Thailand
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The Comeback Kid
By SHAWN W. CRISPIN
BANGKOK, Thailand -- Not long ago, Italian Thai PCL, Thailand's largest construction company, epitomized all that ailed the Thai economy: It had heavy debt, flagging revenues and no solid plan for a quick recovery.
But that was before Prime Minister Thaksin Shinawatra came to the rescue. Now, thanks to heavy government spending on new infrastructure projects, Italian Thai's cranes and bulldozers are moving again. In recent months, the company has landed almost 42 billion baht ($960 million) in public works contracts, new business that has helped propel a double-digit growth spurt in Thailand's construction sector over the last year.
Italian-Thai is just one of the beneficiaries in an economic rebound led by strong domestic demand this year. Bangkok estimates inflation-adjusted gross domestic product will expand 4% to 4.5% this year, an impressive improvement on last year's anemic 1.8% growth.
Mr. Thaksin's policies have a lot to do with the upswing. Mixing vigorous fiscal pump-priming with record-low interest rates has prompted a jump in domestic consumption as the global economy, and demand for Thai exports, has sagged.
In August, consumer confidence hit a 34-month high, according to a Bank of Thailand survey. New car sales have surged 50% so far this year, while low mortgage rates have helped to galvanize the long-moribund residential property market. Meanwhile, government easing of regulations on consumer credit, including lowering minimum income requirements for credit cards, has helped spark a spending spree.
Thailand: Economic Overview
But the Thaksinomics-driven recovery comes at a cost. To fund its many spending programs-including a one-million-baht payout to each of Thailand's 77,000 villages -- the government ran its widest budget deficit ever this year, 3.8% of GDP. As a result, public debt is on track to hit 65% of GDP by 2003, a level that's raising questions about the country's borrowing load. "The question remains: Are Thaksin's populist policies sustainable over the long term?" asks Bob Broadfoot, managing director of the Political and Economic Risk Consultancy in Hong Kong.
Debt Saturation
The government promises to curtail spending next year, cutting by half outlays specifically earmarked to stimulate the economy. Meanwhile, many economists expect the consumption boom also will level off as Thai consumers near their debt saturation point.
So to maintain economic momentum into 2003, either exports or private investment must take up the slack, contend economists.
On those fronts, the prospects are mixed. Historically accounting for about 65% of GDP, Thai exports contracted 1.5% during the first half of this year, then picked up modestly in the third quarter. Aside from slowing demand in the U.S. and Japan, exporters also increasingly are losing out to lower cost Chinese competitors, especially in electronics and information-technology components industries.
War in Iraq is another risk factor for comparatively energy poor Thailand. Bank of America predicts that should war push oil prices to $35 a barrel, Thailand's GDP growth would decline by more than one percentage point. "As a net oil importer, the Thai economy and Thai companies are on the front line of a possible war in the Middle East," says Kongkiat Opaswongkarn, executive director of the Thai Chamber of Commerce.
The private investment outlook is brighter, however. Since Asia's 1997 financial crisis, new annual private investment has amounted to about 13% of GDP, far below the boom-time peak of 32% in 1996. But there are signs of an uptick. Led by government infrastructure spending, total investment growth jumped 7.6% year-to-year in the second quarter, more than double the first-quarter tally. More significant, new foreign direct investment commitments were up 79% year-to-year through August, according to the Thai Board of Investment.
Renewed Interest
In particular, Japanese investors seem to have regained their appetite for new Thai ventures. In September, Toyota Motor Co. unveiled plans to relocate its regional pickup-truck production base from Japan to Thailand. That announcement came on the heels of Isuzu Motor Ltd.'s decision to double the capacity of its truck-manufacturing operation here.
The Japanese Chamber of Commerce says more projects are in the pipeline in petrochemicals, auto parts and IT-related industries. "Many Japanese investors believe now is a good time to increase their Thai investments," Hiroo Sutoh, president of the Japanese Chamber of Commerce in Thailand. "In many industries, Thailand is still a more attractive place to be than China."
But to set a strong private investment-led business cycle in motion, many financial analysts contend Thailand needs to clean up the bad debt still lingering in the financial system from the 1997 crisis. To do that, Mr. Thaksin created the state-run Thailand Asset Management Co., which has taken more than 717 billion baht of nonperforming loans-or about 50% of the country's bad-debt backlog-from Thai banks and finance companies.
But the TAMC has been criticized by some economists for favoring rehabilitation of companies over liquidation of distressed assets. Meanwhile, loans restructured since the 1997 crisis continue to revert to nonperforming status at a rate of 20 billion baht a month, discouraging local and foreign banks from extending the new credits needed to fund a full-blown recovery in domestic private investment.
"New investment is still the name of the game," says Ammar Siamwalla, an independent economist. "Without it, we are only spinning our wheels."
--Mr. Crispin is a staff reporter in The Wall Street Journal's Bangkok bureau.
Write to Shawn W. Crispin at shawn.crispin@wsj.com
Updated October 28, 2002 |
