Economic damage control
How to nurse the Thai economy back to health, Part III
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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The big picture of: 1. what's happening in the global economy, and 2. the likely effect on the Thai economy. That's what today's article provides, the third and final part in a three part series. [Part I, Part II]
After reading today's article, you'll want to expand your economic knowledge in two ways:
1. Learn about other Asian economies facing the same sort of economic problems that Thailand is currently facing.
2. Take a look at Thai economic statistics to see exactly what is going on in the economy.
Other Asian Countries
What's happening nowadays in the Indian economy bears an uncanny resemblance to what is happening in the Thai economy. The Indian currency (Rupee) has appreciated 10% against the US dollar since March. India's central bank, the Reserve Bank of India (RBI), seems to face an even more daunting task than the BOT:
The jump in the rupee reflects an abrupt change in policy by the RBI. Until March the central bank was intervening heavily to hold the currency down. But the large amounts of dollars it was forced to buy were fuelling excessive growth in the money supply and hence inflation. To offset this extra liquidity, the bank "sterilised" the increase in foreign reserves by selling securities to banks. The snag is that sterilisation is expensive because the RBI has to pay much more on the bonds it issues to mop up liquidity than it earns on dollar reserves...The RBI's job had been made even harder by the government, which last year encouraged capital inflows by raising the ceiling on foreign borrowing by firms, allowing Indian companies to take advantage of lower interest rates abroad than at home. All Asian economies have faced upward pressure on their currencies but, ...India is the only one where the government has foolishly invited more capital inflows...
By abandoning its attempt to hold the rupee down against the dollar, the RBI is now able to regain control over monetary policy and so focus on containing inflation. But exporters are howling about their loss of competitiveness and a fierce debate is raging among economists over what should be done about the currency. (Source: The Economist, 07-06-07)
Economic Statistics
Economic statistics are available to everyone over the internet at the Bank of Thailand. [Link]
The Bank of Thailand has a graph that shows a recent radical decrease in exports. [trade balance, balance of payments]
Make sure to look at the "historical data" that shows trends over several months and years. [Link, see link to Excel spreadsheet in upper left corner of page]
Please note that economic statistics have a tendency to jump up and down from month to month and often depend on the season of the year (seasonal trend). If you only look at three months, a large decrease may look significant but not actually be significant. Economic statistics are often frequently revised also.
In short, today's article not only has a lot of new and useful vocabulary, it also provides a good starting point for learning more about Thailand's economy and how it is affected by larger global economic forces.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What precautions did Asian countries take after the 1997 crisis to protect themselves from another crisis?
2. What changes in Chinese foreign reserve accumulation are likely to happen in the future?
3. What impact will changes in China's foreign exchange reserves likely have on other Asian countries? What is their likely response?
4. How might a weak dollar and strong baht affect Thai exports and economic performance?
5. What's happening in the US economy that also depresses Thai exports to the US?
6. How is speculative money likely to find its way into Thailand, according to the author?
7. What two factors make emerging economies like Thailand attractive to investors?
8. What two types of investment money flowing into Thailand is likely to strengthen the baht even more?
9. What are the top three problems faced by the Thai economy?
10. Can these three problems be solved by government policy action? Why or why not?
Bangkok Post Article: June 09, 2007
OPINION / THAILAND'S ECONOMIC PROBLEMS _ PART IIILike small fish in a big pond
By CHET CHAOVISIDHAThailand will simply have to do its best to cope with a difficult situation, brought about by the actions of major players on the economic scene like China, Japan and the United States.
After the 1997 global financial conflagration, several countries have become fearful of the spectre of another financial meltdown - memories of the pain and hardship their economies went through during that time remain vivid. Understandably, since then most countries have been accumulating foreign exchange reserves with almost reckless abandon. China, in particular, has amassed foreign exchange reserves to the tune of over US$1 trillion.
Such an exorbitant amount of dollars in the hands of a single country - and many more with substantial amounts in their foreign reserve portfolios - naturally makes every other country with substantial dollar holdings jittery.
They realise that sooner or later China, faced with the continued prospect of further increases in foreign exchange reserves over the next few years, will relinquish part of these reserves and invest them in other forms of income-earning assets abroad (China actually has already done so recently, though on a relatively small scale) instead of keeping them in non-earning assets at its central bank.
