Thailand outlook : politics trumps financial crisis
Written by Writer on Monday, October 27th, 2008
BY Invitation
Thailand outlook: politics trumps financial crisis
ALAISTAIR CHAN
The nascent economic recovery seen in Thailand at the beginning of 2008 has ended. Gross domestic product growth peaked in the first quarter. Political turmoil has sent business and consumer confidence plummeting. Consumer confidence fell to a 10-month low in September, and Thai households are now as fearful of the future as they were in November 2007, when the military was in charge.
Domestic spending is weak. Private consumption growth was down to 7.2% year-on-year in August, from 9.1% in July. Moreover, much of the gain in consumption was due to high prices. Growth in industrial production has been trending down, from a peak of 14.9% in February to just 7.9% in August.
The slowdown stems partly from Thailand’s deteriorating trade performance. Net exports have been a drag on the economy. Import growth lately has been outpacing export growth, and the monthly trade balance has regularly fallen into deficit this year. High fuel prices pushed import costs up 50% year-on-year in July, although lower prices have subsequently helped temper the rate of growth. Exports have been robust, but have not kept pace. Agricultural exports such as rice have benefited from high prices, while manufactured exports such as electronic and electrical goods and automobiles have held up well, especially in light of the weakening global economy.
Oil prices pushed inflation to a decade high in July, leading the Bank of Thailand to raise its benchmark rate to 3.75% in August. Inflation subsequently cooled with the recent decline in global oil prices. Government spending also had an effect: Policy moves such as cutting public transport fees in Bangkok and utility charges for lower-income households have depressed headline inflation.
The political situation remains fluid. Tensions remain between the government and the opposition People’s Alliance for Democracy. The divide between the government - elected mainly with support from poorer, rural voters - and the PAD, whose support comes mainly from wealthier citizens in Bangkok and certain sections of the military, seems unbreachable.
The protests have generally been a net negative for the economy. In August, protesters blocked access to three airports and some train stations, prompting several foreign governments to issue travel warnings. Tourism has suffered. Political events have distracted the government and prevented it from enacting some of its plans, such as for infrastructure development. This was partly why government spending fell 2.4% year-on-year in real terms in the second quarter.
The global financial crisis: Thai banks and the financial sector have been little affected by global credit problems so far. However, this has not stopped stocks and the baht from dropping in value.
From a peak in May, the Stock Exchange of Thailand index has fallen around 45%. The baht has depreciated 15% against the dollar since the start of the year, unwinding most of its gains from 2007; the baht is currently near the value it had in February 2007. Movements in the baht have been related to Thailand’s trade performance, with the currency losing value as imports growth began to outpace exports.
Thailand’s external position remains far better than it was in 1997. At the end of August it was holding US$100 billion in foreign reserves. The current account has tipped into deficit but falling oil prices are expected to push it back into surplus. The authorities have made little effort to prop up the baht, allowing it to reflect its market value.
The global cycle of deleveraging has yet to run its course. Emerging market asset and currency values remain volatile, and while Thailand is no exception it appears to have avoided the worst of the global credit crunch. When the financial sector stabilises, the extent of the damage to developed nations will matter a great deal to Thailand. Exports are expected to come under pressure, especially in the electronics and automobile sectors.
Outlook: For 2008, consumer prices will rise 6.2% year-on-year, a decade high. Nevertheless, inflationary pressures are declining. Although the central bank remains vigilant, interest rates are more likely to go down than up. In the statement following its October meeting, the BoT judged inflation risks had declined substantially since its previous meeting. Moody’s Economy.com expects inflation at 4.5% in 2009, mostly because of lower oil prices.
A military takeover of the government remains a distinct possibility. The PAD may provoke violence from the police in an attempt to give the military a pretext to step in again.
If this happens, it would be Thailand’s 18th coup since World War II. As during the coup in September 2006, business and consumer confidence will take a hit. The stock market may trend further down along with the baht. Some of this could be alleviated if the military avoids its previous mistakes.
On the other hand, a slowing global economy will remove the advantage of a strong export sector that the military enjoyed throughout 2007. In any case, even without a coup, political turmoil and uncertainty will dampen Thailand’s growth, hurt investment, and slow government policymaking.
Consumer confidence will remain weak until the political situation settles; hence the outlook for domestic consumption is uncertain. At this stage consumption in real terms is expected to grow 2.6% this year, after 1.5% growth in 2007. But consumption could improve further in 2009 and grow 4.1%, especially if the government is able to pass its spending plans.
Even without political upheaval the economy is heading for a slowdown. Exports are expected to weaken moderately, growing 6% in real terms in 2009 compared with 9.1% in 2008. Shipments of manufactured goods such as electronics and automobiles will slow, but agricultural exports such as rice will remain strong and raise rural incomes. Meanwhile, the sharp drop in oil prices will lower the import bill and help the overall trade balance. Thailand is still expected to post a mild current account surplus this year and in 2009.
Thailand was expected to be one of a handful of countries to expand output faster this year than in 2007. Moody’s Economy.com expects that it will grow 4.9% this year, little better than the 4.8% in 2007. Growth will decelerate in 2009, to 4.7%, and risks to the forecast are to the downside.
Alaistair Chan is an associate economist with the Sydney office of Moody’s Economy.com.
Bangkok Post
Monday October 27, 2008
