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ECONOMY

Looming dollar liquidity crunch could batter Thailand

By Achara Deboonme

The Nation

On its own, the credit-rating downgrade in the United States will not hurt Thailand badly. But coupled with lingering problems in Europe and Japan, a perfect storm may be brewing.

External risks are mounting and they could pave the way for a dollar-liquidity crunch similar to that experienced a few years ago, an economist has warned. In a statement released yesterday, Standard & Poor's Ratings Services supported the view, with Thailand highlighted as one of the Asia-Pacific countries likely to be hit by an export slump.

"What we witnessed during the fallout from Lehman Brothers in 2008 could reoccur, and then Thailand and the rest of the world will not be immune to the external risks," said an economist who asked not to be named.

He said the global economy would head downwards if the debt crisis in Europe could not be solved and if the United States had to cut its expenditure without additional monetary tools (such as a third round of quantitative easing, or QE3).

Greece is expected to make headlines again in September when the International Monetary Fund and the European Central Bank make their quarterly assessment, before endorsing another batch of bail-out funds. Investors in Europe are wary that Greece may not succeed with its privatisation plan, and this could further undermine confidence in the euro.

While domestic problems will lower export demand from the Group of Three economies (the United States, the European Union and Japan), exports will be hit while investment could be put on hold because of greater vulnerability.

"This will sharply reduce the appetite for risk, and Thailand will not be able to escape from the overall negative sentiment," the economist said.

The Thai stock market continued its nosedive yesterday on negative factors, in tandem with regional peers. Gold prices ended up above US$1,700 per ounce, forcing Gold Traders of Thailand to revise domestic prices 10 times for aggregate increase of Bt650 yesterday.

In its statement, Standard & Poor's said that after the downgrade in the US rating, there had been no immediate impact on sovereign ratings in the Asia-Pacific region, thanks to sound domestic demand, relatively healthy corporate and household sectors, plentiful external liquidity and high domestic savings rates.

However, it foresees long-term consequences. The US rating change, together with weakening sovereign creditworthiness in Europe, points to an increasingly uncertain and challenging environment ahead, as confidence is undermined. This indicates potential longer-term consequences of a weaker financing environment, slower growth and higher risk aversion as negative factors for Asia-Pacific sovereign ratings.

"Given the interconnectivity of global markets, an unexpectedly sharp disruption in developed-world financial markets could change the picture. It could lead the US and European economies into deep contractions again, or further delay their recoveries."

Standard & Poor's also said that as export demand would drop, as it did in 2008 and 2009, export-dependent economies with large exposures to the US and Europe would feel the most impact. "Specifically, Thailand, Taiwan, [south] Korea, Malaysia, the Philippines, Japan, Australia and New Zealand are likely to experience export-driven slowdowns either through weaker demand or lower export prices, or both."

The ratings company also envisages impacts from tightened international liquidity, which will prompt Asia-Pacific countries to support their economies and financial sectors once again. "The implications for sovereign creditworthiness in Asia-Pacific would likely be more negative than previously experienced, and a larger number of negative rating actions would follow."

Amid the gloom, a silver lining emerged on Sunday when the European Central Bank signalled that it would buy Spanish and Italian bonds. More such actions are expected to avert another crisis.

-- The Nation 2011-08-09