Thailand's Economy Turns Sour

Thailand this week delivered truly shocking GDP and current account numbers for its second quarter. Stock and currency markets tumbled as the economy contracted 0.3 percent in the second quarter over the first which also saw a contraction - though GDP is still 2 percent above the level a year ago. Worse was a current account deficit of US$5.1 billion, a dramatic turnaround for a nation which has enjoyed surpluses every year since the Asian crisis of 1998-1999.

Were these numbers just statistical freaks, so that the second half of the year will see Thailand back in the black, ending 2013 with GDP growth at 4 percent - the Asian Development Bank's lowered forecast - and the current account in balance? Or has a corner really been turned in Thai fortunes which will put growth, the current account and the government's budget under pressure for a sustained period?

Recent falls in global emerging market stocks and currencies have been largely attributed to fears of tighter money as US "quantitative easing" is "tapered". But data from Thailand (and Indonesia and India) suggest that there are deeper problems than simply the end of easy money. A more fundamental problem is declining current account balances at a time when debt costs are rising.

The answer to whether Thailand has just suffered a temporary blip will not be known for several months at least which is bad news for Prime Minister Yingluck Shinawatra. Her government faces declining popularity but wants to push through an amnesty for political activists of all colors but which is widely seen as a wedge to enable the return of her brother, Thaksin. The decline in Yingluck's fortunes is more closely linked to economic and other issues rather than the amnesty bill. So poor economic numbers make it all the more difficult to push ahead with programs intended to bolster the government's popularity.

The first directly relates to both export weakness and budget constraints: the "rice pledging" policy by which the government undertakes to buy rice at a price far above the world price. That has left Thailand with huge unsold stocks but has done nothing to push up the world price as India, Vietnam and others have all happily filled the space once occupied by Thai exports. Yingluck has tried to reduce the pledging price but met with stern resistance from the very farmers its policy is trying to appease. Warathep Rattanakorn, the deputy agriculture minister, said earlier this week that it might be three years before the program is likely to be scrapped. Meanwhile scandals over the implementation of the scheme have been negative for the government's image.

To improve growth prospects, Yingluck has been pushing two major investment projects - one a massive water control system designed to prevent future flooding of Bangkok and environs, the other a huge railway building project focused primarily on high speed rail links. The water project has already run into opposition from assorted affected interests and environmentalists. As for railways, Thailand badly needs massive improvements to a creaking, ill-managed, single track, meter gauge system dating to the 19th century. But given the distribution of the Thai population and the relatively small size of urban centers other than Bangkok and its surrounds, a high speed system looks a gigantic waste of money compared with double tracking the existing one.

There were already doubts that Thailand could afford two colossal public sector projects of limited economic return. Costs of such projects are usually bloated by payoffs to politicians. Now with the baht and GDP growth both under pressure, voices opposing these supposedly vote-winning projects are bound to grow louder. Resistance to them within the ever-cautious bureaucracy will also increase. Worries abound not just about the impact on government debt but also on the balance of payments given the high and rising import component in investment spending.

Thailand's problems are certainly far from serious. The terms of trade have been improving even as export growth has slowed in response to slackening in China and stagnation in Europe. Thailand has a better balance of commodity, manufacture and service exports than any of its neighbors. Tourism receipts continue to grow and will pick up strongly in the fourth quarter.

The weakening of the baht will be welcomed after a period when easy money overseas had pushed it too high for comfort. Nonetheless there is little leeway now. Household debt level do not leave much room for consumption growth and some major Thai corporations have borrowed heavily to finance high profile takeovers - those of supermarket Siam Makro and Singapore's Fraser & Neave being especially noteworthy.

Demand from Europe may pick up. China's growth, though slower, looks assured and Thailand continues to attract money and people from the Middle East and India. But prospects within ASEAN are not so good, with commodity prices pushing Indonesia's current account deficit to worryingly high levels and Malaysia seeing its surplus contract. Those are trends which look likely to last for some while to come.

But Thailand's ability to grow from internal demand alone is quite weak. Urbanization is running at less than 0.5 percent a year and total population growth by even less - through this may be understated given the size of the undocumented foreign labor force. The rice-pledging subsidy will help rural incomes and income distribution but likely have a negative effect on agricultural productivity whose weak performance has been holding Thailand back for many years.

So although the latest gloomy economic data may be reversed in the coming two quarters, it does give a warning that Thailand has problems ahead which can only be made worse by rice-pledging and high speed trains.