Eye on Thailand: The Global Financial Crisis

When emerging Asia’s boom turned to bust in 1997, Thailand was famously on the vanguard of the regional collapse. Now with the United States and Europe repeating several of those same mistakes - albeit on a larger and more expensive scale – Thailand’s post-1997 crisis experience is back in the spotlight. -> Recent articles and publications on Asia.

Now with the United States and Europe repeating several of those same mistakes - albeit on a larger and more expensive scale – Thailand’s post-1997 crisis experience is back in the spotlight. While the small country’s trade-geared economy is certainly not insulated from the mounting global financial and economic turmoil, the national trend towards paying back and better managing debt is expected to provide enough cushion to avoid a repeat of its previous collapse.

Hard hit exports

Thailand is among the region’s more open economies, with exports accounting for around 65% of gross domestic product (GDP) in recent years. Those shipments span the value-added gamut, with the country serving as a production and export hub for multinational automobile manufacturers, while maintaining its traditional position as one of the world’s leading rice, rubber and seafood exporters.

So far Thailand has been hard hit by flagging global demand, particularly in the US and Europe. Exports fell 15.7% year on year in December, the second consecutive month of declining growth, according to Bank of Thailand statistics. The Ministry of Finance’s Fiscal Policy Office meanwhile projected the Thai economy contracted a worse-than-expected 3.5% in the fourth quarter. Independent analysts have carried forward that downbeat analysis, predicting economic and export growth will both be negative territory in 2009.

Concerns are already rising that big foreign manufacturers, faced with financial problems in their home countries and declining regional demand for their products, could permanently shutter their Thailand-based facilities. Those worries intensified earlier this month when Japanese automotive and motorcycle producer Suzuki announced plans to close its Thailand operations. Ailing US auto giant General Motors’ local affiliate also raised eyebrows when it requested and was declined a 3 billion baht loan from Thailand’s Ministry of Industry for a diesel engine project.  

Better Banks

Thailand’s once profligate banks and finance companies were at the heart of the country’s 1997 collapse and after a decade of recapitalizing and restructuring once again face a fast deteriorating outlook - though sovereign rating agency Fitch says Thai financial institutions are much better positioned and provisioned to deal with the current global slowdown than they were during the Asian financial crisis.

In particular, local banks were only marginally exposed to the toxic sub-prime mortgage derivative products that have driven several once prestigious Western banks into insolvency. While several US and European banks collapsed, Thai banks in 2008 recorded a higher average return on assets (ROA) compared to a year earlier, rising from 0.3% to 1.1%.

Lower provisioning requirements for nonperforming loan (NPL) stocks and impressive year-on-year loan growth, which was up 11% for the entire sector, drove those countercyclical gains. While extending new credits, the Thai financial system’s overall NPL rate fell from 9% of total outstanding loans in 2007 to 7% at the end of last year. Meanwhile Thai banks’ Tier 1 capital and capital adequacy ratios (the ratio of capital to risk-weighted assets) are now strong by international standards at 11% and 14% respectively.

It seems likely in the deteriorating global and local economic environment that Thai banks will relinquish some of those recent balance sheet gains. Analysts point to two particular areas of potential volatility, which if aggravated in the year ahead could raise questions about possible systemic risk: the first entails state-owned Krung Thai Bank’s low 40% loan loss coverage ratio for its NPLs; the other Thai Military Bank’s stubbornly high 16.4% NPL ratio.

With average factory usage rates mired at 60%, demand for new capital expenditure bank loans will likely be muted throughout 2009. Industrial output was down 7.7% in November and fell another 18% in December. UBS noted in a recent report that the decline in manufacturing over the second half of last year was steeper than the entire fall during the worst 18 month period of the 1997-98 financial crisis.

While Thailand exported itself out of crisis after the 1997-98 collapse, current global economic turmoil - including a near collapse in global trade - has significantly narrowed potential paths to recovery. Economists contend that a small trade-geared economy like Thailand can only marginally replace the revenues and jobs lost from falling exports by stimulating more domestic demand-led economic growth.

Concerted policy response

New Prime Minister Abhisit Vejjajiva’s government has responded to the crisis with vigorous fiscal pump priming, including direct cash injections into the grass roots economy. With public debt at 23% of GDP, international reserves at US$110 billion, and 2008 balanced budget, the government arguably has plenty of fiscal room to maneuver. 

