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Emerging Markets

Thailand: The cost of crisis

Thailand’s new government is scrambling to stimulate the economy, as the global storm takes its toll. Reuniting the country, however, will prove less straightforward

Exposure to the global economic meltdown has been tough for a country largely dependent on tourism and exports. But Thailand’s self-inflicted political and social wounds were festering long before the global crisis took its toll.

November’s closing of Bangkok’s international airports and April’s dramatic cancellation of the Asean (Association of South-East Asian Nations) summit in Pattaya, amid raging violence in the capital, brought the country’s divisions into sharp relief yet again – laying bare a troubled rift that is growing more acute as the external shock reverberates across the economy.

Thailand’s economy shrank 5% in the first quarter, more than earlier GDP forecasts for 2009 of 2–4%; it marked Thailand’s first contraction since 1998, following a decade of annual growth averaging nearly 5% a year. The Thai government estimated that one million people would lose their jobs this year due to the slowdown after the “yellow shirt” (donned by those opposed to former prime minister Thaksin Shinawatra) chaos of last year; following the antics of Thaksin-supporting “red shirts,” analysts now predict unemployment could rise to nearer two million. Consumer confidence has sunk too, and Thailand faces a challenging year.


Stimulating the economy is the priority of the new government – installed in December following a constitutional coup against elected governments loyal to Thaksin, who himself was deposed by the military in 2006. But that will require ramping up government debt – just when the country’s credit ratings are deteriorating as a result of its fractious street politics and uncertain future.

“Employment opportunities for workers in the urban informal sector, such as contract workers in manufacturing, in construction and in tourism, are shrinking, and it is unclear if they can go back to agriculture,” said Frederico Gil Sander of the World Bank in an April report. “As the government plans another economic stimulus programme, considerations should be given to measures that will boost employment and specifically target these workers.”

In January, the Thai government offered a timid short-term economic stimulus programme to boost household consumption, especially among the poor. It was then forced to craft a second stimulus package worth Bt1.6 trillion ($45 billion) two months later, focusing primarily on public investment in infrastructure projects, which the government hopes will help create 1.6 million jobs. But financing them will inevitably run up against political and institutional constraints.

In the face of shrinking revenues, the government estimates its budget deficit to be about 6% of Thailand’s gross domestic product, which can be financed by loans from domestic and external sources to shore up the budget and support planned investment. However, the World Bank warned that for public debt to remain manageable, “budget deficits will need to be reduced over the next few years and growth needs to return to its long-term average, highlighting the importance of using the crisis as an opportunity to enhance growth prospects.”

Going down

Finance minister Korn Chatikavanij said after the riots in mid-April: “With tourism expected to suffer more losses, and private investment likely to fall after what happened this week, the impact would likely be reflected in more tax revenue shortfalls and increased fiscal deficits.” Korn said he was prepared to boost the ratio of national debt to GDP beyond cabinet guidelines, limiting it to 50%. “Clearly we can afford [increased fiscal deficits] as a country, and we can do so without debt expanding beyond the regional average,” he said.

The government then approved a plan to increase its debt issuance to Bt619 billion; it didn’t convince the rating agencies. Standard & Poor’s cut Thailand’s domestic currency rating and kept a negative outlook for the foreign currency rating.

“The rating downgrade reflects the latest deterioration in the Thai political situation, which has diminished further the prospects of a near-term return to stability,” says primary credit analyst Kim Eng Tan. “The likelihood of further economic disruptions related to these protests has risen as a result. They also demonstrate that political tensions in Thailand will remain high under governments led by either of the two main political factions.”

Investor and tourist confidence have been damaged, he says, but “a net external creditor position, prudent fiscal management and relatively light net government indebtedness remain the key support for sovereign creditworthiness in Thailand.”

Fitch Ratings also downgraded the Kingdom of Thailand’s long-term foreign and local currency issuer ratings, and with them the ratings of Krung Thai Bank and Export Import Bank of Thailand (EXIM), which have significant government support. Fitch left alone the ratings of the five major private banks – a sign that the banking sector remains relatively strong. After its decimation in the Asian crisis that began in 1997, the industry had only just restored itself to health when Thailand got dragged into the global economic crisis to add to its own domestic political woes.

That factor offers some hope. Indeed, Bandid Nijathaworn, deputy governor of the Bank of Thailand, insists that the “Thai economy at this time is fundamentally stronger, and is in a better position to weather the crisis, compared with the situations we were in 10 years ago during the Asian financial crisis.”

He gives six reasons: no imbalances in the economy, and hence no bubble to speak of; the country’s external position is much stronger now, with surpluses in its current account, a low level of foreign debt, and large international reserves; the banking sector is sound and resilient, and liquid; the corporate and household sectors have low debt and strong balance sheets; the ability of the economy to adjust to external shocks has improved. And the level of public-sector debt has been cut to 39% of GDP.

On the last point, authorities now have “ample room to use fiscal policy to support growth,” says Bandid. “Such room will give the authorities better leverage to cope with any further fallout from the global turmoil.”

Sadly, reuniting a bitterly divided country threatens to prove less clear cut.

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