Strong baht aside, export sector needs structural changes, economists warn

Kobsidthi Silpachai, head of markets and economic research at Kasikornbank’s capital markets business division, said the lack of water-infrastructure projects to prevent another flood disaster like the one in 2011 was an underlying reason for the dismal export performance of the past few years. 

He noted that there had been little progress on the projects included in the previous elected government’s Bt350-billion water-management project. Overseas interests were not given the assurance needed to put more foreign direct investment (FDI) to work in Thailand but rather have gone into other markets such as Indonesia and Vietnam. 

“We estimate that one unit of FDI will equate to 21 export units in the future. So, unless present or future governments can market and execute water-infrastructure projects to ensure foreign investors that no floods like [those of] 2011 occur again, they are more likely to invest money elsewhere, and Thailand will incur a large opportunity cost of lost export upside,” he said in an e-mailed interview.

According to the World Bank, FDI into Thailand dropped sharply in 2011 from US$9.1 billion in the previous year to $3.87 billion. It picked up to $10.69 billion in 2012 and $12.65 billion in 2013. The figures are high but are only a tiny fraction of FDI into Singapore, which was $55 billion, $50 billion, $61 billion and $64 billion between 2010 and 2013. During those four years, FDI into Indonesia reached $15.3 billion, $20.5 billion, $21.2 billion and $23.3 billion, respectively.

Nalin Chutchotitham, HSBC Thailand economist, attributed Thailand’s weak export performance to the product mix. The country’s top five exports are electronics and electrical appliances; automobiles and parts; food; machinery and equipment; and agricultural products. 

“As 17 per cent of the total are agricultural and agro-industrial products, a significant percentage of Thai exports are affected by low agricultural prices. Meanwhile, some of the key manufactured products such as electronics face strong competition, while others like electrical appliances are affected by weaker demand in Asia,” she said, explaining why a weaker baht alone may not be enough to lift export growth. 

In its “East Asia Pacific Update” released this month, the World Bank highlighted that the main risks to Thailand’s economic outlook continued to be the uncertain global environment affecting Thai exports and the slow recovery of Thailand’s exports relative to those of neighbouring countries. 

“For Thailand to sustain high levels of growth, the private sector will have to regain a competitive edge in its export-product mix and quality,” it said.

After zero growth last year, the World Bank expects Thailand to register 3.5-per-cent export growth in 2015. Growth in 2016 is forecast at 4.2 and for 2017 it is forecast at 5.1 per cent. 

However, domestic sentiment towards the 2015 export figure is pessimistic. While saying that the Bank of Thailand may revise the 2015 growth forecast in June, an official said there was a possibility that exports may not grow as much as 0.8 per cent as currently expected. 

The Commerce Ministry this month cut its export-growth target from 4 per cent to 1 per cent. This is supported by a 3.5-per-cent contraction in January and 6.14-per-cent contraction in February. 

DBS Group expects the March figures, to be released this week, to show a contraction of 5.5 per cent. 

In a research note, HSBC acknowledged Thailand’s role as a regional manufacturing hub. However, it noted that competitive pressures had been building up. Thailand’s export share has been on a downward trend since the global financial crisis of 2008. A rapid rise in unit labour costs has also eroded its low-cost advantage. Productivity-enhancing reforms and a renewed emphasis on innovation are key to ensuring that Thailand successfully moves up the value chain. 

Thailand is not alone, though. Some other emerging economies in Asia have witnessed strengthening in their currencies in past years, while unit labour costs are rising as declining surplus labour pushes up wages faster than the rise in productivity. If this continues, their exports will remain disappointing in the years ahead unless they move up the value chain or implement productivity-raising reforms to regain their edge in global markets, HSBC said.

In comparison, Indonesia’s strengths as a low-cost manufacturing base are becoming clear: Exports of manufactured goods accelerated last year. Indonesia’s large, youthful population makes it a natural candidate for manufacturing, the research found. 

The poor export outlook explains why political pressure has built up to force the Bank of Thailand to cut the policy interest rate, in a last-ditch effort to boost exports, which contribute nearly 70 per cent of gross domestic product. That may not come soon, though, for several reasons. For one thing, the central bank has to make sure that its actions have a balanced effect on growth and financial stability. A lower policy rate may not boost exports as long as the product mix remains unchanged. Worse, it may encourage unproductive investment, which would erode financial stability.

Kobsidthi even doubts the effectiveness of a rate cut on economic growth, particularly in regard to domestic consumption, as the country’s household debt amounts to more than 80 per cent of GDP.

“Also, cutting interest rates is unlikely to spur investments unless the government is able to convince the private sector that government-led projects or economic policies will be continued by subsequent governments,” he said. 

DBS economist Gundy Cahyadi noted that it should take at least three quarters before private consumption returns to the pre-2013 crisis trajectory. It could take longer given that consumers are constrained by high debt loads. Low import growth is also an indicator of weak domestic demand.

“We believe that fiscal policy holds the key to stronger GDP growth going forward. Despite the optimism on fiscal policy this year, the pace of fiscal spending has actually slowed during the current fiscal year compared [with] the 2013 and 2014 fiscal years,” he said.

Last year, public investment contracted by 6 per cent. 

Forecasting 3.5-per-cent GDP growth for Thailand this year, the World Bank said exports would pick up slightly as the economies of major economies recover slowly. Tourism receipts, however, should recover in 2015 after contracting last year: Tourist arrivals are projected to rise by 10 per cent this year.

“Further economic recovery will depend on the competitiveness of Thai export products and political stability in the years to come,” it said.