By Edward Russell
BANGKOK - Thailand's economy is fast decelerating, representing a volatile new complication to the country's already uncertain political situation and a significant risk to its overall global competitiveness.
A series of policy missteps have badly undermined foreign-investor confidence in the military-appointed government's economic stewardship, including the imposition of capital controls on foreign currency, equity and bond transactions, proposed nationalistic amendments to the Foreign Business Act, and the nationalization of foreign-held media assets.
Now recent economic statistics show that local investors and businesses are equally concerned about the country's economic direction under military rule. Headline economic growth fell year on year from 6.1% in the first quarter of 2006 to 4.3% in the same quarter this year. Most telling, private investment contracted in the first quarter of this year for the first time since 2001, falling 2.4% year on year.
Private consumption fell to its lowest level since the second quarter of 1999, contracting for both durable goods and services, according to recent Phatra Securities research. Meanwhile, James Pitchon, executive director of the international real-estate firm CB Richard Ellis in Bangkok, says year-on-year take-up of office space in the capital city was down 60% last year.
The economic slippage represents the latest mark on the military's tumultuous nine-month record. Upon seizing power in a coup last year from prime minister Thaksin Shinawatra, the now-ruling Council for National Security (CNS) quickly moved to distance itself from the former premier's high-octane economic policies, which included aggressive state-bank lending and ambitious infrastructure development.
Rather than ramping up growth, the CNS declared its intention to put the economy on what it referred to as a more sustainable growth trajectory. Toward that end, the military-appointed government put on ice several of the US$43 billion worth of megaprojects Thaksin had designed to pump up the local economy in anticipation of slowing global demand for Thai exports and a cyclical downturn in the housing market.
Despite last year's 17% appreciation of the Thai currency, the baht, against the US dollar, Thai exports had performed strongly, expanding more than 17% year on year in 2006. That strong trend has continued into 2007, accounting for a $5.5 billion current-account surplus in the first quarter.
To date, those surpluses have provided Thailand's ruling generals with a financial cushion from souring foreign-investor sentiment. However, exports are expected to soften significantly in the coming months, witnessed in the meager $400 million current-account surplus recorded in April, meaning the economy must soon find growth from other sources to avoid a slide into recession. (Exports contribute more than 65% of Thailand's total gross domestic product.)
There is a significant political risk to a further decline in the local economy. Bangkok's business elite largely supported the military's move to oust Thaksin, whose government was perceived by many foreign and local investors as corrupt. However, few foresaw the military-appointed government's nationalistic approach to economic policy, which has alienated big foreign investors.
So far, public-opinion polls show that Bangkok residents still support the interim government, but that could change quickly if the economy slips deeper into the doldrums. In an apparent policy shift, Prime Minister Surayud Chulanont's government is rushing to fill the economic gap through more state spending, which increased about 11% year on year in the first quarter.
That pump-priming has so far failed to stimulate investment growth, as most of the disbursements went toward bureaucracy salaries and state-enterprise expenditures. According to Phatra Securities research, central and local government spending actually fell by 0.3% year on year in the first quarter, after expanding 12.7% in the fourth quarter of 2006.
Bottlenecks and gridlock
According to some economic analysts, Thailand's grinding political conflict and its now-apparent attendant economic slowdown are starting to impact on the country's overall competitiveness. Central to those concerns are lagging infrastructure-development plans and mounting foreign-investor reluctance to contribute funds to military-approved projects.
A 2006 World Bank report identified deficient infrastructure as one of the top three competitiveness concerns for Thai firms. Thai business leaders consistently acknowledge the need to improve infrastructure to keep costs low and remain globally competitive. In recent years, basic transportation logistics are as much as twice as high in Thailand than in many developed countries, weighing against the country's overall competitiveness.
The previous government reached out to foreign investors to help manage and finance its various infrastructure-development plans. However, at a March meeting attended by several Thailand-based foreign business leaders, once-upbeat investor sentiment on Thai infrastructure projects had soured since last year's coup and change in government.
Many investors at the meeting cited the uncertainty surrounding the foreign-investment regulatory regime, including what they perceive to be recent nationalistic revisions to the Foreign Business Act, for dampening their sentiments.
To be sure, a handful of big-ticket infrastructure projects are already under way. In Bangkok, construction on five mass-transit rail lines, one so-called bus-rapid-transit line, and the final section of the city's outer ring road, which includes two soaring suspension bridges, are currently on track. An additional 137 kilometers of mass-transit trains are now in the final planning stages and, if completed on time, would push mass transit beyond central Bangkok into the suburbs by 2013.
In the provinces, road construction is proceeding on the Association of Southeast Asian Nations highway links, including east-west and north-south corridors designed to interconnect the Indochina region with China and pave the way for more efficient regional trade. Last December, a vital piece of the east-west link opened with the completion of the second Thai-Laos Friendship Bridge.
And the freshly paved Highway 331 will more efficiently connect industrial parks to the country's largest deepsea port at Laem Chabang along the eastern seaboard. The port also has plans to increase its capacity from 6.6 million twenty-foot equivalent units to 13.3 million TEU by 2011.
Yet so far those projects have not been enough to revive broad investor, business and consumer sentiment, including crucially in the manufacturing and real-estate sectors. Economists note that road construction was a primary investment driver in the 1980s and into the early1990s, when Thailand was still one of the world's fastest-growing economies.
Now, economic analysts contend that the country needs new or upgraded highways and flyovers all over the country to maintain fast economic growth. And while infrastructure bottlenecks will not single-handedly downgrade Thailand in the eyes of Asia-destined foreign investors, the military-appointed government's nationalistic policy signals have.
Central bank governor Tarisa Watanagase was quoted saying vaguely at a recent presentation on the country's investment climate since the coup that the recent "confluence of events" was a "cause for concern". She was speaking to the still-unresolved political crisis pitting the military versus Thaksin's disfranchised supporters.
Now a fast-slowing economy threatens to accentuate and complicate those political divisions.
Edward Russell is a Bangkok-based freelance journalist.
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