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2 RISKY
BUSINESS Clouds on Thailand's
horizon By Jephraim P Gundzik
Mounting political and social instability
greatly weakened domestic demand in Thailand
during 2006, and a series of policy miscues
ensures that stocks, bonds and the Thai currency,
the baht, are likely to fall as flight of domestic
and foreign capital accelerates in the months
ahead.
With the economy already weakening,
political instability and softened external demand
for exports will almost certainly push
the
Thai economy into recession by the second half of
2007.
Judging by certain economic
measures, Thailand's performance in 2006 was quite
healthy. According to official statistics, real
GDP (gross domestic product) growth accelerated to
5% last year from 4.5% in 2005. Exports were up
17% year on year even as the baht appreciated more
than 15% against the US dollar.
The
central Bank of Thailand has in recent months been
fighting against this appreciatory trend, fearing
the negative economic impact a strong baht would
have on Thai exports, which contribute more than
65% of total GDP. In December, the central bank
sent shock waves through international markets
when it imposed capital controls on foreign
portfolio, currency and bond transactions. The
authorities have since eased those restrictions.
But central banking authorities surprised
the market again when on Friday it was revealed
that they have urged traders at local banks to
adjust their foreign-exchange positions from
"short" to "long" dollar positions, resulting in
Thai banks buying US dollars to weaken the onshore
exchange rate from Thursday's close of 34.63 to
Friday's of 35.05 per dollar. A substantial spread
has emerged between onshore and offshore baht
valuations, with the baht trading at between 31
and 32 to the greenback overseas. The Bank of
Thailand has in recent months spent more than a
trillion baht to keep the currency weak.
These almost desperate offshore
interventions come simultaneously with a weakening
domestic economy. Real domestic demand growth
slowed substantially in 2006. Meanwhile, real
private consumption expenditure growth fell to
3.2% in 2006 from 4.4% in 2005. In the fourth
quarter of 2006, real private consumption growth
dropped to 2.5%, its weakest quarterly growth rate
since the second quarter of 1999. Tourist arrivals
stayed on course, despite the news of domestic
volatility.
The rapid deceleration of
consumption growth was no doubt influenced by the
political and social instability that led up to
the bloodless military coup that ousted prime
minister Thaksin Shinawatra last September. Poor
sentiment was compounded by the expanding
insurgency in southern Thailand, where Muslim
rebels have recently intensified attacks.
Thailand's instability-driven collapse of
domestic demand is also plainly discernible in
sliding real investment growth. Between 2003 and
2005, real investment growth expanded at an
average annual rate of 12.4%, propped up by strong
fiscal stimuli. In 2006, real investment growth
dropped to 4%, its weakest level since 1999. As
with real private consumption, rapidly slowing
real investment growth had little to do with
interest rates or credit conditions.
Thailand's monetary policy was remarkably
easy during 2006 in light of significant imported
inflationary pressures. This easy-money policy
made credit readily available. However, demand for
credit from individuals and businesses is what
weakened, and the prime factor undermining this
demand was growing political and social
instability.
Even more evidence that
domestic demand is collapsing can be seen in
Thailand's rapidly slowing rate of real import
growth. Real import growth plunged to 1.6% last
year from nearly 10% in 2005. Meanwhile, real
export growth doubled to nearly 9% in 2006 from
4.3% in 2005.
Because real export growth
surpassed real import growth by such a wide
margin, Thailand's net export growth turned
positive in 2006 for the first time since 1999.
In addition to net exports, real
agricultural output surged by 4% in 2006 after
contracting by 3% in 2005. Strong external demand
and rebounding agricultural production offset
collapsing domestic demand in 2006, allowing real
GDP growth to accelerate.
Not so
silken The military overthrow of Thaksin's
government was widely referred to as Thailand's
"smooth as silk" coup. Foreign analysts and
investors were convinced that the military's
intervention would solve the country's mounting
security, political and social problems. Rather
than solutions, however, the military government
has managed to compound the country's security
problems and added a new element of economic
insecurity.
Appointed Prime Minister
Surayud Chulanont, a former army
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
