asian economic growth slowing?

Thailand Loses Steam As Oil, Exports Take Toll

By PATRICK BARTA
June 3, 2005

BANGKOK -- Economic growth is slowing rapidly in parts of Southeast Asia, highlighting the region's high vulnerability to stiff oil prices and weaker demand overseas for its products.

The slowdown is particularly evident in Thailand, where government officials have called a high-level meeting with investment bankers later this month to explain plans to reignite growth through massive spending on infrastructure projects. That meeting comes after numerous banks and private analysts have slashed their forecasts for economic growth this year, in some cases to as low as 4% after an expansion of more than 6% last year.

The gloomy news has continued to snowball in recent weeks. In mid-May, GMM Grammy PCL, Thailand's largest music company, said first-quarter profit tumbled 73% from a year earlier in part because of weaker-than-expected consumption. Last Tuesday, the government said its April current-account balance -- the broadest measure of a country's trade in goods and services -- posted its largest monthly deficit in nine years due to costly oil imports and slower electronics and agricultural exports.

Growth could weaken even further, analysts warn, as Thailand reduces subsidies it has used to keep diesel prices low during the past year.

Thailand isn't the only Southeast Asian country showing signs of slowing. Singapore's economy contracted at an annualized, seasonally adjusted rate of 5.5% during the first quarter compared with the previous quarter, as pharmaceutical and electronics companies slowed down production. The Philippine and Malaysian economies also are growing less rapidly than last year.

Southeast Asia's largest economy, Indonesia, is growing faster than a year ago. But analysts attribute that largely to higher levels of domestic and foreign investment after Susilo Bambang Yudhoyono, who is liked by many executives, became president last October.

To many analysts, the Southeast Asian slowdown isn't particularly surprising, or even troubling, given the number of challenges the region has had to confront. This is particularly true for Thailand, which has had to cope with the after-effects of December's tsunami and a recent drought, in addition to waning demand for its manufactured goods.

More broadly, Southeast Asia's heavy reliance on fuel-guzzling factories means it is more vulnerable to oil-price swings than places like the U.S., where services and consumer spending make up a bigger part of the economy.

"Frankly, given the amount of shocks [Thailand] has been through, I think growth has held up pretty well," says Adam Le Mesurier, an economist at Goldman Sachs in Singapore. Growth in Southeast Asia "is still better than the rest of the world," adds David Cohen, an economist at Action Economics in Singapore.

Indeed, many economists predict the region will pick up steam again later this year if oil prices continue to ease, or if the U.S. decides not to raise interest rates much further, which could lead to greater demand for Asian exports.

Even so, economists say the latest slip in Southeast Asia highlights how difficult it will be for the region to recapture anything close to the momentum it had, prior to the 1997-98 financial crisis, when its economies were the darlings of the investment world. Since then, China and India have taken over as Asia's brightest stars and most attractive destinations for foreign investment.

At the same time, much of Southeast Asia has become more reliant on exports as a driver of growth, meaning the region's economies now are more likely to rise and fall with changes in global demand.

"We are probably even more prone to global cyclicality" than in previous years, says Supavud Saicheua, an economist at Phatra Securities, an investment bank in Bangkok. "We are actually more volatile."

During the two decades prior to the 1997 start of the financial crisis, Thailand averaged growth of 7.9% a year, and only once did growth slip below 5%, when it was 4.6% in 1985. This was despite the fact the world economy endured several slow patches during that time and the U.S., a key source of demand for Thai products, suffered three recessions.

In recent years, by contrast, the gap between Thailand's growth rate and the rest of the world has narrowed. The same is true across Southeast Asia, suggesting that the region's growth patterns are starting to look a lot more like those in the developed world than in the faster-growing emerging markets of China and India.

This phenomenon is partly a result of more-conservative policies adopted by some Southeast Asian governments to prevent the kind of overinvestment that had spawned problems in the 1990s. In Thailand, for instance, the government has tightened standards for bank credits to ward off speculative lending. Officials also have said they will take steps to prevent the country's current-account deficit from growing to more than 2% of gross domestic product. In 1996, Thailand's current-account deficit swelled to 8% of GDP.

For the first four months of this year, Thailand's current-account deficit is running at about 1.5% of GDP.

Such policies, while generally endorsed by economists, are coming under some pressure now that growth is weakening so quickly. In Thailand, some economists would like to see the government allow an even bigger current-account deficit, as many believe the country needs growth of at least 5% a year to create enough jobs for its rapidly expanding labor force.

"Four percent [growth] is too weak" for Thailand, says Bill Belchere, the chief Asia economist at Macquarie Securities in Hong Kong.

Some analysts are hoping Bangkok's plans to spend heavily on infrastructure will tide the country over until global export demand rebounds or oil prices ease further. Last week, the Thai government said it intends to spend more than $40 billion in the next five years on rail, mass transit and other infrastructure projects.

But the government could be forced to scrap some of those plans if it doesn't allow bigger deficits, economists warn. Many analysts remain skeptical that many projects will get off the ground.

"Realistically speaking, I don't expect actual money [from the infrastructure projects] to hit the economy until the fourth quarter of next year," says Sriyan Pietersz, an analyst at J.P. Morgan in Bangkok. He says he believes economic forecasts" have to come down some more," because most analysts have been expecting infrastructure spending to start boosting the economy in 2005.