Where is the SILVER LINING for Thai economic outlook?

 A draft agreement on wielding all weapons necessary to boost growth failed to win universal approval, with Germany a notable holdout.

Germany finance minister Wolfgang Schaeuble talked sense when he said that governments’ attempts to boost their economies with monetary loosening could be “counterproductive”. Reforms carried out by politicians were more important, he said, adding “thinking about further stimulus just distracts from the real task at hand.

“Fiscal as well as monetary policies have reached their limits. If you want the real economy to grow there are no shortcuts without reforms,” he said at the meeting in Shanghai.

His notion is worth listening to. 

The Economist’s February 20 edition noted that in Britain and Japan, where quantitative easing (QE) has been used successively, the productivity of workers has grown at a dismal rate, meaning overall GDP growth has been sluggish. That limits the scope for increases in real wages and in the tax receipts needed to service government debt. 

Stimulus measures also produce side-effects. 

 Due to successive bouts of QE, central banks in developed economies have seen their balance sheets swell to between 20 and 25 per cent of gross domestic product. Leading the pack is the Bank of Japan, whose assets account for 77 per cent of GDP. Yet, to date only the US economy is showing any signs of recovery, while others are still reeling. With no agreement at the G-20 meet, all eyes have turned to central banks in rich countries, expecting them to inject more money into their economies. 

It remains to be seen what these countries will do next and whether their measures will be effective in boosting the economy. The state of their economic health will also help determine that of Thailand. 

The G-20 economies account for around 85 per cent of the gross world product and 80 per cent of world trade. In short, a slight increase in their level of demand could boost global trade. Among the beneficiaries would be China, where higher exports would also benefit Thailand as a part of its supply chain. Notably, China now consumes over 10 per cent of Thailand’s exports. Other Asean countries would also benefit, which would in turn boost their demand for Thai products.

It is a sad inevitability that Thailand will be reliant on its export sector for years to come. Yet the contribution of exports to the economy could shrink as Thailand scrambles for other means to boost the economy. 

In 2015, exports generated Bt7.23 trillion in baht terms and US$214.4 billion in dollar terms to the economy. The export value showed a drop of 1.16 per cent and 5.78 per cent in baht and dollar terms, respectively. 

In baht terms, the export value accounted for 53 per cent of GDP. The contribution ratio has fallen in the past three years, when exports showed negative growth rates. 

The situation this year remains shaky. According to the Bank of Thailand, merchandise exports fell 9.3 per cent in January compared to the same period a year ago. It will be a very tough job even to achieve the minus-1.2 per cent growth rate targeted by the National Economic and Social Economic Board (NESDB).

According to the Bank of Thailand, buoying the economy in January were tourism and public spending. How long will this continue? 

Seeing nearly 30 million visitors in 2015, the tourism sector generated Bt2.3 trillion in receipts, or 17 per cent of GDP. This year, the revenue is expected to increase by 9 per cent to Bt2.4 trillion, when the number of visitor arrivals should exceed 30 million. How many tourists will Thailand have to welcome before the sector’s contribution matches that of exports?

On public spending, this vehicle can’t be fuelled forever since it directly affects the country’s financial health. For the 2015-16 fiscal year, Thailand is running a budget deficit of Bt390 billion. The fact that we have been running budget deficits is terrifying. A Finance Ministry official has said that if the deficits continue, Thailand’s public debt will hit the threshold of 60 per cent of GDP by 2021. No problem is expected if the economy expands by 5 per cent per annum. 

The ratio remains low now. Thailand’s public debt at the end of 2015 stood at 44.36 per cent of GDP. Yet, that amount is worrying: public debt at the end of the year exceeded Bt6 trillion for the first time in history. The figure will rise at a faster pace if mega-projects get up and running. 

It remains to be seen what weapons the government has in its armoury to boost the economy. First, the confidence of both consumers and investors needs a big boost. That hasn’t happened yet. 

Another big question: can the NESDB’s economic growth target of 3.3 per cent be achieved in light of external vulnerabilities?