Asia Macro: Thailand – The smile returns?

Thailand has often been called “The Land of Smiles”, partly because of its natural beauty and rich history but also because of the friendliness and openness of its people.

A few years ago those smiles seemed to disappear as the country went through political and social upheavals not seen for decades. With peace seemingly restored, does Thailand have more reasons to smile? We have a quick look at the economy and its outlook.

GDP

Thailand enjoyed solid growth from 2000 to 2007 - averaging more than 4% per year - as it recovered from the Asian financial crisis of 1997-98. Thai exports continued to drive the economy, accounting for more than half of GDP. However, the global financial crisis of 2008-09 severely damaged Thailand's exports, with most sectors experiencing double-digit drops resulting in a contraction of 2.3 percent in 2009. In 2010 the economy rebounded strongly with 7.8 percent growth, its fastest pace since 1995 and reviving memories of the “tiger” growth enjoyed before the Asian financial crisis.

Steady economic growth at just below 4 percent was becoming the norm in 2011 before historic flooding in October and November in the industrial areas north of Bangkok crippled the manufacturing sector and led to a revised growth rate of only 0.1% for the year. 2012 looks to be a better year  and the government anticipates the economy will probably grow between 5.5 and 6.5%, while private sector forecasts range between 3.8% and 5.7%.

Trade

The Thai economy is still heavily reliant on two sectors – exports and tourism. Electronics, electricals and auto/automotive parts form the lion’s share of Thai exports (accounting for almost 37% of total exports as at July). Japanese car companies have substantial production plants across Thailand making the JPY/THB cross a heavily monitored currency pair.

Surprisingly, rice exports only account for 2% of total exports and 11% of agriculture exports and, while serious flooding during the last two monsoon seasons did affect rice crops, its overall impact on trade performance was minimal. Exports remain predominantly Asia-focused with China the major trading partner (12%), Japan second at 10.5% with the US the first “western” partner at 9.6%. Machinery and parts, vehicles, electronic integrated circuits, chemicals, crude oil and fuels, iron and steel are among Thailand's principal imports.

Inflation

Thai inflation remains under control at a relatively low level, by Asian standards. Latest data for August shows an annual increase of 2.69 percent, slower than 2.73 percent in July and helped by government fuel subsidies countering higher oil prices. Subsidies range from capped prices for cooking gas and natural gas for vehicles along with tax cuts on diesel fuel.

Core inflation, a gauge used by the central bank to guide monetary policy, was steady at 1.76 percent, well within the Bank of Thailand’s target rate of below 3 percent. This in turn will permit the central bank to ease monetary policy to counter the expected slowdown in the global economy. At the September 5 meeting the BOT left rates unchanged at 3.0 percent but only with a narrow 3-2 vote(2 MPC members absent) and said it would closely monitor developments in the global economy as well as domestic demand conditions and will be ready to take appropriate action as warranted.

Outlook

Like many Asian economies, Thailand’s dependence on Chinese demand introduces an element of uncertainty for the economy. There is still some slack in domestic demand that could be buoyed by a monetary easing and a growth rate of 5 percent- plus for this year would be a strong performance in a global context.

The political situation has stabilized and the current government has been in place since July last year.  The smiles are gradually returning to streets in Bangkok and the hope is that a China rebound will continue to spread the smiles to the rest of the country.