Thai Economy Under Water: A Serious Supply Chain Shock

[webfact]

GUEST COLUMNIST

Thai economy under water: A serious supply chain shock

Dr Chodechai Suwanaporn

Since the start of October, Thailand has been experiencing its worst floods in half a century. The economic concerns have hightened as major industrial estates have also been inundated. With the exception of Samut Prakan and Rayong, seven major industrial estates have been affected by the floods thus far. The situation remains fragile, and a few factors bear watching, including the flood threat to inner and central Bangkok, the commercial heart of Thailand.

The current flood crisis has created a major supply shock for the country, with economic devastation being felt in the key manufacturing, agricultural and tourism sectors. The foremost impact is in the manufacturing sector. We all know that key manufacturing bases are concentrated in Bangkok and adjacent areas such as Pathum Thani, Samut Sakhon, Samut Prakan, Ayutthaya, Chachoengsao, Chon Buri and Rayong. These industrial areas have all been affected by the floods.

Specifically, the province with the largest manufacturing base is Ayutthaya, where manufacturing (6.1 per cent of Thailand's gross domestic product) has been severely affected. So far seven industrial estates (including Rojana industrial park, Saha Rattana Nakhon industrial estate, Hi-Tech industrial estate and Bang Pa-In industrial estate) have been forced to shut down over the past few weeks.

Japanese investment makes up the bulk of the operations in these estates and most specialise in auto parts and electronics. Because many companies are auto parts suppliers, the flooding has caused supply-chain disruptions and shutdowns for auto producers in other parts of Thailand (including the eastern seaboard) even though they are less, or not at all, affected by the floods.

Anecdotally, manufacturers have stopped operations since early October and such shutdowns have been extended. The Industrial Estate Authority of Thailand estimates that affected industrial estates in Ayutthaya may take 3-5 months or more to fully return to normal operations.

The agriculture sector is also badly hit. This is severely affecting the livelihood of Thais living in the central rural areas. The northern and central parts of Thailand are key agricultural centres, cumulatively accounting for 46 per cent of the country's agricultural GDP output.

The Ministry of Agriculture and Cooperatives recently reported that 10 million rai of cultivated land is so far damaged, of which 8 million rai is rice paddy. Main-crop paddy production was expected to reach 25 million tonnes this year, but this could now be cut by 6-7 million tonnes. As a comparison, Thailand produced about 30 million tonnes of rice and exported about 9 million tonnes in 2010. A production loss of 6-7 million tonnes would be equivalent to about 22 per cent of total annual rice production.

The effect on inflation is likely to be two-fold: from food price increases, such as for rice, due to production losses; and from food price increases due to hoarding. Rice constitutes about 1.8 per cent of weight in the CPI basket. Local rice traders have estimated that rice prices could rise by 20-25 per cent because of the floods and the government's rice mortgage scheme. A 20-25 per cent increase in rice prices alone could add between 0.4-0.5 percentage points to headline CPI in 2011, all else equal.

The flood crisis has also affected Thailand's tourism sector. Among the top tourism areas in Thailand are Bangkok, Hua Hin, Phuket, Krabi, Chiang Mai, Koh Samui and Pattaya, to name but a few. The fourth quarter cool, dry season is typically the peak tourist season. With areas like Ayutthaya fully inundated and Bangkok also facing a flood threat, tourist arrivals are likely to be temporarily hampered in the last quarter of 2011.

Anecdotally, we can all see that there have already been tourist booking cancellations. Tourism revenue makes up about 5-6 per cent of GDP. Sensitivity analysis would show that a decline of 10-30 per cent in tourist arrivals for one to three months would shave between 0.2-0.6 percentage points from GDP growth.

Looking ahead, there are certain things we all should be watching out for:

1. The magnitude of the flood impact on Bangkok, which accounts for 24 per cent of Thailand's GDP. So far, only the western and eastern parts of the capital have been affected, sparing the major commercial area of central Bangkok.