In January the Cabinet approved a 117 billion baht supplementary budget, which included various measures aimed at buoying the economy, including cash 2,000 baht handouts to nine million civil servants and workers nationwide, job creation programs and community investment funds.

Those outlays are added to the stimulus measures written into the 2009 fiscal budget, which was devised to run a 2.5% of GDP deficit. The government has also implemented 40 billion baht worth of tax cuts mainly for the property sector and indicated it could launch another supplementary budget before the end of the fiscal year in September if the global economy slips further than expected.

The Bank of Thailand meanwhile has supported those measures with rapid monetary easing. Since December the central bank has trimmed 175 basis points off the benchmark interest rate, bringing down the 14 day bond repurchase rate to 2%. Economic analysts believe central bank authorities will slash rates further to around 1% before the end of the year. The local currency, the baht, has reacted mildly to the cuts fluctuating between 34 and 35 to the US dollar.

Political turbulence

It represents one of few times in recent years that fiscal and monetary policies have been complementarily calibrated. A grinding political conflict, pitting supporters and detractors of former Prime Minister Thaksin Shinawatra who was ousted in a 2006 military coup, has hobbled successive governments’ ability to devise and implement effective economic policies.

The debilitating conflict climaxed last November when military-linked anti-government protestors closed Bangkok’s two international airports for over a week, crippling the money-spinning tourism and air freight dependent export sectors. The Bank of Thailand has estimated the closure cost the Thai economy as much as 290 billion baht, with hotels estimated to have lost 140 billion baht due to cancellations.

The same protest group occupied Government House for nearly three months beginning last August, effectively crippling the workings of two different Thaksin-affiliated governments. A modicum of stability has returned with the formation of Abhisit’s coalition government, which is believed to have military backing and has prioritized restoring foreign confidence.

Investor confidence has not yet fully recovered from the military appointed administration’s surprise move in December 2006 to impose and then retract capital controls on foreign equity, bond and currency transactions. A nationalistic motion the following year to amend the Foreign Business Act spooked Japanese investors, many of whom have their Thailand operations structured in a way legislators aimed to ban.

Heavy human toll

Despite all the new government’s fiscal efforts, the mounting economic slowdown is still expected to take a heavy human toll. Local newspapers carry near daily announcements of major new industrial and service sector layoffs, with sub-contracted labor so far being the hardest hit.

The Ministry of Industry predicted in January that 40,000 auto parts makers are at risk of losing their jobs as car assembly production has fallen off sharply. The Electrical and Electronics Institute meanwhile estimated that 30,000 workers would likely lose their jobs this year, on top of the 30,000 who were laid off from the third quarter of 2008. Electronics and electrical components account for nearly 35% of total exports.

While official unemployment figures were still low at 1.5% as of December, they are expected to climb potentially twice as high in the months ahead as cash-strapped employers opt to save costs by cutting staff rather than reducing worker hours. Whether rising unemployment will translate into significant new rounds of social unrest and political disruption is unclear.

Labor experts note that private sector union membership rates run at less than 5%, diminishing the risk of organized protests against factory and service sector layoffs. So, too, will an unemployment insurance scheme implemented in the wake of the 1997-98 Asian financial crisis and a recent government decision to expand Social Security Fund compensation for unemployed workers to eight months from 6.5 previously.

Meanwhile a new government small business loan program for unemployed workers requires that the recipients return to their home provinces to receive the funds. Still there are early indications that the government has not committed enough resources to tide over the rural grass roots sector. Aggrieved farmers in northern Lampang province in late January blocked roads and protested in front of the provincial hall on complaints they had not been involved in a corn mortgage scheme.

Indeed grass roots competition for government resources is intensifying. For instance the Farmers Rehabilitation and Development Fund is seeking17.2 billion baht from the cabinet to buy back debts owned by over 62,000 farmers and rehabilitation and occupational training programs. During the 1997-98 financial crisis, a large number of unemployed factory and service sector workers returned to the rural countryside to eke out a subsistence living working in their relations’ fields. Agriculture currently accounts for 11% of GDP.

Higher agricultural prices drove up farm incomes during the first half of 2008, but fell sharply in the second half in line with declining global commodity prices. As the local economy slows and unemployment rates rise, it’s not clear that the rural sector will with falling food prices have the same absorptive capacity it did in the wake of the Asian financial crisis.


Shawn W Crispin is the Southeast Asia Editor for Asia Times Online. He has over a decade of experience reporting from Thailand, including positions with the Far Eastern Economic Review, Asian Wall Street Journal and Institutional Investor magazine.