Thai Economy Review from a Thai perspective

[Hardy641]

Just yesterday the BKK Post and Herald Tribune included articles about Vietnam and Malaysia opening up and implementing various policies to further attract FDI.

Below article has been published in todayâ??s BKK Post and gives a nice inside view of the Thai perspective of the current economic slump. Some of authorâ??s assessments are surely valid but his subliminal criticism of foreigners throughout the article clearly shows the thinking of the ruling Thai elite. It is also interesting that he doesnâ??t even mention the latest restrictive investment rules and measures, the FBA amendment and other xenophobic laws/policies in Thailand.

If Thailand doesn't make a complete u-turn here, I am afraid that it will completely loose out against countries promoting & attracting FDI like Malaysia and Vietnam. :thumbdown:

 

 

OPINION / THAILAND'S ECONOMIC PROBLEMS _ PART II

 

The trouble with the strong baht phenomenon

 

This second of a three-part article on the Thai economy deals with the troubles in the financial system and the effects of a strong baht

 

By CHET CHAOVISIDHA

 

Continuing from the first installment on the state of the Thai economy published yesterday, we carry on with our investigation of the causes for the current state of economic malaise: The large-scale industrial and commercial enterprises are primarily supported by their superior technical know-how, strong financial position and more efficient management and operations, in a spirit congruous with the modern, knowledge-based business world.

 

The local retailing sector has virtually been clobbered by the foreign retailing chainstore giants, as witnessed by the disapperance of countless traditional local mom-and-pop stores all over the country.

 

While long-term merits and defects of this continuing displacement of the local small shops by the foreign retailing chainstore giants are still being debated, and further evidence is required to substantiate the claim that this situation will eventually lead to a long-term increase in efficiency in the retailing sector as a whole, with net positive benefits ultimately accruing to the economy _ the short-term prospect is quite clear, as evidenced by the loss of business, jobs and livelihood of a substantial proportion of the local retailing community previously engaged in this sector.

 

The tourism industry is also suffering a setback, as growth in this sector has not met earlier expectations, partly as a consequence of insurgency in the South, arson activities against schools in the Northeast and the threat of sporadic bombings in the central region and the capital.

 

Besides, this sector has also been most acutely plagued by the ''expansion without employment'' phenomenon, which ascribes expansion in output and income to increased productivity attributed to an advancement in technology and the utlisation of modern, labour-saving machinery and telecommunications equipment, especially in the high-technology service activities.

 

Hence the past several years have witnessed the expansion in service activities with correspondingly little or much less than a proportionate increase in employment in this sector _ a troublesome tendency, considering that this sector has traditionally been the most progressive and dynamic in its employment-creation capacity and ability to absorb new entrants into the labour force.

 

On top of all this, the real sector is also inflicted with the so-called ''household debt'' problem. Over the past several years, induced by the previous government's populist policies, household debts have increased tremendously.

 

On average, they exceed household income earnings by a staggering margin. Since most of these indebted households belong to the lower- and middle-income class and the grassroots echelon of society _ and their income-earning potential is well below the level required to meet their debt obligations _ the situation presents a serious problem for policy-makers.

 

Why? Because by its nature, this kind of problem becomes increasingly more difficult to deal with under recessionary conditions, as the current economic downturn tends to further aggravate the debtors' situation by putting their job security, income and livelihood at risk.

 

As an increasing number of households falls into this category, and as their debt burden accumulates with no prospect of improvement of income in sight, they will be likely to start calling upon the authorities to come up with the necessary funds to bail them out.

 

Unfortunately, such a policy action is unlikely to materialise, on account of the government's precarious fiscal and financial position.

 

Finally, there is also a genuine concern relating to the long-term growth of the Thai economy.

