2008 Year in Review


Economic News

22 Jul 2010
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Disturbed by domestic political turmoil and latterly the global economic downturn, Thailand has spent most of 2008 trying to maintain normal business and economic activities. While there have been silver linings in the clouds, the year has largely been characterised by a search for both political and economic equilibrium.

Deep political divides boiled over in May, when mass street protests broke out in Bangkok and supporters of the opposition People's Alliance for Democracy (PAD), which draws support from rural areas and royalists, occupied government offices for over two weeks. The PAD supporters eventually forced the resignation of Prime Minister Samak Sundaravej on allegations of corruption.

Samak was replaced by Prime Minister Somchai Wongsawat, the brother-in-law and alleged ally of ousted Prime Minister Thaksin Shinawatra. The election of Somchai in September fuelled further PAD protests, which culminated in the group's November takeover of both Bangkok airports.

The siege lasted eight days and left hundreds of thousands of tourists stranded, draining the industry of millions of dollars in daily revenue. The crisis finally ended on December 2, when Thailand's constitutional court ordered the dissolution of Somchai's ruling People Power Party and banned the premier from politics for five years.

As of December 10, Thailand's opposition democrats announced they had enough support to form a new government and planned to propose Abhisit Vejjajiva as the next prime minister. Given the chaotic political landscape throughout the year, it is likely that the crisis will continue into 2009.

Thailand's tourism sector - which contributes 14.1% to the country's Gross Domestic Product (GDP), directly and indirectly - has been hit particularly hard by both the global downturn and domestic political instability. Sensing a tightening of Western purse strings, the sector was quick to adjust to the credit crisis, choosing to focus on the wealthy Chinese segment with its "Wonderful Thailand 2008" campaign, launched in August. But overall, the sector is expecting a decline in visitor numbers, due to persisting political tensions.

On the IT front, the launch of fully-fledged third generation (3G) mobile telecommunications in Thailand gives operators the chance to seek new income streams as the traditional market approaches its saturation point. On August 22, Thailand's two leading mobile phone operators, Advanced Info Service (AIS) and Total Access Communication (DTAC), announced they would be launching 3G services in the first quarter of 2009.

The Thai stock exchange encountered more than a few sticking points, following a general downward trend throughout the year and losing half of its January market value by mid-December. The SET, the country's benchmark stock index, hit a 401.84 average for November, its lowest level since 2003. However, the baht has been steadily gaining strength since March 19, when the currency hit an annual low of .31.158 against the dollar.

Some sectors are weathering the domestic and international storms better than others. The real estate market, led by luxury properties, experienced robust growth in the third quarter. The outlook remains relatively positive, with demand being driven by the prospect of rising prices over the next two years.

Similarly, Thailand's automotive sector continues to grow, buoyed by a range of recent measures. The country is aiming to become a regional centre for vehicle manufacturing, with a target production level of 2m units annually by 2010. Last year, some 1.3m were manufactured, and output capacity is growing apace.

One of the latest moves initiated by the government is to promote the production of more fuel-efficient and ecologically friendly vehicles with tax exemptions for producers and lower tax rates for consumers. Lowering the tax burden on manufacturers is expected to help firms meet rising local demand for fuel-efficient vehicles, as Thais look to trim their growing fuel bills.

In a similarly environmentally and economically-conscious move, the government continued to push for energy diversification, in particular towards biofuels, even as oil prices dropped significantly toward the end of the year.

The promotion of ethanol and biodiesel is one of five main tenets of the Ministry of Energy's energy plan revealed last month. It calls for the acceleration of the yet-to-be released 15-year Renewable Energy Development Plan (REDP), as well as full backing for the sector in making ethanol and biodiesel "the energy for Thais."

The overall outlook for the economy was sound mid-year. Following the conclusion of its Article IV consultation with Thailand for 2008 in July, the International Monetary Fund (IMF) described Thailand's economic fundamentals as "favourable". The Directors predicted a return to medium-term growth rates of around 6%, "based on the assumption of a continued macroeconomic stability and higher productivity dividends from investment in infrastructure".

Among the recommendations in the report, the Bank of Thailand (BOT) was advised to monitor its monetary policy stance on an ongoing basis and stand ready to adjust it in response to the domestic inflation outlook. The BOT clearly paid attention to this recommendation, adjusting the rate multiple times over the course of the year.

For the first half of the year, the policy interest rate held steady at 3.25%, though in July the Monetary Policy Committee (MPC) of the BOT raised it by 25 basis percentage points (bpp), followed by another 25bpp hike in August. At its final meeting of 2008, on December 3, the MPC cut a full percentage point, down to 2.75% - the largest cut in eight years.

While the BOT has demonstrated its willingness to tighten monetary policy when necessary, the government has proposed a $1.4bn package of targeted tax cuts and social payments in keeping with its mandate to boost growth and tackle poverty.

On October 26, Deputy Prime Minister Olarn Chaipravat unveiled an economic stimulus package, pledging $35.78bn to stimulate growth and prevent an economic crisis. One of the key aims of the new deal is to prevent companies defaulting on their loans, which would undermine banks' balance sheets and risk shaking confidence in the banking sector, which has become one of the stronger sectors in the Thai economy.

The BOT expects growth to shrink to 3.8-5% next year, compared to 4.3%-5% in 2008, while the FTI estimates a narrower band of 3.8%-4% for 2009. The FTI has also issued a warning that 1m Thai jobs could be at risk next year.

As Thailand moves into 2009, observers can expect to see the continued aftershocks of this year's political earthquake as the government emerges in a new form. Following a year of political and economic strife, the country should see a return to a more stable business environment.

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