Thailand economy

The struggling Thai economy

Farmer Pramote Kongburi inspects his dried rice field in Praek Siracha, Chainat province, Thailand, July 3, 2015.

Dario Pignatelli | Bloomberg | Getty Images

Thailand’s worst drought in a decade appears to have ended, but the damage could cast a shadow over the economy for months to come.

“Thailand has moved from the land of smiles to the land of frowns. Indeed, deep frowns that shouldn’t be celebrating anytime soon,” ANZ economists said in a recent memo.

The crippling dry weather that first appeared in late 2014 is no longer present in the country’s 67 provinces, the deputy head of Thailand’s disaster reduction department told Reuters last week. But with more than 40 percent of the country’s population engaged in agriculture, the drought has exacerbated the problems of an economy already weighed down by slowing manufacturing, contracting exports and increasing external debt.

This stimulated strong degradations in growth. Credit Suisse now expects economic growth of 2.5% year on year in 2015, down from 3.1% previously, while JP Morgan expects an increase of 2.6%, against an estimate of 3.5 % in June.

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Assess the damage

Thailand is one of the world’s largest rice exporters, but drought has affected 80 percent of rice-growing land, possibly causing production to drop 15 to 20 percent, according to the Exporters Association of Thai rice.

“Not only the offseason [rice] declining agricultural production, even the planting of the main [rice] the harvest season will probably be delayed from August to June-July normally, ”said Santitarn Sathirathai, research analyst at Credit Suisse.

Granted, agriculture as a whole accounts for less than 10 percent of Thailand’s gross domestic product (GDP), but “the biggest risk to drought-related growth will be if water rationing also affects people. industrial zones, potentially reducing manufacturing output “. Benjamin Shatil, an economist at JPMorgan, warned in a report released earlier this month.

Reduced production, in turn, will hurt employment.

“We believe that the effect of drought on declining agricultural production, driven by a 30% drop in paddy production in January-May, has worsened labor market conditions as agricultural employment has suppressed 700,000 jobs in June, ”noted Citi economist Jun Trinidad.

Adverse weather conditions are also weighing on farm incomes, which is reflected in consumer spending.

“Rural households are hit by a perfect storm in agriculture, drying up their cash flow when the debt burden remains high,” Credit Suisse’s Santitarn said, referring to nine consecutive months of falling international rice prices and the efforts of the ruling government backed by the military. to stop the subsidies.

“Although the government has made efforts to provide $ 1.8 billion in soft loans to support farmers, we believe the damage has been done. We expect this to act like other headwinds for the consumption in the future, ”Santitarn said.

Consumers certainly don’t seem in the mood to open their wallets much.

Consumer confidence experienced its sixth consecutive month of decline in July, according to the ANZ-Roy Morgan index, and further depreciation is likely.

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“Looking ahead, we expect consumer confidence to remain negative as the economy fails to recover and farm incomes are depressed by the prolonged drought,” ANZ warned.

Interestingly, reduced harvests will not necessarily drive up food prices in the domestic market.

“The impact on consumer price inflation has been very modest so far,” said Shatil of JPMorgan. “This may reflect the fact that the government still has large stocks of rice, but it is also likely a consequence of the favorable global food price environment, which continues to depress overall prices.”

The stimulus is not the only answer

Faced with a sluggish economy, the Bank of Thailand is likely to cut interest rates to an all-time low of 1.25% later this year, from 1.5% currently, Credit Suisse said.

But monetary easing alone may be insufficient to deal with the consequences of the drought, according to ANZ. In addition to easing, he believes the Bank of Thailand will also allow the baht to weaken.

Trinidad de Citi agreed: “A bias to a low baht will persist, which can improve farmers’ export earnings despite low volumes and thus support rural consumption.”

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