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How slow is a slow Thai economy: A long-term view is essential

THAI GROSS domestic product will likely grow by 2-3 per cent this year. Our most recent projection puts the figure at 2.9 per cent, exactly matching last year's performance.

Of course, the details of growth engines are very different between 2013 and 2014. First, and most important, we had an operable government last year, which, despite the limited major policies initiated in that year, helped push through the needed disbursement of public funds.

This year, we don't. We are approaching the end of the second quarter of the fiscal year, and it now seems increasingly unlikely that we will have a full government by next quarter.

Second, tourism had a blast last year. That fiesta is unlikely to continue this year, which can be blamed on a few factors - political violence in the heart of Bangkok, imposition of a state of emergency, which rendered any travel insurance useless for international tourists, and last but not least, the new tourism law in China.

Third, we are more "cautiously optimistic" about merchandise exports this year. Why cautiously optimistic? We should not forget our poor export performance last year, which shrank at a rate of 0.3 per cent, despite the forecast of 7-per-cent growth at the beginning of the year.

While Thai media seem to have underplayed the role of that law versus the political conflict, its effect is strong across the globe. Destinations ranging from Macau to Australia and New Zealand saw their tourist numbers plunge in the months after the invocation of the new law. The impact was also felt from Europe all the way to the United States, highlighting the global tourism industry's reliance on the Chinese for bloating traveller numbers. That is no more.

And no, it wasn't just because of the global slowdown. That same year, Vietnamese exports grew 16.5 per cent, Japanese exports grew 9.5 per cent - thanks in part to the weaker yen - and China exported 7.8 per cent more than in 2012.

In fact, evidence points in the opposite direction. We were among the minority with shrinking exports in 2013, along with struggling countries like Indonesia.

Going back to the original question, But how low is a 3-per-cent growth rate? A magic number that economists comfortably walk around with is the claim that Thailand's potential growth rate is 4.5-4.7 per cent.

This rate is, however, elusive. If we take the very long-run average growth rate for GDP since 1951, we get 6.1 per cent. However, Thailand has gone through many structural shifts in the past, such as the opening up of the economy, the 1997 crisis and post-crisis export growth.

Once we break periods into several epochs, a striking pattern emerges. Our growth peaked during the liberalisation decade from 1987-1996, at a whopping 9.5 per cent, which regrettably led us into the financial crisis in 1997.

Let's focus on the more recent periods. Once we emerged from the crisis, from 1999, we grew at an average 4.7 per cent up until the US sub-prime woes in 2008. This, I believe, is where the typical magic number for our potential growth comes from. But since 2009, we have had our own structural shift. The baht is no longer as cheap as in the pre-sub-prime period, while labour wages have soared. Can the economy still sustain its "natural" economic growth rate of 4.7 per cent?

In the post-sub-prime world, our average growth has been in the magnitude of only 3 per cent. At this point, people often point out to me the robust performance of the economy in 2010, which expanded at 7.8 per cent, the highest yet in this millennium.

But don't let the low base of 2009 fool you. Had the economy been able to expand marginally, say at 2.5 per cent, in 2009, that striking performance in 2010 would have dwindled to a mere 2.7-per-cent growth.

The year 2012 is another example. Had the flood not wiped out our growth in 2011, a marginal growth rate of only 2.5 per cent that year would have changed the stellar post-flood performance of 6.5 per cent to 4 per cent instead.

In fact, before the flood, the economy in 2011 was shooting for 3.75-per-cent growth, which would have brought the actual growth rate in 2012 down even further. In other words, sure, we may be able to achieve higher than the 3-per-cent potential growth rate, if all things go right, but not by much more - and definitely not in the range of 4.5-4.7 per cent range any more.

Does a 1-percentage-point difference in the natural growth rate matter that much? For one year, probably not. It will make cash churn a little slower in the economy. Firms will find it more difficult to meet targets, while cash on hand may be thinner than before. But overall, we'll survive. If we managed to survive (barely) the 10-per-cent economic contraction in 1997, we will survive a 1-percentage-point slowdown - not even a contraction.

For a longer period, however, a 1-percentage-point difference matters a whole lot. We must not forget why economic growth is important for the long run in the first place, and how it leads to economic development.

A 1-percentage-point difference in the potential growth rate will mean Thais on average being Bt30,000 less rich in 10 years, which gets compounded to Bt122,304 in 20 years and Bt376,000 in 30 years, at today's prices. It will also mean we will miss joining the "high income" countries in the first half of this century or possibly even in the second half.

So while the fuss is over this year's economic performance, a more fundamental issue is lurking in the background. We have relied on synthetic growth since the sub-prime crisis - once from fiscal expansion, once from rapid credit growth and once from just a technical low base. None of these factors is sustainable as a growth engine.

Some lament the loss of the government's transport-infrastructure plan, but a bridge to nowhere remains a bridge to nowhere without a vision of a growth engine. While Malaysia aims to become a developed nation by 2020, we are not even sure whether we will get there. It's time for us to ask, why not?

Views expressed in this article are those of the author and not of TMB Bank or its executives. Benjarong Suwankiri is head of TMB Analytics. He can be reached at tmbanalytics@tmbbank.com.


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