Although Thailand’s first half outlook was marked by concerns, the second half looks stronger based on sound macroeconomic fundamentals.
Thailand, like most of its South East Asian neighbours, has been hit by fears of an economic slowdown amid rising inflation, slowing global economic growth and tighter lending. Political uncertainty regarding the country’s new government, and a territorial dispute with Cambodia have cast shadows over the domestic situation.
Nonetheless, Kongkiati Opaswongkarn, chairman of the Federation of Thai Capital Market Organisations, speaking at an investment forum in Bangkok earlier this month, said he remained upbeat about the immediate economic future. Kongkiati claimed that the government’s new economic package would stand the country in good stead over the coming months.
Thailand’s exports increased 23.1% in the first half on the year compared to the same period last year, taking the six-month trade surplus to $628m. The growth was largely driven by Thailand’s thriving agricultural sector and high global food prices.
The country also shows reasonably solid macroeconomic fundamentals. The International Monetary Fund (IMF) expects growth to reach a very respectable 5.3% this year, while the fiscal situation seems stable and external indebtedness continues to decrease.
Meanwhile, the government has moved to ease some of the pain of inflation, which rose to 8.9% in June, the highest level in a decade. Cuts in oil excise duties, fare exemptions on public transport and reduced public utility bills should all put downward pressure on price growth. While the long-term sustainability of subsidies is questionable – they tend to distort markets and inhibit increases in supply – with the poor feeling the squeeze and inflation threatening to dim the economic outlook, the government feels that they are justified.
The appointment of former finance minister Virabongsa Ramangkura to head up Prime Minister Samak Sundaravej’s economic advisory team has also been welcomed by Kongkiati.
Less welcome, however was Thai Deputy Finance Minister Suchart Thadathamrongvej’s August 8 broadside at the Bank of Thailand (BOT).
Thadathamrongvej argued that the BOT was going against the government’s growth-targeting policy at a time of global uncertainty, and that fiscal and monetary policy should “point in the same direction”. The minister’s comment that “in the past, when a central bank governor disagreed with the government he resigned,” is clearly a call for the head of BOT chief Tarisa Watanagase.
However, Thadathamrongvej’s comments are not altogether unjustified. The BOT’s rate rise coincided with easing inflationary pressures – falling oil and commodities prices combined with improved harvests. But a perceived threat to the bank’s independence – and therefore that of the country’s monetary policy – may trouble the markets and shake confidence in the Thai baht over the short term.
The BOT has helped underpin the country’s stability as it has recovered from 1997’s economic crisis, keeping a generally steady monetary course. In July, the bank increased its benchmark rate by a quarter of a percentage point – the first rise for two years. The bank explained that its decision was driven by concerns that inflation was damaging the country’s macroeconomic fundamentals, putting off investors and contributing to the fall of the baht. Many businesspeople quoted in the local press welcomed the move, which, to some, seemed particularly prescient given the decline in the baht and the country’s capital markets.
Nonetheless, Thailand’s economic performance continues to confound the doomsayers. As the inflationary spike eases, the economy’s current worry should recede somewhat. Growth of around 5% and a strengthening external situation would seem a fine outcome in a difficult year.