When that occurs, especially on a substantial scale, these other countries will be faced with potentially huge losses on their own dollar holdings.
Thus various dollar-holders are impelled to diversify, or to be ready to diversify, their foreign reserve portfolios into overseas real and financial investment.
Also, they must always be on the alert for potential dollar-unloading action by other foreign dollar holders. This set of circumstances will exert a continuing downward pressure on the dollar to remain weak, so long as the above conditions remain intact.
Additional complications arise because even though Thailand's physical volume and dollar values of exports have increased, the nominal baht values have decreased, a consequence of conversion from the weak dollar to strong domestic currency. The upshot is that a certain proportion of local exporters and producers suffer a fall in profits and others have actually incurred losses. This will invariably trigger off a depressive effect on our economy through an income-induced decline in investment and consumption spending, eventually giving rise to a negative effect on employment, especially in the export and industrial sectors in the longer run.
The strong baht can be expected to stay with us for some time to come. The United States' continuing trade and current account deficits and weak dollar, its sluggish economy, struggling automobile industry and slumping property development and housing activities will continue to exert a contractionary influence on the United States' demand for Thai exports.
This condition normally should have served to weaken the baht but that has not happened because it is more than counter-balanced by more telling influences which pull the baht in the upward direction, as outlined earlier.
Furthermore, the yen is also likely to remain weak as Japan continues to pour a huge volume of investment into China and proceeds to import products thus produced in China as well as other Chinese-produced merchandise for Japan's domestic consumers.
As the Japan-China trade volume has been surging continuously over time and is expected to outstrip the Japan-United States transactions soon, it works to the advantage of the Japanese private sector to maintain a weak yen because under such a circumstance its exports to both the United States and China will keep expanding.
Since expectation is generally self-realising, predictably the self-serving actions of Japan's private sector will continue to keep the yen weak for the foreseeable future.
The conclusion here is that a persistently weak dollar and a comparatively even weaker yen will continue to bode ill for Thailand's external balance sheet and income statement, and make for a sustained strong baht.
There is also a further disturbing prospect for the baht, which is associated with oil money.
The high and rising price of crude over the past few years has flushed the oil-producing and exporting countries with an enormous amount of cash. The Gulf states have spent close to US$1 trillion on investment projects at home and have been shopping around for the best bargains and mopping up assets in the United States, their primary investment destination.
Now they are looking to further diversify their portfolios in the European Community markets and emerging markets in the Southeast Asian region.
In the process, some portion of this money will likely find its way into the hands of the hedge funds and other financial institutions which are well known for their perceived investment skills and speculative expertise, and which are always looking out for opportunities to make profits in any kind of market conditions.
To them the emerging markets in Southeast Asia present an opportunity that cannot be passed up - most of these countries have attained relatively high rates of economic growth in recent years, with strong foreign reserve positions built up after the recovery from the 1997 financial crisis.
These countries boast securities markets with relatively small market capitalisations, as well as relatively unrestricted foreign exchange market transactions - a condition which can be influenced by the hedge funds and the like, to secure financial gain. Their operation needs to be more subtle these days though, as they have to make allowance for the spontaneous corrective adjustment inherent in the flexible exchange rate system now practised by most of these countries.
The combination of direct investment from the Middle East oil-rich states and financial investment and speculation by international institutional investors is expected to, in the main, further strengthen the baht and, in the process, create more volatility and wider amplitude of fluctuations in the foreign exchange market.
As long as crude prices stay high, this scenario will endure and the foreign cash inflow will intensify.
For the time being, the oil cash and oil cash-related inflows have been going on in trickles. When this inflow will hit us on a massive scale, with either investment or speculative motives, and how detrimental it will be to the Thai economy, remains to be seen. Meanwhile, we should be making plans to cope with this possible eventuality.
If one has to rank these weaknesses and problems according to their severity and intractability, the top three on the list would be the "household debts", "strong baht" and "slow improvement in productivity in the agricultural and industrial sectors", though not necessarily in that order.
The reason is that although the impact of each factor on the economy is different, all these factors possess important common characteristics with respect to policy actions.
The first two are relatively unamenable to corrective policy actions. In one case, the potentially effective remedial measure is constrained by insufficient fiscal and financial resources available, and the other is subject to an interplay of external circumstances, predominantly uncontrollable by us.
