The effects of the US-China trade war has been nothing short of devastating for Thai exports so far. Thailand has found its manufacturing base pulled apart by opposing forces in the struggle between the world’s two biggest economies. What has surprised many is the global effect on world trade which has been smothered. This week at the Bloomberg ASEAN Business Summit in Bangkok, newly elected Thai Prime Minister Prayut Chan-ocha said he was working hard as the Chairman of ASEAN to see the Regional Comprehensive Economic Partnership come into force. The proposed 16 member free trade area include Thailand, India and China would represent the biggest free trade area in the world with 39% of the world’s GDP. The problem is that bickering on terms has broken out between China and India.
An official at the Bank of Thailand this week raised the prospect of the Thai baht being used as a vehicle for speculation as the currency hit a 6 year high against the US dollar. It comes in a week when Ministry of Commerce figures for May exports show the country’s exports are in free fall with a 5.8% drop. Exports for cars from Thailand in May were down a whopping 17% on the same period last year. This has led to Thailand’s influential National Shippers Council predicting that Thailand’s exports for 2019 will actually experience a contraction.
A leading Thai businesswoman and Chairwoman of the Thai National Shippers Council this week called on the Thai government to put aside its fears of being reprimanded by US authorities and to act to counter the appreciating value of the Thai baht at a time when the world is breaking free from multilateral cooperation and global consensus in favour of national self-interest. Her call comes on the same week as an assistant governor with the Bank of Thailand suggested strongly that an appreciating Thai baht may be driven somewhat by speculative forces that may be detrimental to the economic interests of Thailand.
Economy being pulled apart by US-China trade tussle
Thailand may well soon find itself having to give up this cooperative and benign world view and take action to protect its interests in a world where the Thai economy is being pulled apart between inward investment which only benefits foreign investors and global players as China and the US battle it out to protect their own economic interests.
Time for Thailand to look at the appreciating baht
Thailand is a comparatively open economy in an increasingly competitive regional neighbourhood. In an integrated global economy, it has very little influence. However, at the kernel of the Thai economy is the Thai baht, and soon it may be forced to step in to manage the course of its own currency so that it works for Thailand and its fundamental economic interests.
Mega baht has some positive economic effects
It must be said that the strong baht or as some people have tagged it, the ‘mega baht’, helps to keep Thai inflation under control. While the pricier baht may also deter some tourists, the value of Thailand’s tourist brand and its strength as a location is not yet showing any signs of a problem. In fact, Thailand has now become engaged with the need to protect the quality, environment and infrastructure that supports tourism as a priority. The World Bank has highlighted the issue of the continued sustainability of Thai tourism. A stronger baht helps in this process.
Thai baht may have become a focus for financial speculation with parked money
Thailand’s Central Bank this week raised the prospect that the Thai baht may have become the subject of speculation as the Thai currency peaked at it’s highest value against the dollar for the last six years when it polled ฿30.95 against the greenback. It should be noted that the baht’s performance against the dollar itself is not the extent of the problem. The strength of the Thai baht against regional currencies has been even stronger as well its value against the euro.
US China trade war has been disastrous for Thailand
This comes at a time when Thailand’ economic leadership is in a spin as many of the economic indicators are amid a nosedive at a time of heightened world tensions and cut-throat competition among other nations for business. The effects of the US-China trade war has so far been disastrous on Thailand.
Suggestion of a turnaround in the second half
Some forecasters and government suggest that in the second half of the year, some key plus factors will come into play. The first is that the latest tariffs on China are thought to have the potential to have a beneficial effect on Thailand which is seen as an alternative manufacturing base for Chinese companies. The Thai Examiner has recently reported on plans by printer manufacturer Sharp to ramp up production in Thailand using an existing plant in the country.
Far more damaging that officials and observers had predicted last year or at the outset
Similar predictions have, however, been made before as the first phalanx of tariffs took effect. The effects turned out to be unexpectedly far more damaging than officials at the Thai Commerce Ministry and economic observers at the beginning of 2018 could have feared. There are also concerns that American authorities are now moving to cut off and identify any efforts to use other South-Eastern nations as an ‘arrangement’ to subvert tariffs. This week, it is reported that penalties have been imposed by US authorities on some firms in Vietnam.
Ministry of Finance reported a surge in inward investment applications earlier this year
Nevertheless, the Thai Ministry of Finance is reporting an unprecedented inflow of investment applications for new projects in Thailand concerned with manufacturing in the first quarter of this year. News of the surging inward business investment was released this week to Bloomberg at the same time as Thailand’s newly elected Prime Minister, Prayut Chan-ocha spoke at the Bloomberg Live ASEAN Business Summit in Bangkok. The PM addressed the conference on Friday.
The data comes from the Thai Ministry of Finance and the Macroeconomic Policy Bureau. It cited a figure of ฿84.1 billion in foreign direct investment in Thailand for the period, an astounding increase of 253% over the same period last year.
