Tracing our road to recovery after the floods

Government reconstruction measures, private sector spending on durable goods and reconstruction, and private investment in machinery replacement should support a V-shaped recovery (meaning a sharp but brief period of economic decline) in domestic demand.  

 Externally, the global risk environment and the worsening economic outlook – an expected recession in Europe and weaker growth in the US – are expected to slash external demand for Thailand’s exports. We therefore expect the Thai economy to grow 3.5 per cent this year (below the current consensus of 4.5-5.5 per cent), up from an estimated 1.8 per cent last year. 

The country’s consumer confidence index dropped sharply to the lowest level in 10 years after the October floods. We expect consumer confidence to recover rapidly in the first half this year, when employment conditions return to normal. This will be partly driven by government measures such as compensation for flood victims, minimum-wage hikes, and an increase in civil servant salaries. Most of the manufacturers in flood-affected industrial estates have notified the government that they will re-employ their workers. 

Separately, the Thai Real Estate Association estimates that affected households will spend at least Bt100 billion (about 1 per cent of GDP) on housing renovations this year. Both the private and public sectors are likely to increase investment in 2012. Special loans extended to affected industrial estates and SMEs, together with a corporate tax cut, should boost private investment as companies replace capital equipment damaged by floodwaters. Public investment will also be urgently needed to reconstruct logistics networks and rebuild water management systems to prevent future floods. 

On the supply side, manufacturing production – especially of autos/auto parts, computer parts, electronics and electrical appliances – is expected to rebound strongly in the first half this year as manufacturers catch up with pending export orders and replenish inventories destroyed by floodwaters. In particular, the construction, construction materials, and furniture sectors should benefit from high demand driven by post-flood reconstruction.

 

Thailand’s finances

Fiscal discipline has been a hot topic in Thailand recently.  However, the country’s fiscal position is not yet a cause for concern, in our view. Still-low public debt – at a manageable at 41 per cent of GDP – should provide scope for public investment in the coming years to improve logistics networks and strengthen Thailand’s competitiveness. 

The public debt management law caps the annual fiscal deficit at 20 per cent of the budget. As a result, the planned budget deficit has been set at below 4 per cent of GDP for the past 10 years. Moreover, the actual deficits in fiscal year 2010 and fiscal year 2011 were much smaller than planned as tax revenues exceeded targets. In 2011 in particular, tax revenues exceeded the target by about Bt210 billion. This resulted in an actual budget deficit of only about 1.8 per cent, only half the planned 3.6 per cent of GDP. This helped to boost the government’s cash balance to Bt521 billion (5 per cent of GDP) as of end of September 2011. 

We expect the current account balance to swing from a surplus to a marginal deficit of 0.1 per cent of GDP this year. While tourism income and export growth are expected to fall owing to lower global demand, imports are likely to rise on demand for imported machinery and raw materials to replace those damaged by the floods. 

Meanwhile, capital flows will remain highly volatile in 2012, driven by ongoing sovereign debt problems in Europe and fears of a significant global slowdown.

 

Fiscal policy

The government led by Prime Minister Yingluck Shinawatra has proposed an expansionary fiscal policy to support the Thai economy in 2012. Given the need for additional spending to compensate flood victims and pay for post-flood reconstruction, the planned budget deficit for fiscal year 2012 has been raised to Bt400 billion (or 3.4 per cent of GDP) from the Bt350 billion originally planned. This is based on expenditure of Bt2.38 trillion and revenues of Bt1.98 billion. 

Thailand continues to move towards fiscal consolidation and is on track to achieve its target of a primary surplus by fiscal year 2016 – the planned budget deficit of 3.4 per cent in fiscal year 2012 is smaller than the planned deficit of 3.6 per cent in fiscal year 2011.

 

Politics

Yingluck has had a tough time since her decisive victory in the July 2011 election, facing the worst floods in five decades. We see more challenges ahead, including a tougher global economic environment and an urgent need for post-flood rehabilitation. Political stability will remain an area of focus for the markets. 

A key event to watch for is the end of a five-year ban on 111 executive members of the Thai Rak Thai (TRT) party in May 2012. The Constitutional Court dissolved former Prime Minister Thaksin Shinawatra’s TRT party in May 2007 and banned all of its executive members from politics after a ruling of electoral fraud in the April 2006 elections. Their potential return to politics is likely to support the stability of the Yingluck-led government. 

All in all, in order to restore foreign investor confidence and ensure a positive investment environment in the medium to long term, it is crucial that Thailand build an effective water management and early warning system to prevent future floods and/or natural disasters.

 

Usara Wilaipich is senior economist at Standard Chartered Bank (Thai).