As for the third, it is a long-term imbalance which has to do with scores of structural and institutional factors, needing changes and reforms, such as improvement in education, logistics, communication, transportation, port facilities, beaureaucratic machinery, etc. In effect, these problems and imbalances are likely to persist over time.
And Thailand will just have to do its best to cope with such a difficult situation.
The Constitution Tribunal's recent verdict may have served to clear up political uncertainty and curb the perception of economic risks to a certain extent. Still, the basic economic weaknesses and problems remain and demand effective policy actions.
Chet Chaovisidha is an economist, a former MP for Bangkok, and an economics adviser to several past governments.
This instalment concludes the three-part article; the first two were published consecutively on June 7 and 8, 2007.
Vocabulary (in discussion above)
big picture - overall view of what is happening (not getting lost in the details of a specific case)
bears an uncanny resemblance - looks the same in a surprising way
daunting - frightenly difficult
Reserve Bank of India (RBI) - India's central bank (See Wikipedia)
a seasonal trend - the seasonal pattern in some statistics, for example in the United States consumer spending jumps around Christmas time in December (See The Economist on seasonally adjusted and Wikipedia on seasonal adjustment)
small fish in a big pond - meaning that: big ponds are dangerous places for small fish so they have to be extra careful
cope with x - to control a situation x that is difficult to control
conflagration - a violent and destructive event (for example, a war or a large fire)
the spectre of x - the frightening and unpleasant possibility of x [American: specter]
a meltdown - a sudden and complete failure (of a nuclear power plant, company, or other system)
vivid - clear, detailed, easy to remember or imagine
* memories remain vivid
with abandon - out of control, careless
reckless - without thinking or caring about danger
with reckless abandon - out of control and not thinking about danger
exorbitant - much too large (for example, an exorbitant bill at a restaurant or exorbitant demands)
a portfolio - the combination of assets and investments that an investor holds
foreign reserve portfolios - the assets that a government holds its foreign reserves in (mostly low-yield but safe government bonds)
jittery - worried and anxious
sooner or later - it will happen for sure, but not sure when
relinquish x - give up x, stop having x, hand over x to someone else
non-earning assets - asset not producing revenue anymore (for example, a loan in default or vacant office rental space in a building)
impelled to - forced to
diversify - increase variety
impelled to diversify - forced to increase variety
diversify their portfolios - increase the variety of assets held (See Wikipedia)
the upshot is x - this surprisingly implies x
trigger off - cause
current account - roughly: exports - imports, but also includes several other things (See The Economist on Balance of Payments)
current account deficits - roughly: imports > exports
a weak dollar - a dollar that is less valuable than it used to be
sluggish economy - fall in economic activity, output, income, and growth
slumping - falling suddenly by a large amount
x outstrips y - x becomes more than y (more important, more successful, or larger)
mopping up - absorbing excess (a mop absorbs water from a dirty floor)
x boasts y - x has a nice feature y (that x would probably like to boast about)
market capitalisations - the market value of all company stock shares (See The Economist on market capitalisation)
* unrestricted foreign exchange market transactions
institutional investors - the largest and therefore most powerful participants in financial markets including pension funds, fund-management companies, insurance companies, investment banks, hedge funds, charitable endowment trusts. (See The Economist on Institutional Investors)
a scenario - one way that a situation may develop
trickles - small amounts (a trickle of water is a small amount of water flowing)
detrimental to x - harmful and damaging to x
an eventuality - a possible future event
intractability - the extreme difficulty or impossibility of solving a problem
with respect to (wrt) - related to
* common characteristics with respect to
amenable to x - willing to accept x (or willing to do x)
unamenable - not willing to accept
remedial measure - action to correct or make a bad situation better
subject to an interplay of external circumstances - many factors outside the economy have an effect inside the economy
a tribunal - a court or committee appointed to deal with a special problem
Constitution Tribunal - the special tribunal that recently disbanded the Thai Rak Thai (TRT) party
Answer Key:
1. What precautions did Asian countries take after the 1997 crisis to protect themselves from another crisis?
They have been accumulating large amounts of foreign exchange reserves. China has accumulated over $1 trillion in reserves.
2. What changes in Chinese foreign reserve accumulation are likely to happen in the future?
China is likely to move some of its accumulated reserves into other forms of income-earning assets abroad. Reserves are now concentrated in low-risk but low yield US treasury bonds.