Similar pattern seen in Malaysia but still Thai exports dive at a now alarming rate
Experts are suggesting that this investment is linked with firms adapting their supply chains to use countries such as Thailand as a new base to avoid the penal US tariffs now being imposed on Chinese firms. A similarly increased investment in manufacturing activities has been cited in Malaysia at a figure of 127%. However, as yet, one year after the trade war opened up, there is nothing to observe but a growing acceleration of the downward trend in Thailand’s exports even accounting for a pickup in exports to the United States. The drop in exports of 5.8% in May can not be disguised. It as a startling outcome.
Base for annual figures will change from next month – end of August the new crunch moment
Another reason for relative optimism being advanced by Thailand’s Finance Ministry is that the annual base for measuring export growth or decline will swing dramatically from June onwards. This coincides with the sharp downturn Thailand experienced last year. However, since the trade war began, as the months have progressed, the data being published by the Thai government is showing an accelerating drop off in exports. The figures for July when they are released at the end of August will be a telling point in this story.
Bank of Thailand raises a red flag in relation to rising baht value this week warning of speculation
The Bank of Thailand raised a red flag this week when it suggested that the appreciating value of the Thai baht may not be in line with Thailand’s real economic fundamentals. It suggested that Thailand’s currency may have become the focus of speculative interests. If true, this would mean that Thailand has become a victim of its own success as the country has, for decades now, prudently managed its finances and developed itself as world destination sought after by people for the East and the West. Many investors, at all levels, from hedge funds to individual professionals taking flight from countries such as China are targeting Thailand. It is more likely, however, that the activity is being driven by large investment players who see Thailand as a safe bet and a useful hedge.
Rising baht and a sharp decline in exports
The Thai baht has still been advancing for months now, even as the country’s exports have been essentially falling off a cliff. The surge in the Thai baht is also coming as we see large amounts of inward investment into the Thai Stock Exchange. In addition, as reported by the Ministry of Finance this week, applications for foreign inward investment are up by 253%. It appears that Thailand is becoming a haven for investment at a time when its industrial exports are experiencing steep declines caused partially by a rising baht. It is an extraordinary situation.
Bank of Thailand assistant governor suggest international money is being ‘parked’ in Thailand
This week, an assistant Governor at the Bank of Thailand made a distinct call, she suggested that Thailand may have become a parking spot for international money being used by large financial institutions and investment firms. Vachira Arromdee, who is an Assistant Governor of the Bank of Thailand, suggested that such speculative behaviour whether it involves a complex number of transactions or a punt on an appreciation of the Thai baht was undesirable behaviour.
It could be, of course, that Thailand is also falling victim to the same problem that Japan has experienced in the past. It may have already become a perceived safe haven for investors. This new environment may benefit foreign investors but it is deeply damaging to Thai business and significantly, those at the bottom of Thai society in the fields protecting its agricultural output and underpinning the economy.
Exports to other Southeast nations off by 7% with a 1.4% drop in agricultural exports
Amid the dramatic fall-off in exports, there is also very disconcerting data which shows Thailand’s exports to other Southeast Asian nations for May off by as much as 7% with exports to Singapore down by a huge 14.3%. Overall, industrial exports were down 5.8% but there, we also a 1.4% drop in exports relating to agriculture at depressed prices for Thai farmers. The May figures show significant declines in exports of rice, sugar, rubber and tuna showing the fisheries industry is also feeling the impact.
Massive fall off in exports to the European Union
The export data shows a massive 8.6% falloff in exports to the European Union and a 7.2% decline in exports to China. The figures indicate that Thailand is also suffering from an overall worldwide downturn in trade. The real and powerful effect of the appreciating value of the Thai baht versus both the US dollar and other local currencies in Asia is also a fundamental part of this problem. Significantly, Thailand’s exports to the United States rose by 8% in May compared to the same period last year. The figures represent a point where Thailand must now reappraise its plans as the Ministry of Commerce, for the first time, accepts that a contraction in Thai exports is a possibility for 2019.
Exports of cars from Thailand are down over 17% in May from May 2018, figures show
Buried amongst the economic data released this week are some shocking figures. Exports of cars from Thailand in May were down over 17% compared to this time last year and electrical circuits over 16%. It appears that the centre of Thailand’s manufacturing base is being impacted by both the trade war and the uncompetitive value of the mega baht
Commerce Ministry suggesting that exports for 2019 may now actually contract
The frank admission emerging for the Ministry of Commerce that a contraction in exports is possible contrasts somewhat with the Ministry of Finance commentary this week suggesting that a recovery will occur in the second half of the year. The Ministry also suggested that an economic growth rate of 3.5% could be achieved this year. This is looking increasingly hopeful as the economic picture is fast becoming darker. The exports data to the 20th of August 2019 will be crucial. For the overall Thai economy, the economic data at the end of August may also cause a reappraisal of its prospects.
