Published on June 24, 2005

If you think that the bad news about the Thai economy is going to go away anytime soon, then you must be kidding yourself. The preliminary data for May show that Thailand posted a trade deficit of US$930 million (Bt38 billion) on the back of surging imports.

Steel and oil imports accounted for a major chunk of the deficit. And if the service account managed to record a small surplus of $200 million in May, then we will have another month with a current-account deficit of at least $700 million.

If this ends up being the case, according to Phatra Securities, the year-to-date current-account deficit will hit $3.8 billion, which is already more than 2 per cent of the projected gross domestic product for 2005.

The Thaksin government pledged to cap the current-account deficit at 2 per cent of GDP. And yet it is clear that the government is already about to breach this target, even though it has yet to make any investments in the mega-infrastructure projects it is planning to launch.

You may be wondering how long Thailand can afford to run such a current-account deficit. If the deficit continues at this rate until the end of the year, the country will lose some $10 billion in foreign exchange reserves. Should this come to pass, the market would really get panicky.

In a way, the government has been caught off guard by how quickly the current account has deteriorated. A current-account deficit implies that a country is living beyond its means.

In the past three years, the Thaksin government was able to afford whatever crazy populist projects popped into its chief policymakers’ heads because the country still enjoyed a current-account surplus. During that period we had more savings than demand.

Now the situation has completely changed. With the rising oil prices, higher import prices of steel and other raw materials and lower earnings from tourist revenue, the current account is running into a deficit. If tourism fails to pick up later this year, Thailand will really be in for some trouble. The 5-per-cent target for economic growth will be wishful thinking.

Already, currency speculators have smelt blood. And they are speculating against the baht because they see the deterioration in the current account. Given such poor sentiment, by September the baht could slide further to Bt42 to the US dollar, according to JP Morgan research.

The government has boasted that it has introduced a dual-track economic policy in order to create a shield for the economy against potential global shocks. If exports were to falter, domestic demand would slide into the driver’s seat to help drive the economy.

As it has turned out, the dual-track policy is an illusion. There is only one track – that is, the global track. The Thai economy is now integrated with the global economy much more than it was in the pre-crisis period. When there is an external shock, as is now the case with the oil-price shock, the economy is battered badly. If the dual track were really in place, as the Thaksin government would like you to believe, the economy would have proven more resilient in the face of a global shock.

So what can Thailand do under the circumstances? The answer is simple. It can only cut back its overall spending in order to bring the external deficit under control. The economy would certainly have to weaken sharply as a result.

Can the Thaksin government tolerate this slowdown?

But this is a price that Thailand has to pay. If the country keeps on spending at this pace and allows the external deficits to balloon, it will face a weakening currency and rising inflation. Then things will get really nasty. That’s why people are suddenly debating the relative merits of growth versus stability. It looks increasingly certain that we will have to embrace stability before the country is hit by runaway inflation.

The question is whether the Thaksin government knows what it is doing. It looks as if it is at its wit’s end.

Thanong Khanthong

Post your comment to this story here