("They realise that sooner or later China, faced with the continued prospect of further increases in foreign exchange reserves over the next few years, will relinquish part of these reserves and invest them in other forms of income-earning assets abroad (China actually has already done so recently, though on a relatively small scale) instead of keeping them in non-earning assets at its central bank.")
3. What impact will changes in China's foreign exchange reserves likely have on other Asian countries? What is their likely response?
The value of the dollar reserve holdings of other Asian countries may decrease if China shifts away from the dollar.
If China shifts away from accumulating all its foreign exchange reserves in US dollars, the dollar may depreciate. The drop in the value of the dollar would decrease the value of the reserve holdings of other Asian countries. Holding assets that lose value means the country will lose money, so countries have to be ready to change how they hold their foreign exchange reserves.
They may have to diversify the portfolio of assets that they have their foreign exchange reserves invested in, moving the reserves into different currencies such as the yen or different kinds of assets rather than the low yielding government bonds that are normally held.
("When that occurs, especially on a substantial scale, these other countries will be faced with potentially huge losses on their own dollar holdings. Thus various dollar-holders are impelled to diversify, or to be ready to diversify, their foreign reserve portfolios into overseas real and financial investment. Also, they must always be on the alert for potential dollar-unloading action by other foreign dollar holders. This set of circumstances will exert a continuing downward pressure on the dollar to remain weak, so long as the above conditions remain intact.")
4. How might a weak dollar and strong baht affect Thai exports and economic performance?
A rise in the baht may lead to a decrease in exports (Ex) because Thai products are not as competitive in international markets. The Thai baht has to appreciate more than the currencies of countries Thailand competes with in international export markets, making Thailand less competitive.
The decrease in exports (E) decreases income (Y, GDP) which in turn decreases consumption (C) and investment (I) which is called the Keynesian multiplier effect which can seen in this well-known equation from economics:
Y = C(+Y) + I(-r,+Y) + G + (Exports - Imports)
If output decreases, employment is likely to decrease and unemployment increase.
("Additional complications arise because even though Thailand's physical volume and dollar values of exports have increased, the nominal baht values have decreased, a consequence of conversion from the weak dollar to strong domestic currency. The upshot is that a certain proportion of local exporters and producers suffer a fall in profits and others have actually incurred losses. This will invariably trigger off a depressive effect on our economy through an income-induced decline in investment and consumption spending, eventually giving rise to a negative effect on employment, especially in the export and industrial sectors in the longer run.")
5. What's happening in the US economy that also depresses Thai exports to the US?
The US economy has been sluggish recently. The growth rate is near zero and economic activity is very low. This means demand for imports from other countries like Thailand decreases.
("The strong baht can be expected to stay with us for some time to come. The United States' continuing trade and current account deficits and weak dollar, its sluggish economy, struggling automobile industry and slumping property development and housing activities will continue to exert a contractionary influence on the United States' demand for Thai exports.")
6. How is speculative money likely to find its way into Thailand, according to the author?
Oil money is likely to find its way to Southeast Asia and Thailand via hedge funds and other financial institutions.
7. What two factors make emerging economies like Thailand attractive to investors?
a. Relatively small market capitalisations.
b. Relatively unrestricted foreign exchange market transactions.
8. What two types of investment money flowing into Thailand is likely to strengthen the baht even more?
a. Direct investment from the Middle East oil-rich states.
b. Financail investment and speculation by international institutional investors.
9. What are the top three problems faced by the Thai economy?
a. Household debt
b. Strong baht
c. Slow improvement in productivity in the agricultural and industrial sectors.
10. Can these three problems be solved by government policy action? Why or why not?
The strong baht is determined largely by factors outside of Thailand which makes it largely uncontrollable by Thai government policy.
("...subject to an interplay of external circumstances, predominantly uncontrollable by us.")
Productivity can be improved in the long-term with government policy that focuses on education, logistics, communication, transportation, port facilities, and more efficient government bureaucracy.
("As for the third, it is a long-term imbalance which has to do with scores of structural and institutional factors, needing changes and reforms, such as improvement in education, logistics, communication, transportation, port facilities, beaureaucratic machinery, etc. In effect, these problems and imbalances are likely to persist over time.")
