Economics 101
I was at dinner with the Prime Minister the other day…
Isn’t that a great way to start a conversation? I mentioned to the Pope at confession last week…So Barry and I were chatting in the Oval Office on Tuesday…
By the way, I wasn’t the only person at the dinner, there were many others, so I only got to ask the PM one question, which she muffed, however, I digress…
Anyway, I was at dinner with the PM the other day, and she was discussing the great strides the Thai economy had made…
Oh, I should say right now and say clearly that this sub is going to be very boring and I advise everyone to stop reading and go on to the next sub about the foreign male tourist and the Thai lass who did him wrong.
Don’t say I didn’t warn you.
Recently, there have been a fair number of subs predicting that the Thai economy and the Thai country as a whole is about to go straight down the shitter. The proponents of this thinking usually use their own experience in being done over by an Isaan teenager as proof, combined with the rise in beer prices in Thailand when denominated in their home currency.
I got an email just the other day, in reference to a recent sub of mine, in which the writer said, and I quote, “The Thai economy will explode in 10 – 20 years because 99.9% of all Thais are lazy shiftless scam artists.”
Well, I beg to disagree.
The Thai economy, despite the protestations of those whose only exercise is walking from their hotel to Nana Plaza, is not based on sex tourism. Nor, in fact, is it based on agriculture.
Let’s look at the facts.
The leading sector in the Thai economy is Automobiles and Automotive parts. Thailand is the world’s leading producer of 1 ton trucks. Many companies, such as Ford and Toyota, have major plants here.
After that, the next sector in importance, you may be surprised to learn, is financial services. Then comes electrical parts. Fourth on the list, approximately half the size of automotive, comes tourism. Despite the dire predictions, tourism is growing rapidly, as evidenced by flight arrivals in both Bangkok as well as Phuket airports. And if you look at the people arriving, just looking at the queues in Immigration for example, you see families, tour groups of couples from China, hordes of Russian lovers, in fact, very few people you might visually categorize as sex tourists.
So many flights now come into Suvarnabhumi that they have had to re-open Don Meuang, which must be a relief to those who have been writing subs about how much they loved that shabby excuse for an international airport. Having flown in and out of there 4 times in the last month it is still as god awful as it ever was but at least now there are Starbucks.
Then, in descending order of importance to the Thai economy, come cement, auto manufacturing, heavy and light industries, appliances, computers and parts (Thailand is the world's leading producer of hard disk drives. During the floods of 2011, HDD production was so severely curtailed that many computer companies globally were unable to ship product and thus missed quarterly sales forecasts), furniture, plastics, textiles and garments, agricultural processing, beverages, and tobacco.
Overall, the industrial sector accounts for 39% of Thailand’s GDP, compared with agriculture at less than 9%. Thailand is often cited as being the world’s largest rice exporter (which title I believe has been recently lost to Vietnam) but rice exports as a whole are still below things like textiles and footwear.
By the way, the entire Thai economy is booming. GDP in 2012 grew at over 6% which is quite healthy by today’s international standards while 4th quarter 2012 GDP grew at a startling 19% (this is in comparison with the 4th Q of 2011 when GDP was curtailed by the floods but, even so, most economists were predicting only 15% growth).
Another way to look at the perceived strength of an economy is through its stock market, and The Stock Exchange of Thailand is currently at a 15-year high. While stock market index growth sometimes runs contrary to the strength of an economy, very often it is an indicator of the willingness of institutions to buy or invest in local companies.
Lastly, we can look at a country’s currency. While currencies are often manipulated by a government in the short term (by adjusting interest rates and the money supply) over the long run currency rates are determined by relative supply and demand. If investors wish to invest in a country, they need to buy that country’s currency, which keeps it strong.
Historically, the Thai baht was fixed at 25: 1 USD for many years. The financial crisis of 1997 forced the government to float the currency, which immediately went to 60 THB: 1 USD. The baht fluctuated around the 40 mark until 2005, when another bout of strengthening drove it to 28. It then weakened a bit until 2008 since when it has been gradually strengthening again. But considering the fact that 16 years ago it was at 25, today’s rate of 30 cannot be seen as historically unprecedented. <Small correction: the rate is fractionally above 29 and you will get 28.xx baht for your US dollars at currency exchange booths – Stick>
Retirees may long for the days of 60 THB: 1 USD again, but those were unusual rates only because of the 1997 financial crisis; historically rates of 25-30 THB: 1 USD are much more in line. On the other hand, there is no indication that the baht will continue to strengthen, and few economists are predicting levels of, say, 25 or even 20 to the dollar. I have seen some forecasts that say the baht will weaken short term to 35.
Overall, the strong baht can be seen as evidence of a strong economy. Economies that need to export more deliberately try to keep their currency weak, which has not been the case for Thailand (it is true for the US for example).
All of these items put together: strong GDP growth, strong export growth, a multi-faceted economy, strong stock market and strong baht, all indicate a healthy economy.
And, by the way, we can add political stability for the first time in several years.
Now, you might say, well that’s all well and good for now, political stability and economic growth and all that, but what about the future?
I was at lunch with my closest Thai friend, a senior finance ministry official, and I asked him about the stability. He said, Thailand now having its first ever female PM, the opposition has had to rewrite the playbook on how to destabilize a governing party, and the Democrats simply have no idea how to attack her. When I asked him how long the stability will continue, and what might happen to interrupt it, he lowered his voice and murmured something.
Thailand certainly faces challenges from other emerging economies, especially in the region: Indonesia, Vietnam and now even Myanmar. But it takes a long time for companies to move factories, and while Thailand may be losing its share of new investment to other countries, the relative stability of the Kingdom acts in its favor when overseas multinationals make investment decisions. The strong baht may be a deterrent to investment, but its stability remains key, compared with, for example, the fluctuations in the Vietnamese dong. Investors like stability and, while Vietnam may be cheaper today than Thailand, the uncertainty regarding its currency dissuades many from putting too much funding there.
None of us can predict the future nor can anyone say with any certainty that the strength in the Thai economy will continue. But there are few economic signs that point to a collapse, or even a gradual weakening.
And does anyone doubt that the present government will be able to win the next election in 2015?
So practically, those considering retiring or moving to Thailand to work might want to consider hedging as well as diversification strategies. If you believe that the Thai currency will continue to strengthen against your home currency, then moving some funds here (for example one year's worth of annual living expenses) is not the worst idea. If your goals are long term, investing in property could also be considered. (When you move a foreign currency into Thailand to buy a condo, if the baht appreciates against your currency, when it is time to sell, you will receive more of your home currency as long as you can sell your condo for at least what you originally paid for it). Extra cash could be invested in the stock market and / or business (taking proper care to do due diligence on your partners).
However, diversification is always wise. Personally I find the region’s most stable currency to be the Singapore dollar, and some money invested in the Singapore stock exchange (currently yielding about 4% in dividends) gives you both an investment in an excellent economy as well as in a strong currency, and a decent return.
Wingeing about things is always fun; putting together a constructive personal financial plan is tedious at best but, properly done, frees you of worries about the cost of your next bar fine.
Take care,
Professor
Stickman's thoughts:
I am in total agreement with everything you say in this submission. The economy here is booming and I see no reason why it is not going to continue to boom.
When I get the silly idea in my head that I am going to abandon the ship and return to the land of sheep I refocus, and remember that Thailand is booming and that this is going to be an interesting place to sit on the sideline for some time to come
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