Thai exports are heading for a second straight year of sluggish growth, and in fact contracted by 4% in the first four months of the year, according to the latest data. The well-known reasons are falling prices for commodities, the baht's strength compared to regional currencies, weak demand from developed economies, and the fact that Thailand's manufacturing sector is getting left out of supply chains for the newest technology products, such as smartphones.
The government and the private sector should take a variety of approaches to solve these problems and restructure Thailand's export industries. But this will require three to 10 years to succeed. In the meantime, Thai producers can pump up their export sales by targeting nearby markets that have recently begun to boom.
Myanmar and Cambodia top the list, thanks to their recent spurt in GDP and consumption, which looks set to continue for many years to come. Both markets offer massive opportunities for Thai companies, which already offer the kinds of industrial products and consumer goods these countries need.
Myanmar is one of the most untapped markets in Asia. With GDP expected to expand by 8.5% this year, it boasts the highest growth in Asean. Since Thein Sein assumed the presidency in March 2011, substantial political and economic change has transformed Myanmar's prospects. Parliamentary byelections were held in 2012, the same year that a new, more liberal law on foreign investment was established. In response, many western countries have eased sanctions on trade and investment.
Foreign direct investment has been flooding into Myanmar as multinational corporations rush in to capture an underserviced market of 51 million people. FDI will reach US$8 billion in the 2015 fiscal year, almost triple the level of 2013, according to the Myanmar Investment Commission. Most projects target the energy, manufacturing and telecommunications industries. Tourism is also booming; visitor arrivals surpassed 3.5 million in 2014, a dramatic rise of 70% from the preceding year.
Thailand is already Myanmar's third-biggest trade partner, behind only China and Singapore. The top Thai exports to Myanmar in 2014 were fuel, electrical appliances, beverages, electrical machinery and equipment, cement, steel, plastics, vehicles and prepared foods such as instant coffee and condiments. Thailand's exports to Myanmar grew 19% year-on-year, with only marginal declines in a few categories such as steel.
Myanmar's demand for all kinds of industrial products and services can only grow. The country is beginning what will be a long period of high growth in infrastructure spending. Among the big projects will be construction of government buildings in the new capital Nay Pyi Daw and transport links with Yangon.
The manufacturing sector will expand rapidly, hosted in special economic zone developments such as Dawei, Kyaukphyu and Thilawa. The large slate of construction projects and the influx of FDI will require all sorts of supplies such as machinery, equipment, tools and parts as well as advanced raw materials.
On the consumer side, the outlook is brightening because the national minimum wage will soon be hiked, helping attract workers to return from abroad. Expats will continue flooding in, ready to spend on quality imported products. Thailand's geographical location and well-developed consumer industries give Thai companies a big advantage in meeting needs in Myanmar.
Cambodia is smaller but also very promising, with GDP growth forecast at 7.3% this year. Manufacturers continue to build or expand factories there, supporting robust growth in exports of products such as garments and footwear at least for the medium term. Rising FDI and continuing development aid will help sustain momentum.
Thailand's top exports to Cambodia in 2014 were fuel, electrical machinery and equipment, gold, vehicles, electrical appliances, sugar, beverages, cement, plastics and rubber. Year-on-year growth in Cambodia's imports of Thai goods was an impressive 13%. Categories with strong growth included electrical machinery and equipment, gold, livestock, furniture and glassware, whereas fuel, sugar, and rubber declined marginally.
Urbanisation and the emergence of a middle class are the bright spots in Cambodia's prospects. The urban share of the population is roughly 20%, well below Thailand's 50%. The urban populace is set to grow by at least 2% per year in the years ahead. The capital, Phnom Penh, will see annual population growth of almost 3%. The growing middle class already accounts for 15% of the country's total population of 15.6 million.
The new middle class will want products and services that provide convenience and save time. That will translate into tremendous growth in demand for packaged foods, condiments, household supplies and personal-care products as well as home appliances such as air-conditioners, refrigerators, washing machines and water purification systems.
Affluent Cambodians as well as expats will be spending more on amenities such as home furnishings. Because international brands are in high demand, local firms are increasingly interested in becoming agents or distributors for foreign products.
Agriculture and food processing are two sectors with growth potential. Cambodian farming relies on outdated, inefficient methods and produces mostly rice. As such, the Cambodian government is encouraging more investment in agriculture, and diversification of crops.
Various projects will expand the production and processing of rice, corn, and other crops such as palm oil, tapioca, rubber and cassava. This will increase demand for agricultural machinery and equipment such as water pumps, well-drilling machines, tractors, rice milling and packaging equipment, as well as for supplies such as fertiliser and seeds.
Although the outlook in Cambodia and Myanmar is bright, there are certainly risks. Thai producers and exporters will find it challenging to gain distribution of their goods throughout each country. The most common solution is to partner with local distributers, which introduces execution risk. It's imperative to conduct careful due diligence on a potential local partner to ensure that qualifications and reliability are high. Contracts should comply with local law. The rights and obligations of each party and dispute resolution procedures should all be clearly stated.
The other challenge is rising competition. Exporters from more developed countries in Asia are rushing in. The market and competitive environment are changing very fast. To succeed requires versatility, but Thai companies are in a strong position.
EIC, a unit of Siam Commercial Bank Public Company Limited, offers in-depth macroeconomic outlook and sectoral impact analyses. For more information, please visit www.scbeic.com or contact eic@scb.co.th