Thailand faces policy challenge: Escap

 

 "In addition to boosting investor confidence and reviving the economy in the short term, careful design and effective implementation could help make the economy more resilient and inclusive in the coming years," said  the Economic and Social Survey of Asia and the Pacific 2012: Pursuing shared prosperity in an era of turbulence and high commodity prices, the flagship publication of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
 Released today, the report showed that Thailand's economy is more influenced by external factors. As the eurozone crisis emerged, portfolio investment flows exhibited greater volatility in 2011 and large outflows were seen in the second half of the year due to sovereign debt issues in advanced economies and foreign banks seeking to recapitalise repatriated part of their funds.
 As a result, the Thai stock market lost slightly in 2011, after gaining 41 per cent in 2010, while the Thai baht depreciated against the US dollar in 2011, after appreciating 9.8 per cent in 2010.

Still, Thailand rode on an increase in Asia's attraction as a whole. As Asia is the centre of world economy, foreign direct investment inflow to Thailand was $8.4 billion in 2011, compared to $9.7 billion in 2010 and $4.9 billion in 2009.

The report showed that in 2012 Asia and the Pacific faces another year of slowing growth as demand for its exports
falls in developed nations and capital costs rise, but the region will remain the anchor of global economic stability.
 While Thailand is set to grow 5.8 per cent this year, the growth rate of the region’s developing economies is projected to slow  down to 6.5 per cent in 2012 from 7.0 per cent last year, compared to a strong 8.9 per cent in 2010, estimates the annual ESCAP report. However, the slowdown in growth will help lower inflation in Asia and the Pacific which is projected to moderate from 6.1 per cent in 2011 to 4.8 per cent this year.
 “The Asia-Pacific region continues to face a challenging external environment, which is why the focus of the 2012 Survey is to map the landscape to help steer through turbulence and volatility. This Survey provides a valuable tool to pursue a sustainable pathway for shared prosperity in Asia-Pacific,” said United Nations Under-Secretary-General and Executive Secretary of ESCAP, Dr. Noeleen Heyzer while launching the Survey in Bangkok.

Reduced demand in the region’s traditional export markets resulting from the eurozone debt crisis and continued economic uncertainty in the United States of America, together with higher capital costs and loose monetary policies of some advanced economies will contribute to the slowing of Asia-Pacific growth in 2012, notes the Survey.

Despite the slowdown, the region will remain the world’s fastest growing with China forecast to grow at a robust 8.6 per cent, decelerating from the 9.2 per cent rate of 2011. Growth in India is projected at 7.5 per cent in 2012, up from 6.9 per cent in the last fiscal year.

“Growth in Asia and the Pacific remains better than in any other region – continuing as an anchor of stability and a new growth pole for the world economy. South-South trade with Asia-Pacific in 2012 will help other developing regions, such as Africa and Latin America, further reduce their dependence on low-growth developed economies,”  Heyzer said.
Managing the balance between growth and inflation, using several inflation fighting measures beyond monetary
policy alone, is highlighted as the top key policy challenge for these governments. Others are coping with capital flows and dealing with considerable exchange rate volatility, and; addressing jobless growth and unemployment by encouraging domestic consumption to act as an enhanced engine of growth and productivity, improving working conditions and income equality.

On THAILAND

- The Thai economy suffered from severe floods, but a strong rebound is underway

•  Thailand 's economy suffered from a series of production chain disruptions in 2011, growing by a mere 0.1 per cent after a strong rebound of 7.8 per cent in 2010. The worst flood in half a century inundated 30 out of 77 provinces, including key manufacturing bases in and around the capital as well as the northern and central regions, which account for half of the country's agricultural output.

•  Estimated flood damage was $46.7 billion, but the impact went beyond the Thai borders – for instance, global supply of hard-disk drivers was severely affected. Earlier in the year, the impact of the Japan earthquake was felt, especially in the automobile sector.

