Reform concerns that keep us up at night

Reform concerns that keep us up at night

It is only natural for an economy under reform to slow down. Take China as an example. Since President Xi Jinping announced a shift in focus from quantity to quality of growth, the era of double-digit expansion has ended. GDP growth of around 7% a year is the new normal. The world's second largest economy is reorienting itself away from heavy reliance on leveraged investment and toward more reliance on resilient domestic consumption. After all, what country has more consumers than China?

In Japan, meanwhile, the "third arrow" of Abenomics has been fired again following Prime Minister Shinzo Abe's election victory last month. Leveraging bold monetary easing and expansive fiscal measures, the government will now push structural reforms to sustain future growth. If it succeeds, Japan could put nearly three decades of stagnation behind it. But for now, the economy is still in recession and the indicators for the near term are not promising.

Historically, economic reforms have not come naturally, as they tend to hurt a country's performance. Jean-Claude Juncker, president of the European Commission and former prime minister of Luxembourg, once put it this way: "We all know what to do, we just don't know how to get re-elected after we've done it."

Austerity and reform programmes emerged in Greece, Ireland, Italy, Portugal and Spain only when the euro zone entered a debt crisis. We will not discuss the merits of such measures during a crisis — Nobel economics laureate Joseph Stiglitz called them "an utter disaster for the euro zone" — but the sequence of events is in line with our conjecture. Economic crises tend to serve as a burning platform for reforms. Something really bad has to happen before people start thinking about making changes.

In this context, it may be fortunate that current circumstances in Thailand are not "normal", in that the government does not have to worry about political repercussions and can focus its energy on carrying out reforms.

Against such a backdrop, TMB Analytics predicts Thailand's GDP will expand by 3.5% this year, a decent rate but far from spectacular. If growth continues at that rate, it will could take 20 years for the country to achieve high-income status as classified by the World Bank. That is an optimistic estimate. The conservative target is 2060.

Raising Thailand's growth rate by just one percentage point a year would shorten the journey to high-income status by 10 years or more. However, given that the reform process probably will nip growth in the short term, we must make sure that the efforts pay off in the long term. Policymakers need to be sure their strategic priorities are right. We will sleep better knowing that these top reform agenda items are getting serious attention:

Corruption eradication: Thailand currently is ranked 85th out of 175 countries in Transparency International's Corruption Perceptions Index. The problem takes many forms, from petty graft to large-scale bribery and kickbacks. In its modern form, corruption is also tied to populist policies that sometimes prove very costly to taxpayers. Most people agree that corruption must be eliminated; nevertheless, we have barely seen any real progress so far.

Labour shortage: Thailand's reported unemployment rate of 0.5% is the second lowest in the world. Given that many economic activities in the country are labour-intensive, we face serious constraints in the labour market. Our ageing society will pose further difficulties as the ratio of working-age people for each elderly person shrinks.

Value creation in agriculture: Agriculture employs 30-40% of the workforce but accounts for only 10% of GDP. As we pointed out in our November column, rice is not the only product that can earn money for the Thai rice industry. Rice straw, for instance, could be turned into biofuel, and certain grains into wine, with support from the government.

SME strategy: Small and medium-sized enterprises account for about a third of GDP and more than three-quarters of total employment. However, many SME start-ups have trouble obtaining credit. According to the World Bank's "Doing Business 2015" report, Thailand is ranked 89th out of 189 countries in ease of getting credit. Micro- and nano-financing might be a quick-win solution for both small businesses and economic reform.

Rail transport: Thailand's obsolete rail system is our last, but not least, concern. According to the World Economic Forum's Global Competitiveness Report, Thailand ranks 74th out of 144 in quality of rail systems. Even though the government is pushing ahead with an overhaul, it could take a decade before the system is fully upgraded. Investors not only want to see the megaproject carried out, they also want to see policy continuity by successive governments.

Similar to the Japanese experience, Thailand in 2015 is likely to be bolstered by expansionary fiscal policy from Gen Prayut Chan-o-cha's government, and accommodative monetary policy from the central bank. The coming Asean Economic Community will also spur border trade and activity in special economic zones. Yet risk is skewed towards the downside. Falling farm prices are depressing household spending, hurting regional economies. Some infrastructure investments may not go ahead as planned. Stalled exports remain a big concern as well.

On the whole, we might not have high hopes for this year but we are cautiously optimistic about the longer-term prospects. If the above reforms are successful, Thailand will almost certainly emerge stronger again.


TMB Analytics is the economic analysis unit of TMB Bank. Behind the Numbers is co-authored by Benjarong Suwankiri and Warapong Wongwachara. They can be reached at tmbanalytics@tmbbank.com

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