Very Difficult To Decide What To Believe

[ray23]

Been hearing nothing but the the baht is harming the export here then out of the blue pops up thi bit of information, can't be both ways so what is the truth?

From the Antion:

"Export growth still strong in first two months

Despite the strong baht, Thailand's exports remain robust with more than 18% growth in the first two months of 2007 over the same period of the year before.

The baht, which has risen by 12% against the US dollar since the start of the year, has worried traders, many of whom have called for stronger currency controls.

Exports in January and February were worth US$21.7 billion, up 18.07% over the same period last year, while imports increased just 2.8% to $19.7 billion.

The trade surplus of more than $2 billion reflected the strong baht as well as decisions by some businesses to delay imports as they believed the US dollar would weaken further.

Commerce Minister Krirk-krai Jirapaet said he was satisfied with the surplus, which compared with a deficit of $780 million in the first two months of 2006.

In February, figures showed $11.2 billion in exports and $10.1 billion in import value, up 18.4% and 3.13% respectively over the same period last year.

Despite the strong early performance, Mr Krirk-krai said the ministry would maintain its export growth projection at 12.5% this year to around $145.9 billion, from $129.7 billion earned in 2006. "

[pete_r]

My assumption would be that the overall export performance is good because large companies have ways to soften the effects of currency fluctuations and are still doing well, while at the same time smaller exporters may be suffering.

The slowing down of the imports makes the trade surplus look good, but it also reflects decreasing investments in new projects and a lower confidence in the economy.

[sonicdragon]

It can be both ways. That's the joy of the dismal "science".

[ray23]

Thanks guy no wonder I never wanted to study this LOL

[Heng]

Was going to say the same. Yes it can be both ways. I have exporter friends who are still doing pretty well and others who taking a break and going back to school. It's not just large and small companies... it also depends on what industry they are in -my orchid ops for example are of course still doing okay because 90+% of the world's orchids come from Thailand... where else are you going to shop?- and of course the financial state of their enterprises should be considered -those running on O/D's and debt are going to run dry before the firms that are flush with cash, multiple income streams, etc.-.

[solo siam]

Well, even if they were simply selling exactly the same amount of products that would still show up as a 12% increase.

[LivinLOS]

Most companies dont have the luxury of negotiating large contracts in Baht values.. Large contracts are often fixed in dollars and so when the baht appreciates they lose based on the initial price quoted.

Secondly if parts for the export or labour are made on the domestic market then those costs raise..

Falling prices.. Rising costs..

Doesnt apply to all businesses of course but does apply to the majority I would guess.

[ray23]

Well maybe this is why it's a cleer as mud to me. The original article paints a pretty rosey picture. Yet the following article posted in the same newpaper on the same day goes back to doom and gloom. With exporters crying the blues

SEMINAR

'Not much' can be done for economy

Industries call for investment incentives

Deputy Finance Minister Sommai Phasee yesterday conceded his ministry had limited tools to boost the economy, while shrugging off calls from the private sector for tax incentives to lift investment.

Speaking at a seminar hosted by Thansettakij newspaper, he said it was unlikely the government would cut the corporate income tax to stimulate spending, but he also gave assurances that the Finance Ministry would not increase the value-added tax (VAT) from 7 per cent to 10 per cent as widely speculated.

While saying, "There is no room to make a major tax cut," Sommai stated that the ministry was considering using tax and other incentives to stop the economic slow-down.

Sommai said public spending accounted for 19 per cent of gross domestic product (GDP) and that even though the government runs a fiscal deficit to boost growth, it actually could not do too much.

Any cut in income tax or consumption tax - VAT - will hurt government revenues, which is currently below expectations, he said, adding that there was the option of cutting the specific business tax to boost the real-estate sector. The current rate for specific business tax is 3.3 per cent.

Finance Ministry spokesman Somchai Sujjapongse said government revenues in March were 3.4 per cent, or Bt3.64 billion, short of expectations. And the revenues in the first six fiscal months to March were 0.3 per cent off target but 6.6 per cent higher than the same period last year.

The ministry considers the slow-down in domestic consumption the reason for the lower-than-expected income from VAT and corporate income tax. Excise tax revenues from vehicles and auto products also dropped. Total revenues in the first six months to March totalled Bt608.39 billion.

The private sector has called for the government to seek investment in the industrial, exports and property sectors with proper policies after signs of the economic slow-down became clearer.

