Economic Mid-Year 2001

Export-led era
may be waning

Woranuj Maneerurungsee

TRADE

Prime Minister
Thaksin's 'look inward' vision could signal a major shift in the goverment's attiude toward stimulating economic growth.
The US and Japanese economic slowdown-the immediate cause of local exporters' discomfort-has focused poliymakers' attention on the fact that exports are no longer an economic cure-all

The stagnant world economy has put a big dent in Thailand's hopes of using exports to drive an economic recovery. The Thaksin government is increasingly turning toward stimulating domestic consumption as an alternative.

For the first time since Thailand embarked on its export-oriented approach more than two decades ago, policymakers are questioning whether the country can continue to rely on exports as the main engine driving the economy.

Prime Minister Thaksin Shinawatra earlier this year outlined a "look inward" policy that would capitalise on local strengths, with fiscal policy designed to support domestic demand. Heavy dependence on exports would be lessened, he said.

Most economic forecasters are growing more pessimistic about export growth for 2001. They cite the poor performance in the first four months, when the value of exports declined year-on-year by 2.7% to US$ 20.7 billion.

In April, the Bank of Thailand revised its export growth figure for the year to between 3% and 4.5%, and said the overall economy would grow in a range from 2.5% to 4% for the year. It is highly likely that the forecasts will be revised downward again as external factors point to further problems for Thai exports.

The National Economic and Social Development Board in March downgraded its economic growth forecast to 3.5-4% from 4-4.5%, and export growth to 7-9%, down from 9-11%. Citibank in June projected exports would grow by only 0.5%, compared with its earlier projection of 6%.

The Commerce Ministry remains relatively bullish by comparison, saying 9.4% growth to $76 billion should be achievable.

All the fo,recasters acknowledge that slowdowns in the United States and Japan are having the greatest impact on exports. The International Monetary Fund has forecast I.5% economic growth for the United States this year, with a rebound to 2.5% next year. It said Japan would record 0.6% growth against a global average of 3.2%. The United States is Thailand's largest single market, consuming 20% of ail exports.

Suchart Chantranakaraj, ptesident of the Thai Garment Manufacturers' Association, fotecast zero export growth for his industry, against an earlier projection of 6-8%, mainly due to the sluggish US economy.

Half of Thailand's garment exports, which were worth $3.3 billion last year, go to the United States.

"We rely heavily on this market, and if garrnent export values to the United States fall by 10%, it means total exports drop by 5%. That's why I have projected zero growth," Mr Suchart said.

He said customers of his company, Goldmine Garment Co Ltd, were reluctant to order rnore goods since retail sales have been dropping steadily. He said production capacity had been cut slightly to reduce inventories, and while no staff had,been laid off, overtime had been reduced.

Weerawat Angchotcharoen, chief of marketing for Amallion Enterprise Co, a producer of printed circuit boards, said the electronics industry had been hit hard by a slowdown in the US high-tech industry.

In the first quarter, he said, Amallion's sales fell by a half from a year earlier as customers cut production.

Mr Weerawat was making no official forecast for the second and the third quarters as the company would mainly be clearing stocks of old models. New models targeting US customers are planned in the fourth quarter.

"The headquarters of electronic industries based in the US are developing new and more advanced high-tech products to revive their industry. In Thailand, for example, plants that were producing ordinary [cathode-ray tube] monitors will produce [liquid crystal display] screens instead," he said.

Over the past few months, many high-tech companies such as Seagate, Delta and Thomson had laid off workers to match cuts in production capacity, Mr Weerawat said.

According to the Commerce Ministry, exports from Thailand represented 1.2% of total US imports of $295 billion between January and March, or 16th among all US trade partners.

Among Asean competitors, Malaysia was the biggest trading partner of the Inited States with a market share of 1.8%, followed by Singapore at 1.4%, with Thailand ranked third.

Among the US-bound Thai export products showing declines in value were computers and accessorics (8.4%), electical circuits (7.2%), telephones and components (15.5%), televisions10.7%), rubber gloves (2.9%), natural rubber (27.2%), and leather footwear (13%).

The ministry said Thailand was losing competitiveness in computers and accessories as well as electrical appliances to Mexico, Chian, Malaysia and Singapore. The contry's US market share of computers and equipment shrank to 3.8% in the first quarter from 4.2% in the same period last year.

Most Thai exporters feel the US economy is still fragile despite five Federal Reserve interest-rate cuts totalling 2.50 percentage points since the start of the year. Fed chairman Alan Greenspan has warned that the US economy remained at the risk of weakening more than anticipated.

The period of sub-par economic growth was not yet over, he said.

The news has been even worse in Japan, where officials reported recently that the economy had contracted by 0.8% year-on-year in the first quarter, raising fears of the country's fourth recession in a decade.

Prime Minister Junichiro Koizumi of Japan had earlier warned of a tough economic year ahead with rising unemployment and corporate bankruptcy.

He said he was reluctant to say that the economy would improve soon.

Against a backdrop of gloomy external factors, the Thai government has come up with some measures, not all of them new, to help exporters make the best of tough times. For example, exporters can use orders from foreign buyers to obtain full packing credits from two state banks: the Export Import Bank of Thailand and Bangkok Metropolitan Bank. The method, proposed by the Commerce Ministry, differs from the existing practice under which exporters use letters of credit certified by banks in buyers' countries.

The letters enable exporters to obtain from local banks funding of about 80% of value of their orders.

The government has also waived value-added tax on the purchase of local raw materials used to make products for export.

Declining exports aside, the government is also worried-about the sharp increase in imports, whose value rose by 95% to $20.8 billion in the first four months, creating a trade deficit of $10 million.

Only automotive imports declined. Imports of capital goods were worth $10 billion, up 22.8%, raw materials and intermediate goods $6 billion (up 5.2%), consumer goods $1.6 billion (up 10.8%) and fuel $2.4 billion (up 22.6%.

The Thaksin government has urged businesses and especially state agencies to seriously review their import requirements and to source materials domestically wherever possible. It is estimated that state enterprises would import around 62 billion baht worth of goods this year for their investment projects.

However, imports by the private sector are still rising as the Thai export industry over the past 10 years has come to rely heavily on imported content. Such content now represents about 38.6% of total export values each year. Leading users of imports are the electronics and electrical appliance sectors (61% of export value), petroleum products 56.5%), vehicles and parts (56.2%), fertiliser and insecticides (52.9%) and industrial machinery (49.3%).

The import price index increased sharply by 18% in the first quarter, led by capital goods at 36%, oil 12%, intermediate goods 3.5% and consumer goods 1%.

The export price index rose only 4%. The prices of products made with local content (such as sugar and frozen shrimp) rose by 3.8%, while those of high-tech goods rose by 4%.

The price index of exported farm products dropped sharply by 13% in the first quarter. The actual value of farm product exports in the first four months of the year rose by 4.8% to $2.4 billion, driven mainly by frozen shrimp (up 49% to $623 million) and poultry (up 14% to $224 million).

The panic about foot and mouth disease in westrn countries has accelerated imports of other foods to replace beef and pork, and Thailand has been a beneficiary.

Rice exports, in which Thailand leads the world, rose in volume but fell in value in the first four months of the year. Export value contracted by 16.7% to $435 million while the volume rose by 3% year-on-year to 1.92 million tons from 1.87 million.

Exports of other farm commodities goods are also facing the problem of falling prices, which could weaken further amid higher global output.