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The economic consequences of Thailand's political crisis

Similar to other emerging countries, Thailand's economy is usually dependent on the global economic situation because of the importance of export and capital flows in stimulating economic growth. Therefore, in recent years, the economic outlook in Thailand has been determined by the world economy, which was influenced by the global financial crisis and the European Union debt crisis.

However, in 2014, an important factor affecting the Thai economy has become the ongoing political crisis. At the end of 2013, the US and EU economies continued to improve. Conversely, the Thai economy has slowed significantly since the fourth quarter of 2013 (GDP growth 0.6 per cent) because of a sharp decline in household consumption and government spending. In addition, tourist arrivals shrank significantly.

The impacts of the political crisis on the Thai economy come from three factors.

First, government spending declined, affected by the delay of a complete election and the limited role of the caretaker government.

Second, consumption expenditure dropped because of the decline in consumer confidence and uncertainty about the economic and political situations. This factor also has an effect on both domestic and foreign investment.

The third factor is the decrease in tourism income.

For these reasons, we expect that domestic demand will plummet this year. Therefore, gross domestic product is projected to expand by less than 3 per cent for the second consecutive years (2013 GDP growth was 2.9 per cent).

Based on a National Institute of Development Administration research project on macroeconomic analysis, a macro-econometric model has been developed to provide tools to examine Thailand's economic outlook. We expect that domestic demand will continue to slow during the first half of the year. Therefore, GDP is expected to grow by 1.4 per cent during that period.

However, the economy should get better during the second half. We expect that the political situation should be improved and a new election in the second quarter will be successful. Therefore, the new government should be formed no later than July. Based on this assumption, domestic demand should rebound in the second half.

Together with the moderate expansion in exports, we expect that GDP will expand at 3.8 per cent in the second half of 2014. Therefore, we forecast full-year GDP growth at 2.6 per cent.

Export should provide the most impressive driving force. Export volume of goods and services (including tourism income) is expected to grow by 5.6 per cent. This figure shows improvement over 2013, when export volume increased by 4.6 per cent.

However, government expenditures are projected to expand at a minimal rate. Moreover, we project that private consumption will expand at 2.1 per cent and investment by 1.5 per cent.

These figures provide the evidence that the political crisis has had a significant impact on the economy in 2014.

Moreover, we have conducted an analysis based on the assumption that political problems carry on into the second half without a permanent government. Under this scenario, we project that GDP in 2014 will expand by 1.9 per cent because of a delayed recovery in domestic demand.

Finally, another important aspect of the economic consequences of the political crisis is the country's long-term growth potential. The delay in infrastructure investment due to the lack of a permanent government and the diversion of foreign direct investment in key industries such as automobiles and electronics could be factors that affect long-term competitiveness and growth potential.

As a result, the political crisis is an important risk factor to the Thai economy. The impacts are not only limited to the short-term growth prospects during 2014 and 2015, but also for the country's long-term economic potential. Therefore, we hope that the situation will improve in the near future, leading to the recovery of Thai economy's ability to realise its growth potential.

Yuthana Sethapramote PhD is director of the Master of Financial Economics programme, graduate school of development economics, National Institute of Development Administration. E-mail: yuthana.s@nida.ac.th.





2013 2014

(forecast)

GDP growth 2.8/ 2.6

Headline inflation 2.4/ 2.3

Private consumption 0.0/ 1.8

Private investment -3.0/ 1.0

Exports (goods value) -0.1/ 5.0


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