A Delicate Balance: Thailand’s increased prosperity brings new risks

By Jonathan Hopfner

BANGKOK (KWR) Few would contest the Thai economy is undergoing a spectacular resurgence. Gross domestic product (GDP) growth surged to over 6 percent last year and is projected by analysts such as Lehman Brothers to reach 7 percent in 2004. The stock market, racking up gains of over 100 percent in 2003, is scaling dizzying heights, and consumer confidence, as measured in a recent MasterCard poll, is the highest in the Asia-Pacific region. Thanks to more efficient tax collection, government revenues are exceeding targets. International reserves are holding steady and inflation remains low. And all this at a time when many of the world’s economic players, continue to underwhelm or even disappoint in comparison.

Arguments remain, however, as to who or what is responsible for this stellar performance. The government, and an ever-growing circle of admirers in Asia and beyond, credit it to the forward-thinking policies of Prime Minister Thaksin Shinawatra, who through a series of carefully orchestrated spending initiatives fostered economic growth based on domestic demand. Others see it as the fortunate convergence of a series of external factors that have little to do with “Thaksinomics” and warn that the administration’s appetite for spending on debt-relief and universal health care programs will eventually put the country in a precarious fiscal position.

While Shinawatra no doubt deserves much of the credit for convincing Thais it is once again safe to go out and spend their money, it also seems true that the Thai economy is being at least partially supported by a set of happy coincidences. The first is the relative weakness of the baht, which, though scraping back some territory recently, has shed nearly half its value since hitting its peak against the US dollar before the 1997 economic crisis. This has provided a much-needed boost to exports, which have found a willing and relatively new market in China. Since 1999, when they totaled $1.85 billion, exports to China have surged to $4.5 billion in the first ten months of last year. High prices for commodities such as rice, rubber, and tapioca have contributed further to Thailand’s favorable trade balance. The administration has spoken much of the need to “balance” the economy by reducing its dependence on exports, but has taken few steps towards this goal. A recent decision to spend $97 million this year on heightening safety and standards among local food producers demonstrates the importance the government continues to attach to the sale of Thai agricultural products on the international market.

Domestically, rock-bottom interest rates have helped companies restructure their debts – many left over from the excesses of the period prior to the 1997 crash – and encouraged households to borrow money for purchases, boosting domestic consumption in the process.

The question now is how long these circumstances will last. Despite government efforts to slow the baht’s rise, it gained steadily against the dollar last year. With the US reluctant to shore up the dollar against Asian currencies due to its ballooning trade deficit, it is likely to rise further. According to the independent Thailand Development Research Institute (TDRI), household debt is increasing at a dangerous speed; from three times monthly income in 1994 to 5.5 times in 2002. While this rate remains relatively low compared to other countries in the region, much of it is accounted for by households under the 900 baht ($23) per month poverty line. They have seen their debts soar to 19.8 times monthly income in 2002. With mortgage loans up 14 percent in the last year and land sales up 39 percent, the Bank of Thailand (BOT) has warned that the country is fast moving towards a property bubble, a situation eerily like that which preceded the 1997 crisis.

Banks, too, especially the state-owned institutions that have bankrolled much of the government’s development efforts, continue to be saddled with uncomfortable bad debt burdens. Non-performing loans as a percentage of total lending reached 23.72 percent at the Small and Medium Enterprise Development Bank, 17.02 percent at the Government Housing Bank, and 11.51 percent at the Industrial Finance Corporation of Thailand in the first nine months of 2003.

None of this is to say that the economy will once again suffer the kind of devastating bust it did in 1997 – the government’s abundant foreign exchange reserves and steady revenue stream should preclude that – but unbridled optimism may be equally unwarranted. A stronger baht, higher interest rates, and the inevitable downturn in spending when households struggle to service the debt they have amassed could all conspire to quickly unravel the gains Thailand has made over the past few years.

Crucially, some forces within the government seem well aware of these possibilities, and are already taking steps to prevent them. BOT Governor Pridiyathorn Devakula, while far more publicity-shy than the Prime Minister, may prove an equally important actor in the economy’s success or failure; he warned on Jan. 15 that import growth, household debt, and property prices were all reaching unsustainable levels, and that the central bank was concerned Thailand was on the verge of “walking too fast and then stumbling.”

The central bank already appears to be taking action to correct any possible imbalances. The government approved a plan put forward by the BOT and the Ministry of Finance (MOF) for the streamlining of the financial sector. Under the framework institutions failing to meet stricter minimum capital requirements will be forced to merge with their larger counterparts or bring their operations to an end.

While the MOF said the goal of the plan was to strengthen local institutions to allow them to better compete in the international market, analysts believe it is also intended to reduce the number of burgeoning consumer credit firms that have sprung up in the midst of Thailand’s recent prosperity. The weeding out of the sector’s smaller players will make it easier for the BOT to supervise their lending practices.

With forces like the MOF and BOT conscious of the risks Thailand faces and prepared to take steps to reduce them, the country’s strength will likely stand on firmer foundations. And if its growth continues apace, it will become increasingly apparent that Shinawatra has contributed to, rather than single-handedly created, Thailand’s success.