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Second half expected to pose challenge to Thai GDP

Sep 03. 2012
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Thailand surprised global economists with 4.2-per-cent economic growth in the second quarter against the consensus of 3.1 per cent. However, hard times are coming in the second half when the euro-zone crisis is set to deepen and drag down Thailand's expo

In its “Credit Outlook” report last week, Moody’s Investors Service praised Thailand for the unexpectedly strong quarterly results.

Thailand and some other Southeast Asian nations have shown resilience in the face of the global crisis, bucking the trend of lacklustre growth in other parts of Asia, particularly in China and the newly industrialised economies of Hong Kong, Singapore, South Korea and Taiwan. Thailand’s economy grew 4.2 per cent year-on-year, up from 0.4 per cent in the previous quarter. Indonesia’s real GDP accelerated 6.4 per cent in the second quarter from 6.3 per cent in the first quarter, while Malaysia’s rose 5.4 per cent from 4.9 per cent. The Philippines economy, which grew 6.4 per cent in the first quarter, is expected to show a similarly healthy second-quarter performance.

Growth in other Asian countries reliant on international trade was hurt more due to the weak demand in the US and euro area. But as China’s growth decelerated to 7.6 per cent year on year in the same period, its lowest pace since first-quarter 2009, this raised the threat of a negative spillover into the rest of Asia, given China’s role in stimulating the region’s recovery following the global financial crisis.

Today, Commerce Minister Boonsong Teriyapirom is calling a brainstorming session with exporters from key sectors. After earlier setting a 15-per-cent export growth target, the ministry is now under pressure to come up with a more realistic target. This month, the Bank of Thailand, Fiscal Policy Office and Thai National Shippers’ Council are expected to revise downward their export growth forecast to 5-6 per cent, as the July export slump pulled down exports in the first seven months of this year by 0.4 per cent.

Like Indonesia and Malaysia, Thailand’s exports significantly weakened economic growth but domestic demand, particularly private consumption and investment, has offset the contracting exports.

“In Thailand, the continued recovery following last year’s floods has driven construction activity and private capital spending. Historically high rates of gross fixed capital formation are partially attributed to Malaysia’s wide reaching Economic Transformation Programme and, in Indonesia, strong inflows of foreign direct investment in recent quarters. In each of these countries, low inflation has sustained favourable consumer sentiment and private household spending,” Moody’s said.

Amid the gloom in the euro zone and US, the Asean-5 economies – Indonesia, Malaysia, the Philippines, Thailand and Vietnam – have been able to withstand the headwinds well.

According to Moody’s, the relatively small contribution of public consumption to overall growth year to date suggests a degree of policy flexibility for these governments to pursue stimulus spending. Benign inflation and relatively healthy external buffers contribute to stable financing conditions. The buoyancy of fiscal revenue reflects healthy labour markets and the continued profitability of businesses, both of which are correlated to high economic growth. Nevertheless, commodity price volatility will have differing effects on fiscal revenue, while expenditures will likely be muted by smaller subsidy bills.

“Although developing Asean’s immunity to external headwinds may not last for long, central banks in these countries have the flexibility to cut rates to stimulate activity and relieve pressure on fiscal authorities to increase deficit spending, thereby raising debt ratios. Thailand has already cut its policy rate twice to aid flood reconstruction,” it said.

According to HSBC Global Research, with relatively strong economic fundamentals, Thailand saw its real GDP return to its pre-crisis peak within five quarters of the Lehman Brothers fiasco in 2008. The suffering lasted nine quarters when it faced the Asian crisis in 1997.

Challenges lie ahead, though. Forecasting a 0.6-per-cent contraction in the euro zone this year and expecting the situation in the zone to stabilise in the next 6-12 months, HSBC said capital flows would be a big issue for Thailand and the other Asean-5, based on the fact that capital flows have had a big impact on credit growth in Asia over the past 20 years. These countries are more vulnerable to capital flows, inward or outward. If the global economy enters a deep recession, massive capital outflows would tighten credit and hurt growth. On the other hand, if things improve and capital inflows rise substantially over 12 months, there’s a risk of a credit bubble.

Thailand along with Asia has attracted inflows now, providing relatively safe investment bets. This year, foreign investors have remained net-buyers of Thai shares by over Bt60 billion. A larger amount is going to the bond market. Concurrently, in June and July, banks showed loan growth of over 16 per cent. The Bank of Thailand has insisted that there is not yet a sign of a bubble, particularly in real-estate lending, which sparked the 1997 crisis. According to HSBC, greater capital inflows are anticipated in 12 months and this may ignite tightening measures. But the outflow scenario is also on the cards.

Expecting mild recession in the euro area, HSBC noted that Asean-5 still has scope to manage the crisis this time. In both Thailand and the Philippines, fiscal policy is already geared to provide support this year, which will help cushion against the impact from capital reversals and global headwinds more generally.

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