Are these green shoots? This question, usually the primary concern of pandas (or panda look-alikes), is now on everyone’s mind as observers try to identify the early signs of recovery out of the global financial crisis, which, like a forest fire, spread rapidly and caused great damage to the world’s economies and the Thai economy in particular. It now appears that the fire has been put out (with much liquidity…), but the green shoots emerging in the burned forest remain very fragile as hot spots remain and the risks of the fire re-igniting are not negligible.
The Thai economy, along with all economies in Asia, was hit hard by the sharp drop in external demand caused by the global financial crisis, and GDP shrunk in the last quarter of 2008 after 38 quarters (more than nine years) of growth. Capacity utilization fell off a cliff to levels very close to the trough following the 1997/1998 Asian financial crisis. Thailand has relied on exports as its primary engine of growth, so the sudden and sharp drop in world trade was bound to cause a deep contraction in the broader economy. The shock was transmitted to the domestic economy in the first quarter of 2009, and by that time about 2/3 of the drop in GDP can be attributed to weakness in domestic rather than external demand.
But while the strong financial armor put up since the 1997/1998 Asian financial crisis could not prevent the foreign fire from spreading into Thailand’s real economy, the precautions did allow the Bank of Thailand to ease monetary policy without concerns for inflation or exchange rate stability. Also, healthy banks and subdued demand for credit meant that there was ample liquidity in the financial system, which coupled with prudent fiscal policies in the past have allowed the government to engage in a major expansion of fiscal policy at relatively low costs (measured by the cost of new borrowing and risks to debt sustainability). Other Asian countries, most notably China, found themselves in the same position, and implemented similarly (or more) ambitious fiscal and monetary policies.
Since March, a number of indicators have shown signs of improvement. Indicators of industrial production abroad – which are important to Thailand given its dependence on foreign demand – have either improved (in the case of Asia) or at least bottomed out (in the case of G3 economies). In Thailand, a few indicators from value added tax (VAT) receipts to business sentiment have also shown signs of improvement in the past few months. Exports of goods and especially services are still very weak, but declines have been less sharp than in other East Asian countries, and exports to non-traditional markets seem to have bottomed out.
The green shoots are there, but there are also many potential hidden hot spots that could re-ignite the fire and kill the green shoots. The main hot spot for Thailand is the health of the G3 economies. Despite the increased importance of emerging trading partners, such as China, significant recovery, especially in the short term, will still depend on a pickup (or at least stabilization) in the mature economies. Although growth prospects for the G3 countries seem to have improved, a non-trivial probability remains of a new round of negative shocks from declining employment (which may generate second round effects to the real economy), new failures of financial institutions, or growing concerns about fiscal sustainability.
Another hot spot is the ability of the Thai government to execute planned investments, as historically disbursement rates have been relatively low. Fiscal policy has moved from stimulating consumption to investment measures, some of which also address long-term bottlenecks to growth. If project implementation cannot be step up, the likelihood of generating a positive multiplier effect in the short term (when it is still needed) – and of increasing private investment in the long-term – are reduced.
A quick resumption in growth is essential in a country where there formal safety nets are few and vulnerable groups must rely on the flexibility of labor markets and family networks for maintaining consumption in adverse conditions. A rapid assessment conducted jointly by the World Bank finds an interesting paradox of Thais working more and less at the same time: there is less formal and higher-paid work (for example, as port workers, or in manufacturing jobs), which forces individuals into lower-productivity (and lower paid) activities, where they must work more hours to make up for the lost income from their primary job. This has put great pressure on vulnerable individuals, which are in some cases are reverting from supporting to depending on their extended families.
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