Mid-Year Economic Review 2002

EXPORTS

Right time to add value

Woranuj Maneerungsee

EXPORTS

The baht is no longer weak in relation to the currencies of key competitors and Thailand cannot compete in exporting cheap, basic products

For exporters, most of the benefits derived from a weak baht are now in the past.

The floating of the baht in July 1997 was initially welcomed by exporters who were struggling because the overvalued currency had reduced their competitiveness in the global market.

They expected the positive effects to outweigh the negative, including the fact that the imported content of exported products would increase in price.

The government of the day, led by Gen Chavalit Yongchaiyudh, hoped that the country's exports would thrive on the back of the baht's depreciation and revive the economy.

Those hopes, kept alive by subsequent governments, have been constrained to a large degree by the spread of the economic crisis through much of East Asia, a trend that eventually lifted the competitiveness of products made by many other Asian nations, when compared with those of Thailand.

Now, five years on, Thailand's exports have not performed as well as had been expected. Last year, they totalled US$64 billion, down by 7% from $69 billion in 2000. Shipments in the first three months of this year totalled $15.4 billion, down by 6.7% year-on-year.

Most international trade analysts say the benefits from the low baht are almost over as other Asian countries had been forced by economic circumstances to devalue their currencies, notably South Korea, Indonesia and the Philippines.

The baht is now hovering around 41-43 to the US dollar, compared with around 25 baht before the float, when the currency was fixed daily around 25 to the dollar.

With Asian trading rivals adopting the same export-boosting strategies as Thailand, competition intensified, especially in key markets including the United States and the European Union.

For exporters, one factor that limited the immediate benefits derived from weaker currencies was a shortage of liquidity to lubricate trade deals, not to mention the sharp economic contraction within Asia itself.

Somyos Chamchoy, a senior researcher at Thai Farmers Research Centre Co Ltd, said that after 1998 Thailand encountered a buyer's market for many products, with Asian exporting countries competing by cutting prices to retain market shares.

As well, importers bargained hard as they knew that Asian exporters would gain from depreciating local currencies when they converted dollars and other stable foreign currencies into the local unit.

According to the Bank of Thailand's index on exports (see table), using 100 as a base in 1995, the average price per type of export product between 1998 and 2000 stood at 84.26 to 90.44 points, down from 108.88 in 1996.

Data used to compile the indices were obtained from the Customs Department.

The prices of agricultural products have declined continuously and reached a low of 49.69 points last year, from a base of 100 in 1995. In contrast, export volume has grown sharply, meaning that farmers and exporters are worker harder for less income.

When the baht plunged in value immediately after the float _ at one stage dropping as low as 58 to the dollar _ the price of Hom Mali or fragrant paddy surged to a record of just over 10,000 baht a ton.
However, the price is now nudging 6,000 baht a ton, close to the pre-devaluation level.

Even the price of electronic goods, a major element of the "new economy" declined.

The recent sharp drop in prices for dynamic random access memory (Dram) chips, a major export of South Korea forced its government to review export projections for this year.

Supachai Panitchpakdi, the next secretary-general of the World Trade Organisation (WTO), has expressed concern about the decline in farm product prices, given their impact on poverty in developing and least-developed countries.

Mr Supachai, a former deputy prime minister, said the export revenue of several developing countries had been halved by the fall in farm product prices.

A major obstacle to the trade in farm products, he said, was that agricultural products faced tariffs up to four times those on industrial goods.

He stressed that greater liberalisation of the farm product trade would benefit developing nations substantially.

"There is a lot of work to do on tariff structures, not only subsidies in major economies," he said.

However, Mr Supachai's goal is difficult to achieve given an increasing trend toward what developing nations see as protectionism in developed nations.

The European Union has introduced food safety measures allowing for strict checks on imported food.
In late May, the United States surprised its trade partners by passing a new farm law that allows almost $180 billion to be spent over the next decade on subsidising local farmers.

The move contrasts with the United States' call at the WTO ministerial meeting in Doha last November for the elimination of farm subsidies.

Teerana Bhongmakapat, an economist and lecturer at Chulalongkorn University said protectionism also affected industrial goods.

Anti-dumping measures were being imposed more frequently by countries to protect domestic industries.

Given changes in global trading patterns, Thailand needs to move away from making labour-intensive products in which other Asian countries are more competitive because of lower wages and other costs.

The benefits derived by Thai exporters of labour-intensive goods just after the floating of the baht, when other Asian currencies held against the dollar, will not return. China is shaping up as a major rival in producing cheap-quality products.

While Thailand makes its transition to producing value-added products, exporters might suffer from lower returns in baht given the now weakening US dollar.

Dr Teerana said successive governments had not done enough to make Thailand's exports more competitive.

"I prepared a White Paper on export competitiveness when I was an adviser to Mr Supachai almost a decade ago. Today, this issue is on the Thaksin administration's agenda.

"I fear that Thailand's goods will be under pressure from both high-technology and labour-intensive goods from China," he said.

Chavalit Nimla-or, a veteran exporter of garments and vice-president of the Federation of Thai Industries, agreed with Dr Teerana, adding that the weaker baht had given him a chance to resume exports, as clothing had been a "sunset" industry when the baht stood at 25 to the dollar.

Most Thai garment and textile exporters now realised that they could not cut their prices to compete with products from China and Indonesia, he said.

Therefore they were trying hard to upgrade product quality.

China is shaping up as a key rival of Thailand in every export segment.

Many multinational companies are investing in export production in China, which has its own merchant fleet, unlike Thailand.

Even so, Thailand's export scenario is far from gloomy, with many exporters in tune with the need for change.

Food producers have moved away from exporting basic products into manufacturing value-added goods, rather than just trying to increase shipments of raw products.

Listed companies including Surapon Foods and GFPT Plc see improved prospects resulting from the outstanding export performance of frozen shrimps and chicken.

One strong point for food processors is that they do not rely on imported content so they are largely immune from any weakening of the baht.

As a result, the Thaksin government has encouraged exports of products with high local content.
For example, the government launched the One Village, One Product programme as a means of finding exotic and unique products for export.

The government hopes that Thailand's export structure will change from a heavy dependence on electronic goods to high value-added exotic goods, copying the Italian economy.

Further, the government plans to reduce the reliance on traditional markets from 70% to 60% of the country's exports in bid to maintain export growth.

Thailand's main export markets are the United States, the European Union and Japan.

The government also wants to change the country's structure from one relying on exports to contribute almost 50% of gross domestic product to one dominated by local consumption.

"However, I never see developing countries drive their economy forward by boosting local consumption," Dr Teerana said.

In the next five years, at least, it could be said that Thailand's economy would depend on exports.

However, in the longer term, the country needed to be able to sustain export growth.

The best answer for the export sector was to improve production efficiency to increase competitiveness. This was a not new suggestion, Dr Teerana said, but it had never been properly implemented.