Thai slowdown 'temporary', robust fundamentals cited
Thailand's economy is still in robust shape, says an economist, despite the recent volatility and downward revisions of economic-growth forecasts.
In its third revision, which will be officially revealed this month, the Finance Ministry's Fiscal Policy Office (FPO) forecasts the 2013 growth rate at 3.8-4 per cent. This follows the forecast cuts by other institutions including the Bank of Thailand and the National Economic and Social Development Board.
Given the lacklustre export outlook and decelerating domestic spending and investment in light of slowdown in the Chinese economy and the fragile recovery in the United States, Thailand seems to share the same fate as many Asian economies. Foreign capital is flowing out of Thailand, classified as one of Asia's emerging markets.
However, Frederic Neumann, co-head of Asian economic research at HSBC, said the recent slowdown in the growth of Thailand's gross domestic product would likely prove temporary.
"Unlike Malaysia, for example, Thailand has again become competitive in recent years, attracting increasing investment in manufacturing, which should lead to a sustained growth in exports," he said in an e-mailed interview. "In addition, Thailand is increasingly benefiting from strong growth in neighbouring countries, such as Myanmar and Cambodia, making it the growth leader in northern Asean.
"There are some concerns like rising household debt and lingering political uncertainties, but fundamentally, the recent sell-off looks overdone, and Thailand should deliver a number of years of robust growth."
The economist recently included Thailand among six Asian economies - the other five were South Korea, Taiwan, the Philippines, Vietnam and Malaysia - as those that should do reasonably well, at least cyclically and compared with expectations.
"Amid all the talk about the end of the emerging-market era ... do you really expect the West to deliver growth rates beating these economies in the near future?" Neumann asked in his research note.
Slower-than-expected growth in the first half is leading to lowered forecasts for Thailand's growth rate this year. The latest bad news was announced at the "SCB Investment Symposium 2013" seminar yesterday by Ekniti Nitithanprapas, deputy director-general of the FPO. He said GDP should expand by 3.8-4 per cent this year, with several short-term risks, chiefly slow recovery in the US, Japan and Europe.
The export sector, which contributes 73 per cent of GDP, does not function well, while public-sector investment (with a 5-per-cent share) does not contribute significantly, he said.
However, the economy will be supported well by the 20-per-cent growth in tourism revenue, a low unemployment rate and strong public finances.
"The US economy will go through another volatile cycle due to the high debts level late this October. This may cause capital to flow back into emerging markets. Furthermore, the upcoming German election warrants monitoring," he said.
Thailand's economy has been expanding by 4-5 per cent annually in recent years thanks to past investment. New investment in basic infrastructure will be the key for long-term growth. Failure to invest would result in no income and no reduction in the country's debt-to-GDP ratio, Ekniti warned.
While the economy relies more on external demand, which has declined, he said the impact was minimal. Thailand has the capacity to recover rapidly thanks to the low unemployment rate of 0.7 per cent - just 200,000 jobless in the 39-million-person manpower pool - coupled with the low domestic inflation and Thailand's ample foreign reserves of US$170 billion (nearly Bt5.5 trillion), which exceeds short-term debts.
Because of weaker growth prospects coupled with fears of a tapering of the US quantitative-easing (QE) programme, Thailand has witnessed foreign sell-offs in bonds and equities, and the outflows have pressured the dollar-baht exchange rate. The baht has weakened to 32 per US dollar, the lowest in three years, after hitting 28 in April.
Bank of Thailand Deputy Governor Pongpen Ruengvirayudh said yesterday that the central bank had sold US debt papers to shore up the baht as well as to limit losses on US bond holding.
The volatility prompts such intervention to avoid overshooting, Pongpen said.
"As we need dollars for market intervention to keep the baht from falling sharply, we have to sell dollar-denominated debts," she said.
Cutting its holdings of US Treasuries is in line with the policy adopted by other central banks, as the bonds offer a lower return, she noted. However, she did not confirm a Bloomberg report that the BOT made its biggest sale of US Treasuries, worth of $18.2 billion, this year.
She insisted that the central bank had ammunition to counter the next wave of capital flight, if the US tapers off its QE programme. Whether the capital will flow back to Thailand and other emerging markets depends on the US Federal Reserve's policy and investors' reactions.