Building Blocks

Thailand

Economic News

22 Jul 2010
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The slowing of Thailand's economy is expected to hit the construction sector hard, with a number of major developments being put on hold and investments for new projects drying up.



In late February, industry leaders warned there would be a sharp contraction in the construction sector this year, coming hard on the heels of a steep decline in the second half of 2008.



Their concerns proved right, as indicated by figures released by the National Economic and Social Development Board (NESDB) on February 24, which show Thailand's Gross Domestic Product (GDP) expanded by 2.6% last year, well down on the 4.9% of 2007. This decline was mainly attributed to a fall in growth in the final quarter of 2008, with GDP contracting by 4.3%.



According to the NESDB, the construction industry, along with trade and the hospitality and transports sectors, were the hardest hit in the last quarter of the year. In particular, the report cited the closing of Bangkok's airport by protestors in late November and early December as having a major impact on the economy, undermining the tourism sector, one of the main driving forces for the construction industry.



The report said GDP would increase by 1% at best, which is disappointing news for the building trade, which saw some 600 firms close their doors last year, according to a report by the Commerce Ministry.



However, the Thai construction industry will benefit from falling materials prices, especially in the cost of imported steel and fuel.



Polpat Karnasuta, the president of the Thai Contractors Association (TCA), cautioned that falling levels in private and public investment could see construction activity fall by half in 2009. Polpat went on to say that state spending on construction is expected to reach $4.4bn this year, 27.2% down on expenditure in 2008, while private sector investments are likely to be down 64.4% on last year's $12.5bn, he was reported as saying on February 26.



Sino-Thai Engineering and Construction (Stecon), one of Thailand's largest building companies, also foresees a tight 2009, predicting a 30% fall in revenue this year.



"Given the current circumstances, it would be difficult for contractors like Stecon to boost our revenue this year. We don't expect large-scale construction projects to be kicked off, particularly by government agencies," Woraphant Chontong, Stecon's senior executive vice-president for finance and administration, told local media on January 7.



The government agencies will be restricted in their capital investments, with the state having little leeway to boost expenditure at a time when revenue is falling due to lower tax income. The government has committed itself to limit deficit spending in 2009, with Finance Minister Korn Chatikavanij saying on February 16 the budget shortfall would not exceed $11.9bn or about 4% of GDP in the coming fiscal year.



Though somewhat restricted in the support it can offer the construction sector, with welfare payments expected to take an increasing share of the budget, the state is planning to offer some relief. On February 18, Prime Minister Abhisit Vejjajiva said a number of projects would be implemented through the public-private partnership (PPP) model, utilising both state and private funding.



"It can be a hospital. It need not be limited to a road construction or a water supply project. It can also be a housing estate project," he was reported as saying.



The prime minister added that the government was also considering changing the regulations governing the PPP scheme. The proposed amendments cover
the scope of investments the state would make through the programme, investment opportunities open for the private sector and how profits will be divided, he said.



Though promising, the new scheme will not come into force until after the new budget is enacted in October, meaning that the construction sector could face a lean seven months.



This is being compounded by an easing in tourism investments, resulting from the global downturn. In late February, local hotel management and development firm Xen Hotels and Resorts announced it was postponing the construction of four properties while in mid-January hotel operator Cental issued a statement saying it was cutting back its investment budget for 2009 by $27m to around $45m due to the global and domestic economic slowdown.



While the immediate future appears challenging, the government is predicting the economy will move into positive territory by the third quarter, as the effects of the global crisis ease and more funding is made available through the new budget. If the predictions are right, Thailand's construction industry will commence rebuilding in a matter of months.

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