Thailand: Carry on

The economy has enjoyed a good first half of 2011, with exports on the rise, GDP expanding and foreign direct investment flowing in, though fears that the general election held earlier in July could spark a further wave of political instability have eased following a relatively smooth democratic transition process.

Though it is expected to be below last year’s stellar 7.8% growth, GDP is forecast to increase by 3.5-5% in 2011, with the range taking into account the possibility of a slower-than-expected global recovery and questions over how quickly Japan, one of Thailand’s leading trade partners, can regain its own economic momentum following the devastating earthquake and tsunami in March.

Foreign investment is also well up, with more than $6.6bn entering the economy in the first five months of the year, according to data issued by the Thai Board of Investment in late June. Authorities have set a $13.2bn target for the whole of 2011, and it seems this will be easily surpassed.

Thailand’s foreign trade is also doing well, with exports of $93bn for the first five months of the year, an increase of 20.8% over the same period in 2010, with the May figure of $19.5bn the second-best over the past six months.

One factor that is causing some concern is inflation, which has been edging up this year, hitting an annualised 4.19% at the end of May, up from 4.04% the previous month. While some of this increase has been put down to rising food costs, the heating of the economy by higher demand for goods and services has also played a part, with ramped-up spending either side of the election seen as having the potential to throw fuel on the inflationary fires.

In an effort to keep inflation and demand in check, the Bank of Thailand has been incrementally increasing its key interest rates, having lifted its main policy rate eight times since last July to its present level of 3%. The reserve has flagged further increases, with Mathee Supapongse, the director of the bank’s domestic economy department, telling reporters on June 22 that he expected a further rise soon. With the central bank’s Monetary Policy Committee due to meet on July 13, it seems likely that the key rate will be increased, probably by 25 basis points.

However, far more than interest rates or inflation, it is the July 3 general election that has attracted the attention of analysts and the business community, as well as the public. With the victory of the Pheu Thai party, which is led by business executive Yingluck Shinawatra, sister of former premier Thaksin Shinawatra, there are fears that the opposition victory could see a shift in fiscal policy.

A recent survey conducted by the Thai Listed Companies Association said that, while around 80% of Thai senior executives believed the economy would expand by at least 3.5% this year, the potential for political instability remained an underlying threat. Some 55% of respondents to the poll of 95 top executives said the single largest risk faced by the economy came from political issues, followed by global economic factors and inflation.

Though there is wariness over the possible fall-out from the election, many analysts look back at Thailand’s long history of riding out political storms when seeking pointers to future developments, with most taking comfort from the economy’s ability to divorce itself from turmoil and get on with the job at hand.

One to take this view is Kosit Panpiemras, the executive chairman of Bangkok Bank, the country’s largest commercial lender. “The political troubles in the past did not hurt the Thai economy much because the business sector was able to drive growth,” he said in an interview with English-language daily The National on June 16. “We believe that, irrespective of which party forms the next government, the business sector can drive economic expansion and this year’s GDP can grow by 4%.” Kosit did add a codicil to his generally positive assessment, saying that if the election put into power an unstable government or one that focused more on populist schemes than on projects for developing the country, the economy could suffer in the longer term.

While the Thai economy has exhibited a high level of resilience to political instability in the past, there has been only minor unrest in the wake of the ballot, so it is uncertain how long the election’s ripple effects will last.