By Jens Erik Gould From The Financialist

While much of the globe wrestles with the growing healthcare and pension costs associated with an aging population, Southeast Asia is in the enviable position of remaining largely exempt from such concerns. In most countries in that region, an expanding working age population underpins positive GDP figures and labor productivity growth. But there’s one country that isn’t following the demographic pack. That would be Thailand, and the results aren’t good for growth or Thai stocks. “Thailand faces not just aging challenges but challenges from changing consumers and workers,” says Amlan Roy, head of Credit Suisse’s global demographics research team in London.

It’s all in the numbers. While Indonesia, Malaysia, the Philippines, Singapore and Vietnam all have population growth rates of at least 1 percent per year between 2010 and 2015, Thailand’s is only 0.3 percent. Its total fertility rate of 1.4 children per woman is significantly lower than the Philippines (3.1), Indonesia (2.3) and Malaysia (2.0). Thailand’s labor force growth rate is also the lowest of the six countries, coming in at 0.8 percent per year compared with 2.4 percent for the Philippines. And while immigration helps plug labor force gaps in other countries in the region, the growth in migration compared with the overall population is minimal in Thailand, and out-migration has become more prevalent in recent years.

Those less-than-desirable demographic trends are hurting the economy. The combination of labor shortages, low investment rates and the scarcity of high-level skills have already become binding constraints on long-term growth rates. As a result, Thailand’s potential GDP growth rate could fall to around 3.5 percent over the next decade from the range of 4 to 4.5 percent that has been seen in the past, according to Credit Suisse analyst Santitarn Sathirathai. According to an IMF study, the expansion of the working age population contributed an average of 0.8 percentage points per year to Thai GDP growth between 1990 and 2012. But that number is expected to fall to an average of zero between 2013 and 2032. Thailand’s real GDP growth is also lower than its peers: it was 4.2 percent on average between 2010 and 2013, compared with 5.5 percent in Malaysia. And GDP per capita is a mere one-tenth that of Singapore.

Thailand could offset some of its demographic challenges by fixing social, economic and political inefficiencies that also hurt growth. “Thailand needs to face up [to] its demographic challenges in a very urgent, consolidated and holistic fashion,” Roy says. That would include reforms in education, labor markets, the technology sector, pensions, insurance and health. In the educational realm, for example, Thailand is the only country in the region where more than half of the population only attended primary school. That’s an important reason why Thais have found it challenging to move from farming to higher skilled jobs in manufacturing and services. Indeed, a noteworthy 38 percent of employed workers are in agriculture, and the Thai service sector is the second smallest of the ASEAN-6 countries.

Also, it doesn’t help that the country has the lowest real investment to GDP ratio in ASEAN. Political reform is also needed: the country ranks 85th in the world on Transparency International’s Corruption Perception Index, and corruption limits effective and efficient management of resources. Finally, then there’s the perennial instability: the country is no stranger to massive street protests and there were coup d’états in 2006 and 2014.

Still, if those reforms don’t happen, there won’t be much of a buffer for the negative effects of the aging population. For equities investors, this isn’t a good thing. True, the growing number of seniors may provide upside for healthcare companies and hotels. But overall, slowing growth and a declining labor force should further push up wages, which already increased 49 percent between 2001 and 2011. These factors will likely eat into company margins, presenting risks to earnings per share growth and making Thailand a less attractive destination for foreign direct investment, according to Credit Suisse. “From a longer-term perspective, demographics feeds our caution because of its impact on GDP growth,” analyst Dan Fineman says. “Investors have yet to discount Thailand’s structurally lower growth prospects.”

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