 

The growth in GDP is largely attributable to the quantity and quality of labour input and investment or capital accumulation. In the case of Thailand, the investment in new plants and more productive machnery and equipment is the chief contributor to our GDP growth. As reported by a government agency, contribution by a rise in productivity remains rather limited. In this respect, an additional important statistic can give a broader and more relevant perspective: the average rate of economic growth of the past years since 1997 has been consistently below that of the similar interval leading up to the 1997 crisis.

 

This suggests that the Thai private sector has become more conservative and cautious about over-investing in the same reckless fashion as it did during the years prior to the 1997 crisis.

 

In this day and age, various countries strive for a high rate of growth and lower cost of production through an increase in productivity. Raise their competitive edge, to be precise. They recognise that the innovation and investment to raise productivity and competitiveness are today's only answer to tomorrow's sustainable growth.

 

Thailand is an open economy with exports making up roughly 60% of the GDP.

 

As our competitive edge used to lie in cheap labour, a factor which no longer holds true today, the country's relatively low rate of investment plus slow rise in productivity under the existing, competitive global conditions almost translates to dying a slow economic death. Other emerging countries will soon sweep past Thailand in the economic race to world markets.

 

The financial sector has, over the past several years, assumed a new complexion in its structure, organisation, and operation.

 

Since the 1997 financial crisis and the tragedy that followed, a number of local commercial banks and major non-bank financial institutions have fallen into foreign ownership. These foreign majority-owned financial institutions tend to follow modern banking principles and, more often than not, lend on the bases of project feasibility, management ability and good corporate governance, as opposed to traditional banking practices which tend to extend loans to borrowers on the basis of personal relationship and collateral-asset availability.

 

As a result, the existing financial system is characterised by a situation in which most large-scale enterprises with superior technical know-how, efficient and prudent financial management and operations, a strong financial position and accurate perception of the current and future economic and business outlook, generally find themselves needing less credit from financial institutions. This is despite the latter's willingness to lend to them as they are attracted by their appearance of efficiency and superior performance.

 

On the contrary, medium- and small-sized business find themselves less able to obtain additional credit for their cash-strapped operations. Potential lenders, with the exception of government-owned financial institutions, look unfavourably on their traditional-style management and operation and are unwilling to extend additional credit, be it asset-based or otherwise.

 

Another aspect of the financial system is that although technically these foreign majority-owned financial institutions are subject to the same regulation and supervision of the central bank, in practice, they are obligated to attain the objectives and follow the policy guidelines of their overseas parent banks.

 

Hence the existence of several foreign majority-owned financial institutions signifies a tacit understanding that the existing financial system has become less amenable to the central bank's control. As a result, monetary policy actions have been rendered less effective than previously.

 

The public sector is currently plagued with a wobbling fiscal position, an inevitable outcome of a weakening economy and declining tax revenues. Additionally, most of the state-owned banks and so-called semi-financial institutions have been seriously weakened by the financial burden imposed upon them by the previous government's free spending and giveaway campaigns.

 

The upshot is that fiscal policy is subject to a rigid constraint, as a severe limitation has been imposed upon them by the relative scarcity of fiscal and financial resources available.

 

Inflation has not been a serious threat over the past years, in spite of soaring energy prices and rises in transport and distribution costs. The situation could have been worse had it not been for the working of the strong exchange rate of the baht, which operates to prevent domestic energy prices from going up as high as they could, and would, have. Against the generally unpromising economic backdrop, this could almost be regarded as a bright spot.

 

Lately though, inflation has begun to rear its ugly head once again. The external sector is at present undergoing a painful experience of the strong-baht phenomenon.

 

The trouble with the strong baht is that it tends to make for a decline in our exports of goods and services and a rise in imports. This has the effect of depressing our domestic income, production, output and employment.

 

The reduction, in turn, leads to a fall in consumption and investment expenditure as a result of lower household income and business profitability, thus setting off further rounds of decline in income, production, output, employment, and consumption and investment, until the process finally comes to an end through the income-expenditure interacting mechanism.

