Thailand equity rally belies underlying economic problems

September 16, 2013 3:14 pm

Thailand equity rally belies underlying economic problems

By Michael Peel in Bangkok

Asian emerging markets rallied on Monday, as investors pinned hopes on continued US bond-buying to help ease growing domestic economic pressures. Bangkok’s Set index had a particularly strong day, climbing 3.1 per cent and the baht rallied on relief at the news Lawrence Summers had backed out of the race to head the US Federal Reserve, leaving vice-chair of the Fed, Janet Yellen – seen as more dovish than Mr Summers – as the perceived frontrunner. Only Indonesian equities posted larger gains, rising 3.4 per cent.The market reaction implicitly highlighted Thailand’s financial problems that, while less serious than India’s now or its own during the 1990s, have intensified amid slowing economic growth, rising consumer debt and government spending on subsidies.

Having re-established a reputation as an attractive investment opportunity after the 1997 Asian financial turmoil, Thailand is now subject to a wider scepticism facing many emerging markets seen as needing to undertake difficult but important structural reforms.

“Thailand feels to me like a place with no long-term road map,” said Su Sian Lim, a regional economist for HSBC. “It always has been a very laisser-faire economy. But now we are coming up against more long-term structural issues that can’t be solved with a laisser-faire approach.”

The flood of easy money into emerging markets has helped buoy the Thai economy in the face of underlying concerns ranging from sluggish export performance – and a consequent growing current account deficit – to slow progress on investing more than $60bn earmarked for much-needed infrastructural improvements.

Government spending on commodity subsidies has also been rising, with the doubling of support to rubber farmers last week in response to continuing protests coming on top of a rice-buying programme that has led to large stockpiles building up.

Another worry in Bangkok is levels of household debt, which have climbed from 55 per cent of gross domestic product in 2008 to more than 77 per cent last year. While analysts say this is partly due to a first-time car buyer scheme that offered customers tax rebates in an effort to stimulate the automotive industry, there are also wider concerns about consumers living beyond their means.

Patamaporn, the 35-year-old owner of a fashion shop, said she had started having debt problems after she had to borrow 500,000 baht from a bank in 2010, to renovate her business after it was burnt down during that year’s civil unrest. Since then, Patamaporn reckoned slow demand meant her monthly takings had halved to about 100,000 baht, out of which she has to service the bank loan, as well as repayments totalling 60,000 baht on three credit cards, her mortgage and her car.

“I want the government to pay more attention to cope with economic problems and to have concrete long-term objectives,” she said. “It’s exasperating and pathetic to watch politicians fighting in the parliament on TV for their own interests.”

The Thai government has been trying to combat some of the criticism about the economy, taking its message of financial good health around the world. Yingluck Shinawatra, prime minister, has just returned from a European roadshow that took in Switzerland and Montenegro, while the government has sent other recent delegations to promote trade and investment to destinations ranging from Mozambique to the Maldives.

Teerat Ratanasevi, Thai government spokesperson, said the country’s expected economic growth rate this year of between 4 and 4.5 per cent was in line with the recent historical trend. He said it was misleading to compare the rate with the growth of more than 6 per cent achieved last year, as that came from an unusually low base because of the economic damage caused by a severe 2011 flood.

“The Thai economy is still doing well,” he said. “It’s still solid, with good fundamentals.”

Analysts say there are important ways in which Thailand today is in much better shape than when it plunged into a disastrous financial crisis more than 15 years ago. Banks are better capitalised, while corporate dollar debt is at much lower levels.

But a sense of gloom – and of opportunities missed or about to be missed – is increasing, as are concerns about what will drive the economy once the prop of the US quantitative easing programme that has buoyed Thailand and other emerging markets is removed.

“We are not going to have a crisis, because there is no imbalance in the system,” said Supavud Saicheua, executive director of Phatra Securities, a Bangkok-based investment bank. “But what we are going to have is growth that is slower than we need.”