At the seminar "Economic Direction the Country Should Go", representatives from the three sectors said they did not expect much from the current government, which has only one year to solve many problems. However, they urged the government to launch policies that would strengthen the country's structural foundation.

"If I were the government, I would spend the budget on developing the country's infrastructure," said Sawasdi Horrungruang, chairman of Hemaraj Land and Development.

He said the government should not suspend any mega-projects, because they would generate real investment in the country. "I don't understand. If the government does not have enough money, why doesn't it grant concessions to private companies?" he posed.

Private-sector investment will reduce the government's risk and burden. However, he said it must be operated under conditions that are fair to both the public and the concessionaires.

Sawasdi said he was worried more about multinational conglomerates rather than the unstable political situation. He suggested local companies form conglomerates with potential foreign-company partners to benefit from economies of scale.

Thai Frozen Foods Association president Poj Aramwattananont agreed with Sawasdi that standalone companies would face tough situations in the future.

As a representative of exporters, he said the government should curb the baht's strength, which was 18 per cent higher than at the beginning of last year.

"Although this government said it would not focus on exporters, it should recall it was the export sector that helped the country come out of the 1997 economic crisis," he said.

Last year, Thailand's GDP was about Bt8 trillion, half of which came from the export sector. He said the export sector could be divide into two parts: local-content industries like agro-products; and hard industries.

Local-content industries were worth about Bt1.5 trillion and hired about 20 million workers. However, there were only 1 million workers in heavy industries like electronic parts and metals.

"If local-content operators are not able to export their products, the vacancy rate of employment will be hiked," he said.

He said political turmoil would not have any effect on exports. "However, the government policy should head in one direction and create trust among the people," he said.

Anuphong Assavabhokhin, the third speaker and also CEO of Asian Property Development, said the property business usually grew at the same rate as the Kingdom's GDP.

"Some analysts have forecast that GDP will grow lower than 4 per cent this year. If that is true, it will be reflected in the growth of the property sector, too," he said.

He said operators had raised their marketing budgets from 7 per cent to 25 per cent. Hence, gross margins in this business will decrease dramatically from last year.

Small and medium-sized property companies are facing tougher measures from banks and financial institutions, he said.

However, he said the government should announce an echo-account law, to boost consumer confidence in purchasing accommodation.

In addition, it should register all property companies in Thailand, in order to help operators forecast business conditions more accurately.

It was earlier reported that Thailand could miss its revenue target of Bt1.42 trillion due to the economic slow-down.

Sommai said his ministry had ordered state-owned banks and specialised financial institutions, including the Government Savings Bank, the Government Housing Bank and the Bank for Agriculture and Agricultural Cooperatives, to maintain their target lending even though some of them had earlier told the ministry they might cut their lending targets, due to higher bad debt and the economic downturn.

New central-bank regulations aimed at commercial banks have also influenced lending policy, he noted. In 2005, the Bank of Thailand (BOT) introduced a new accounting standard known as Basel II as it realised that banks had recovered from the 1997 Asian crisis. But the new rules, coupled with economic deceleration, have forced banks to lend aggressively, he said.

Sommai said even though the BOT was likely to cut the key interest rate tomorrow, many investors were sceptical about its effectiveness in boosting growth.

Sommai also said the ministry had planned to revive the role of Secondary Mortgage (SMC), which was supposed to provide cheap mortgage loans. SMC however, so far has failed to do its job.

Industry Minister Kosit Panpiemras told the seminar Thailand's economy would recover in the third quarter.

He said the government had spent Bt400 billion in the last two months and would speed up spending next month.

The government has also told all public bodies to complete bidding for all projects in June, in an attempt to increase private-sector investment. Moreover, it plans to approve giant projects in Map Ta Phut soon.

"We'll try to end the economic slow-down as soon as possible. However, we will not use populist policies to solve economic problems like the former government did," he said.

Wichit Chaitrong

Chalida Ekvitthayavechnukul

The Nation

[cclub75]

It looks illogical.

However, there are several factors that can explain it.

-some companies negociate price on a period basis, within a contract. Therefore, there could be a "lag" effect between rising THB and a change in selling prices and/or the lost of market shares.

-to cope with increasing THB, some companies may have already increased their prices, successfully : without loosing market shares.

-some companies might have decided to reduce their margin, in order to keep their market shares.

-some companies may be protected from an increasing THB due to their sector of activity.

-other might be more protected due to sales in another currency than USD.

