Thailand remains vulnerable to external factors

The floods cost many lives, devastated infrastructure, interrupted supply chains and production, destroyed physical capital and personal assets. According to the Bank of Thailand (BOT), the Thai economy shrank by 9 per cent in the fourth quarter of 2011, and the growth rate for the entire year was close to zero.

Despite uncertain near-term prospects, volatile and fragile global economic recovery, especially in the euro zone and the United States, the IMF expects real output to grow by 5.5 per cent in 2012 and rise to 7.5 per cent in 2013. This is predicated on the continuation of accommodative monetary policy and appropriate fiscal stimulus measures, sound public finances, and medium-term structural reforms in the financial and labour markets to improve productivity and competitiveness.

The BOT’s own forecast, however, is less rosy than the IMF’s. It projected a growth rate of 4.9 per cent in 2012 and 5.6 per cent in 2013. The lower growth forecast in part reflects concerns about the uncertain external economic environment – the global economy. At the German Business Talks event last month, the BOT Governor Dr Prasarn Trairatvorakul suggested that “the global economy is beset by substantial risks and uncertainties”. He specifically mentioned the euro-zone debt crisis and the fragile US economic recovery as major concerns affecting Thailand’s economic outlook.

Thailand is highly export dependent. Exports accounted for 61 per cent of Thailand’s gross domestic product (GDP) in 2010. The prospect for a strong economic rebound depends, to a large extent, on export performance. The US and the euro zone are main export destinations, accounting for one-fourth of Thailand’s exports. Both the US and euro zone are also the largest sources of portfolio investment (short-term capital flows), respectively 5.4 and 1.9 per cent of Thailand’s GDP.

The Thai economy is clearly linked to the two arguably weakest spots of the global economy. An uncertain and volatile economic and financial environment, made worse by political gridlock – especially in the US, with a highly charged presidential campaign afoot – and a lack of political will and cooperation to tackle the problems. There are significant risks of possible financial contagion and macro-economic instability spilling over from the euro zone’s sovereign debt crisis and recessions. If the euro zone goes into recession and the US economic recovery falters, even the lower growth scenario suggested by the BOT can be a tough challenge.

In recent weeks the potential conflict concerning Iran’s nuclear programme and its implications on oil supply and prices have come into sharper focus with the visit of Israeli Prime Minister Benjamin Netanyahu to Washington. Netanyahu advocated a pre-emptive military strike against Iran to Obama and to the influential US pro-Israel lobbying group (the American Israel Public Affairs Committee). Obama, for his part, accepts Israel’s sovereign right to make its own decisions to defend its national security interests, and assured Netanyahu that they have the same strategic objective of “preventing” Iran from having nuclear weapon capability, but urged him to give time to diplomacy and economic sanctions.

The “loose talk” of war, noted Obama, was driving up oil prices. This has not gone unnoticed. In an article published by this newspaper last week, Kasikorn Research Centre suggested that an oil price spike above US$200 to $250 could cause global stagflation and raise Thailand’s inflation to a “staggering 8 per cent…. Thai exports could contract up to 20 per cent … and the economy shrink [by] 5.5 per cent against current projected growth of 4.5-6.0 per cent”.

Concerns over Iran and crude oil supplies have affected oil prices since the beginning of this year. Aided by false reports of an explosion on a Saudi Arabian pipeline, London Brent crude reached its highest level since July 2008 at $128 a barrel. It has fallen back following the news that Iran and the US, Britain, France, Germany, Russia and China have agreed to resume negotiations over its nuclear programme.

The World Bank, in its assessment of oil market outlook, suggested that oil prices on average are expected to decline over the 2012-2013 period as a result of slowing growing demand, rising supply and capacity (especially from oil sands in Canada), efficiency improvements and substitution away from oil. Though the worst-case scenario highlighted by Kasikorn Research Centre does not appear likely given recent developments, it adds another element of uncertainty to the global economy and the downside risk to the forecast of Thailand’s economic outlook.

 

Kiertisak Toh is a member of the economics faculty at Radford University, Virginia and a senior fellow at the Centre for International Development, Sanford School of Public Policy, Duke University, North Carolina. The views expressed here are his own.