Four months ago, Thailand seemed trapped in a political quagmire that prompted the governments own economic advisers to warn that GDP growth could turn negative by the end of the year. The divisions appeared intractable as so-called red-shirt protestors clashed with soldiers in parts of the nations capital, even as life in the rest of Bangkok and Thailand went on as normal.
By May, the nations economy was poised on a knife edge; concern had grown sharply over the economic fallout from anti-government protests, as consumer confidence plummeted to nine-month lows and tourist visits slumped 13% from a year earlier.
A decisive show of force by the Thai government late May put a bloody end to the protests, in which 91 were killed and thousands wounded. Today, peace in Thailand sits uneasily with emergency security laws that are in place in Bangkok and six provinces. Introduced on April 8 after red-shirt protestors stormed Parliament, the decree allows security agencies to detain suspects without charge, impose curfews, ban political gatherings of more than five people and censor the media on grounds of national security. In September, unexploded bombs were found in Bangkok and a province nearby, prompting prime minister Abhisit Vejjajiva to warn of more attacks to come.
Yet the Thai economy has bounced back, both from the political turmoil that has gripped the country intermittently for the past four years, and from the global economic crisis, outperforming expectations, with growth at levels last seen before the 1997 crisis. The 7.5% increase in GDP this year is the countrys fastest pace of expansion since 1995. In recent weeks the countrys benchmark SET index has hit 13-year highs, with a gain of 27% and foreign inflows of $741.3 million since the low it plumbed in May. The countrys famed tourism industry is expected to return to the exuberant highs it saw in 2008.
But Thai finance minister Korn Chatikavanij cannot rest easy as he wrestles several conundrums. They range from the strength of the Thai baht and the questions it raises about the sustainability of the countrys export-led growth model, the impact of a range of anti-poverty programmes he introduced, as well as the nations underlying political problems, which remain unresolved.
The Thai baht has climbed steadily upwards in past months, hitting 13-year highs against the dollar in September. Thai exporters have been complaining vociferously, and month-on-month expansion in exports is already hurting, having halved to a rate of 20.6% in July from 46% the previous month. According to Korn, every 1% increase in the baht impacts GDP by 0.3% and exports by 0.4%. As of late September, the baht was the second-best performer in Asia excluding Japan, against the US dollar, having climbed 8.5% this year.
The government has few options available to address the strong baht as it sits within the remit of the independent central bank. Korn says the distortion in currency markets is now his main concern.
The main issue that we are concerned about is the fact that there are clear imbalances being caused by the currency markets, he tells Emerging Markets in an interview. Currencies in south-east Asia have risen sharply in recent months, with the Malaysian ringgit jumping 10.95% this year and the Indonesian rupiah gaining 5.7%. The region has benefited from inflow and demand for exports as their banks balance sheets remained clean as opposed to western counterparts, and governments managed to steer clear of vast budget deficits that are hobbling the US and Europe.
Jonathan Mann, director of emerging market debt at F & C Investments in London, says that the current backdrop to currency markets creates more pressure on the Asean (Association of South-East Asian Nations) region. A combination of a low renminbi and yen intervention makes countries wary of appreciation in their currencies as it makes them less competitive, says Mann, who believes that Chinese domestic demand will buoy the worlds second-largest economy and act as an anchor for the region.
Further internationalization of the renminbi will work to Thailands advantage, says Korn. He adds, Right now there is an element of the Asian currencies being used as proxies for the RMB because the RMB is not internationalized, and that is problematic in itself. If the RMB were to be internationalized, then I think our currency problems would become more normalized.
In addition, Korn says he is trying to steer Thailands economy away from dependence on exports, which make up 70% of the GDP. He points out that the Thai recovery came in three parts first, through government stimulus packages, then by the resurgence of the export market, and finally domestic consumption.
Where we need to work is to continue to build on the momentum weve been seeing in domestic consumption, he says. But theres no doubting the fact that exports remain very important in a medium-sized economy such as ours. Theres a limit to how much you can depend on domestic market. If the currency impedes our ability to reach out to these global markets, that will have an impact on our growth rates.
Korns dilemma was underlined by the Asian Development Bank, which declared last month (September) that the export-led growth model was no longer an easy route to quick growth. ADB president Haruhiko Kuroda called on Asian countries to rely instead on domestic and regional consumption to propel their economies forward. The ADB is only the latest international institution to question the use of the export-led model, which has been used by a raft of Asian states including Japan, South Korea and many of the Asean economies.
But there are more challenges facing Korn, a charismatic Oxford-educated investment banker turned politician. He points out that the export-led growth model has produced good GDP numbers and helped slash the number of Thais living on the poverty line from 49% to 8%, but it has not helped narrow the wealth gap in Thailand.
This is true not just for Thailand but most emerging economies that have been dependent on exports, he says. Youre seeing a concentration of benefits, among capital owners as opposed to among the labour force. This realization is making the matter more urgent from our perspective.
The issue of poverty is all the more pressing for prime minister Abhisit Vejjajivas government, as much of the support for the red shirts is in the poorer north and north-eastern provinces. Thailands wealth gap is one of the main complaints by opposition supporters calling for the government to hold fresh elections. Korn broaches the topic of the red shirts gingerly, commenting, The problem was always that a few rich vested interests were trying to stir up trouble. We want to make sure that every excuse is removed in order to ensure there is less chance of the same kind of tension, and problems arent repeated.
According to UN Development Programme statistics compiled last year measuring the Gini coefficient from 1992 to 2007, a common measure of income inequality, Thailand has a Gini coefficient of 42.5, compared to Malaysias 37.9 or Chinas 41.5. About 9% of Thai children under the age of five are underweight, and there is an 11.3% probability that adults will not live to the age of 40, the UN said.
This year Korn has introduced a comprehensive package of anti-poverty programmes, which include microfinance, taxes on large property owners and land reform. He says, For us the main issue were working on addressing has been equal access to opportunities and resources... From the Finance Ministrys perspective, the most critical problem has been the lack of access to financial resources by the poor.
These include a programme that refinanced half a million Thais who were unable to borrow from banks and relied instead on loan sharks, who charged monthly rates of up to 20%. The loans are issued through a state-owned bank which charges 1%.
In addition, Korn has also addressed land reform. The Ministry of Finance rents out small plots of government-owned land to farmers with no land of their own, charging a nominal rate Korn describes as almost for free. In the aftermath of the crisis, the government has also introduced a tax on property and assets, which is due for parliamentary approval. The measure is intended to help improve income inequality and even out the countrys unfair tax system, which derives most of its revenue from levies on income, hitting the poor. The ownership of land in Thailand remains concentrated in too few hands, Korn says. Revenue from the tax will be channelled to a Land Bank Fund that will buy land for the poor, an idea of Prime Minister Abhisits.
But in spite of the governments efforts, the opposition are still a viable force and held rallies with thousands of supporters in Bangkok in late September. Joshua Kurlantzick, a fellow for south-east Asia at the Washington-based Council on Foreign Relations, says that an election may be the best way of closing the divide in Thailand. Probably the only real healing will come after an election, if that election is free and fair; however, I am not sure that is going to happen, he says. The national reconciliation plan was fine in theory, but Abhisit is under little pressure to actually implement it since, as time goes on and repression weakens the red shirts, he is in a stronger position.
The Thai government have said that an election is not forthcoming this year.