Fiscal Boost

Thailand

Economic News

22 Jul 2010
Text size +-
Recommend
The Thai government's announcement of a large spending scheme may help the economy push through tougher times ahead, though growth still seems likely to remain under pressure.



On October 26, Thai Deputy Prime Minister Olarn Chaipravat pledged $35.78bn to stimulate growth and prevent an economic crisis. The package includes $13.2bn in lending to small-and-medium-sized enterprises (SMEs) and small farms, plus $3.24bn to bolster the stock market. 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 package is set to be funded through public-private partnership, with the private sector, banks and state organisations participating. According to Olarn, this structure should ensure that the fiscal position is not undermined.



The government is also moving to support crop prices to help farmers and shore up Thailand's export earnings. On October 24, the local press reported that the authorities were speeding up the process of cutting down old rubber trees in order to reduce supply, after rubber prices dropped more than 50% since a 28-year high in June. This move may not prove cheap - the government will pay farmers $1950 a hectare in compensation.



The government's action comes in the wake of the shocks delivered to the global economy from financial troubles in North America and Europe, which have seen several countries move to recapitalise and take equity stakes in banks hit by the international credit crunch and slowing growth. The shock waves have impacted emerging markets, despite their generally high growth rates, with investors increasingly wary of countries perceived as vulnerable to capital outflows. Furthermore, tightening international credit has made it harder for emerging market institutions to access capital from abroad.



South East Asia, which has historically been vulnerable to capital flight (and where the memories of the 1997-98 economic crisis are still vivid) has been particularly affected, and Thailand is no exception.



"There is complacency about the lack of exposure to the U.S., but actually there is an indirect connection through other countries such as Vietnam," Mark Devadason, President and Chief Executive Officer of Standard Chartered Bank (Thai), told OBG.



Thailand has been hit by falling demand in key export markets. "Exports orders from our main markets - the US, Europe and Japan - have dropped significantly in all industries," Thaveekij Jaturajarernkul, deputy chairman of the Federation of Thai Industries (FTI) told the international press on October 28.



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



More immediately, the currency and stock exhange have sent warning signals. On October 28, the baht dropped to an 18-month low of 34.97 against the dollar, and the day before, the benchmark SET index plummeted 10%, causing trading to be suspended for the third time in three decades. The fact that these drops occured after the government's promise of a huge spending package may cause the authorities particular concern.



Having said that, the country's historic vulnerability to capital flight, and a degree of speculation on the market, are likely to have weighed more heavily on the baht and SET than might otherwise have been the case. While slower growth is a serious concern in a country with a rapidly rising population, the economy is still set to expand at a respectable rate this year and next.



"The lessons learned in 1997 have helped Thailand," Devadson told OBG. "One factor is that SMEs, middle market, local, and multinational companies are all rather conservatively run. There will be downturn but no recession."



The government's spending package seems well-targeted, strengthening the banking system - which has been at the root of the worldwide crisis - and easing access to credit for SMEs, which are particularly exposed to market fluctations and find it harder to raise capital.



Therefore, over the medium term, the cash injection could prove a key step in maintaining growth in the leaner year ahead that Thailand now faces.

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×

Product successfully added to shopping cart

Read Next:

In Thailand

Will restricting numbers protect Thailand against excessive tourism?

By enacting measures to preserve natural and heritage sites, Thailand is stepping up efforts to protect its visitor attractions and promote sustainable tourism, although the intervention is...

Latest

Covid-19 and Latin American agriculture: can innovation overcome the...

Although the coronavirus pandemic has created significant challenges for the Latin American agricultural sector, it has also created opportunities for innovation and the expansion of home-grown...