 

This situation has been the outcome of many complex circumstances and an interplay of a host of variables. In the first place, we are being squeezed by a weak dollar as well as a weak yen. Historically, the dollar and the yen moved in opposite directions. As a result, the adverse effect of the former on the performance of our external sector, in terms of exports and imports, was usually and, to a large extent, negated by the latter, and vice versa.

 

Strangely, the current situation is one in which dollar is weak against the baht and the yen is weak against the dollar and also against the baht. So, conceptually, our exports are supposed to be discouraged while imports encouraged.

 

Fortunately, Japan's economy has been recovering from its lengthy doldrums. Its increasingly more robust economy has prevented the growth of our exports from decelerating as much as they would have.

 

Chet Chaovisidha is an economist, a former MP for Bangkok and an economic adviser to several past governments.

 

The final instalment of this article will be published tomorrow.

[khunsanuk]

Hi,

 

"These foreign majority-owned financial institutions tend to follow modern banking principles and, more often than not, lend on the bases of project feasibility, management ability and good corporate governance, as opposed to traditional banking practices which tend to extend loans to borrowers on the basis of personal relationship and collateral-asset availability."

 

This guy is not really suggesting that banks *should* loan based upon personal relationships, is he?

 

Sanuk!

 

[Central Scrutinizer]

KS,

 

Of course he is! That is the 'traditional banking practices' way it was in Thailand before 1997. And such a great way to run a banking business isn't it? This guy has advised several PMs over the years. Yep. Betcha he lost a bundle during the baht crisis as well. Wanna bet? It's those damned crafty nasty foreigners, always was, always will be. They just don't play fair.

 

Did you notice the household debt figure? That to me will be key one day soon. What's this crap about people expecting the government to pay for their defaulted loans anyway? Does any other country do this? I thought that was just for large corporations that are 'vital' to the national interests, you know, like Chryseler (how the fuck do you spell this anyways?) and those sorts. One of these days, one of these days ... when?

 

Cent

[junglesoup]

Agree, I also think national household debt throught out the world will be key to alot of things in the next few years, not only Thailand.

[Central Scrutinizer]

I think sooner for Thailand than a lot of other countries, but yes, one day there will be another worldwide recession/depression. Many people, middle class, have hardly any savings. When they lose their jobs many will not be able to make their mortgage payments and massive credit card debt payments by the second month or so without their jobs. Many live paycheck to paycheck and even pay their bills on/with credit cards. Its a dangerous game that will one day come back and bite millions on the ass. The easy credit culture is a bubble waiting to burst.

 

Cent

[Central Scrutinizer]

I see it around me here in Surin every day. I hear about what the people are doing from my wife and her Sis. The government workers, teachers, nurses, police, army, etc. All of them are in debt up to their ears. They get loans from their 'credit unions' all the time. They are buying stuff they cannot afford, just to 'keep up with the Joneses' and save their face. The children are demanding their parents buy more and more of the things they see on the TV commercials. Nearly everyone has a new car or truck, and at the end of the month many have little money for their needs, real needs, so they put this on their credit cards, which are easily given by the banks now to most middle class workers. Children who live two or three blocks from the high school have brand new motocykes, bought on Mama and Papa's credit union money, and they drive these to school every day. It's all about face. The kids demand these things as though their parents are rich, when really they are barely getting by and have no cash on hand and very little savings. Face. Look what my Momma bought me! Many who had pretty good money in their savings accounts a few short years ago now have none and are living off their credit cards. In just a few short years there has been a dramatic change in this I have seen. I know of families that are so far in debt now it'll take them 30 years or more to get out of it at their present salaries, and they just keep getting further and further into debt. Adults in their 30s and 40s are borrowing from their parents just to pay their bills and living costs. Many are at their limits now. I figure one day soon it'll all collapse like a house of cards. Hell, this culture is crazy at times, but it is the same in many western countries as well. The Thais are just catching up the past few years in the credit frenzy and culture. No one wants to buy a second hand vehicle or home. Everyone wants new, as second hand is 'bad luck'. It's insane at times when I think about it and see it all around me. It can't go on forever. The piper will one day need to be paid, and no one will have the satang to do so.