•  Investment was seen rising in the third quarter and the country's diversified exports helped ease the impact of the global slowdown, but the devastating flood resulted in a 23 per cent contraction in manufacturing in the fourth quarter of 2011 from the previous quarter.

•  The Government introduced comprehensive measures including a water management plan, with a view to restore investor confidence. Full output restoration is expected in the second or third quarter of 2012.

•  Meanwhile, new initiatives including minimum wage increase and rice mortgage scheme are expected to help economic growth become more inclusive in 2012.

•  In 2012, Thailand is expected to grow faster at 5.8 per cent, driven by large public investments set to take off in post-flood reconstruction. Private consumption and investment are also expected to make strong contributions, as consumer confidence has picked up quickly since the floods.

Inflation has been stable

•  Inflation remained steady, without a noticeable rise during the severe floods. This was partly due to favourable harvest earlier on in the year. Aggressive monetary tightening in 2010 and through most of 2011 also helped contain inflation, which stood at 3.8 per cent in 2011 as compared to 3.3 per cent in 2010.

Fiscal policy aims at post-flood reconstruction and stronger domestic demand

•  Fiscal deficit has narrowed from 4.7 per cent of GDP in 2009 to 2 per cent and 1.5 per cent in 2010 and 2011 respectively, but is expected to widen in 2012 due to post-flood reconstruction.

•  The Government announced a range of measures aimed at boosting domestic demand, including tax incentives for first-time vehicle owners and a rice mortgage scheme for farmers.

•  A minimum wage increase was also introduced in April 2012, with a parallel cut in corporate income tax rates.

•  In response to unprecedented floods, the government reallocated 10 per cent of its budget for flood relief and rehabilitation programmes, and announced plans to borrow 400 billion baht ($12.7 billion) to pay for water management projects and an insurance fund to restore investment confidence.

Monetary policy shift gears from curbing inflation to supporting growth

•  In response to inflationary pressures, not least from high commodity prices, the central bank increased its policy interest rate by a total 220 basis points from July 2010 to August 2011. The severe floods, however, prompted it to cut rates in November 2011 and again in January 2012 by a total 50 basis points, down to 3 per cent.

Export growth slowed and capital flows more volatile in 2011

•  Current account surplus was at 3.4 per cent of GDP in 2011, down from 4.3 per cent in 2010.

•  Net exports grew by a slower 17.4 per cent in 2011, compared to 28.1 per cent in 2010, as severe floods took a heavy toll on manufacturing and resulted in a decline in export in the fourth quarter. With imports of capital goods rising amid post-flood reconstruction activities, trade surplus is expected to narrow further in 2012.

•  With prolonged weak external demand from traditional markets in developed countries, it is a relief to know that South-East Asia's export base has diversified over the past decade, with a higher share of exports now going to regional markets in Asia . For instance, the share of euro zone and United States markets declined from 32 per cent in 2000 to around 20 per cent in 2010. This same period, however, also saw the deepening of regional supply chains, with a rising share of intermediate goods exports. ESCAP analysis shows that the subregion's export dependency on traditional markets remains quite high, once such re-exported goods are considered.

•  Foreign direct investment inflow was $8.4 billion in 2011, compared to $9.7 billion in 2010 and $4.9 billion in 2009.

•  Portfolio investment flows exhibited greater volatility in 2011 and large outflows were seen in the second half of the year due to sovereign debt issues in advanced economies and foreign banks seeking to recapitalize repatriated part of their funds. As a result, the Thai stock market lost slightly in 2011, after gaining 41 per cent in 2010, while the Thai baht depreciated against the US dollar in 2011, after appreciating 9.8 per cent in 2010.

Policy challenges

•  Post-flood reconstruction and new policies such as minimum wage increases could help to address both short and long term challenges that the country is facing. In addition to boosting investor confidence and reviving the economy in the short term, careful design and effective implementation could help make the economy more resilient and inclusive in the coming years.