We don't have the details of export sales. Maybe businesses in some sectors have performed very well. And other have suffered a lot.

So basically, it's too early to really juge the effects of the falling USD/rising THB.

I should add : because of this diversity, the statements of BOT and thai authorities ("THB is rising too much, it's going to kill thai exporters") were, and still are silly.

How is it possible to compare a company who sale machines in Europe, with a company who sale rice in the US ? Different activities, competitors, currencies, markets etc.

Edited April 10, 2007 by cclub75

[Auntymarybrown]

The explanation : the inverse j curve

the j curve effect

In the short term a devaluation or depreciation of the exchange rate may not improve the current account deficit of the balance of payments. This is due to the low price elasticity of demand for imports and exports in the immediate aftermath of an exchange rate change.

Assuming that the economy begins at position A with a substantial current account deficit there is then a fall in the value of the exchange rate. Initially the volume of imports will remain steady partly because contracts for imported goods will have been signed.

However, the depreciation raises the sterling price of imports causing total spending on imports to rise. Export demand will also be inelastic in response to the exchange rate change in the short term, therefore the earnings from exports may be insufficient to compensate for higher spending on imports. The current account deficit may worsen for some months.

Expenditure Switching causes a change in trade volumes

Providing that the elasticities of demand for imports and exports are greater than one in the longer term then the trade balance will improve over time. This is known as the Marshall-Lerner condition.

Showing the J curve effect, as demand for exports picks up and domestic consumers switch their spending away from imported goods and services, the overall balance of payments starts to improve.

There is some evidence for the J Curve effect which shows the quarterly balance of trade in goods and the average value for the sterling exchange rate index between 1990-2000.

In late 1992 the pound was devalued by nearly 15% following the United Kingdom's exit from the European Exchange Rate Mechanism. The sharp fall in the exchange rate provided a welcome boost to the competitiveness of UK producers - but in the short term, the balance of trade actually worsened. Import volumes remained steady - but were more expensive following the decline in the exchange rate. Exports took time to respond to the more competitive value of sterling.

But in 1993-94 there was a clear acceleration in export volumes and a slower growth of imported goods and services as the effects of the exchange rate depreciation started to take effect. The net result was an improvement in the balance of trade in goods - although not sufficient to take the balance from deficit into surplus.

The Inverse J Curve Effect

An appreciation in the exchange rate can lead to a short term improvement in the balance of trade. Imports become cheaper and exports more expensive in overseas markets. But initially the elasticity of demand for both imports and exports is fairly low - leading to an overall improvement in the trade balance.

Edited April 10, 2007 by Auntymarybrown

[cclub75]

An appreciation in the exchange rate can lead to a short term improvement in the balance of trade. Imports become cheaper and exports more expensive in overseas markets. But initially the elasticity of demand for both imports and exports is fairly low - leading to an overall improvement in the trade balance.

I agree with your demonstration.

However, we were speaking about exports in value. Not only the trade balance.

The fact is : in value, thai exports have surged. "Exports in January and February were worth US$21.7 billion, up 18.07% over the same period last year"

[Crash999]

There are a few factors, with cclub75's first point being the most important- there is a lag time between the time orders are accepted and goods are exported. In consumer products this lag time varies between 2-6mo depending on product type. Orders shipping in Jan/Feb were placed at a 37-38 baht/dollar level. We'll start to see the impact of the strong baht in the second quarter and there will definitely be an impact this year.

It's not just a weak dollar but also a strong baht caused by a big influx of (speculative?) investment over the past 18 months or so- hence the BOT's efforts in trying to get the situation under a level of control.

Ultimately a strong baht is bad news for exporters, especially small-to-medium sized ones that don't have the resources to weather an economic storm.

[xbusman]

Okay, lets start with the simple stuff. This is Thailand, and all economic data should only be presented in terms of Baht to avoid confusion. Secondly, America is not the only export market, in fact I think it represents around half of all exports. To measure total exports from Thailand in dollars is almost a fraudulent concept.

Now, lets adjust for currency. From Jan 2006, the Thai baht has appreciated against the dollar by around 18.2%

If we now measure the export level in thai baht we find our 18% has evaporated into.... ZERO percent growth in real terms. Now lets add in inflation, which is generally guessed at of around 4% last year. So in terms of real goods, we lost 4% of our export level in the first two months of the year.