Public investment projects may have to be looked at
One of the key drivers of the Thai economy is public investment and infrastructure projects. The instability of the government coupled with a fast-changing economic landscape my cause the government to have to reexamine these plans in 2019. With declining exports to China and increasing exports to the United States, for instance, Thailand may need to relook at its huge commitment to the ambitious Chinese Belt and Road scheme. The world economy is experiencing a seismic shift since the US-China trade war began, perhaps an outcome that has surprised many. On the other hand, the new government will be anxious to see public investment and capital expenditure go head as it is a key driver of the economy.
Observers watching the US economy carefully for a chink in the armour suggesting weakness that will bring Trump back to the table
Balancing this out, some commentators now suggest that the trade war is also beginning to damage the US economy. Forbes recently published US transport data that showed a sharp reduction on shipment activity in recent months. Many financial commentators are hoping the rapprochement between the two world powers may come about. This would lift, overnight, the menace that has driven world trade downwards. This may come about if Trump comes to believe that the US economy is also suffering from the confrontation. Thailand’s economic team will be cheering on such an outcome. However, what has happened in the last 12 months or so, does indicate how vulnerable Thailand has become to trade tensions and acrimony between the world’s great trading blocs. It certainly warns against an over-reliance on Thailand’s giant-sized northern neighbour, China.
Time to ditch political bandwagons and tackle the real issues impacting Thailand’s economy
It also means that Thai economic planners must look now also to deeper problems underlying Thailand’s economic prospects, chief among them, the demographics crisis and the practical weaknesses within the Thai education system. The time for bandwagons may be over. Indeed this may true for many countries in the world most especially developed ones where the demographic issue is the real underlying economic problem. Fighting climate change and other political bandwagons are, in fact, contributing to the problem.
Thailand’s new democratic environment may not bring economic benefits in the short term
The new political situation in Thailand is also not helping. The unwieldy 19 party coalition that the Thai prime minister heads might bestow more validity than the junta government but, purely on economic terms, what benefit? Thailand was snubbed by the EU when it signed a free trade deal with Vietnam and for all its talk of democracy, the US under Donald Trump is only interested in one thing, the bottom line for America. It is well known now the US State Department doesn’t represent real US policy since Trump has come to power. This also means, of course, that the 2020 election in the United States is perhaps just as critical to Thailand’s economic prospects as its own election held on March 24th and some would argue, it is even more so.
Economic governance will now become even more challenging with a fractious government
For the Prime Minister and Thailand’s economic deputy prime minister, Somkid Jatusripitak, it only means that the process of governing the Thai economy is now far more difficult and challenging. Many of the political parties bring with them a range of populist policies to implement while a real crisis may be enveloping the economy. The bickering that has broken out over cabinet positions is disconcerting. It will be an exercise in brilliant leadership to pull this government together and pull the Thai economy out of the crisis it now faces. Perhaps it can be done, perhaps not. Thailand is a resilient nation or perhaps the economic data will begin to swing upwards in the second half. On the other hand, if the decline continues, we should see other indicators which will focus the attention of authorities very smartly at the end of August.
World’s biggest free trade area was Thailand’s greatest hope for 2020, it’s prospects have dimmed
The great hope for the Thai government that came to power in 2014, was to maintain stability and open up markets to Thai exports. It worked well with Thailand as a key Chinese partner and even to the point where the prospects of the huge tariff fee market offered Regional Comprehensive Economic Partnership (RESP) appeared the ultimate goal for Thailand. The biggest free trade area in the world, including Thailand, India and China with 13 other pacific region countries represent nearly 40% of the world’s GDP. However, its prospects are already receding and looking dimmer as India and China cannot agree on terms. This week, the Thai prime minister, speaking at the Bloomberg conference in Bangkok, suggested that as the current Chairman of ASEAN, he was working to bring this about. A way forward or a forlorn hope? Thailand faces a crunch economic challenge with a weak democratic government. This certainly would be a boost.
Shippers Council tells Thai officials that an exports contraction for 2019 is now likely
Thailand’s National Shippers Council have made it known to the Thai government, this week, that they feel a contraction in Thailand’s exports is the probable outcome for the year as shocking figures for May show a huge fall-off in Thailand’s exports compared to May 2018. The Chairwoman of the Thai National Shippers Council, Ghanyapad Tantipipatpong, blamed the dramatic deterioration on two key factors: the US-China trade war and the rapid appreciation of the Thai baht versus both the US dollar and other local currencies.
Call to tackle the Thai baht and disregard fears of being targeted as a ‘currency manipulator’
The Chairwoman called on the Bank of Thailand to take action to deal with the strength of the Thai baht. The businesswoman sounded a note of alarm for the Thai government on the matter. She dismissed any fears of being targeted by the US for currency manipulation. ‘The central bank should not worry too much about the US’s watch list for currency manipulation,’ Ms Ghanyapad said. ‘It should rather focus on overseeing exporters’ competitiveness. If overall exporters see losses from exports, it will become a big problem for the country in the future.’