Economic Update

Published 08 Mar 2012

Thailand’s government is confident the country’s economy is well on the way to recovery, following the devastating floods in late 2011, to return to the high levels of growth witnessed before the disaster. Recovery efforts will take time, however, as further investments in infrastructure and social support are still required.

On February 16, Thailand’s finance minister, Kittiratt Na-Ranong, told the Wall Street Journal that the economy could expand by up to 7% this year, even taking into account the residual harm from last year’s flooding.

“The Bank of Thailand (BoT) sees growth of 4.5–5% this year, but if we can manage it right, it could be 7% without any overheating,” said Kittiratt. This growth would come on the back of an increase in consumer spending, higher government spending and strong export sales, he said.

Not all are as optimistic as Kittiratt. The University of the Thai Chamber of Commerce (UTCC) has predicted that GDP will expand between 1.3% and 1.8% in the opening quarter of 2012. This figure is less than previously thought, due to a number of factors, including high fuel prices and a recent bomb attack in Bangkok that the chamber believes will weaken tourism receipts in the near term. Despite the slow start to 2012, the UTCC did expect the economy to regain momentum in the second quarter and beyond, posting year-end growth of up to 5%.

If the economy does post the sort of growth the minister has predicted, the result will be a marked turnaround from last year. In early February 2012, the BoT issued a statement saying that GDP had grown by just 1% in 2011, well down on the forecasted 4.1%. The shortfall was due to the floods that disrupted industrial production, inundated farmland and caused damages of around $11bn, the bank said.

While the central bank expects GDP to expand by 4.9% this year, and 5.6% the next, Paiboon Kittisrikangwan, the assistant governor at the BoT, said the European debt crisis could undermine demand for Thai exports.

To offset the possible slowing of overseas markets, the government is hoping its domestic investments will bolster growth. To help support this recovery, it is looking to raise further funds on the capital markets, with Niwat Kanjanaphoomin, the president of the Thai Bond Market Association (TBMA), saying on February 17 the state was set to sell record levels of debt in 2012.

According to Niwat, the government was planning to sell bonds valuing $16.3bn in the first nine months of the year − close to the year-end total of $16.6bn for 2010, a record at the time. The government will be able to take advantage of easing yields on bonds to raise cash for new and existing projects, he said.

“Yields are shifting down, giving lower costs for the issuer, and it is also time to restart projects and new investment postponed after the floods,” Niwat told the Bloomberg news agency in an interview. “The government has a plan to use its budget to restore confidence and build some protection from the floods, so we will have more issues from the government.”

While the government is working to rebuild damaged infrastructure, there is only so much that state spending can do, according to World Bank economist, Kirida Paovichitr.

“The government is trying to stimulate the local economy but the state’s investment is only about 7% of GDP, while public sector consumption is about 10%,” he said. “Even though the government is trying to stimulate the economy through direct state investment, it can help at most with 1% GDP growth.”

One factor that the government hopes will spark domestic growth is the 40% increase in the minimum wage, set to come into force in April. The planned pay rise, one of the election pledges of Prime Minister Yingluck Shinawatra, has received mixed reviews. Some have said it will boost consumer spending and serve to stimulate the economy, while others feel the timing of the measure is not right, given the losses many private sector firms suffered as a result of the flooding.

Among those who fear increasing the minimum wage to $9.75 is Sirichai Sombutsiri, a senior executive vice-president of Siam Commercial Bank, who warned on February 9 that it could help push up the consumer price index to between 3.5% and 4%, well above the BoT forecast of 3.2% for the year.

Defending the increase, the finance minister said the pay rise was not just a populist policy, but part of a wider economic stimulus programme. “Higher wages will boost domestic consumption,” Kittiratt told a conference on small and medium-sized enterprises on February 8. “Our citizens have far too little income to become a quality consumer.”

It will be some time before the effects of the government’s efforts to restore momentum to the economy can be judged, and to what extent external factors such as the European debt crisis could undermine those efforts. Most forecasts, however, point to Thailand regaining at least some of the ground washed away by last year’s floods.