Where is Thailand’s economy headed?

Thailand is booming economically, and Carl Berrisford (analyst for UBS CIO Wealth Management Research) thinks this is a sustainable boom (not a boom & bust).

The main reasons for his positive prediction for Thailand’s economy:

  • increased political stability
  • a major government infrastructure spending program
    • total around ~1.9 trillion baht, with the peak of the spending outlays occurring in 2016-17
    • mainly BKK mass transit system
    • 4 new high-speed rail routes
    • extending capacity of Suvarnabhumi airport
    • road & rail projects
    • – all this has led to housing boom in Bangkok
  • record levels of inbound tourism
    • mainly Chinese tourists and Asean nationalities (visa-free entry to Thailand)
  • opening of Myanmar 2012 also increases Bangkok’s importance as regional flight hub
  • Japan yen is cheap now, so Japan wants to extend its supply chain and raise export capacity in Asean markets
    • lots of Japanese investments into carmaking and electronics sectors
  • Thailand public debt-to-GDP ratio is 44%
  • household income is rising (partly due to minimum wage rises)

Read the full article here for more details.

Other Stock Exchanges May Not Be Available

The Stock Exchange of Thailand (SET) Index has dropped by nearly 5% today in what is described as heavy trading – this is in addition to a fall of just over 2% yesterday (of course, now that the Index is down below 700, even comparatively small changes can represent seemingly large percentage changes). As usual, commentators seem keen to put forward their own reasons for these falls – some will talk about loss of investor confidence following the closing of the Map Ta Phut industrial estate facilities, some talk about concerns over HM the King’s health, some talk about political uncertainty in advance of political rallies to be held this weekend and some will talk of the semi-mythical ‘profit-taking.’ In reality, of course, markets generally move for a whole range of different reasons, including the release of information on specific industries or companies which rarely make the headline news. Evidence increasingly suggests that when several factors coincide in order to create a movement in the same direction (but especially when the movement is downwards), then at some point a herd-like mentality can take over, brokers panic and a more or less random movement turns into an emergent crash. To stop this happening, there are usually ‘circuit breakers’ inserted into the exchanges – for example, trading would be suspended for the rest of the day on the SET if there is a loss of 10% or more in a single day. That gives people time to cool off and return to a more rational frame of mind. On the whole, we might reasonably expect a general decline in the level of the SET (and other regional indices) as the ongoing global financial crisis continues to lead to depressed export markets. This can be exacerbated in Thailand by uncertainty over the future but there are also reasons to feel optimistic about the future economically (although we would probably need a change in those responsible for the economic management of the country). Besides which, the time to sell shares is when prices have gone up and the price to buy them is when prices have gone down.

Let Them Eat Lobsters

With the steel-trap intellectual rigor with which he is rapidly becoming associated, PM Abhisit Vejjajiva has decided to close down all those dirty, nasty, unwanted manufacturing projects and replace them with shiny, shiny, shiny tourism resorts. Mr Abhisit, who is not believed to have done an honest day’s work in his life, seems not to have explained why it would be a good idea to get rid of skilled, high-paying, long-term manufacturing jobs and replace them with low-paid, low-skilled, seasonal tourism jobs – however, the strong suspicion is that, like so many other subjects, he has no idea what he is talking about. He has no connection with the working people of Thailand and his sleazy, repressive administration is an increasingly embarrassing failure. Meanwhile, in an obvious reinvention of the largely successful OTOP campaign, the Office of Small and Medium-Sized Enterprise Promotion (OSMEP) is to state a pilot project in the northeast of the country to promote silk handicrafts. Higher education institutions (including Silpakorn University) and some local co-operatives will join together to help ‘upgrade’ the industry – presumably this will be a mixture of technical skills and the ability to respond to market demand and market driven requests, which means finding out what people want and making it for them, rather than making things they know how to make. In addition, depending on how closely the OTOP model is to be followed, there may be help in distribution and national-level and international-level marketing. Meanwhile, barter trade with Russia is back on the agenda – readers might recall that during as I recall the premiership of Samak Sundaravej (who I believe is seriously ill) there was a plan to exchange frozen chickens for some more badly needed second hand fighter aircraft. The plan failed because – well, how many frozen chickens would you swap for a second jet fighter? Perhaps we could get the EBay people in to consult.

