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Political unrest prevents Thailand from moving forward

Political risk remains the greatest uncertainty for local companies this year, say senior business executives.

Aishwarya Gupta

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Political risk remains the greatest uncertainty for local companies this year, say senior business executives.

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Rifts prevent Thailand from moving forward

Political unrest and the shutdown of the two airports in Bangkok in late November severely affected tourism and consumer confidence in Thailand. Real GDP is projected to contract by 2.7 percent in 2009, as the global outlook remains negative and external demand continues to contract. The fiscal stimulus and monetary expansion implemented by the authorities are likely to partially mitigate the impact of the slowdown, allowing growth to resume in the fourth quarter of 2009 assuming a better outlook for the global economy in 2010.

Private investment in Thailand has been subdued in the past three years due to uncertainty about the political situation.
In 2006-2008 investment grew by an average of 2.7 percent a year (compared with real GDP growth of 4.3 percent on average), down from 14.8 percent during 2003-2005. This earlier retrenchment of investment has dampened the impact of the financial crisis, most notably on foreign direct investment (FDI). While little new FDI is expected, there has been no rush to exit from foreign investors. Growth of private investment in 2008 came mainly from Thai investors, as gross FDI inflows declined from 2007 levels. Private investment is expected to contract 5 percent in 2009 as capacity utilization remains low (around 50 percent). However, growth could resume in the fourth quarter on the back of increased public investment. Public investment has been sluggish in Thailand since the 1998 crisis, but is expected to increase in 2009 given increased political stability and the political imperative to respond to the slowdown in the export sector. The share of public investment in real GDP averaged only 5.7 percent during 2004-2008 compared more than 10 percent before the 1998 crisis. In 2008, public investment contracted by nearly 5 percent as a result of political uncertainties, which delayed investment decisions. Public investment is projected to grow at 7 percent in 2009 as the implementation of large infrastructure projects step up.

The fiscal stimulus and monetary expansion implemented by the authorities are likely to partially mitigate the impact of the slowdown, allowing growth to resume in the fourth quarter of 2009 assuming a better outlook for the global economy in 2010.

Fiscal policy has become expansionary to mitigate the impacts of the crisis.
External debt service ratios are manageable at 5.4 percent of Thailand’s exports overall. Total external debt was under 60 percent of international reserves at the end of 2008. The Thai financial sector is basically sound and has been largely insulated from the immediate impact of the global financial crisis, but increasing pressure from the slowdown on companies will be passed to banks.

The average capital adequacy ratio amounted to about 14 percent at end-2008. Net NPLs declined during 2008 to 2.9 percent of total assets. While this trend is set to reverse during 2009, banks appear to have enough room, at least in the short-term, to cope with higher NPLs. There is adequate liquidity in the domestic banking system, but banks have become more cautious given that credit quality is expected to deteriorate. Credit expanded by 9 percent in 2008, initially due to higher demand for working capital, then as a consequence of large domestic firms switching from foreign to domestic borrowing.

Thailand’s economic growth is falling by more than earlier expected amid a sharp and continuing decline in global trade.

“Countries like Thailand that have been dependent on manufacturing exports are most affected,” said Verghis, who covers Thailand and four other Southeast Asian countries. The World Bank released its latest forecasts for Thailand and other economies in East Asia and Pacific on Tuesday. The global economic slump shut down what has been, for the past three decades, the main engine for Thailand’s economic growth: exports. As a result, the manufacturing sector has been badly hit. The Thai government estimated that one million or more workers would lose their jobs this year due to the slowdown. In January, the unemployment rate stood at 2.4 percent of the total workforce – a full percentage point higher than the 1.4 percent recorded in December 2008.

The Thai government announced an economic stimulus program totaling 117 billion baht ($3.34 billion). The program included a host of short-term measures to boost household consumption and assist lower-income families. The government is now preparing a second stimulus package worth 1.6 trillion baht ($45 billion). Among other initiatives, this package focuses on public investment in infrastructure projects, which the government hopes will help create 1.6 million jobs. “The infrastructure investments, if implemented, will help generate growth and improve Thailand’s competitiveness,” said World Bank. “However, it is worth noting that financing for infrastructure has been available for the past few years. What has suppressed investment was not funding, but rather political and institutional constraints.” While the impact on the real sector has been larger than expected, the global crisis has not shaken the Thai financial sector. The World Bank attributed this to Thailand’s strong macroeconomic fundamentals; low external debt coupled with high international reserves; and a sound financial sector, which has undergone a series of reforms following the 1997 crisis.

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