thegreglowe.com

By GREG LOWE
IN BANGKOK

THAILAND’s economic fundamentals are sound enough to ride out the global financial crisis, though the domestic political turmoil is making a bad situation worse, experts say.

Consumer fears: Thai consumers are now more fearful of the future than when they were living under military rule last November, says Moodys Economy.com

But the country remains vulnerable to a wave of indirect effects. Exports and tourism are already contracting as global liquidity evaporates, signalling the first signs of a slowdown. Analysts say the economy will stutter in 2009, but will avoid recession.

Bank of Thailand (BOT) puts Thai banks’ total foreign investments at 102 billion baht (S$4.38 billion), 1.3 per cent of the sector’s total assets, leaving it relatively insulated from failing financial institutions in the United States and Europe.

Boontuck Wungcharoen, CEO Thai Military Bank, said three years of local political uncertainty have meant Thai banks have depended on domestic deposits and expanded slowly, operating at around 75 per cent capacity.

Loan growth has come from more traditional sectors, such as working capital, rather than the complex debt instruments at the heart of the current financial meltdown.

Ratings agencies agree, giving the country’s well-capitalised banks a clean bill of health.
‘Thai banks now compare favourably with most regional peers, with strong profitability and capital measures, although asset quality is still moderately weaker due to legacy of bad loans from 1997,’ said Vincent Milton, managing director of Fitch Ratings Thailand.

The state’s 100 per cent guarantee for local bank deposits has been extended until 2011.
The central bank has not intervened in the crisis so far, but economists expect it to cut interest rates by 50-75 basis points early next year, from the current 3.75 per cent. The baht has weakened to 34.83 against the US dollar.

BOT has US$103 billion of foreign reserves, significantly higher than in the 1997 crisis, maintaining the baht’s strength. Thailand Development Research Institute said it had no evidence of BOT buying baht.
The degree of openness of the Thai economy, its international trade as a proportion of GDP, is relatively low at 121 per cent, compared with around 350 per cent in Singapore and Hong Kong, according to Standard Chartered Thailand.

GDP will grow between 4.3 and 5.0 per cent this year and 3.8-5.0 per cent in 2009, according to BOT, down from its original forecasts of 4.8-5.8 per cent and 4.3-5.8 per cent respectively. Some analysts are more pessimistic, predicting growth as low as 3.0 per cent next year.

Exports, which account for around 67 per cent of Thailand’s GDP, according to the Federation of Thai Industries (FTI), will plummet from 19.5 per cent growth this year to 7.0-8.0 per cent next year.
Imports, mostly raw materials used to produce the country’s export goods, will fall from 29.0 per cent growth to 6.0 per cent next year, according to Phatra Securities.

Tourism is already feeling the pinch as the country enters its high season, which runs from October to February. Hotel occupancy is down from 75 per cent to 50 per cent, according to analysts.

Recent figures from Airports of Thailand show international passenger numbers dropped to a four-year low in September, down 19.4 per cent to 2.2 million, while the domestic market fell by 21.5 per cent to 1.25 million.

These downward trends will inevitably lead to job losses. University of the Thai Chamber of Commerce predicts unemployment to surge from current levels of 1.7-1.8 per cent to more than 2.3 per cent next year.

Thailand’s domestic political turmoil has scared off investors and tourists, with Thai consumers are now more fearful of the future than when they were living under military rule last November, according to Moodys Economy.com.

‘The political crisis is the first factor affecting our economy. It doesn’t help keep the economic situation stable,’ Thanit Sorat, FTI vice-chairman, told The Business Times.

Foreign direct investment has been crimped by local troubles too. Total foreign net applications to the Board of Investment fell to 221.4 billion baht for the first nine months of 2008, down 33.8 per cent year on year.

Research from Phatra Securities said the current impasse will take two to four years to resolve.
The situation is also distracting the government from developing effective economic policy, resulting in a real-term 2.4 per cent year-on-year drop in government spending in Q2 2008, according to Moodys Economy.com.

In line with indices across the region, the Stock Exchange of Thailand (SET) has lost half of its value this year, with a 140.7 billion baht foreign net sell-off.

In its most recent survey last month, the Securities Analysts Association forecast the SET to close this year at 611 points, down from September’s prediction 800-plus points, with the 2009 forecast at 671 points.

While the economy is predicted to stay sluggish for the next three years, observers expect the first signs of a turnaround to take place in the second half of 2009.

‘The economy is not unstable and there’s no need for emergency or drastic measures,’ said Dr Saicheua. ‘The best policies would be to cut interest rates next year as inflation falls. Bring back political stability. And prove that the government can implement policy by getting one or two mega projects started.’

This is the fifth in our series of stories on how some other countries – especially Singapore’s major trade and business partners – are coping with the financial crisis

Published November 12, 2008
© The Business Times