Exim Bank warns of US default fallout

Could be more serious than Lehman Brothers

The knock-on effect on Thai exports from a US debt default, which could occur if President Barack Obama is prevented from raising the debt ceiling, could be bigger than the Lehman Brothers collapse, warns Kwanjai Tachasanskul, a first vice-president of the Export-Import Bank of Thailand.

A bird’s eye view of Klong Toey port in Bangkok. SITHIKORN WONGWUDTHIANUN

However, economists estimate only a limited effect on exports but say the capital market could take an extensive hit.

The US accounts for 10% of Thai exports in terms of value, while other destinations are in the US supply chain, said Ms Kwanjai.

Thai exports shrank by 14% in 2009 due to the spillover effect from the Lehman Brothers meltdown.

Amid tepid domestic consumption and private investment, as well as potential delays in the government's hefty investment plans, the nascent recovery in the world's largest economy has raised the Thai government's hopes of boosting weak exports and the overall domestic economy.

The US$16.7-trillion debt ceiling must be raised by Oct 17 to avoid a potential default on US debt obligations and sovereign credit rating downgrades by international ratings agencies.

Ms Kwanjai estimates computer and peripheral products, rubber-related products, jewellery, canned foods, electrical appliances and electronics will be hurt the most if the US debt ceiling remains deadlocked.

But the effect on Asian capital markets is difficult to predict, as it could result in either capital outflows or inflows.

To guard against potential risk, Ms Kwanjai suggests investors hedge against foreign exchange volatility.

She predicts Thai exports will expand by 2% this year on signs the sector is picking up and high demand during the Christmas and New Year season.

Exports rebounded in August after three months of declines, rising by 3.92% year-on-year that month to $20.5 billion.

For the first eight months of this year, exports grew by a mere 1.03% year-on-year.

The Finance Ministry's Fiscal Policy Office recently projected Thai exports will grow by 1.8% this year to $230 billion, based on the assumption that export value will average $19.8 billion a month during the fourth quarter.

TMB Bank economist Warapong Wongwachara said almost 1% of Thai export growth will be shaved off for every one-percentage-point reduction in US gross domestic product (GDP).

Based on foreign economists' forecasts, a US debt default would shave no more than 0.5 percentage points off US GDP if it affected it at all, so the impact on Thai exports would be minimal, he said.

Mr Warapong said China's structure changed after the Lehman Brothers crisis, and now it imports more to satisfy consumption.

Strong consumption in China could therefore provide a buffer for Thai exports in the event of a US debt default.

However, the local capital market is a more critical area, as offshore investors could flee to safe haven assets such as the US dollar or the yen, said Mr Warapong.

"Capital would flow out if that were the case, but the extent of such a flow would depend on market anticipation of any US stimulus tapering. If the market bets the stimulus retreat will not happen this year, capital outflows would be minimal," he said.

Whatever happens, exporters and investors should brace themselves for potential capital market volatility, Mr Warapong added.

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Writer: Wichit Chantanusornsiri and Oranan Paweewun