Thai Economy a Study in Contradiction

The Thai economy presents a paradox. On the one hand it can boast about the best-underpinned currency in Asia, with a huge current account surplus and reserves. On the other, domestic demand continues to splutter, partly because of a household debt overhang which, though past its peak, is about 79 percent of gross domestic product and bank non-performing loans are only now peaking.

This domestic weakness stands in startling contrast to the extraordinary strength of the country’s external position. Last year the current account surplus was US$48 billion or about 11 percent of GDP. The result this year is likely to be only slightly less. But almost half this surplus is exiting the country via the private sector, probably more to buy assets in the west as in neighboring countries such as Vietnam and Myanmar where Thai capital is well placed to thrive.

Foreign reserves also continue to rise and will soon breach the US$200 billion mark as the Bank of Thailand buys dollars to keep the baht appreciating too much. Foreign debt is static at around $140 billion, most of it long term.

The overall data suggest that business profits remain very strong but there is a perceived lack of new investment opportunities within Thailand, and a reluctance to distribute more income to the employees or outside shareholders.

Ambitious government plans to further develop the eastern seaboard, attracting foreign capital to higher value-added industries, are fine in theory but run up against shortages of skilled manpower. It also requires Japanese and other foreign investors to bring skills and money. Boosting this already rich region would also do nothing to reduce the socially divisive imbalance between it and the neighboring Bangkok metropolis and the north, northeast and south of the country.

Capital goods imports for this and for railway projects should narrow the current account surplus but these remain slow to get off the drawing board given political uncertainties and the reluctance of a conservative bureaucracy to increase government debt with capital projects with limited returns.

Investment must also face the fact that Thailand’s workforce has been static since 2009. Even allowing for some increase in illegal labor from Myanmar and Cambodia, a static and aging labor force is little attraction. Tourism continues to lead as an export earner but productivity gains are hard to generate in this industry, especially if the focus is on numbers rather than spending power.

The one area however where Thailand has been seeing quiet success is in reducing the agricultural labor force from 14.6 million in 2010 to 11.7 million today. This is providing much of the productivity gain which is enabling the economy to grow by 2.5-3.5 percent as rural labor flows into higher-value non-agricultural work.

If continued, over time this process may reduce regional and political tensions but that is a long haul. For now aging Thailand must do even better at productivity if it is to keep growing at 3 percent. The capital is there but is so much flows overseas the domestic economy will limp along and Thailand will have to trust to continuing export and tourism surges.