Proceeding with Caution

Thailand

Economic News

22 Jul 2010
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Thailand's economy, which was showing signs of returning to good health after contracting last year amidst the global financial crisis, could be facing something of a relapse as a result of heightened political tensions at home and a poorer international outlook.



On May 19, Thai security forces moved to disperse thousands of antigovernment protestors that had been occupying a key commercial and retail district in central Bangkok since late March. Though the operation was aimed at ending the standoff, lingering tensions and fears that there could be further demonstrations could take some of the heat out of Thailand's economic recovery.



The Thai government is still hopeful that GDP growth will be 3.5-4.5%, down from the 7% projected at the beginning of the year, Prime Minister Abhisit Vejjajiva said in his weekly broadcast to the nation on May 30. However, in order to achieve this, additional state spending could be required to further pump-prime the economy.



The premier's revised forecast for GDP is in contrast to that of Tarisa Watanagase, the governor of the Bank of Thailand, who told a press conference on May 28 that economic growth should be somewhere in the 4.3-5.8% range. Much of this growth would be driven by an increasing demand for Thai products in the export market, offsetting any falls in tourism earnings and lower local spending, she said.



Government estimates are that exports will rise by 14% in 2010 year-on-year, according to the Ministry of Commerce. However, the expected boost from exports has been put somewhat at risk by the unease in European markets caused by the rippling debt crisis spreading out from Greece.



While the impact of Europe's economic crisis has yet to become clear, any cooling in that region could lead to a drop in demand for imports from Thailand, thereby taking some of the steam out of an export-driven rebound.



According to Tohru Nishihama, an economist at Tokyo-based Dai-ichi Life Research Institute, Europe's woes could have a very real affect on Thailand's economy.



"The European crisis may slow exports at a time when domestic demand is already hurt by the political turmoil," Nishihama told the international press on May 31.



Another sector that could take a hit is tourism. Previous protests by both pro- and antigovernment demonstrators, including mass sit-ins that closed Bangkok's international airport in late 2008, have harmed Thailand's vital tourism trade and undermined its image as a safe holiday destination. Arrivals are already down 18% in April over the previous month. It will take some time for confidence in Thailand as a tourism product to return, though if there is no further unrest, the industry could see a gradual pick up late in the year.



Some estimates put the direct cost of the protests in central Bangkok at more $4bn, including the damage done in the area, fall in business during the six-weeks-long standoff and projected losses in tourism and other sectors. In late May, the Finance Ministry said the demonstrations could reduce growth by 1.1% this year.



The main issues facing the government are how quickly it can restore confidence in Thailand as a holiday and investment destination and how fast it can roll out a promised package of measures aimed at appeasing some of Thaksin's supporters, a package the prime minister has said will reduce income disparity and increase services in rural and poorer areas of the country.



The government only has a limited window of opportunity, according to Warut Siwasariyanon, the head of research at Finansia Syrus Securities in Bangkok.



"Investors may be temporarily relieved that a semblance of normalcy has returned, but the political risk remains high and
 investors will likely be cautious," he told international press in late May.



Caution could remain a watchword for the government, which will be keen to see no new round of protests while trying to stimulate the economy and manage debt levels at the same time. It could be a difficult few months for the government of Prime Minister Abhisit.

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