Because of the lag between current economic conditions and business reactions, this is the start of the slide. A year ago new contracts were being made with China and Vietnam to pull away from the baht. A year ago we were only 5% to 10% too high but the stable government and reliable vendors made a premium possible. Today, we are pushing 23% to 28%, what do you think next January looks like in Baht terms?

We are in the process of losing 60% of our gross domestic product. Ever seen anything like that happen. I can tell you from experience that losing 3% of your GDP can be amazingly painful. It will first hit the commodity products that employ so many poor Thai. Items like rice, fish and rubber. Next come the low tech stuff like garments and plastic injection (sounding familiar yet regarding the most vocal groups reported in the papers?) and finally lumbering Ford and Toyota will begin boarding up the big shops as internal demand disappears (car sales down almost 20% since year start) and a loss of competitive pricing externally (Japanese announce new joint ventures in China).

Now lets look at imports in real terms.....

The baht is 18% stronger so in real terms it is buying 18% more goods than last year.

Almost all imports are either commodities that Thailand needs for production (steel, oil) or technology (computers, cars). If imports grew 3% in US$ terms, that means in thai baht measured in real terms the total growth was around 21%. With inflation low in developed countries exporting technology, and I think oil has actually dropped in price from a year ago. Thats pretty close to real terms.

What does a 21% increase in real goods imported mean to Thai companies. You got it, it aint good. Particularly when their inventory is chock full of over valued goods from last year. Anyone with an inventory is losing money daily against newly imported cheaper goods. I see this in the Harleys where a bike that has been in a dealers inventory for more than six months is now around 20% cheaper to import. Overall, cheaper imports help reduce costs but in a closed market which this basically is, those additional imports either have to go for growth (remember our GDP is not growing) or they have to elbow out local content contributing to further reductions in GDP.

The numbers are all there, but you have to read them carefully. There are plenty of ways to spin the numbers and massage the data. Ultimately, the appreciation of the baht will eventually evaporate 60% of our GDP. That process began at around 39 baht/$ and will be complete at around 32 baht/$.

[ThaiGoon]

We are in the process of losing 60% of our gross domestic product. Ever seen anything like that happen. I can tell you from experience that losing 3% of your GDP can be amazingly painful.

World Bank expects Thailand's GDP to grow 4.3% this year.

[Gary A]

One thing to keep in mind is that figures don't lie but liars figure. The beauty of statistics is that you can manipulate them to support any argument you have.

[ray23]

One presents rodse a that it how it is. The other doom and gloom as how it is.

Somwhere there is an average, which would seem to be more accurate a to the overall. I certianly can understand that some sectors are doing better then others.

Wonder which one they are.

There is another factor that comes into play with the Governments PR program. The better image presented the more likely investors will return.

It's interresting to me that huge fortunes are made in times like these, with the right investment timed right. The only thing I understand about stocks is buy low sell high. How you find those two places I have not a got a clue. If I did I would be doing some serious study right now. Not only here but in the states as well.

[Crash999]

The numbers are all there, but you have to read them carefully. There are plenty of ways to spin the numbers and massage the data. Ultimately, the appreciation of the baht will eventually evaporate 60% of our GDP. That process began at around 39 baht/$ and will be complete at around 32 baht/$.

Whereas I agree there will be an impact, a 60% drop in GDP is a tad on the doom and gloom side. Even Mugabe's efforts to screw up Zimbabwe haven't done that much damage.

Remember that before the Asian crisis the Baht was pegged to the dollar at 25:1, supporting a vibrant export base. After the crash it slowly strengthened to 35:1 back in '99 and I remember at the time the exchange rate was seen as favorable for exporters.

Now the world has moved on since then with the likes of China, India, Vietnam, and Indonesia all rising up in the global export market. Many of the export industries that were competing in low value-added product categories have moved on years ago. The strong baht will hurt only those manufacturers left who were limping along, aided by an Fx rate as high as 45:1 in recent years.

The issue as I see it for the Thai government is that the strengthening of the Baht is not caused by a fundamental strengthening of the economy, it's caused by a big influx of foreign equity investment- something which if pulled out would leave Thailand no better off than it was before and with a smaller export base. Hence the (stumbling) efforts to control speculative investment that was met with a lot of criticism in the press.

[sonicdragon]

The explanation : the inverse j curve

the j curve effect

In the short term a devaluation or depreciation of the exchange rate may not improve the current account deficit of the balance of payments. This is due to the low price elasticity of demand for imports and exports in the immediate aftermath of an exchange rate change.

