Latest TIP ranking batters already-fragile economy
As Thailand continues to languish in Tier 3 of the United States' "Trafficking in Persons" report, worsening the economic sentiment, the real impact, even worse, could be felt in the coming months.
The report was released at a time when the Thai economy is at one of its worst moments in decades. All economic engines with the exception of tourism are turned off. Severe drought is also a threat, cutting farmers’ purchasing power.
With investment and consumption remaining weak, hopes are on public spending. Yet it was revealed that only 30 per cent of 46 state enterprises’ investment budgets worth Bt350 billion had been disbursed so far. Meanwhile, the export sector, which accounts for 70 per cent of gross domestic product, was at its worst, falling 4.8 per cent year on year. A drop in imports also suggested low investment activities.
The TIP report is a fresh blow. Ranked in Tier 3, Thailand is on par with countries like North Korea, Syria, Iran, Algeria and Zimbabwe. Other than Thailand, no Asean nation is at the bottom of the list. This year, Malaysia’s ranking rose above Tier 3, though it remains on the Watch List, along with Cambodia, Myanmar and Laos.
The ranking sparked criticism of the US for using the report as a political tool to weaken the junta. But regardless of such criticisms, Thailand should brace for the worst.
In light of the export slump, the ranking could worsen the situation. Penalties for countries demoted to Tier 3 are at the discretion of the US president. Within 90 days of the report’s release, penalties can be announced. They may include a cut in the Generalised System of Preferences and other forms of non-humanitarian assistance and funding.
The US just this month agreed to renew the GSP for Thailand until the end of 2017.
Thailand’s ranking has not moved up despite efforts to tackle human trafficking. This also raises fears that the European Union may also be displeased with Thailand’s measures to deal with illegal fishing. These two main markets consume about 20 per cent of Thailand’s exports.
As exports to all key markets except CLMV (Cambodia, Laos, Myanmar Laos) dropped in June, the Bank of Thailand is now the only hope for exporters. In recent weeks, the baht has weakened sharply against the US dollar and several economists are convinced that it will remain weak in the near future.
United Overseas Bank (UOB) said in a research note that the central bank would likely tolerate a weaker baht and its positive impact on exports given the deteriorating domestic conditions.
Expecting a 2-per-cent export contraction for the whole year, DBS economist Gundy Cahyadi noted that it would mean three consecutive years of export contraction for Thailand.
"It is one reason why the authorities have shown little concern for the baht, despite the unit being the third-worst-performing Asian currency against the US dollar over the past month," he said.
Without stronger export growth, the manufacturing sector will remain sluggish. As the sector makes up one-third of the economy, Thailand should expect sluggish GDP growth to persist.
"If we [are] to see any chance of GDP growth inching higher going forward, a faster pace of fiscal disbursement will be crucial towards the year-end. We had lowered our 2015 GDP growth forecast to 3.2 per cent back in May but continue to see some downside risks to our projections," he said.
The Finance Ministry’s Fiscal Policy Office on Tuesday lowered its GDP growth forecast for the second time this year to 3 per cent, against 3.7 per cent in April and 3.9 per cent in January.
Expecting a spill-over impact of the export contraction on private investment, UOB projects GDP growth at 2.7 per cent, below the BOT’s forecast of 3 per cent.
While expecting a policy-rate cut in the third quarter, HSBC noted: "Timely execution of public investment will be instrumental in ensuring the continuity of economic recovery, especially as the severe drought is threatening to dampen private sentiment further."