Exports Need More than Depreciation

If exports rise and fall by dramatic amounts because of the appreciation or depreciation of the currency in which those exports are denominated, then it shows little customer loyalty to the products. Consequently, calls to keep the baht at an artificially low position are nearly always missing the point of the underlying weakness of the economy. In the first place, artificially restraining a currency is likely to provoke a trade war or, at least, repercussions from trading partners who feel they will lose out as a result. Secondly, the 1997 financial crisis should have persuaded most people that it is very dangerous to try to buck the market – that is, change the demand conditions for a currency when a strong sentiment is in action.

Perhaps more importantly, the attribution of currency changes to export rises and falls demonstrates the extent to which so many Thai exports are little more than commodities in nature. If customers want to buy shrimps, then they will buy the cheapest shrimps all other things being equal. However, if there are for sale branded Thai tiger prawns, suggesting prestige and superior taste, then customers may be persuaded to pay a little more for them and to be loyal to that product – in other words, to recognise the added value that leads to the reduction in elasticity for the product.

This is where Thai exports continue to be weak – it is neither a secret nor rocket science, people have been saying the same thing for years. Create brands, add value, foster loyalty and people will not treat Thai products like the commodities they so often do these days. Appropriate government support, especially for the Small and Medium Sized Enterprises sector, is also of considerable importance.

The 3Ls Strategy

At a conference between representatives of the International Labour Organization (ILO) and Thai trades unions in February:

“Professor Dr Voravidh Charoenloet, Faculty of Economics, Chiang Mai University stated that it would take longer to recover from this crisis in comparison to the 1997 crisis when the economy recovered in only 2-3 years. This crisis, he observed, had a direct impact on the real economy and was causing an economic recession the world over. Moreover, the economic growth rates of Thailand relied mainly on the 3L Strategies of low wages, low productivity and long working hours. Thai workers are among those working the longest hours in the world, in order to secure sufficient income for feeding the family.”

This 3L strategy is, in my opinion, now no longer tenable, given the impact of the economic crisis on the continuing drain in competitiveness represented by the rise of China and Vietnam. Decreased demand around the world will lead to manufacturing workers in the export sectors losing their jobs (which we are already seeing – unemployment is now being estimated at reaching two million by the end of this year). Thailand is especially vulnerable to external shocks (i.e. unexpected events anywhere in the world) because of its reliance on exports and tourism and the need to import so much oil and gas from overseas. The current government is taking some steps to provide support to redundant workers but the measures appear to be both temporary and short-term in nature. There is not much point in retraining workers for jobs which do not exist, for example.

Back in 2001, the incoming Thai Rak Thai government had a vision for the economy that emphasized promotion of domestic capitalists and regional development as a means of countering the vulnerability to external shocks while still remaining open to the world (the processes of globalization are such that it would be impossible to become a closed society and ruinous to try it). Unfortunately, that vision has been lost owing to the military coup and its supporters on the right such that, now, the current government has no discernible policy for the future of the economy beyond continuing as before. However, the means by which a poor country becomes a middle income country (as Thailand now is), are not the same means by which a middle income country can become a high income country. This is the so-called Middle Income Trap. An example of what to do from here is South Korea – it is not too late to begin to emulate Korean success and increasingly important to do so.

Grim Prospects for Economy

The PAD Disaster and the global economic recession are going to strike hard on the Thai economy this year. Various new estimates of the extent to which exports will be reduced are making the news again, for example here and here. Of course, no one really knows how bad the situation will be because nobody knows whether the measures put into place by the American, British and other western governments will have the desired results – sensible people have realized the need for Keynesian style economics and the requisite stimulus measures have been put into place (it is possible to differ about the best ways of doing this) – yet there is evidence that banks are continuing to cause problems by not addressing the need to pass on the money they have been given by government to ease their liquidity crisis – government really needs to force the market to conduct itself as required.

Meanwhile, the Santika Pub fire disaster is not likely to help the already badly affected tourism industry, which is still suffering from the PAD seizure of the two international airports. Expect continued political protests to exacerbate the problems of perception among potential visitors.