Thailand: East Asia's Economic 'Canary'
stratfor.com
Summary
Thailand is East Asia's canary in a coal mine for an impending economic
downturn in the region sparked by rising oil prices and interest rates.
Analysis
In the East Asian Net Assessment and the Global Economy Net Assessment,
Stratfor described a global recession on the horizon and how East Asia would
be particularly sensitive to the factors contributing to negative growth --
rising commodity prices and interest rates and a strengthening U.S. dollar.
In East Asia, Thailand is the first among equals and should be watched
closely as a leading indicator of the unfolding regional and global trends.
The kingdom, like many of its neighbors, imports a high proportion
(approximately 90 percent) of its oil, and its economy is dependent on
exports -- especially energy-intensive light manufactured goods. This makes
Thailand especially representative for Indonesia, China, Malaysia and the
Philippines, compared to Japan and the Little Tigers -- Singapore, Hong Kong,
Taiwan and South Korea -- who have evolved into more energy-efficient
economies.
Thailand also is an open market with a reasonably transparent economy; this
means economic events likely to happen in other countries will happen in
Thailand first, and the trend will be easier to spot -- similar to the
circumstances before the Asian financial crisis in 1997. Whatever symptoms of
economic malaise Thailand begins to display in the coming months, many of its
neighbors will likely be infected with a similar disease.
Rising oil prices, which nearly hit $50 a barrel Aug. 20, already are sending
shockwaves through the Thai economy. In late July, Thailand cut its 2004
economic growth projection by 0.8 percent because of high oil prices.
In recent days, the country's oil subsidies have come under fire. The
subsidies, which are intended to fight inflation, are estimated to have cost
the government as much as $500 million so far this year. Because Prime
Minister Thaksin Shinawatra is looking at an election in February 2005,
subsidies will likely remain and could cost as much as $1 billion at that
point. China, India and Indonesia, which have similar subsides, also will
experience a drain from the public coffers.
High oil prices already are hitting Thai industry pretty hard. An industry
insider said in The Nation on Aug. 12 that more than 400 small- and
medium-sized plastics manufacturers -- about 10 percent of the sector in
Thailand -- will be forced to shut down operations in the second half of the
year because of rising oil prices. The closures would reportedly put up to
6,000 people out of work.
Plastics companies are particularly sensitive to oil price fluctuations
because they raise the firms' primary input and transportation costs.
However, this indicates that some of Thailand's top exports -- automotives,
electronics and garments -- will also face higher input and transportation
costs. This situation will worsen dramatically if oil prices rise above a
level where it is no longer possible to sustain adequate subsidies.
Interest rates also are contributing to Thailand's woes. The country's
central bank raised its key repurchase rate by 25 basis points Aug. 25, after
two similar interest rate hikes by the U.S. Federal Reserve since June 30.
The end of cheap money in the kingdom is not here yet -- the prime lending
rate is still at a low 5.7 percent -- but it is coming. Thai firms will need
to begin at least thinking about cutting costs -- including payrolls.
Rising interest rates also will contribute to declining global consumption,
hurting the export-oriented economies of East Asia the most. Higher U.S.
interest rates will make it more expensive for developing countries carrying
high levels of external debt -- such as Indonesia, Malaysia and Thailand --
to roll their payments over with new debt issues.
Thai firms are probably not suffering alone. China exports similar products
and also maintains oil subsidies. However, the opaque nature of its governing
regime -- including suspect statistics -- and the complexities of its diverse
economy prevent an ample read of the situation on the ground. If Thai firms
are smarting now because of high energy costs, the effects will eventually
spread through to the country's major trade partners: the United States,
Japan, China, Malaysia and Singapore.
Over the next several months, if not quarters, while reaction to an economic
downturn begins to permeate Thai society -- capital flight, bankruptcies,
demonstrations, the sacking of a series of government officials -- similar
events will be on the horizon or bubbling just below the surface in
neighboring nations. It will not look the same in every country --
Singaporeans just do not protest like South Koreans, and the Chinese and
Japanese abhor bankruptcies -- but the same problems will exist nonetheless. |
