Sharing views on Thai economic challenges

May I have your views on Thailand’s overall economy, which relies heavily on exports?

The Thai economy slowed slightly in the fourth quarter of 2015 although growth improved markedly for the whole year. Gross domestic product expanded 2.8 per cent in the three months through December from a year earlier. Prime Minister Prayut Chan-o-cha has accelerated [state] spending to help everyone from farmers to small businesses, in an effort to boost local demand amid falling exports.
While fiscal spending should help prop up the economy in 2016, the pace of the recovery will be gradual, given the backdrop of continued political uncertainty and high household debt. Meanwhile, lacklustre external demand and declining competitiveness will weigh on goods exports.

Will global economic difficulties, especially the slowdown of China’s economy, have any impact on Thailand? How must Thailand’s exporters adjust themselves to overcome such challenges as the downturn of the global economy, the baht’s appreciation, drought, which affects the local agricultural sector, and political instability? What is the first priority local exporters should focus on?
China is now such a big force in the global economy that its economic slowdown would inevitably affect the rest of the world. The Chinese market accounts for 12-13 per cent of Thailand’s exports. If China is making less money and its people have lower incomes, then they will produce less and their demand for raw materials will go down, which will surely affect Thailand’s export sector.
Since the export future is looking bleak, the role of government spending, which accounts for 23 per cent of GDP, will become more critical for Thailand.
[Those] in the export business should equip themselves with some financial knowledge such as learning how to hedge against currency risks, which can in turn prevent huge losses due to the fluctuation of the Thai baht. [The US dollar versus the baht] has strengthened from 32 to 36 in the past 12 months.
This [movement] would have helped exporters but would have hurt importers.
So a good understanding of currency hedging would help both exporters and importers to gain certainty of price and protect their bottom line.

Do you have any suggestion to the Thai government or relevant authorities on how they should tackle such challenges and obstacles?
Understanding currency hedging will only help to protect the importers’ [and] exporters’ bottom line. It won’t necessarily help them to increase their business. The good news is that a weak baht will definitely support exporters’ revenue, while lower oil prices and tourism will aid the economic recovery.
Besides stimulus spending, there is one main area in which the government ... can help: supporting educational initiatives for the people. As an educator, I believe that the increase of knowledge can positively impact the overall business community. Additionally, the government should promote financial education to local businesses, which would help to deter unnecessary financial mistakes.

How will Thailand be able to overcome the middle-income trap and improve the incomes of its people, and move towards becoming a developed country?
According to the Thailand Development Research Institute, Thailand is at risk of remaining in the middle-income trap for at least another 20 years, despite a likely compound growth rate of 4-5 per cent per year. The TDRI said the country must specialise in either manufacturing or services with a certain development direction to escape the trap. I agree with this, and would like to emphasise financial education and services within the services segment. The United States, Japan and Taiwan specialised in services to do that, while South Korea specialised in manufacturing.

Could you please give your ideas on hedging as a way to manage risk due to currency fluctuation?
Hedging is a risk-management strategy designed to mitigate or offset price risks. When companies conduct business across borders, they must deal in foreign currencies. For importers, the most important point to understand is that risk happens when Thai baht falls in value relative to other currencies. This is because when the Thai baht falls, importers end up paying more for goods when Thai baht is exchanged for the other foreign currencies. So to hedge this risk, importers must sell Thai baht or buy the currency pair USD/THB.
For exporters, the most important point to understand is that risk happens when the Thai baht rises in value relative to other currencies. This is because when the Thai baht rises, exporters end up receiving less revenue when other foreign currencies are exchanged into Thai baht. So to hedge this risk, exporters must buy Thai baht or sell the currency pair USD/THB.
The easiest way to execute these currency-hedging trades is through a brokerage firm. Hence this is another reason why understanding currencies will help both individuals and companies.