Bhot jolokia is perhaps the hottest naturally occurring edible substance. It rates about a million on the Scoville scale (Tabasco sauce is rated at 5,000). This is about it for interesting diversions. The analysis in this post rests on several assumptions and there are plenty of references to numbers. We do not want to be lost in diversions ...
Disclaimer: The figures here are approximate. While the general argument stands, I do not recommend using these figures for your professional work.
Yours, looking forward to spring Analyst,
AA
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Disclaimer: The figures here are approximate. While the general argument stands, I do not recommend using these figures for your professional work.
We engage in what-if analysis, to isolate the vulnerability of Thailand’s export and GDP growth rates to an (hypothesized) slowdown in the US [1] that begins in 4Q2011.
Our problem is ill-defined though simple to state. How would a slowdown in the US from its baseline level of economic activity impact Thailand?
Let us first look at transmission mechanisms of a US slowdown. The US weighs heavy in world affairs. Therefore the channels of direct impact are many. For example, one set of channel is the choices the US makes with regards to deficit spending, monetary policy, trade policy and defense policy [2]. Its position on RMB appreciation would constitute another channel. The non-governmental channels are decisions its consumers make on discretionary spending and the choices its corporations make with regards to capacity expansion plans and inventory levels. Then we have secondary channels impact such as anticipatory cut-backs in other major economies, changes in risk appetite of international investors, and so on.
In our analysis, we assume that all other economies continue to (magically) chug along unperturbed. Unrealistic I admit, but so are most isolated impact studies. Besides, the results still shed useful light on the linkages between the US and the Thai economy and give a lower bound on the impact of a US slowdown on Thailand.
We focus on the trade channel alone. We think that the short-run economic impact on Thailand of a potential adoption of trade-distortive measures by the US will be marginal. Therefore we assume that trade levels will continue to be determined by supply-demand forces and relative total factor productivity.
Impact of Contraction in US Imports
Reducing dependence on exports to the US Thailand’s bilateral exports to the US stood at 22.5% of its total exports in 1998 [3] (Chart 1). Over the past decade however Thailand has reduced its exports dependence on mature markets, including the US. Last year, the US accounted for only 10.5% of its total exports (Chart 2).
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| Chart 1: Declining trend in Thailand’s direct exports to mature markets |
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| Chart 2: Composition of US imports from Thailand |
Sharp fall in machinery exports Thailand’s machinery export comprised 44% (USD10bn) of its bilateral exports to the US in 2010 and these remain vulnerable to a US slowdown. In 2009 Thailand’s machinery export contracted by 25%. The contraction in machinery export to the US was sharper at 36%. In the event of a slowdown in the US we expect machinery exports to fall by 20% (USD2.0bn) - the downside risk mitigated by the fact that the consumer and business sentiments in the US have remained cautious throughout 2010 and is expected to continue to remains so through 2011.
No effect on agricultural exports We do not expect a material impact on the demand for Thai agricultural exports to the US for the following reasons:
- Thai agricultural products are competitively priced and the basket comprises mainly of food products; the demand for which is sticky in the short-run.
- While material in absolute terms [4], USD22.3bn (2010), Thailand’s agricultural exports are a small fraction of the global international trade in agricultural products. This slack can be easily picked up by other markets.
- The price of agricultural commodities have maintained a general upward trend throughout 2010 despite prospects of uncertain recovery in the US, deflation concerns in Japan and sovereign debt and banking sector problems in the Eurozone. The two main reasons underpinning the performance of commodities are strong demand from China and India and the channelization of funds from the second round of quantitative easing in the US into the commodity markets. We expect these trends to continue through 2011.
No effect on fuel/chemical exports Thailand’s chemical and fuel exports were 13.3% of its total global exports in 2010. The main destination of these exports is however regional and their price dynamics will be impacted more by domestic demand in China, India, Indonesia and Malaysia, investor preference for the commodity asset class and inflationary expectations in the emerging markets [5] than by a slowdown in the US.
Effect on ‘Other’ exports Under the assumption that direct imports by the US for products classified as ‘other’ contracts by the same fraction as import of machinery, we expect Thailand’s direct exports to the US to further contract by USD1.6bn.
Thus the direct impact on Thailand’s bilateral exports to the US due to a US slowdown will be –USD3.6bn.
Impact of contraction in re-exports to the US
Hong Kong and Singapore are the two largest re-export centers for Thailand’s exports. In 2010, 69.8% of Thailand’s exports (USD7.5bn) to Hong Kong and 44.3% of its exports to Singapore (USD4bn) were re-exported [6]. Exports to the US from Hong Kong fell by 44.9% in 2009 and that to the US from Singapore fell by 13.6% in 2008. Assuming that percentage contraction in re-exports from these countries remains the same as contraction in exports from these countries under a US slowdown scenario, Thailand’s exports will fall by USD3.3bn due to reduction in re-exports from Hong Kong and by USD0.6bn due to reduction in re-exports from Singapore. The total contraction due to contraction in re-exports will be USD3.9bn. The composition of the tri-lateral trade suggests that the major brunt will be borne by the machinery sector.
Tourism Impact
Tourism represents 6.5% of Thailand’s GDP. However spending by tourists from the US represents just about 5% of all tourism revenues and therefore, the impact of US slowdown on tourism earnings will be insignificant - a 50% fall in revenues from tourists from the US will contribute to a contraction in foreign exchange earning of USD470M. In fact over the past five years perception of risk of political violence in Bangkok has been the single most important and dominant risk factor for the tourism industry; the impact of economic slowdown has thus been much smaller in comparison.
How much do Thailand’s earnings contract?
Total fall in earnings directly attributed due to contraction in US imports alone of goods or services from Thailand in the event of a slowdown in the US will be USD8bn (2.8%) of Thailand’s 2010 GDP.
How much does Thailand’s GDP contract?
The value-addition in machinery products is small as the items are either low-tech or the technology royalty is accumulated elsewhere. Besides, raw material such as steel and rare earth metals are mostly imported and Thailand imports over 78.0% [7] of its fuel requirements. Assuming a 25% value-addition in machinery products, this translates to GDP impact of US$1.5bn. Assuming a 20% value-addition in export products classified as ‘Other’, the GDP impact is –USD320M. A tourism value-addition of 60% would translate into a further GDP impact of –USD282M. Thus, the GDP impact of a US slowdown on Thailand through the channel we have mentioned is –USD2.1bn, or –0.73% of Thailand’s 2010 GDP.
[1] of a magnitude similar to the one experienced in 2009 in terms of Y-o-Y GDP growth rate
[2] The US spends more on defense than the rest of the world combined. A reduction in defense budget may lead to flare-ups in the Persian Gulf or facilitate the (re)emergence of competitive domestic politics in non-democratic Middle Eastern societies and trigger a spike in oil prices. In the context of the current economic environment, this will send a stagflationary shock-wave across the globe.
[3] the year following the Asian Financial Crisis (AFC)
[4] 13.4% of Thailand’s exports in 2010
[5] which are high and are likely to continue to remain so throughout 2011
[7] 70% of the total energy generation in Thailand is from gas-fired plants and 8.2% by high quality coal – the overwhelming fractions of both of which are imported.
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