Political situation remains fragile in Thailand

With a largely export-driven economy [mainly electrical appliances, automotive parts, machinery], the country has been badly hit by the general downturn in global demand, and by the recession in its key trading partners: the US and Japan. Growth contracted by 2.2% in 2009 as, besides the global economic crisis, the persistent political instability damaged consumer confidence, foreign direct investment and the all-important tourism industry.

However, the economy rebounded strongly in 2010, with GDP growth of 12% year-on-year in Q1 and 9.1% in Q2, due mainly to booming exports [especially cars and electronics], but also a surge in private investment and consumption. In the second quarter, tourism and domestic demand werent as badly affected by the political unrest as had previously been expected, and the surge in exports also countered any impact. After a 13% decrease in tourist arrivals in May, due to the riots in Bangkok, the number of tourists recovered soon afterwards. According to the Commerce Ministry, exports increased 32.6% year-on-year between January and August  while imports rose 47.9%.

Overseas sales are expected to slow down in the latter part of the year, as global demand cools down and the appreciation of the baht against the US$ undermines the competitiveness of Thai exports. In Q3 of 2010 growth already slowed to 6.7% year-on-year [-0.2% on the previous quarter] as exports and agriculture output declined, however, GDP growth will increase 7% overall this year. Severe floods have damaged agricultural land in autumn 2010, which could negatively affect the growth rate.

Inflation increased in the first half of 2010, fuelled by the strong economic performance, but slowed in August and September 2010 due to government subsidies [e.g. for energy costs and transportation] and as a stronger baht tempered import prices. For the whole of 2010, consumer prices are expected to increase to 3.3% year-on year.

The health of the banking sector has improved significantly. According to the Bank of Thailand, gross non-performing loans by the banks decreased to 4.2% of total loans in Q3.

Economic policy

Like many other countries, Thailand has implemented expansionary fiscal and monetary policies to counter the economic crisis. In January 2009, the parliament introduced a US$ 3.35 billion stimulus package aimed at boosting the economy. Consumer spending should be stimulated by cash handouts for low earners, tax cuts, loans for education and subsidies for transport and utilities. An additional stimulus package of US$ 42 billion was launched in July 2009, designed to generate employment and income through public investment [infrastructure projects, public health, school and hospital projects] over the next three years. This expansionary fiscal policy drove the fiscal deficit to 4.4 of GDP in 2009. Due to the strong economic rebound the budget deficit is expected to decrease to 2.2% of GDP this year.

As inflationary pressures increased, due to the strong economic performance in the first half of 2010, the central bank raised the benchmark interest rate in July and August to 1.75% per annum, the first increase in almost two years. A further increase to 2% was decided 1st of December, an indication that the Bank of Thailand views inflation as a bigger problem than slowing growth.

The baht exchange rate has been steadily rising this year, due to the good economic performance and interest rate increases, which triggered an increase in capital inflows. Between January and November the baht appreciated 11% against the US$, to its highest level for 13 years. This has raised concerns in government and from exporters that a persistently stronger baht will hurt Thailands export competiveness. In order to alleviate the appreciation pressure on the baht the Central Bank relaxed restrictions on capital outflows in October, allowing companies to invest and lend more abroad and increase the ease of repatriating overseas earnings. Additionally, the government removed a 15% tax exemption for non-resident investors on income from domestic bonds, with the aim of curbing the inflow of foreign investment, also in order to prevent asset bubbles.

Outlook

After this years strong economic performance, GDP growth is forecast to slow to 4% in 2011, as Thai exports will be affected by a decrease in global growth, especially since the recovery of the US and Japan remains fragile and Chinas growth will cool down. Domestic demand is expected to be a main driver of growth, but any deterioration in the political situation could weaken consumers´ and investors´ confidence.

The budget deficit is expected to rise to a still acceptable 3.4% of GDP. Thailand's sovereign payment capacity is guaranteed by a manageable foreign debt level and more than adequate foreign reserves.

Like other Asian currencies, the baht will remain under appreciation pressure, as the recent US Federal Reserve decision to start another round of quantitative easing will probably decrease the yields on American assets, driving more short-term investment capital to emerging markets like Thailand. A further baht appreciation would hurt exports. Therefore further capital control measures taken by Thai authorities to tighten currency volatility cannot be ruled out.

While macroeconomic policies are prudent, more structural reform efforts are necessary, especially a liberalisation of the electricity and communications sectors, and an improvement of infrastructure and education.