Posted on 04 Aug 2008
How vulnerable is the Thai economy to a US recession?
Economic pundits were until recently big fans of the notion
that the Thai economy will no longer be flying on one engine - a reference to a
shift of paradigm whereby exports will cease to be the sole driver of growth in
2008. Recent events notably the political Armageddon, mounting inflationary
pressures precipitated by high prices of oil and other commodities and rising
interest rates suggest they might have changed their minds.
Given the current political upheavals and their adverse
effects on domestic demand, exports should continue to be the sole driver of
growth irrespective of a deep downturn in the US economy. Global investors are
now bracing for the possibility of a US recession as the staggering
scale of the sub-prime housing loan crisis comes into clearer view. Can Thailand shrug off a US recession? Perhaps not as
increased global integration has meant that the real economy and financial
market cycles of the US and Asia have an inclination to move in sync,
particularly after the economic meltdown in 1997.
Thailand
is a very open economy and is, thus, vulnerable to the vicissitudes of external
demand. Indeed, the share of trade in its GDP has increased steadily over the
past several years to reach a high of about 140% with exports accounting for
about 75%. Those who believe in the decoupling theory argue that
notwithstanding the nation's heavy dependence on foreign trade as the
sustenance for growth, a severe economic downturn in the US is unlikely to have dire consequences for Thailand thanks
to increased intraregional trade and the strengthening of its fundamentals.
To the extent that Thailand
depends on export-led growth, the US has become a less important
export destination than previously. The US share of Thai exports has been
declining steadily from about 20% just prior to the financial debacle of
1997-98 to slightly above 10% today with emerging and developing economies
taking up the slack.
Likewise, the shares of the European Union and Japan have,
over the same period, declined from roughly 15% and 16% to about 13% and 11%
respectively. Particularly important is the emergence of China. The
Chinese share of Thai exports has jumped from 3.1% to about 10% today,
representing a threefold increase over the 10-year period.
The China
trend is in line with neighbouring countries, notably Taiwan, South
Korea and Hong Kong whose shares of exports to China surged
from about 3%, 11% and 34% in 2000 to 24%, 22% and 49% respectively in 2007.
Even in India and the Philippines, the portion of exports going to China increased
more than five-fold and three-fold respectively.
Further, Thailand's
exports to America amount to
only about 9% of its GDP compared with about 20% for Singapore,
Malaysia, and Hong Kong. Thus, Thailand
is much less exposed to the ups and downs of the US economy. But the doomsayers
often opine that the links between Thailand
and the US
are, indeed, much more complex than they appear.
While the direct effect on Thai exports might not be
substantial, the indirect effect on the country's exports to Europe and Asia could be sizeable because of the importance of
American market for their exports. Moreover, China's
growing consumption of Thai exports is intertwined with the US via its processing and re-exporting Thai
intermediate products to the US
market.
Anecdotal evidence, however, shows that the spillover
effects on Thailand's
real economy through foreign trade linkages have, thus far, been minimal.
During the first half of 2008, exports continued to show grow impressively at
23% over the same period last year.
While exports to the United States grew by a mere 6.7%,
those to Asean and China rose at an unconscionable level of 53.5% and 27.5%
respectively. Rapid economic growth in China this year has resulted in
increased imports of raw materials and intermediate inputs from Thailand and
other Asian countries, helping propel growth in the region-growth in Thailand
is expected to perk up to almost 6% during the first half of the year. On the other
hand, those destined for two other major markets namely Japan and the European
Union showed a respectable growth of 12.9% and 10% respectively.
All this by no means implies that the country is insulated
from America's
foible s and woes. With increased globalisation of financial markets, the risks
of US
recession spreading through this channel cannot be underestimated. Over the
past few decades cross-border financial linkages have risen substantially as
reflected in a dramatic increase in gross external assets to GDP for both
developed and emerging countries.
The current slump in Asian stock markets is a case in point.
The recent collapse of the equity market in Thailand
could be ascribed to the financial turbulence in the US prompted by sub-prime woes and
the demise of several financial institutions.
It looks as though the downside risk to export and growth
has not emerged in Thailand
as the aftermath of the US
economic contraction. The spillover effects of a US recession via direct and
indirect trade channels have, thus far, been minuscule. This is in contrast to
past US recessions where
there was a positive correlation between US
growth and Thai exports, and between US growth and Thai growth.
Perhaps this could be reconciled by the fact that the current
economic downturn in the US
has been primarily driven by a housing slump - the worst since the Great
Depression - with as yet little or no effect on consumption growth. Only
through a sharp deceleration in US household consumption triggered by a full-scale
recession in the United
States will the ripple effect of US woes be
widely felt across the real side of the economy here.
