transparency rather than focusing on benefiting investors who execute the project.

Contracts, especially that of the high-speed rail project, must be publicly disclosed. And the EEC projects and the high-speed rail project must be opened for public hearings before execution due to their large scale, he added.

Meanwhile, yesterday MSCI expands the investment in Asia market that boost the Stock Exchnage of Thailnd yesterday closed up 7.20 points at 1,632.04 with a record transaction value of Bt204.85 billion.Trading was led by foreign investors net buying Bt12.53 billion.

Globally, with equity markets nearing HSBC’s index targets, HSBC prefers a more defensive stance.

In our view, Asean fits the bill. While we expect more volatility and more market stress in the near term, here’s why we think Asean equities can hold their own despite the long shadow cast by trade tensions.

External factors – exports

In Asean, some factors are likely to offset the dispute over tariffs between the US and China over the long term – think shifts in supply chains and new trade agreements – and the region has slowly regained its competitiveness in recent years.

There’s also policy ammunition at home to navigate the trade slowdown.

HSBC expects lower US yields and a stronger US dollar.

Historically, Asean equities have not been overly affected by the dollar’s strength when US yields have fallen. During such periods, valuations have often been much richer and inflation much higher than they are now.

In times of stress, history tells us that Asean is a better place to hide than other emerging markets. Asean outperforms emerging markets in times of US dollar appreciation, rising volatility and EM corrections. Asean will also be supported by a higher dividend yield than in other parts of the region.

Domestic factors

Elections and policies in Thailand, Indonesia and the Philippines have caused some market wobbles.

But we believe the election results point to policy continuity, which should support reforms, infrastructure spending and consumption.

irst-quarter results show earnings are performing quite well in difficult circumstances. Earnings expectations have held up reasonably well so far.

Consensus expects Asean’s 2019 earnings growth at 6.3 per cent. Though this is below the expectation of 7.6 per cent at the start of the year, we think strong domestic demand aided by pro-growth policies can compensate further for problems elsewhere.

Focus on domestic growth, easing monetary policies, infrastructure spending and dividend plays. We remain overweight on the Philippines, Thailand and Indonesia. Upgrade Malaysia to neutral and downgrade Singapore to underweight (from neutral) within the Asean context. On a sector basis, we like consumer, real estate, communication services and selected industrials.