Assuming that the economy begins at position A with a substantial current account deficit there is then a fall in the value of the exchange rate. Initially the volume of imports will remain steady partly because contracts for imported goods will have been signed.

However, the depreciation raises the sterling price of imports causing total spending on imports to rise. Export demand will also be inelastic in response to the exchange rate change in the short term, therefore the earnings from exports may be insufficient to compensate for higher spending on imports. The current account deficit may worsen for some months.

Expenditure Switching causes a change in trade volumes

Providing that the elasticities of demand for imports and exports are greater than one in the longer term then the trade balance will improve over time. This is known as the Marshall-Lerner condition.

Showing the J curve effect, as demand for exports picks up and domestic consumers switch their spending away from imported goods and services, the overall balance of payments starts to improve.

There is some evidence for the J Curve effect which shows the quarterly balance of trade in goods and the average value for the sterling exchange rate index between 1990-2000.

In late 1992 the pound was devalued by nearly 15% following the United Kingdom's exit from the European Exchange Rate Mechanism. The sharp fall in the exchange rate provided a welcome boost to the competitiveness of UK producers - but in the short term, the balance of trade actually worsened. Import volumes remained steady - but were more expensive following the decline in the exchange rate. Exports took time to respond to the more competitive value of sterling.

But in 1993-94 there was a clear acceleration in export volumes and a slower growth of imported goods and services as the effects of the exchange rate depreciation started to take effect. The net result was an improvement in the balance of trade in goods - although not sufficient to take the balance from deficit into surplus.

The Inverse J Curve Effect

An appreciation in the exchange rate can lead to a short term improvement in the balance of trade. Imports become cheaper and exports more expensive in overseas markets. But initially the elasticity of demand for both imports and exports is fairly low - leading to an overall improvement in the trade balance.

If you want to quote verbatim from someone else's material it is considered good manners to make reference to the original work . In this case you might also include the URL so that readers can see the pedagogical graphs.

http://www.tutor2u.net/economics/content/t...tes/j_curve.htm

[xbusman]

In 1994 China was far less a player, just 13 years ago. At 25 to the dollar, the economy was stable and a decent hotel room was 400 baht. Pricing, costs, labor were all readjusted to an equlibrium after the crash. Its fine to compare todays baht to an artificial baht 13 years ago if you compare in real terms based on what available options were there at the time.

Today, we have to compete head to head with China. A baht that manufactures goods 30% higher than a neighbor to the north with better infrastructure is bad bad news any way you slice it. Can someone name a reason to pay a 30% premium over China, Vietnam or India? If so, we need to get it in the press right away, lots of Industrial heads are looking for that reason right now. Even if its as small as 6% premium, how much extra money should customers pay to deal with arguably the most corrupt customs departments in the world?

Get it? The export industry is headed for extinction with every satang that clicks away. Meanwhile the Chinese voraciously gobble up our industrial output for their coffers.

No one said the entire 60% of GDP will disappear. Even Nambia exports something. How much and how fast it evaporates is up to a mass of variables that no one can predict. Even then, there are all sorts of market forces that will work hard to right itself. Rubber and rice are commodities, before they disappear eventually the world market prices will rise in response to increased costs from a major supplier. Rubber takes years to develop, we might not lose the rubber industry for ten more years, maybe then only half of it. Maybe major fires in Indonesia drive the supply so low that Thailand replants all the rice in rubber trees and makes huge money for decades despite the high baht. GDP increases because rubber pays more per acre than rice.

The point is that these shifts and changes cause great upheaval and pain in societies. How much GDP do we loose before there is an unrepairable mess on our hands. We are dealing with 60% of the GDP, is losing 3% okay? 13%? 23%? 53%? Tourism contributes around 7% to GDP, sit back and think of Thailand without a single tourist arrival in 2007. Is losing 7% okay? I believe Thailand could survive the complete loss of the tourism industry, Lord knows they have been trying for years, but I do not believe that they can survive a major blow to the export industry which is exactly what the strong baht is doing.

The ultimate issue is that Thailand being stable and open to investment was one of the first "asian tigers" to participate in the outsourcing boom. Since that time, they have failed to move in further stages of technology (Singapore), educate the workforce (India) or fix the infrastructure (China) and those sins are about to come due as the new kids (Vietnam) prepare to leave them in the dust. Perhaps 25 baht/$ is where we are headed and where the economy needs to be. I just want to know what is going to fill the void where the exporters where. Fashion? Education? Film Industry? Nano technology? If 14 million tourists a year make 7% of GDP, if we need to fill 28% of GDP does that mean another 56 million tourists to Phuket hotels will do the trick? Maybe 50 million if they are high quality.....

