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Smooth sailing for Thai
economy
By David Fullbrook
SHANGHAI - Despite the tsunami, the Thai
economy looks strong thanks to rising investment,
growing exports and hints that consumer spending
will grow. Clouding this sunny picture, however,
is oil price uncertainty, the dollar-yuan
tug-of-war, and violence in the country's southern
border provinces.
Before the tsunami
devastated tourism along the Andaman Sea coast,
economists were forecasting growth around 5-6% for
this year, broadly similar to 2004. In the days
since, they have been trimming forecasts about
30-40 basis points. JP Morgan, for instance, now
sees the economy growing 4.6% this year against 5%
before the tsunami. However, Thailand's ability to
rebuild is strong, tourism resilient and other
economic foundations solid. So the economy could
yet chalk up a healthy 5% expansion.
Exports and government spending on
social programs helped the economy power through
2004. The government focus is now shifting
to infrastructure. Prime Minister Thaksin
Shinawatra has promised to spend 900 billion baht
(US$22.5 billion) to double-track national railways,
which should cut journey times by half and more
than double freight capacity, while adding at
least three more mass-transit lines in Bangkok to
relieve traffic jams. Another 300 billion baht
will go to roads and other projects.
This
splurge has some wondering where all the money
will come from. "The government does not want to
borrow heavily overseas for this, but at the same
time, you can't expect the private sector to
finance this without borrowing overseas. Overall,
it's a positive, though we have to be very
cautious about the financial liability," says
Chris Bruton, an economic commentator.
With the economy growing, banks awash with
cash and interest rates low, most analysts are
unruffled. "Local investment and infrastructure
can be financed locally because there is still a
lot of funding liquidity," says Usara Wilaipitch,
Standard Chartered's Thailand economist. "Given
all other factors, we believe recovery in
investment over the next few years will take the
place of consumption as a driver of the economy."
Meanwhile, firms with many
factories running at full-tilt are starting to
expand production capacity. In the previous few
years, cutting debt and building healthy cash
balances were bigger priorities for Thailand Inc. Not
anymore. "If you look at the capacity utilization, it
is close to 75%. We do think that for 2005, the
linchpin for economic growth will be capital
expenditure. It's on that count I remain fairly
sanguine on the Thai economy as long as global
growth continues," says Lian Chia-Liang, JP
Morgan's Thailand economist.
Many foreign investors who held back because of expensive oil
will unfreeze projects to avoid losing investment
incentives. "Much of the investment approved [by
the Board of Investment] in 2003 and 2004 has not
taken place due to investor concerns about high
oil prices. We expect those investments to be made
[in 2005] because of approaching expiry of
investment privileges granted for those projects,"
says Wilaipitch.
Auto parts, electronics,
petroleum, petrochemicals and tourism are the
big-spend investment sectors. Investment will also
grow in construction materials, where prices have
risen fast as developers build more homes and the
list of infrastructure projects grows. Supporting
corporate investment will be exports, which,
despite the strengthening baht, posted a
surprising 20% increase in 2004. "The solid
support from export growth over the last few
years, in light of cautious optimism about the
global export demand, should sustain," says David
Cohen, Action Economics' Asian economic
forecasting director.
Though the US
economy is stumbling, analysts remain divided on
whether it is going to fall or is just pausing for
breath; Europe is steady as she goes while China's
lengthy stride gives it a growing appetite for
Thai products. "During the past five years, the
importance of the Chinese market has increased,
accounting for less than 3% to 7% now," says
Wilaipitch. "Because of a slowdown in China and
the US, we expect exports to grow only 10-12% in
2005."
While the US buys about 20% of
Thailand's exports, China will likely be buying
10% or more within five years if the strong growth
continues. Japan's cautious recovery will also
reduce reliance on the US for many Thai exporters.
Even so, Thai exporters cannot afford to rest.
They need to produce more complex goods, aiming
products at the Chinese market as well as the West
if they are to survive the challenge of China's
cheaper labor - about $0.90 an hour against
Thailand's $1.20, and rapid innovation.
"Thailand's labor rates are not as low as in
China, so they've really got to specialize," says
Dr Mark Mobius, Templeton Emerging Markets' lead
manager.
That equation may shift
in Thailand's favor if China allows the yuan
to strengthen, probably around 5% against
the greenback, this year, as most observers
expect, and the baht steadies. Exporters wince
every time the baht creeps beyond 40 to the
dollar, moving into the 39 bracket. Yet their
concern may be a little overdone. "Compared to
[Philippine] peso or {Indonesian] rupiah, baht has already appreciated to a
larger degree, but if we compare to Northeast
Asian currencies, the baht has appreciated to a
lesser degree. Overall, we still believe the baht
remains competitive," says Wilaipitch.
She
thinks a baht ranging between 38 and 40 to a
dollar will not greatly harm exports. Lian is more
bullish, expecting the baht to touch 37.5 come
mid-year. Most observers consider the baht
undervalued to varying degrees. "I'd say around 30
is a fair value. Whether it is going to get there
depends on many factors, such as inflation," says
Mobius. However, a few take the opposite view. "I
don't think the Thai baht has a significant upside
potential against the US dollar, which I think has
significant potential to rebound," says Marc
Faber, a fund manager renowned for his contrarian
views.
With inflation creeping up,
but far from being a serious threat, interest
rates are heading north for the foreseeable
future, pulled along by the US Federal Reserve's clarion
call, with the benchmark 14-day repo rate rising to
2.25 over the course of the year from 1.75 now,
and minimum lending rates adding 50 basis points
through the year. But even with these increases,
rates remain historically low and
growth-friendly. Higher interest rates will make some
savers feel marginally wealthier, encouraging
spending. Low unemployment, around 2%, should
help buttress consumer spending too, which sagged last year.
Pockets
are certainly full, but people still wary
after the late-1990s financial depression have become cautious because
of high oil prices. Many have also been paying
down their personal debt, which has been expanding
over the past few years because of low borrowing costs and
wider access to credit. Sentiment may now be
turning, with consumer confidence posting its
first increase in 10 months in November. "I think
consumer confidence will improve, partly because
of the stronger baht, which means higher
purchasing power and reduces inflationary
pressures," says Wilaipitch.
With
the economy
well positioned, the stock market could
rally, after going nowhere in 2003. It doubled in
value during 2002. Fund managers are most
definitely sniffing around. "Sectors I favor are
food processing, health care, and I think
tourism," says Faber. "I think in Thailand, like
the rest of Asia, it is a question of individual
stocks. There are many that are reasonably priced
and have a steady business."
Templeton
Emerging Markets' Mobius adds, "There are
selective opportunities in banks, finance and
property companies. There are big variations in
valuations. We're not in a euphoric, crazy bull
market - people have not got overly excited yet -
but we could get into that." A few uncertainties
remain that could dampen appetites for stocks.
February's general election unnerves some, but
most expect a solid victory for Thaksin. That
should be positive for foreign investment in the
bourse and the real economy. "Whatever you like to
say about the government, it brings a degree of
stability not seen before, it creates a sense of
certainty that business people like," says Bruton.
Almost daily killings in the three
southern Malay-Muslim provinces remain something
of a wild card. While many are about local
disputes, politics, business rivalries and such, a
small, militant faction could yet exploit the
situation if local security forces fail to improve
relations with the people. That said, the outlook
remains bright, probably for the next few years.
"I think a lot will depend on the Chinese economy.
If it continues to grow around 7-8%, I think the
outlook for Thailand is reasonably favorable,"
says Faber.
(Copyright 2005 Asia Times
Online Ltd. All rights reserved. Please contact us
for information on sales, syndication and republishing.) |
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