2. Whether the floods will affect other industrial bases such as Rayong on the eastern seaboard, which has so far been spared.

3. Policy measures to alleviate flood conditions and the pace at which the flood waters recede. This will affect how quickly the repair work can start and industrial operations can normalise. Indeed, major research houses have estimated that the flood impact could take 1.0-1.5 percentage points off Thailand's pre-flood crisis 2011 GDP growth forecast of 4 per cent, given the plant shutdowns, agricultural losses, and tourism impact.

The flood crisis since September will mean that the fourth quarter of 2011 will be hard hit, with expected growth in the range of -1.0 per cent to 1.1 per cent year-on-year. Furthermore, the short-term price impact from agricultural losses and hoarding means inflation may rise to the vicinity of 5 per cent by year's end.

Dr Chodechai Suwanaporn is executive vice president of economics and energy policy at PTT Public Company Limited. [email protected].

-- The Nation 2011-11-03

[Moruya]

The country has been hit hard for sure. It will continue into 2012 and there is a real risk that foreign investors will look to relocate - something that is tough to do when there are wide-sweeping increases to the minimum wage because of public outcry but very easy after floods.

[taff33]

Could some one explain to me how they say Rayong has been spared the affect of the Bangkok floods, or do they just mean the knock on effect.

[soomak]

Finally someone who seems to know what he is talking about, and speaks to the point. And his numbers seem to be accurate.

Regarding the economic impact:

Everybody is talking about the impact to this year's GDP (how much income would be generated this year), so the effect seems small (1.5 - 2% of GDP).

That includes the production being stopped at inundated industrial estates, tourists canceling or shortening their vacations, rice crops being lost, etc.

However:

They fail to take into account the damage and loss of property by so many individuals and companies. When water gets into a factory, it causes damage to machines, computers and basically everything.

The same when a house is flooded., and many people are not insured at all.

So probably the real damage is much more than 2% of GDP, although really hard to calculate right now when everything is under water.

[sparebox2]

Rayong is not directly affected. But indirectly it is hit just as hard.

Drinking water is hard to buy, as they are all been bought up for various reasons. One of them is to resell to bangkok people.

[puntmeister]

Rayong is not directly affected. But indirectly it is hit just as hard.

Drinking water is hard to buy, as they are all been bought up for various reasons. One of them is to resell to bangkok people.

Drinking water is hard to buy because it is being stockpiled by consumers, but also because there have been interuptions in production and distribution.

Water isn't the only commodity hit with production/distribution problems - baby formula, for example, is in short supply.

Although the economic damage from disrupted auto parts is real enough, humans can survive for quite awhile without pick-up trucks. Babies don't go

long without milk though.

[newermonkey]

Rayong is not directly affected. But indirectly it is hit just as hard.

Drinking water is hard to buy, as they are all been bought up for various reasons. One of them is to resell to bangkok people.

I use one of the countless water machines found every 5th or 6th shop-house front. (everywhere) 4Baht for 5 ltrs. no problem.

[bridge2bridge]

Rayong is not directly affected. But indirectly it is hit just as hard.

Drinking water is hard to buy, as they are all been bought up for various reasons. One of them is to resell to bangkok people.

I use one of the countless water machines found every 5th or 6th shop-house front. (everywhere) 4Baht for 5 ltrs. no problem.

In BKK a lot of these are out of order?

[softgeorge]

The country has been hit hard for sure. It will continue into 2012 and there is a real risk that foreign investors will look to relocate - something that is tough to do when there are wide-sweeping increases to the minimum wage because of public outcry but very easy after floods.

Yes but the whole incident has not effected the baht at all it still remains very strong.

[anterian]

Rayong is not directly affected. But indirectly it is hit just as hard.

Drinking water is hard to buy, as they are all been bought up for various reasons. One of them is to resell to bangkok people.

I use one of the countless water machines found every 5th or 6th shop-house front. (everywhere) 4Baht for 5 ltrs. no problem.