Your right about fortunes being made in times like these. Always hardest to make money in old industries with status quo. Change creates great opportunities but what I am hearing from all my Thai business associates is that imports are the way to go. Everyone is getting on the import wagon and pouring money into real estate. Lots of lip service about reducing costs and finding new markets in India and Laos but in the end, how much do they need to import?

An economy this small and with such a large population and low per capita should be absolutely appalled at a projected GDP under 5%. Given the resources Thailand has, they have had to work very hard to get the growth rate under 7%. Keep it there for another ten years and look for Thailand on any map wedged between Vietnam, China and India as an afterthought. This is going to be a bad ride for everyone and lots of people will get fabulously wealthy from the change but millions more will move downward on the economic ladder, a repeat of the mess in 97 when Thaksin did so well at the expense of so many.

Its not rose tinted glasses, optimism or pessimism, money is money, customers is customers. You cant run a bar beer without customers nor can you run a country without GDP and the taxes it generates. Thailand is facing a period of great uncertainty and challenges, I feel sorry for the people asked to deal with this so late in the game. The effects of what is happening today took years to engineer and solutions take even longer.

[cclub75]

The ultimate issue is that Thailand being stable and open to investment was one of the first "asian tigers" to participate in the outsourcing boom. Since that time, they have failed to move in further stages of technology (Singapore), educate the workforce (India) or fix the infrastructure (China) and those sins are about to come due as the new kids (Vietnam) prepare to leave them in the dust.

Bravo Xbusman. Brillant analysis.

[sonicdragon]

I agree with much of what xbusman says, with the exception that I expect the baht to trend lower in the coming months (relative to other asian currencies not necessarily to the US$). The political situation and economic realities will not work in thailand's favour, and the tourist industry will be adversely affected by tinkering with the immigration rules.

There is very little chance for thailand to compete with china. I hate to say it, and it is a big generalisation, but thais are just not particularly good at running businesses partly because thai workers are not particularly good either and i say this with some considerable experiences behind me. I have witnessed first hand how many MNCs need to employ significantly more people to do the same functions as compared to china and india. Some japanese car makers have succeeded (I use the term very loosely) in large part due to tax breaks, strong local demand, and very high levels of automation - but I think these are the exceptions. Of course there can, should and will be local industry, but thailand needs to concentrate on the things that it is good at - in particular tourism/hospitality and agriculture and not get worked up with trying to compete with china. One silver liming that I can see to this is that if a trade-war breaks out between the US and china, it could be *very* good for thai exports and the economy as a whole, although other asian countries are likely to benefit more.

[xbusman]

Sorry, if I alluded to a prediction of where the Thai baht is headed, if I did it was ingenuous of me. I can no more predict the thai baht than I can the weather. Anyone who can predict currencies better than 50.1 % accurate is a fool to be working or talking about it. Very very very few financial advisers or mutuals funds are able to outperform the Dow Jones Industrial average over time. What does that say about big money and the brightest minds?

Why I keep a toe hold in Thailand is that I am making a bet that China moves to take Formosa back one day, and in my lifetime. From what I know of the Chinese and their history, that is a very serious matter, far more serious than we take it for in the West. That would change everything. I dont believe its that much of a long shot but I think my time frame might be too western. Americans think of things in this quarter, europeans this year, Thailand this decade and China.... this century. If they make a move in my lifetime, those of us in operation in Thailand will be in the catbird seat. If they dont, we will be in a lovely tourist resort.

[sonicdragon]

I agree with you on the taiwan issue in that it's only a matter of (long) time. However, I think there is more chance of a political solution, catalysed by the continued economic expansion and deregulation in the mainland, than a military one; and that the eventual re-unification could actually be a non-event (ie, it will be "in the price" many years in advance)

[Auntymarybrown]

Sorry, if I alluded to a prediction of where the Thai baht is headed, if I did it was ingenuous of me. I can no more predict the thai baht than I can the weather. Anyone who can predict currencies better than 50.1 % accurate is a fool to be working or talking about it. Very very very few financial advisers or mutuals funds are able to outperform the Dow Jones Industrial average over time. What does that say about big money and the brightest minds?

