WILL THE GLOBAL FINANCIAL CRISIS SINK THAILAND?

BY INVITATION

At first Thailand appeared to be relatively shielded from the global financial Armageddon, but now it is starting to feel the pinch. As the world economy continues to be buffeted by the financial crisis, major spillovers on the real economy here have become increasingly apparent.

The world-wide battering has put to rest the notion that Thailand, with better economic fundamentals and increased intraregional trade, could decouple from America's foibles and woes. Exports plunged 26.5% year-on-year in January following a decline of 20.5% in November and 14.6% in December. The plunge in the last three months snapped an 81-month streak of positive growth that had long helped to maintain the country's growth momentum. Economic growth fell into negative territory during the final quarter of 2008, dragging down the pace of expansion for all of last year. And risks are growing that the current quarter could be even worse.

Until the third quarter of last year, Thailand had shown considerable resilience to the US downturn as the slowdown was then relatively mild and was not concentrated on household consumption but rather housing. The impact was initially confined to the local stock market which plunged to its nadir toward the end of the year as foreign investors pulled out. Ironically, our market fell more than America's where the financial maelstrom originated.

Major financial institutions in the US and Europe collapsed thanks to their exposure to credit-default risk embedded in mortgage-backed-securities (MBS) debt. But Thai financial institutions were immune owing to limited exposure to the MBS market and other products poisoning the balance sheets of their Western counterparts.

Now that the sharp deceleration in US household consumption triggered by a full-scale recession has come to pass, the downside risks to Thailand's exports and growth are becoming evident. Emerging countries in Asia are witnessing with trepidation the plunge in their exports. South Korea saw its foreign sales plummet 32.8% in January, accelerating from 19.5% and 17.9% in November and December. Taiwan's exports contracted a record 44% following drops of 23.9% and 41.9% in he two months previously. Among Southeast Asian countries, Singapore, Malaysia and the Philippines experienced severe contractions in their exports in the fourth quarter of 2008, marking the greatest synchronised export slump in history.

Like emerging countries in Asia, Thailand has long depended on international trade as an engine of growth. Its heavy dependence on exports has, contrary to the Thaksin-led government's dual-track strategy, increased at the expense of domestic demand. Exports account for about 70% of GDP - an increase of about 10 percentage points from a decade ago - indicating it is among the most exposed economies in emerging Asia where the average ratio is roughly 50%.

Thailand's foreign sales are now being choked not only by weak world demand, but also by the difficulty of accessing trade finance owing to the global credit crunch. Thai exports tumbled in every major market be it the US, Europe, Japan or Asean. Similarly, exports to China - the only country that might possibly provide the engine to pull Thailand and emerging Asia out of the economic quagmire - have recently tumbled.

Even China is sinking. Recent grim figures underscore the depth of its downturn. Exports have nosedived in recent months with the January figure down by 17.5%, the sharpest decline in 13 years. Even worse is the precipitous fall of imports - a plunge for a third straight month from 18% in November and 21% in December to 34.1% in January - reflecting an abrupt fall in domestic demand. Similarly, China's growth slumped to 6.8% in the final quarter of 2008, down sharply from 9% in the third quarter and 13% for all of 2007.

It looks as though Thailand is fast falling into an economic abyss. However, the global financial storm is unlikely to batter its economy as much as the one in 1997. Thailand's macroeconomic fundamentals are indeed much stronger than they were a decade ago when it had huge current-account deficits, heavy debt loads - much of which was short-term debt - and inadequate foreign reserves. Today, it has cushioned itself against shocks with a war chest of foreign reserves exceeding $110 billion, and with its low debt-to-GDP ratio, well-capitalised banks, better corporate balance sheets and modest property price appreciation, it is in far better shape to cope with the current economic meltdown.

While the global downdraft is not expected to damage the Thai economy as deeply as the previous crisis did, the downturn is likely to be more protracted thanks to the adverse external environment. The strong demand for our exports that spurred recovery a decade ago is no longer there. The US, Europe and Japan are now in a recession that threatens to be the worst since the Great Depression of the 1930s. While a rate-cutting binge and the incumbent government's fiscal stimulus packages may help, it is only through an upturn in these countries that we could hope to see Thailand on the path to a quick and sustained economic recovery.

Suphachai Sophastienphong is chief economist for Siam City Bank.