Thailand’s economy appears to be regaining momentum following last year’s devastating floods that adversely affected exports and GDP. Consumer demand is on the rise and the state-backed rebuilding programme is channelling funds into infrastructure. There are still concerns, however, over the sustainability of the recovery if some of the country’s major markets fall back into recession.
According to a report issued by the Asian Development Bank (ABD) on April 11, the Thai economy should expand by 5.5% in 2012, making it one of the better performers in the region, and a far cry from the 0.1% increase in GDP in 2011. At least some of this rebound will be powered by government efforts to repair flood damage and to strengthen defences against any repeat of the inundation that submerged swathes of the country, including much of its industrial belt.
Luxmon Attapich, the senior economist at ADB, said that flood mitigation projects were vital to rebuilding faith in the Thai economy and restoring the flow of capital.
“Thailand’s ability to restore confidence among investors still depends on upgrading infrastructure to handle possible floods and reviving industrial plants, as well as implementing long-term comprehensive water management. These are urgent issues to help boost the Thai economy over the next two years,” she told local media.
The ADB also identified the salary increases given to public servants early in the year and the 40% increase in the minimum wage as another factor helping to stimulate growth. The increases, which came into effect at the beginning of April, will boost spending power, promote more consumer activity and push up the circulation of cash in the economy.
It is estimated that the wage increases will increase the country’s cash flow to almost $300m per month. However, Thanawat Polwichai, the director of the University of Thai Chamber of Commerce’s Economic and Business Forecasting Centre, has warned the pay rises will result in higher production costs, which in turn will be passed on to consumers, thus fuelling inflation. According to Thanawat, businesses were likely to increase prices by between 5% and 10% in the latter half of the year to offset the wage hikes.
So far, though, inflation remains within forecasted levels, with the consumer price index up 3.45% year-on-year (y-o-y) at the end of March, well within the 3.3-3.8% range estimated by the Ministry of Commerce. However, the full effects of the minimum wage increase cannot truly be gauged just yet, as low-income earners will only be receiving the first of their expanded pay packets at the end of April.
Though inflation is still at acceptable levels, there have been some suggestions that the Bank of Thailand (BoT) may consider tightening up its rates policy, possibly in the second half of the year, to temper domestic demand. Currently, the bank’s key interest rate is 3%, with the BoT having twice reduced its benchmark one-day-bond repurchase rate since late 2011.
Nuchjarin Panarode, an economist with Capital Nomura Securities, says the reserve bank will probably take its time before moving on rates, waiting until the recovery is in full swing.
“The BoT is likely to wait until the manufacturing sector is normalised again, probably during the third quarter, before any changes can be made to the rates,” Nuchjarin told the Reuters news agency on April 4.
Though the economy is in recovery mode, the same may not be said for some of its major export markets. With much of Europe teetering on the brink of recession, demand for Thai goods in the eurozone has fallen back. According to data issued by the BoT in early April, exports only posted a marginal improvement in February, up just 1.2% on the same month in 2011 to total $17.76bn, thanks to a 21% increase in shipments to ASEAN nations.
By contrast, exports to Europe fell 12.5% y-o-y, and though officials believe sales will rebound by the end of 2012 this will depend on how soon and how well European markets rebound.
With the Thai economy becoming more inwardly focused, rather than so heavily dependent on exports to sustain it, GDP should continue to expand steadily, and will most likely meet the ADB’s forecast of 5.5%, or even the slightly more ambitious 5.7% projected by the BoT. As long as inflation does not eat too deeply into the gains being made by Thai workers, the increased flow of money through the economy should also help boost confidence and promote growth.