Thailand's investment is no longer a matter of choice
Author: Sutapa Amornvivat, Ph.D.
Published in Bangkok Post newspaper / In Ponderland column 27 January 2016
As the year of the monkey kicks off, anxiety is everywhere in sight. For the first time in nearly half a century, no single economic power enjoys bullish prospects. In the 1980s, Japan was at the height of its “miracle” with record salaries and employment. . In the 1990s, the United States rode on the success of rapid technological change that created waves of new jobs as well as the dot com bubble. At the turn of the millennium, the European Union was exuberant with the promise of growth driven by a streamlined internal market and single currency. Then China’s accession to the World Trade Organization helped it re-emerge as one of the world’s great economic powers. Even during the global financial crisis of 2008, China marched briskly onward. But today, there is no comparable big winner.
2016 will be another difficult year for emerging economies, especially ones that rely on exports. The slow rebound of the world economy in the past year or two was driven by an arguably shaky recovery in the financial and service sectors in the advanced economies. Manufacturing in all of the top economies remained slack. International trade slumped and so did commodity prices, undermined by China’s industrial overcapacity and demand downturn. China’s manufacturing sector cannot look forward to a V-shaped recovery. After all, China is de-emphasizing that sector as a calculated policy move to rebalance its economy on a lasting basis, namely to reduce the role of industry and investment while increasing emphasis on consumption. Inventory depletion will eventually prompt a new cycle of production to re-stock, but continuing weak demand will limit the rebound.
Also discouraging is the reversal of net capital flows into emerging markets, which will add stress to already fragile economies. The U.S. Federal Reserve’s long-awaited decision to hike its interest rate in December 2015 put an end to uncertainty. But it also signaled that the long global credit boom might be followed by a painful process of deleveraging. For the first time since 1988, net capital flows to emerging markets turned negative in 2015. Capital rushed out of both debt and equity markets, forcing emerging-market central banks to dip into foreign exchange reserves to protect their currencies. This implies a higher risk of a liquidity crunch and perhaps another financial crisis.
What does it mean for Thailand in 2016? Stronger headwinds from abroad will very likely stall the export sector for yet another year. SCB Economic Intelligence Center (EIC) expects Thailand’s exports to stagnate in 2016, impeded by sluggish global trade. After all, nearly one-third of our exports go to China and its trading partners in Southeast Asia. The prolonged drought and depressed prices for farm goods and industrial commodities add to the long list of export maladies in 2016. Clearly, it would take a herculean effort for policymakers to get the Thai economy growing at a respectable pace again.
Timely execution of infrastructure projects means everything. A burst of public spending on these projects will instantly inject liquidity to prop up the ailing economy. Large-scale construction projects will create jobs and disburse income through a long value chain that includes vulnerable groups like low-income households and SMEs. After years of delays, the transport mega-projects must now be executed, in time to give hope for the economy this year.
Thailand must invest in economic fundamentals to improve income rather than fueling further credit growth. As of recent, Thai policymakers have resorted to consumption stimulus policies in attempts to combat economic woes; yet their effects have proven short-lived. Moreover, continuous use of such policy is not without side effects. One consequence is the massive accumulation of household debt in Thailand, now at 86% of GDP, one of the highest levels in emerging Asia. The high debt burden constrains household consumption, reducing the marginal gains from stimulus measures. The adrenaline rush from a consumption stimulus might feel good, but debts need to be paid with higher income or, less helpfully, with lower spending.
Mega projects, worth some 3 trillion baht altogether, must not be viewed as a one-shot remedy. Rather, it should be seen as a long-term cure to our dwindling growth potential. A broader, long-term strategy to maximize the benefit of these new roads and rails is needed. Defining a clear vision will help ensure policy continuity and guide all stakeholders in the same direction. In particular, the plan should include reforms of “soft” infrastructure. This is because a superhighway from Bangkok to Kunming will yield little, if there is no change in rules and regulations to facilitate travelers or cargo. Perhaps more importantly, the private sector must take actions to translate brand-new infrastructure into business opportunities.
The new infrastructure should serve as a springboard for Thailand to shift towards a service-based economy and to become a service hub of ASEAN. The concentration of new investments in transport infrastructure would greatly benefit Thailand’s service sector. Service businesses like construction, logistics and their value chains would benefit directly, while opportunities would more broadly stimulate business sectors like real estate, commerce, tourism, media and advertising. Unlocking the potential of these important businesses should be Thailand’s game plan. If successful, the service industry will become a new growth engine, contributing more to GDP than manufacturing and agriculture, reducing the economy’s vulnerability to global shocks.
The ultimate goal is to lift the country’s growth and make the most out of every baht spent on roads and rails. Improved productivity from new investments will equip the Thai economy with the strength to withstand yet another bout of global turbulence. With exports in peril and consumption crippled by debt, timing is of the utmost importance that Thailand executes these public infrastructure investments as promised.