Thailand's flood crisis and the economy

18 Nov, 2011

The government, central bank and economists have slashed their economic growth forecasts for the year.

The government has promised 130 billion baht ($4.2 billion) to help the recovery effort, but rebuilding and improvement of defences will require huge sums.

Below is a summary of the impact on Southeast Asia's second-largest economy and how the government is responding.

IMPACT ON GDP AND INFLATION

The central bank slashed its 2011 economic growth forecast to 2.6 percent from 4.1 percent on Oct. 28 and says the economy is likely to shrink 1.9 percent in the fourth quarter from the previous three months. It may review its forecasts this month. .

Central bank Governor Prasarn Trairatvorakul said the output loss could reach 200 billion baht..

The university of the Thai Chamber of Commerce sees damage of 300-400 billion baht and GDP growth of 1.5-2.5 percent this year.

Inflation stood at 4.19 percent in October but food prices were almost 10 percent higher than a year before and supply problems may continue to cause price distortions.

GOVERNMENT SPENDING

Ministers have talked about 600-700 billion baht for short- and long-term flood management plans, but little has been said as yet about the sources of funding.

Virabongsa Ramagura, head of a flood committee set up by the government, suggested some could come from the country's $182 billion in foreign reserves but Governor Prasarn has made it clear these must be held in secure investments.

However, the Bangkok Post has reported that the central bank might be open to swapping some reserves for government bonds.

This week the cabinet approved more than 18 billion baht for rebuilding Don Muang airport, roads and educational centres.

It has agreed to a bigger budget deficit of 400 billion baht in the current fiscal year from Oct. 1, up from 350 billion. Public debt is expected to rise to an estimated 43.5 percent of GDP this fiscal year from 40.22 percent as of August.

The government has helped industry with tariff-free imports of machinery and raw materials to be used in export goods, to replace items damaged by the floods.

INTEREST RATES

The Bank of Thailand decided to leave its policy rate unchanged at 3.50 percent on Oct. 19, pausing because of the economic situation after nine increases since July 2010 to tame inflation.

Governor Prasarn told Reuters last week he saw room to adjust rates to help businesses, supporting expectations of a rate cut at the meeting on Nov. 30.. Until now, most economists had expected the rate to be left steady.

Against that background, two-year bond yields have fallen by 30 basis points to 3.27 percent since last month and five-year yields by 38 bps to 3.25 percent.

IMPACT ON FACTORIES AND OUTPUT

Some factories in industrial estates in central Ayutthaya province, which had been forced to close by flooding in October, are back in business, while others are being cleaned up now water has receded. Two estates in greater Bangkok are still in danger of flooding but latest reports say they may be spared.

Despite the improvement, it may take weeks for some firms to get back to work so supply disruptions will continue.

The electronics and car sectors have suffered in particular. Thailand is a regional hub for the world's top car producers, and even if most of the big assembly plants are away from the floods, car part firms have been affected to varying degrees.

Honda said the floods had affected its production on four continents. But it resumed some output on Monday along with Nissan and Mazda.

Thai auto sales fell 40.5 percent in October from a year before and are bound to fall further, according to Toyota.

Thailand is the world's number two maker of hard disk drives. World prices are rising because of the disruption in Thailand, and tech firms may need 2-6 months to recover.

Factory output fell 0.5 percent in September from a year earlier and is bound to suffer more..

RICE, BANKS, SHOPS, TOURISTS

Thailand is the world's top rice exporter and the government has estimated that it could lose a quarter of its main crop due to the floods. The government says paddy output could fall to 19 million tonnes from 25 million previously.

The number of bank branches closed by the floods dropped to 483 from more than 630 last week after some reopened their doors. But banks expect loan growth to slow this quarter.

Top retailer Central Pattana said occupancy rates at its hotel in Bangkok had dropped to about 60 percent from 70 percent normally. But those in Pattaya and Hua Hin were higher than usual at 80-90 percent as tourists and Thais escaped the floods.

The floods may cut foreign tourist arrivals by 1 million to 18.5 million this year, meaning a loss of 50 billion baht, according to the Tourism Council of Thailand

Central bank Deputy Governor Suchada Kirakul expects foreign tourists to be 700,000-800,000 below its 18-19 million target.

Don Muang airport, used by budget airlines for domestic flights and by private planes, has been closed since Oct. 25. The main international airport, Suvarnabhumi, is still open.

Copyright Reuters, 2011

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