Short-term Economic Impact

The immediate economic impact of the tsunami was felt most acutely in the tourist industry, and to a lesser extent in the fisheries sector. The extensive damage to buildings— particularly tourist hotels—and the negative impact on potential tourists of the traumatic events associated with the death and destruction following the tsunami was expected to have a substantial negative effect on the overall economy. The consequences of an absence of tourists for even one year would have been devastating for both the tourist industry and the wider regional economy because each occupied hotel room translates into many related economic activities, generating employment for both local and migrating workers.

The initial assessments of the impact of the tsunami on the Thai economy can be gauged by the movements in the Thai stock market. Stock prices reflect investor expectations about the present value of the expected future stream of dividend payouts derived from corporate profits. The tsunami had an immediate impact on the Thai stock market. The overall security exchange index (SET) fell during the first few trading days after the disaster, reflecting concerns about the longer term impact on the Thai economy (Figure 3 [ PDF 107.4KB | 1 pages ]). But market participants, after this initial (over)reaction to the tsunami, revised their assessments and concluded that the economy would not suffer much from the tsunami in the long term. The SET index rebounded within a week, though the stock price index relating to the tourism industry was depressed longer, faced with a continuous bombardment of bad news. Nevertheless, as the market reassessed the damage even the tourism industry index recovered within a month. By the end of January 2005 it had even exceeded its pre-tsunami level, rising in line with the SET index.

This investor assessment of the long-term impact of the tsunami on the economy was, however, more optimistic compared with the early assessments of most official and private sector analysts. As already mentioned, JP Morgan predicted a zero growth rate for the first quarter of 2005, while both JP Morgan and Morgan Stanley revised downward their annual growth forecasts by 0.3 per cent. The Bank of Thailand also projected a reduction of annual GDP growth by 0.3 per cent due to the tsunami, even after taking into account the growth momentum of the last quarter in 2004, and expected compensating effects of soft loans and other assistance. In the worst-case scenario, if no tourists were visiting the affected areas, GDP was projected to decline by 1.3 per cent.

The tourism industry in the affected provinces experienced a significant negative impact in the immediate post-tsunami period. This was caused primarily by a fall in tourist arrivals, rather than because of the damage to hotels and other tourist infrastructure (Table 6 [ PDF 73.1KB | 1 pages ]). The striking reduction was most evident in the occupancy rate, but hotels in the three provinces also experienced on average a shorter duration of stay. The key issue was not so much the rebuilding of tourism infrastructure—important as it was—but how to bring back the tourists who had been scared away by the tsunami.⁵

The first quarter growth rate of 2005 turned out to be a robust 3.3 per cent, but the annual growth rate fell to 4.5 per cent, significantly lower compared to the 6.2 per cent growth achieved in 2004, and much lower than what was predicted by analysts. ⁶ The current account recorded a deficit of $6.4 billion in the first seven months of 2005, compared with a surplus of $3.4 billion a year earlier.⁷ Inflation rose from 2.7 per cent in 2004 to 4.5 per cent in 2005 and the trade deficit widened to 8.5 per cent of GDP. The current account surplus of 1.7 per cent of GDP in 2004 turned into a 4.4 per cent deficit in 2005.

However, the downturn in tourism alone could not have caused the very large fall in the GDP growth rate. The tourism industry contributes only 6 per cent to Thai GDP and the six tsunami-affected provinces accounted for only 30 per cent of Thailand’s total tourism income. The tsunami did not destroy all hotels (or the fishing industry) in the six provinces. Moreover, other tourist attractions on the east coast of the Gulf of Thailand remained intact and the industry as a whole proved to be resilient. But in 2005 the Thai economy was badly affected not only by the tsunami but also by drought, ongoing insurgency in the south, rising oil prices, and a slowdown of global trade. The main cause of higher inflation was high oil prices. The combined effect of these problems was reflected in a sharp deterioration in the trade and current account. According to several estimates, the tsunami was probably responsible for only a 0.3 per cent reduction in Thailand’s GDP growth in 2005.

Thus the early predictions tended to exaggerate the immediate adverse economic impact of the tsunami on the Thai economy. Arguably, the overly pessimistic forecasts made in the immediate aftermath of the tsunami may have had the unintended consequence of eroding consumer and business confidence and depressing business activity, contributing to the aggravation of the economic slowdown.

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