Thailand: Looking closer to home

The government in Thailand is hopeful that a weakening of export sales to Europe will be offset by rising demand for Thai goods and services among fellow ASEAN countries and the US.

Like many of its regional neighbours, including Malaysia and Taiwan, Thailand’s economic expansion slowed in the second quarter after the earthquake in Japan disrupted trade and more Western countries continue to fall prey to a deepening downturn. GDP rose 3.2% from January to March but fell to 2.6% between April and June compared to the same period last year.

This easing in growth could impact demand for Thailand’s exports, at the same time that Prime Minister Yingluck Shinawatra prepares to institute spending policies that could soften declining exports’ impact but also stoke inflation.

Ravi Ratnayake, the director for trade and investment at the UN Economic and Social Commission for Asia and the Pacific (ESCAP), warned in early August that continued uncertainty over the US economy could see the dollar fall in value, which would push up the baht and make Thai exports more expensive.

“A huge impact can be expected, as significant amounts of Asia’s exports go to the US,” Ratnayake said.

Indeed, in the first seven months of this year, Thai exports to the US totalled $12.9bn, up by 17.5% year-on-year and accounting for almost 10% of the country’s total exports. In 2010, shipments to the US totalled $20.2bn and are expected to grow by more than 15% next year. Weakening demand in Europe, however, has quelled hopes for similarly robust expansion there.

However, a recent report issued by ESCAP pointed to a way to ease any pain resulting from a slowdown of the economies in the US, the EU and Japan, with ESCAP’s executive secretary, Noeleen Heyzer, suggesting that Asian-Pacific countries such as Thailand rely more on intraregional trade, which can also make the region more resilient to external shocks.

“Opportunities for export expansion will depend largely on the growth of intraregional demand and the ability of various developing countries of the region to restructure and diversify their exports to meet that demand,” said Heyzer.

The report, released at the end of July, suggested that Thailand may have achieved this diversification, at least to some degree, and forecasted that Thai exports would increase by 10% this year, better than most of its ASEAN partners.

Further down the track, however, there may be additional hurdles that could limit expansion. In particular, there are concerns that some of the promises made by the new prime minister, Yingluck Shinawatra, could, if kept, lower Thailand’s competitiveness as an exporter and as a destination for foreign direct investment.

This is very much the case with the pledge by Yingluck’s Pheu Thai party to increase the daily minimum wage to BT300 ($10), a 40% increase. This would put Thailand’s minimum wage well above that of both Malaysia and Indonesia, according to the Thai Chamber of Commerce.

Though Pheu Thai has said it will counter higher wage bills by reducing the corporate income tax from 30% to 23%, this may not completely offset the steep rise in the minimum pay rate, particularly for smaller businesses, thereby detracting from Thailand’s appeal as a regional manufacturing centre.

In addition, Yingluck’s recent plan to guarantee rice prices in an attempt to insulate the country’s rural poor from the effects of the global slowdown could continue to erode the country’s share of the global market as the export price of a tonne of rice could climb as high as $750, making it difficult for exporters to find buyers.

Another concern for Thailand is that while the share of imports from leading exporters such as the US or Japan to ASEAN nations is easing, much of the slack is being taken up by China rather than countries within the bloc itself. A study conducted by the Thailand Development Research Institute (TDRI) showed that China has overtaken Japan as the main supplier of plastics and chemical products to ASEAN countries, and has become the leading exporter of textiles to the bloc. According to the TDRI report, issued in early August, in 2010 some 58% of textiles imported into ASEAN were from China, compared to just 18% in 2000. Significantly for Thailand, its share of the ASEAN textiles market remained steady at around 5%.

However, the question of whether Thailand’s export markets in Europe and the US could shrink while those within the ASEAN bloc expand may have less importance than previously would have been the case. In its draft policy statement, approved by the cabinet on August 16, the new government has said it wants to reduce the economy’s dependence on exports, instead planning to promote a policy of self-sufficiency as a way to insulate the nation from the current volatility of the global economy.

At this point, it would be hard for Thailand to step too far back from its entrenched role in the US and European economic communities, but looking to the ASEAN region for future expansion would help diversify its export markets.