In BKK a lot of these are out of order?

Ever wonder how often they check and clean the filters?

[Gweiloman]

In some perverse way, while some companies are very hard hit and will suffer significant losses, the rebuilding and reconstruction will benefit other SME's, thus mitigating the impact on GDP to a certain extent (please no inane comments about politic and politicians here. There's enough of that rubbish on other threads).

I remember economic case studies while at university about how Germany and Japan which were utterly economically destroyed after WW2, only to become economic powers, driven by the necessary subsequent rebuilding. For the sake of Thailand, let's hope that we can see something along those lines, which will benefit the general populace.

[khaowong1]

But, it wasn' t Germany and Japans money that rebuilt those two countries. Who's going to put up the money to rebuild Thailand?

[Gweiloman]

But, it wasn' t Germany and Japans money that rebuilt those two countries. Who's going to put up the money to rebuild Thailand?

I think there will be plenty of investors lining up to do so. It's almost a certainty that the returns will exceed anything the financial markets will return over the next few years.

[beppi]

They fail to take into account the damage and loss of property by so many individuals and companies. When water gets into a factory, it causes damage to machines, computers and basically everything.

The same when a house is flooded., and many people are not insured at all.

So probably the real damage is much more than 2% of GDP, although really hard to calculate right now when everything is under water.

While the impact of closed-down factories temporarily lowers GDP, everything spent on recovery INCREASES it later!

That's why a nice catastrophe, just like any accident or other mishap that needs expenditure to recify, is good for the economic statistics.

Perverse, but true! (It's called capitalism ...)

[Markaew]

Rayong is not directly affected. But indirectly it is hit just as hard.

Drinking water is hard to buy, as they are all been bought up for various reasons. One of them is to resell to bangkok people.

I use one of the countless water machines found every 5th or 6th shop-house front. (everywhere) 4Baht for 5 ltrs. no problem.

In BKK a lot of these are out of order?

Ever wonder how often they check and clean the filters?

Reverse osmosis filters generally stop flowing water when they are dirty. If it is flowing water it's probably ok unless the filter is physically damaged.

[waza]

Finally someone who seems to know what he is talking about, and speaks to the point. And his numbers seem to be accurate.

Regarding the economic impact:

Everybody is talking about the impact to this year's GDP (how much income would be generated this year), so the effect seems small (1.5 - 2% of GDP).

That includes the production being stopped at inundated industrial estates, tourists canceling or shortening their vacations, rice crops being lost, etc.

However:

They fail to take into account the damage and loss of property by so many individuals and companies. When water gets into a factory, it causes damage to machines, computers and basically everything.

The same when a house is flooded., and many people are not insured at all.

So probably the real damage is much more than 2% of GDP, although really hard to calculate right now when everything is under water.

If you read the article he doesnt say a 1 -2% drop in GDP but a 1-2% drop in GDP growth. It seem a very unlikely result from such massive damage. PS: There is no profit in agricultural losses

[Markaew]

But, it wasn' t Germany and Japans money that rebuilt those two countries. Who's going to put up the money to rebuild Thailand?

Japan, for example, had a new constitution imposed on it and in my opinion made it the great country it is today. That would be great for Thailand. They could have a real government with a different country looking over their shoulder to ensure the did not deviate. What a great idea! Corruption, indecision, and directionless Thailand could be on a course of lasting prosperity with real respect in the world community.Thailand brags they have never been colonized. That is their whole problem.

Edited November 4, 2011 by Markaew

[IAMHERE]

Rayong is not directly affected. But indirectly it is hit just as hard.

Drinking water is hard to buy, as they are all been bought up for various reasons. One of them is to resell to bangkok people.

I use one of the countless water machines found every 5th or 6th shop-house front. (everywhere) 4Baht for 5 ltrs. no problem.

When you think that machine had a filter changed? When if ever has any maintenance been done on that machine. Why would you even suspect any care or intelligence was used installing the machine in the first place. I'd think about boiling that water myself.