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At present, the Thai economy and currency have fully recovered from the severe financial & currency crisis of nearly 10 years ago during 1997-98 when the Thai baht collapsed in value. The remarkable economic recovery for Thailand is noticed with strong economic growth, political stability and only a small 10 percent of the population now living below the poverty line. However, more recent challenges for Thailand and its 65.5 million citizens include the lingering economic impact from the tragic tsunami that hit the Thai coast in December 2004 killing 8,500 people in addition to extensive damage to the country’s tourism industry.

POLITICS: Prime Minister Thaksin Shinawatra remains in power since being elected in February 2001, re-elected February 2005, representing the governing party of Thai Rak Thai (TRT), he has a majority and is firmly in control even after a scandal that almost rocked his leadership shortly after taking office. Prime Minister Thaksin is Thailand’s richest individual making his fortune by building a telecommunications empire. Political risk to Thailand is the economic threat that the government may have to increase the national debt to keep its election promises. However, Prime Minister Thaksin is implementing sound policies including a $40 billion USD equivalent infrastructure program financed by creative financing, asset securitization. The government is making prudent decisions by financing infrastructure rather than targeting consumption.

ECONOMY: free enterprise market system has emerged with the economy now performing strongly over the last few years following an expansionist policy with several large capital projects underway. Thailand has abundant rich natural resources as the agricultural sector contributes to a large output of the Thai economy. Thai industries consist of electronics, food & beverages, autos, textiles, light manufacturing, cement, metals such as tungsten & tin, medical tourism and tourism. Thailand is the world’s number two tungsten producer, and the third largest tin producer. Prior to the 1997 economic crisis, real GDP growth since the mid-1980’s averaged 9 percent coupled with large current account deficits resulting in a large consumer and property boom. Up and until the crash in 1997, both the current and capital account were negative for years. The current account deficit in 1997 was at 3.2 percent of GDP. The 1997 crash resulted in a realignment of the current account to surpluses.

Over the last few years with strong balance of payments, there has been a reduction in private sector debt. Unfortunately, the tsunami of December 2004 has had some short term pressures on the economy. There will be a temporary deficit for the current account in the range of 4 percent of GDP, modest baht depreciation has taken place due to fewer tourism visits coupled with a slowdown in electronics demand during the first half of 2005. At present, economic growth in the second half of 2005 is healthy. In addition, there has been a dramatic decline in external debt to the 30 percent of GDP level from 65 percent in year 2000, this development bodes well for continued economic stability. During 2004, Thailand began negotiations with the United States for a free trade agreement between the two countries.

Economic Statistics
Total GDP as measured by purchasing power parity equated to $525 billion USD (2004) with corresponding GDP/Capita at $8,100 USD. Real GDP growth fell by 1.4 percent in 1997, year 1998 contracted significantly by 10.4 percent, year 1999 rebounded positively to 4.2 percent. Recent GDP growth figures include year 2005 projected at 3.5 percent, year 2006 at a strong 5 percent. Other GDP growth figures include year 2004 at 6.1 percent, 2003 at 6.9 percent. CPI inflation has been rising with year 2005 estimated at 4.2 percent (September 2005 at 6 percent), 2006 projected at 2.7 percent. Other inflation figures had year 2004 at 2.8 percent, 2001 at 1.6 percent, 2000 at 2.4 percent. The current account has been in surplus since 1998 with year 1998 itself recording a surplus of 14.3 percent of GDP, 1999 at 12.5 percent, year 2000 at 10.2 percent. Year 2004 trade surplus at $8 billion USD (2004) with the current account showing a surplus of $6.7 billion USD. The fiscal account is in slight surplus. Net foreign direct investment (FDI) position is in surplus at 3 percent of GDP. Unemployment is low at 1.5 percent (November 2004). Public debt is presently at 47 percent of GDP with a government goal to 40 percent.

POSITIVE: development of large scale potash mine, large merchant marine, growing foreign reserves level which will help provide stability to the baht, declining debt to GDP ratios, financial restructuring, interest rates are low which is helping corporate debt service, high literacy rate, advanced communications network, moderate petroleum deficit/importer, IMF debt paid out. CONCERN: higher oil prices – moderate importer, drought – impact on agricultural production (ie. rice), AIDS is a growing threat with a 2.25 percent Thai infection rate, Muslim violence in the southern part of the country, avian flu risk?

BANKING SYSTEM: official reserves including gold holdings have been rebuilt to $49.7 billion USD (November 2005). There still remains a large volume of non-performing loans (NPL) that have not been cleared out of the banking system, the 1997 Asian crisis resulted in up to 50 percent of the loans reaching NPL status. The concern is that a large NPL portfolio will withhold back the economy from reaching full capability. State-owned banks have been merging with industry consolidation taking place, also there has been a re-emergence of finance companies aimed at spurring growth in consumer credit. Central bank, Bank of Thailand manages the baht perhaps by trying to reduce the volatility to help make for a more steadier exchange valuation for Thai business, especially those with foreign currency transactions. The Bank of Thailand has an inflation target range from zero to 3.5 percent for core inflation. The central bank interest rate is now set at 3.75 percent, up from 1.25 percent just over one year ago in an attempt to combat rising inflation. Overall, the banking system is very competitive but there remains an inherent financial risk as some financial institutions remain vulnerable to an economic slowdown.

