There is still time to avert disaster

Let’s start with the current account, which measures the flow of goods and services. In 1996, Thailand ran a current account deficit of 8.1 per cent of GDP. The previous years saw a similar rate, resulting eventually in a loss of confidence in the Thai baht and the financial crisis that followed. Essentially, the financial markets forced a correction of the Thai current account deficit in a painful way, to end Thailand’s over-investment or over-consumption. The deficit in the current account was then financed by foreign capital.

In 2007, The Thai current account improved to a surplus of 6.3 per cent of GDP. Yet last year, the surplus narrowed significantly to 0.1 per cent. In the first half of this year, the current account ran into a deficit of 1.9 per cent of GDP.

The situation is similar to the trade account. In 1996, Thailand ran a trade deficit equal to 5.2 per cent of GDP. In 2007, the country enjoyed a surplus of 10.8 per cent to GDP. In the first half of this year, the deficit was 0.4 per cent of GDP.

Most worrisome are the rising deficits from oil and gold imports. In the first half of this year, oil imports accounted for 9.3 per cent of GDP, while gold imports accounted for 4.3 per cent of GDP. 

In spite of the privatisation of the PTT and the heavy investment of PTTEP, Thailand still continues to rely heavily on energy imports. This is a sore policy failure in Thailand’s energy sector, which continues to drain the country’s reserves in a significant way. Gold imports are another story, but the phenomenon represents investors’ craving for hard assets to hedge against inflation and as a safe-haven investment.

The Thai government so far has failed to commit to a budget balance. All administrations in recent time have been running a budget deficit to the tune of Bt300-Bt350 billion a year to finance overspending. This will create more public-sector debt at a time when it is important to maintain fiscal discipline to cope with the global economic crisis lying over the horizon. If the public-sector debt continues to grow, its ratio to GDP will soon exceed 50 per cent or 60 per cent, beyond which it might reach a point of no return as experienced by most euro-zone governments over the last few years.

If Thailand continues to allow the triple deficits to persist, it will face macro-economic deteriorations starting with a weaker baht, inflationary pressure, tighter financial conditions, higher interest rates, economic slowdown and a loss of the country’s competitiveness.

These troubling signs must be addressed now before they develop into a full-blown crisis. Better late than never.