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Source: www.asiaecon.org |

GOVERNMENT EFFORTS MIGHT NOT BE ENOUGH TO AVOID A RECESSION IN THAILAND


The global financial crisis has slashed demand for exports worldwide, deeply affecting export-driven economies, particularly in Asia, as the region is twice as dependent on exports as the rest of the world. As a country that relies on exports for 70% of its GDP, Thailand is now facing one of its largest economic contractions in more than a decade. Recent political unrest has severely hit the country's tourism sector, further contributing to Thailand's dire situation. The government has begun to take measures aimed at spurring economic growth, however, efforts might not be enough to avert a recession for Southeast Asia's second largest economy in 2009.




The global financial crisis has slashed demand for exports worldwide, deeply affecting export-driven economies, particularly in Asia, as the region is twice as dependent on exports as the rest of the world.  As a country that relies on exports for 70% of its GDP, Thailand is now facing one of its largest economic contractions in more than a decade. Recent political unrest has severely hit the country’s tourism sector, further contributing to Thailand’s dire situation.  The government has begun to take measures aimed at spurring economic growth, however, efforts might not be enough to avert a recession for Southeast Asia’s second largest economy in 2009.

Thailand’s January exports fell 25.3% from a year earlier to $10.4 billion, marking the third month of contraction. The steep fall was a result of falling global demand for Thailand’s cars, hard drives and electrical goods exports.  Thai officials predict exports to fall 13.1% in 2009 after growing by 16.8% in 2008. Meanwhile imports plunged by 27% to $8.69 billion in January, as opposed to a 8.8% drop the month before.

The fall in exports have resulted in a dramatic fall in manufacturing output, with a 21.3% fall in January, marking the steepest fall in Thai history.

The tourism sector suffered as tourist arrivals in January fell by 10.5% to 1.29 million, after a 19.4% decline in the fourth quarter of 2008. The decline was mainly attributed to the unstable political scene, particularly during the end of last year, with political protesters closing down Bangkok’s main airport for more than two weeks. Political instability will continue to impact economic growth as the tourism sector currently accounts for 6% of the overall economy. 

As a result, Thailand’s GDP growth during the first quarter will likely be worse than the 4.3% contraction experienced in the last quarter. Overall GDP growth for 2009 is forecast to contract by at least 1%.

Moreover, the country’s current account surplus in January reached $2.29 billion, compared to $91 million in December as a result from lower oil prices and falling demand for raw materials in light of shrinking exports. Blomberg stated that this was the steepest widening since the organization began its records in 1991.

Private investment and consumption fell drastically from the year before, reflecting a decrease in consumer confidence, purchasing power and internal demand.

In light of Thailand’s dire situation, the government has introduced several measures to counter the pressures of the slowing economy, including a $3.3 billion stimulus package announced earlier this month, aimed at boosting domestic demand and creating jobs. Furthermore, the government has pledged long term infrastructure projects and cash handouts to the poor in order to boost private consumption.

“The measures are based on the idea of reviving the economy directly, that is, adding money in people’s pockets,” Prime Minister Abhisit Vejjajiva stated, “Giving money directly to people is the most effective way. It will lead to more spending that will help industrial, agricultural and business sectors.”

The Bank of Thailand has reduced its lending rates by 1.75 percentage points to 2% since last December. Thailand’s Siam Commercial bank, the country’s third largest lender, plans to cut its savings and lending rates by 25 points. Other banks are likely to follow suit, as they try to support Thailand’s sinking economy.


However, Thailand’s economy might still reach a recession despite governmental stimulus and rate cuts. A severe increase in unemployment rates, weak infrastructure, lack of labor skills and political instability may be the biggest challenges facing the country in the next few months. Domestic consumption, one of the country’s main engines of growth, will not be dramatically affected by the stimulus, as government expenditure accounts for just 20% of the economy.


The decrease in exports has resulted in increasing levels of unemployment. GM, a US carmaker announced last week that it would lay off 790 of its 3,000 Thai workers, while Toyota has fired over 1,000 Thai workers since the end of last year.


Similarly, the decline in the tourism industry will likely result in as many as 80,000 lost jobs. Meanwhile, around 1,307 Thai companies went bankrupt in January alone, a 53.7% increase from the same period the year before. The government expects 4.2% of the country’s total workforce, or 1.2 million workers, to lose their jobs this year, raising the unemployment rate in 2009 to an estimated 2.5-3.5%. Yet,  governmental stimulus measures will only provide 180,000 new jobs.


Moreover, Thailand’s weak infrastructure will likely hinder economic growth as it will pose obstacles to the increasingly industrialized economy. The country’s telecommunication, electricity and transportation sectors have already shown signs of strain in the past few years. The government’s funding of infrastructural projects will boost growth and capacity but will not be enough to substantially improve the situation.


Additionally, lack of labor skills including a shortage of engineers, experts, and technical workers, will limit the country’s future technological environment and productivity. More efforts should be placed on education, attracting foreign skilled workers and international cooperation in the areas of technology and development. 
Increased efforts aimed at improving infrastructure in the country’s rural communities would also ensure balanced national growth and lesson the disparity between the rural poor and the urban rich.

Political instability is also likely to remain a challenge, particularly in current difficult economic times, as insufficient efforts will spur lack of confidence in the government and most likely fuel opposing parties. The continued instability would carry on declines in the tourism sector, weighing in the country’s overall growth. The recently announced cut in taxes, will help to ease public pressures, but might not be enough to ensure stability in the long run.

Further, Thailand’s future economic performance will also be impacted by the amount of efforts placed on the ongoing reform of the country’s financial sector.  While the government has shown to place increased focus on improving the country’s financial systems, efforts should not be disrupted during the economic crisis in order to ensure that loans are paid, as well as ensure transparency, availability and confidence. An efficient financial structure will be crucial to Thailand’s economic recovery.


The government should also increase efforts in attracting foreign investments, improving domestic investments and consumption, as well as increase transparency in an effort to balance the country’s increasing dependency on exports.


Although, the government’s stimulus plan might not be enough to avoid an economic recession this year, analysts predict the country to recuperate by the end of the 2009 or early 2010, as slight impacts of the stimulus package are combined with an expected growth in external demand. Thailand’s efforts to further open its markets and its increasing measures to expand international trade, particularly with its regional neighbors, will also help to accelerate its economic recovery by boosting trade, investment, economic assistance and regional development. However, long term sustainability and healthy economic growth will only take place once more efforts are made towards overcoming Thailand’s current challenges.

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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