Why I keep a toe hold in Thailand is that I am making a bet that China moves to take Formosa back one day, and in my lifetime. From what I know of the Chinese and their history, that is a very serious matter, far more serious than we take it for in the West. That would change everything. I dont believe its that much of a long shot but I think my time frame might be too western. Americans think of things in this quarter, europeans this year, Thailand this decade and China.... this century. If they make a move in my lifetime, those of us in operation in Thailand will be in the catbird seat. If they dont, we will be in a lovely tourist resort.

"I am making a bet that China moves to take Formosa back one day, and in my lifetime. "

By the way, excuse me for asking but how old are you ?

Edited April 11, 2007 by Auntymarybrown

[Temporaneo]

Okay, lets start with the simple stuff. This is Thailand, and all economic data should only be presented in terms of Baht to avoid confusion. Secondly, America is not the only export market, in fact I think it represents around half of all exports. To measure total exports from Thailand in dollars is almost a fraudulent concept.

Now, lets adjust for currency. From Jan 2006, the Thai baht has appreciated against the dollar by around 18.2%

If we now measure the export level in thai baht we find our 18% has evaporated into.... ZERO percent growth in real terms. Now lets add in inflation, which is generally guessed at of around 4% last year. So in terms of real goods, we lost 4% of our export level in the first two months of the year.

Because of the lag between current economic conditions and business reactions, this is the start of the slide. A year ago new contracts were being made with China and Vietnam to pull away from the baht. A year ago we were only 5% to 10% too high but the stable government and reliable vendors made a premium possible. Today, we are pushing 23% to 28%, what do you think next January looks like in Baht terms?

We are in the process of losing 60% of our gross domestic product. Ever seen anything like that happen. I can tell you from experience that losing 3% of your GDP can be amazingly painful. It will first hit the commodity products that employ so many poor Thai. Items like rice, fish and rubber. Next come the low tech stuff like garments and plastic injection (sounding familiar yet regarding the most vocal groups reported in the papers?) and finally lumbering Ford and Toyota will begin boarding up the big shops as internal demand disappears (car sales down almost 20% since year start) and a loss of competitive pricing externally (Japanese announce new joint ventures in China).

Now lets look at imports in real terms.....

The baht is 18% stronger so in real terms it is buying 18% more goods than last year.

Almost all imports are either commodities that Thailand needs for production (steel, oil) or technology (computers, cars). If imports grew 3% in US$ terms, that means in thai baht measured in real terms the total growth was around 21%. With inflation low in developed countries exporting technology, and I think oil has actually dropped in price from a year ago. Thats pretty close to real terms.

What does a 21% increase in real goods imported mean to Thai companies. You got it, it aint good. Particularly when their inventory is chock full of over valued goods from last year. Anyone with an inventory is losing money daily against newly imported cheaper goods. I see this in the Harleys where a bike that has been in a dealers inventory for more than six months is now around 20% cheaper to import. Overall, cheaper imports help reduce costs but in a closed market which this basically is, those additional imports either have to go for growth (remember our GDP is not growing) or they have to elbow out local content contributing to further reductions in GDP.

The numbers are all there, but you have to read them carefully. There are plenty of ways to spin the numbers and massage the data. Ultimately, the appreciation of the baht will eventually evaporate 60% of our GDP. That process began at around 39 baht/$ and will be complete at around 32 baht/$.

I agree on the fact computing exports in US$ is deceptive and that such increase is actually same volume just higher priced in US$.

I do not agree on doomsday forecast of 60% GDP decrease, for sure some exporters are suffering and some will have to leave business. However when that will happen Thailand trade balance will turn into a deficit , therefore causing baht to depreciate. That will allow survived exporters to return to profit and contribute to Thailand GDP like before.

Anyway the future is not rosy....the most unfortunate thing is that xenophobic Thai authorities seem to be completely unaware of economics, the only thing Thailand holds a competitive advantage compared to its peers is tourism and retired relocation , but they are throwing it away with uselessly tough visa rules.

[xbusman]

Like I said, the entire 60% will not evaporate but somewhere between a lot to way too much of it will. How much is too much, hang on because I think we will get the chance to find out. There will be all sorts of righting mechanisms but how much stress they can handle, how much they they can replace is the question. Even if they can supplant the loss, those types of shifts are very very painful to go through even in stable countries with open opportunities.

