Economic Update

We will be closed next week for the holidays. Publication of economic updates will resume on January 2.

While the floodwaters that submerged much of Thailand’s economic heartlands are receding, the high tide mark of damage to the economy has yet to be reached. A full assessment of losses is still a long way from being completed, but the government is confident of a quick recovery.

The flooding in October and November has washed away many of the optimistic forecasts for growth this year and has affected consumer and investment confidence. According to a mid-November report issued by the University of the Thai Chamber of Commerce (UTCC), GDP may rise by only between 0.5% and 1% this year, with the lower end of the scale more likely if industrial estates in the eastern part of the country have incurred greater damage than expected.

Earlier this year, the Thai economy was projected to expand by at least 4%, though the Bank of Thailand revised this downwards at the end of October to 2.6%, still above the UTCC’s expectations. The continued flooding in many parts of the country may prompt the central bank to review its latest forecast, however.

The UTCC estimated that losses stemming from the flooding could reach $13bn, with more than half of this coming from reduced industrial production, combined with $2.7bn of losses in the agricultural sector and a downturn in tourism cutting revenue by $1.4bn. Some estimates suggest the total cost of the flooding could run as high as $32.5bn.

There are concerns that the floods will also usher in a renewed bout of inflation, which the Bank of Thailand had predicted would remain below 4% for this year and through 2012. However, rising food costs due to crop losses and higher demands for many goods and materials needed for rebuilding and repair work could push inflation beyond the predicted rates.

The floods will have an impact well beyond Thailand, with a ripple effect on a number of industries across the world. Japanese carmakers Mitsubishi and Toyota, for example, were forced to close their Thai manufacturing facilities from early October until mid-November because many of their local parts suppliers had been flooded. Other manufacturers, including General Motors and Honda, have also seen their production disrupted.

Perhaps even more significant for the international economy is the damage done to Thailand’s computer and technology industry, with many factories still awash. A recent report by JP Morgan warned that the flooding would hit Thai producers of hard disk drives and other computer components, resulting in a 15% fall in global PC output for this year. The report did indicate, however, that Thai production should begin to recover by the first quarter of 2012.

The flooding could also increase international food prices, particularly for rice, of which Thailand is the world’s largest exporter. This year’s rice harvest could be around 19m tonnes, well off the 25m tonnes estimated earlier in the year. Such losses could impact Thailand’s ability to meet its export contracts and put further pressure on global commodity prices.

Though there has been some criticism of the cabinet headed up by Prime Minister Yingluck Shinawatra for its handling of the crisis, with the opposition claiming that aid has been slow in coming, the government has been developing its strategy for recovery.

An immediate funding package of $3.3bn has been assembled to fund initial rebuilding work, and an additional $5.2bn for flood recovery and water management projects has been included in the draft 2011-12 budget, unveiled on November 9. Much of this funding will go towards restoring damaged infrastructure and utilities.

Among the government’s measures to reboot the economy will be allowing duty-free imports of some machinery and raw materials for use in the production of goods to be exported. However, the tax holiday covers only plant and materials that were lost due to the flooding and does not represent a wholesale lowering of import tariffs. The government has also approved an $11m scheme to provide soft loans to companies and individuals.

Though the losses caused by the flooding are extensive and are expected to rise as a final counting of the costs is completed, many are confident the economy will recover quickly. A return to growth, however, is dependent on there being no further damage to the economy in the coming months. As long as the floodwaters recede and the flow of state funding to support recovery is maintained, that optimism should not be misplaced.