Impacts of the Subprime Crisis on the Thai Economy

In the current subprime crisis, it is fortunate that the Thai financial system was not directly affected in a significant way. One small bank had to be re-capitalized because of exposures to toxic assets. Most other banks avoided exposures to these assets or were exposed just marginally. There were certainly people going round trying to sell the various Collateralized Debt Obligations (CDOs) to financial institutions. That the Thai financial system avoided falling prey to these toxic assets must be related to the lessons that have been learned from the 1997 crisis. From the painful experiences of that crisis, the Thai financial sector is now much more risk averse than before. Also being a less sophisticated financial system than those in the West, there was little understanding of what these debt instruments were, and because of the risk aversion, financial institutions avoided them.

The stock market was of course affected in line with stock markets around the world. As financial markets in the advanced economies experienced liquidity crunches, there was a massive liquidation of liquid investment assets in the emerging markets and a massive outflow of capital. Fortunately, Thailand had more than sufficient foreign reserves to cover for this capital outflow, and depreciation pressure on the exchange rate could be managed fairly easily. Other countries were not so fortunate, and some countries experienced a severe depreciation of their local currency. This shows that it is no longer sufficient to think of having enough foreign reserves to cover the current account and short-term debt; reserves also need to cover other contingent liabilities, such as foreign holdings of stocks and bonds that can be quickly liquidated, converted to foreign currency, and then taken out of the country.

Even though the financial system managed to avoid the direct impacts of the subprime crisis, the country is now seriously affected by the crisis indirectly through the trade channel. This has become very apparent since the last quarter of 2008. Prior to that, Thai exports were still growing rapidly, at more than 20% year on year in US$ value. Starting in November 2008, export growth turned negative and has been negative ever since.

As an economy highly dependent on export of goods and services (as was discussed earlier), the Thai economy has now been hit hard by the global recession and the resulting decline in world trade. After exports grew by more than 20% in the first three quarters of 2008, exports declined by about 9.4% in US$ value in the fourth quarter of 2008 (Table 2 [ PDF 121.9KB | 1 page ]). Real GDP declined by 4.2% in that quarter, making the overall growth for 2008 to be a mere 2.6 %, much lower than the forecasts of around 4-5% before the impacts of the subprime crisis were evident. The picture was even worse in the first part of 2009. Exports fell by about 20% in the first quarter of 2009, and real GDP dropped by 7.1%, which is getting close to the level of declines seen after the onset of the 1997 crisis.

One of the indicators that points to a shrinking economy is the heavily depressed capacity utilization of manufacturing productions. Figure 11 [ PDF 121.9KB | 1 page ] shows that capacity utilization rates fell across-the-board since the beginning of 2008 and particularly since around the end of the third quarter of 2008. As expected, the firms or industries more dependent on the export market experienced deeper production declines. Among highly export dependent firms (exports greater than 60% of total sales), capacity utilization is now less than 50%. Other indicators also move in the same direction; with private investment, private consumption, employment, among others, all falling.

Obviously, the growth prospects of the Thai economy will depend on the prospects for growth and trade at the global and regional level. While there are signs every now and then that the western economies may begin to bottom out in the not too distant future, overoptimism about this prospect would be rash. As in the case of the 1997 crisis, even if the economy bottoms out, this does not mean that the problems are over. As indicated earlier, Thailand bottomed out five to six quarters after the start of the crisis, but it took five years before output returned to precrisis level. The decline in the nonperforming loan ratio to less than 10% took even longer; about eight years. Thus, in the case of the subprime crisis, a quick return to business as usual appears to be out of the question.

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