My wild guess on Taiwan. The current regime wont do it because they remember the horror of the cultural revolution and mass starvations. They are intent on becoming a world power and wont squander the opportunity through impulsive acts. Also, remember how far taking little Tibet put them back, they will be far more judicious with Taiwan. The next generation however, will consist of children brought up with money and no knowledge of the past. They will flex their muscle and the first place they are going to look is Taiwan. So my WAG is within 30 years.

[Crash999]

While I agree with a lot of what you said, I disagree that there is going to be such a huge impact in the economy.

No one said the entire 60% of GDP will disappear.

In fact you said, "We are in the process of losing 60% of our gross domestic product," which I seem to have interpreted incorrectly to mean that we are in the process of losing 60% of our gross domestic product. Sorry about that.

Anyhow, it's not the doom and gloom situation you are painting. As mentioned, the business that was to be lost to China was lost years ago, even at 45 baht/dollar. Little else is moving now due to the strong Baht- it's only an erosion of the manufacturing base that has been hanging on over the past few years.

If you look at the country's balance of payments you can see the strengthening baht is due to capital influx. Once the tide turns and begins moving out the baht will weaken, likely sooner rather than later.

[Crash999]

There is very little chance for thailand to compete with china. I hate to say it, and it is a big generalisation, but thais are just not particularly good at running businesses partly because thai workers are not particularly good either and i say this with some considerable experiences behind me. I have witnessed first hand how many MNCs need to employ significantly more people to do the same functions as compared to china and india.

I've found that the Chinese are much more entrepreneurial and driven- they go the extra mile to make a deal happen even changing their own procedures or taking a loss to get a business relationship started. Not so in Thailand- where often even getting samples for a potential buyer can be an ordeal. Price quotations happen overnight- by the time we get our quotes back from Thailand the business has been settled, orders placed, and production underway.

There are also macroeconomic advantages. Large domestic factories churning out product for a billion Chinese have a scale that can't be matched. Tax breaks and rebates for factories as well as discounted land, power, and water means that those factors of production cost less for the factory and their suppliers. The currency is pegged to the dollar at a rate out of market equilibrium, hence the massive USD reserves.

The government has been a huge reason the export industry has done as well as it has, pushing all the incentives out and ensuring that everything is relatively hassle-free for foreign investors. The BOI pales by comparison.

Lastly, whereas everyone focuses on the cost of labor the difference is not as big as one might imagine- for example in Shanghai the average cost of manufacturing labor there is now equal to that in Bangkok. Large factories in Shandong province are highly automated- bales of cotton in one end of the factory, towels out the other end with minimal human interaction except in packing.

With all this said, China is starting to plateau in terms of economic growth. The tax system is being revamped to reduce rebates and incentives for JVs, the currency is appreciating, and other economic are sniping away business like India, Vietnam and (if they can keep things stable) Indonesia.

I give it another couple of years before some cracks begin to show. In the meantime, buy those China equities!

[xbusman]

English is an amazing language, so incredibly precise with an unmatched vocabulary but in the end we all read what we want to believe.

We are in the PROCESS of losing 60% of our GDP.

Now, that process starts at about 42 baht and continues to decline with our currency until..... maybe 3 baht to the dollar when complete entropy ensues. That would be a process, and we are definitely in that process.

Saying that 60% of our GDP WILL evaporate is far more misleading. Saying that 60% of our GDP has evaporated is a blatant lie. Saying that We COULD loose up to 60% of our GDP is accurate but ignores the pain which has already started a year ago and is continuing as the baht strengthens.

So you are absolutely correct, you did read it wrong.

IF you think losing exports which account for up to 60% of the entire GDP is not going to be painful I am rather taken aback. Losing 5% has caused revolutions, famines and wars. I dont know what the GDP shrinkage was during the great depression in the late 20s but I would guess less than 10%. That caused scars that remain today 80 years later. Of course, I am inclined to agree with the old adage" A recession is when your neighbor is out of a job, a depression is when you are out of job." You would be correct in the fact that for the upper 10% of the economic scale, loss of GDP is not a gloom and doom scenario. Can be quite ugly for the other 90% though.

[sonicdragon]

I dont know what the GDP shrinkage was during the great depression in the late 20s but I would guess less than 10%.

I think it was more of an early 30s phenomenon, than a late 20s. It began with the stock-market crash in Oct 1929, and (depending on how you measure it and what geographic areas you include) GDP fell by 20-30% over a period of around 3 years. It took 10 years to recover to pre-crash levels in the US. To say that it was a catastrophic economic event is putting it mildly. We can only pray not to have to live through something like that.