The export data for Thailand turned south (again) in June, killing any hope for an export revival in the first half of 2012. The US dollar value of overseas shipments in June contracted by 4.2 percent from a year earlier, and if we exclude non-value adding gold trade, the contraction worsened to 5.5 percent.
Many economists had been hoping that May’s upside surprise of 9.1 percent export growth (excluding gold) would be a sign of an export revival. And some officials continue to express optimism about the second half of the year, hoping for record-breaking growth rates in the fourth quarter (totally meaningless given the very low post-flood base of a year earlier) to bring full-year growth back up above 10 percent. We deem it unlikely.
For the first half of the year, exports without gold contracted 1.3 percent overall, while Asean was the only destination with which Thailand recorded positive export growth with every month, bringing the six-month growth rate at 10 percent. The major drag, to no one’s surprise, was exports to European Union, off 12.7 percent over the first six months.
Almost every indicator points to the gloomy outlook for Thai exports persisting. The signs include slowdowns in major trade partners’ economies _ in China, the US, Japan and debt-incapacitated Europe _ to contractions of similar export-oriented economies in Asia such as Taiwan and Singapore. It would be difficult to imagine that Thailand alone could be more resilient in escaping the global slowdown.
TMB Analytics projects that exports in 2012 will grow by around 7 percent from last year, and even that may be optimistic. Our figure is in line with the latest revised forecast from the Bank of Thailand, but is about half the rate projected by the Commerce Ministry, and two-thirds that of the finance ministry.
But falling exports are not the sole worry this time around. Imports have been at an all-time high. Benefiting from strong post-flood reconstruction and rehabilitation investment, imports in the first half of 2012 grew 10 percent, putting the trade deficit at an all-time high of $10 billion for the first six months, higher than in any six-month period for the past 21 years of data. One may argue that this year may be a one-off event, like the trade deficits we observed in 2005-06. The difference, however, was that fuel import plus oil prices were the factor then, while capital goods imports are the factor now.
We expect imports to grow by around 11.1 percent this year, propelled by domestic spending. Our further analysis shows that this year is the first year since the 1997 Asian crisis that the trend in import data has shot past the trend in export data. And unlike the monthly trade statistics that bounce around up and down, trends have inertia and will only move when the direction of data is meaningfully changed. We can expect the trade deficit to be with us for the duration of the year. So, yes, unfortunately, net exports will be a burden for our GDP growth this year, which we project to barely reach 5 percent.
It would sound rather trite to end the point here. It is Economics 101 at best to assert that trade deficits undermine GDP growth, as we export less, while continuing to import for consumption. But there is more to the story. This is the one with huge implications, which deserves more attention in our view.
The liquidity of the Thai banking system is strongly tied to the trade balance. Even a cursory glance at trade data reveal a clear correlation between the two. Whenever the trade balance plummets, liquidity also drops, and vice versa. This is a somewhat subtle finding but should come at no surprise intuitively.
For simplicity’s sake, let’s look at the case in which exports accelerate. This means more foreign currency receipts in the hands of our exporters. Exporters naturally have to convert the sums into Thai baht with banks inside the kingdom. This implies stronger demand for the baht vis-a-vis foreign currency in the onshore market.
Since most Thai banks virtually have negligible foreign assets and liabilities on their balance sheets, they have little incentive to hold foreign currency, other than for clients’ trade and financial transactions. Hence, the surge in demand for baht will be passed on by banks to the Bank of Thailand. If the central bank aims to stabilise the dollar/baht exchange rate, it would appease this excess demand by selling the baht while buying in, say, US dollars (with the innocuous assumption of no sterilisation).
This very act provides a direct boost to the domestic currency supply to the economy. Of course, Thai commercial banks are the main counterparty to the central bank in this operation. In effect, the banks unload foreign currency to the central bank, which ultimately puts it into the country’s foreign reserves, and receive baht in return.
Needless to say, this directly translates to more liquidity in the banking system. Simply put, the Thai business-as-usual of exports and imports can influence the amount of money available to banks.
Tightening liquidity in the banking system poses considerable risk to businesses and the economy. Certainly, banks can keep up the pace of their lending, provided they can successfully raise deposits. However, this is rather wishful thinking given the current market, where commercial and state-owned banks and the government itself are competing aggressively for funds. A flock of promotional deposit campaigns on TV right now is good testament as to the banks’ dire need for deposits.
With gloomy tidings from the West and the Far East, this year’s trade balance will likely continue on a deficit path. This will continually drain liquidity from Thai banks. Bank lending is the economy’s lifeline, channeling idle funds from savers to borrowers. With a stable policy interest rate set by the Monetary Policy Committee, we may not see lending rates adjusted upward. But without liquidity, don’t count on those funds reaching the hands of borrowers.