REGIONAL ANALYSIS: Myanmar, Laos, Islamic threat, China, Southeast Asia
Myanmar and Laos are a provider of illicit drugs making this area known as the ‘golden triangle’. Thailand is becoming a transhipment centre for this rampant drug trade and major drug money laundering centre. Of importance, the main drug now is methamphetamines and it is estimated that up to 6 percent of the Thai population are drug addicts. Increased regional political risk, decline in tourism now is a real possibility due to the recent terrorist bombings in nearby Bali, Indonesia (2002, 2005 strikes). A growing economic threat to Thailand and the region is the transfer of manufacturing to low wage China and the export of deflation from China to the region. Southeast Asian currencies remain vulnerable to the inherent Islamic terrorist risk, the potential to disrupt trade.

KNOWLEDGE: the capital account is the macro-economic variable that created so much economic pain to Thailand during the 1997-98 financial crisis. The country’s weak banking system added fuel to the fire during this time as capital outflows due to domestic Thai corporations taking advantage of low domestic interest rates by borrowing baht to repay foreign exchange debts thus provoking increased capital outflows. The Thai economy has stabilized, short term external debt is paid. However, economic vulnerabilities are evident such as a large degree of non-performing loans (NPL’s) and a widening negative net international position.

The main saviour to the economy may very well be indeed the Thai household as 80 percent have virtually no debt. With a savings rate of 30 percent of GDP and falling, the Thai economy is successfully shifting to a consumption based model similar to wealthy South Korea. The key question is, how long will this trend continue?

Reserve adequacy is an accurate measure of currency stability. That is many currency crashes are caused by difficulties in the capital account. Are official reserves large enough to cover any short term debt requirements? At time of review, Thailand looks stable with plenty of sufficient reserves.

ISO symbol ‘THB’, Thai baht. At the time of review on November 4, 2005, the baht was valued at 40.96 THB to the USD. The exchange rate regime follows that of a managed float, it used to pegged but speculative pressure on the baht forced the government to float it in July 1997 at the start of the Asian currency crash. The IMF provided a $17.2 billion USD economic recovery plan in August 1997 to help stabilize the baht. As measured by purchasing power parity, the baht is significantly undervalued to the USD with some estimates by up to 50 percent.

CURRENCY HISTORY: the Asian financial crisis that struck with devastating economic consequence to Southeast Asia in July 1997 lasting into 1998 started in Thailand with the collapse of the national currency, the ‘baht’. This currency crisis of 1997-98 provoked the domino affect with many other nations in Southeast Asia following the baht’s lead and experiencing massive currency devaluations themselves. Trouble started in Thailand by late 1996 – early 1997 as the baht was in effect pegged to the US-dollar (USD) of which the international community felt the baht to be overvalued at that point in time. Further, the baht experienced numerous speculative attacks coupled with markets losing confidence in the Thai economy. Defending the exchange rate peg at the time depleted foreign reserves resulted in a larger than expected depreciation of the baht. The problem was further set on fire with Thai banks and corporations not hedging their USD positions culminated with a domestic Thai banking fraud. The Asian contagion resulted in a large proportion of the financial institutions in those Asian countries going bankrupt including the closure of 56 bankrupt finance companies in Thailand alone. IMF policies were then implemented to help stabilize monetary policy and the exchange rate. Thailand’s economic meltdown and currency collapse in 1997-98 also revealed severe deficiencies in the legal system. The Thai government has accordingly approved a new Bankruptcy Law, introduced creditors’ rights legislation and the creation of a Corporate Debt Restructuring Advisory.

Historical exchange rate valuations for the baht in relation to the USD include the following: January 1993 at 25.51 THB to 1 USD, January 1994 at 25.54, January 1996 at 25.29, January 1997 at 25.71, June 1997 at 24.31, July 1997 at 30.08, November 1997 at 38.88, December 1997 at 43.89, January 1998 at 52.55, May 1998 at 39, year 1999 average at 37.8, year 2000 average at 40.1, January 2001 at 43.14, January 2002 at 44.01, January 2003 at 42.75, January 2004 at 39.1 and February 2005 at 38.46.

CURRENCY FORECAST: the baht is expected to appreciate versus a weakening USD over the medium term. Political, economic and regional risk is moderate and is forecasting a second severe decline in the USD in the months ahead, currency appreciation to the baht in relation to the USD will prevail. At present, strong GDP growth rates by Thailand coupled with improving macro-economic fundamentals including strong exports has allowed the Bank of Thailand to intervene in the currency markets to limit baht appreciation. The revaluation of China’s yuan/renminbi during summer 2005 will provide further appreciation pressures to the baht as several Asian economies realize currency appreciation to the USD over the long term. Currency pegs ultimately fail particularly for a developing nation like Thailand where its peg collapsed in 1997. There is no intention of returning to a fixed exchange peg and capital controls are unlikely.

UPDATED: November 4, 2005

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