 

Cent

[Rex7777]

Cent,

 

It's not just Thailand. The same thing has been going on in America for the past ten years or longer. Most people have little or no savings. Most people are up to their ears in debt. Many work two jobs. For the past few years, the rise in home prices and the consumer's ability to tap their home equity kept the economy afloat. But surely that scenario is coming to an end. Real estate inventories are at record levels in some areas, and foreclosures are rising. I'm not sure how it will all end, but it doesn't look good.

 

Rex

[Gadfly]

Debt is admittedly a huge problem in the US, but Thailand's problem are of totally different magnitude, and this is so primarily because of how those how make the rules here continue to believe that "traditional banking" is viable and competition in the financial sector is a threat.

 

"These foreign majority-owned financial institutions tend to follow modern banking principles and, more often than not, lend on the bases of project feasibility, management ability and good corporate governance, as opposed to traditional banking practices which tend to extend loans to borrowers on the basis of personal relationship and collateral-asset availability."

 

Banking based on "personal relationships" is generally just a polite way of saying loaning to cronies. There is a reason why over two thirds (nearly 70%) of Thai banks had non-performing loans following the 1997 crisis while only 11% of international institutions operating in Thailand had bad debts. But you won't see much discussion of this in the Thai press or by local business leaders.

 

Weak banks fuel corruption and they make economies more vulnerable to financial crisis. It creates a house of cards. We can and have argued here about exactly what knocked down Thailand's house of cards in 1997, but that doesn't change the fact that the Thai economy was and, to a large extent remains, a house of cards.

 

All of this is related to the strong opposition the Bangkok elite had and continue to have to the sale of four totally failed Thai banks to foreigners during Chuan II. The fear of competition fuels the desire to enact new barriers to foreign competition in the Thai economy, such as the proposed amendments to the Foreign Business Act - which, in their current version, will be applied retroactively by requiring foreigners to divest holdings that the government admits are legal under the current law.

 

The debate locally is generally caste in terms of Thai vs. foreign ownership. Thai ownership is good, and therefore needs to be protected against bad foreign ownership. It may not be stated explicitly, but that is the underlying assumption. But no one questions who it is good for. It certainly wasn't good in 1997, and it still isn't good for the average Thai. But it is good for the connected elite, and they equate their own personal interests with that of the country as a whole.

[Central Scrutinizer]

Rex,

 

Yep, I acknowlegd that in the post above in this line: "I figure one day soon it'll all collapse like a house of cards. Hell, this culture is crazy at times, but it is the same in many western countries as well. The Thais are just catching up the past few years in the credit frenzy and culture."

 

And I do believe it will collapse one day worldwide. It is a house of cards. The UK was shown recently in some articles to be almost as bad for househould debts/credit card debts as is the states already. But Thailand I feel is even in worse shape, and they have far less to fall back on and far less social institutes and social networks to help those that fall in the crash to come. I believe the 'elite' here are pushing to regain total control of the big business and banking sectors here, and they do not care what happens as long as they get theirs. They will ruin the country, and are working at it now every day with these silly laws they are managing to get passed. It all remains to be seen, but the past year has shown that the 'elite' still have many connections and much power. It is interesting to watch all this play through, the coup, the new constitution, the coming elections, the political party bans and banning of their top embers from politics, etc. It's like watching a highway pile-up in slow motion.

 

Cent

[Gadfly]

the new constitution,

 

...and the old construction. The hull of a building you see at the corner of Sukhumvit and Soi 6 (Nana BTS station) has been there for 10+ years. They can't complete it and they aren't tearing it down. It just stays there: decaying year after year. Meanwhile, millions are invested in new condo buildings going up elsewhere up and down Sukhumvit. The deadlock at that site illustrates the systemic and pervasive nature of Thailand's problems.