Monday, July 20, 2009

Thai Exports: Stabilization, Less Scorching?

The AP reports that Thailand's exports fell 25.9% (yoy) in June, slightly less than the 34.7% drop in May. This could be evidence of greater stabilization and a bottoming out, though I would caution throwing around the now cliche term, "green shoots". Ultimately, a real sustained recovery will depend on improvements in key international and regional markets, given Thailand's dependence on exports for growth. In 2008 exports accounted for 76% of GDP (AustGov). In particular, it will depend on rising demand for Thai electronics, automobiles and parts, electrical appliances, and higher prices for rice and rubber. Anecdotal evidence shows mixed signs in these sectors according to Bloomberg,

Exports, which make up about 60 percent of the economy, haven’t risen since October. The price of rice, of which Thailand is the world’s largest exporter, last month averaged $581 a ton, 33 percent less than a year ago.

“We see export orders in the next three months and that lessens the prospect that the economy will worsen,” Amara Sriphayak, a Bank of Thailand official, said June 30.

Orders to electronics, computer and food producers have improved, Rachane Potjanasuntorn, director general at Export Promotion Department said today, adding the outlook for the automotive and jewelry industries remains unclear.
It should be noted that this analysis does not take into account other important factors like Thailand's precarious political situation or activities in the tourism sector. The political situation has calmed in the past two months, but it still has the potential to explode at any moment, as the country's power-brokers and colored factions still remain staunchly divided on important issues. As for tourism, which accounts for roughly 7% of GDP, the situation remains heavily clouded by panic over the A(H1N1) flu, negative press about airport security, the lingering fall out from the yellow shirt take over of the airport at the end of last year, and general political uncertainty.

What is happening in the US and China, the two countries cited as the cause of the "turn-about" in exports (see here and here)? In the US, Bloomberg reports positive signs on the economy,
The index of U.S. leading indicators rose in June for a third consecutive month, reinforcing signs the economy may be emerging from the worst recession in five decades.

The Conference Board’s gauge of the economic outlook for the next three to six months increased 0.7 percent, more than forecast, after a revised 1.3 percent gain in May, the New York- based research group said today. It is the first time the index has climbed for three months in a row since 2004.

An important excerpt though, as far as Thailand is concerned, is this,

Smaller job losses, rising stock prices and stabilization in homebuilding and manufacturing are evidence that government efforts to stem the financial crisis and lower borrowing costs may pay off. A jobless rate that is forecast to reach 10 percent and falling home values are a reminder that any expansion will be muted as consumers rein in spending and boost savings.
The last part about any expansion being muted by a draw back in consumer spending and increased savings does not bode well for the short-term prospects of Thai companies, who rely heavily on US demand for growth and profits. The news is much more positive than say the fourth quarter of last year when everything was still in free-fall, but things remain shaky and without strong evidence of a full recovery in sight.

In terms of China's economy and imports from Thailand, the Reutersarticle notes that,

China's exports fell 3.6 percent, but that was sharp improvement from a fall of 10.9 percent in May and it was the smallest drop since October.

For the second month this year, China was Thailand's biggest export market, a spot usually taken by the United States.

Last week, China reported that its economy in the second quarter expanded a stronger-than-expected 7.9 percent over a year earlier, making it the best-performing major economy in the world

So, China's resilient economy looks like the main reason Thai exports did not slide further into the abyss in June. But what is driving demand in China and how sustainable is it? One of the main drivers of growth at the moment is massive government stimulus spending to the tune of $586 billion. The AP describes the stimulus and the latest growth figures,
China has bought a rebound in economic growth with a flood of government spending and bank loans, averting a surge in politically dangerous unemployment and fueling hopes that it might help lead a world recovery.

The government's announcement Thursday that second-quarter growth accelerated by 7.9 percent from a year earlier boosted global financial markets, though Beijing cautioned that a full-fledged recovery is not firmly established.

The economy grew by 6.1 percent in the first quarter, according to the National Bureau of Statistics, and analysts said full-year growth should easily reach the government's 8 percent target.

The increase highlighted the economy's dependence on Beijing's $586 billion (4 trillion yuan) stimulus effort. It was launched after demand for Chinese exports collapsed, wiping out tens of millions of factory jobs and raising the specter of unrest.
This is my main reason for guarded optimism on the Thai economy and the global economy in general, everything hinges on the success of these stimulus packages. What we have now is global demand being "artificially" propped up by government spending. Take government spending out of the equation and everything goes back into free-fall again. I don't have much issue with the decisions to impose stimulus--at the time there was no real political or socially acceptable alternative. Certainly the stimulus packages, plus the bailouts, pose moral hazard issues for the future, but if the governments of the world did not step in to act as the "demander of last resort", then the crisis could have easily spiraled out of control, with even more drastic consequences for the global economy. What was essential was that someone stepped in to fill the gap left by theprecipitous fall off in private demand. Looking forward, government stimulus spending can not go on forever though, it is simply unsustainable in the long-term. "Real" private sector demand will eventually have to replace "artificial" government demand if we are to see a sustainable recovery--there are no two ways about it. The hope and the prayer right now is that the stimulus either causes the revival in private sector demand or it buys us enough time for when that starts to happen. We'll have to wait and see how it all plays out.

None of this is to say that there is not money to be made in Thailand. And as Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family, once said, "The time to buy is when there's blood in the streets." In fact if one reads from the Mark Mobius (Templeton Investments) playbook, Thai stocks and the baht are cheap right now, creating opportunities for future profits. Here are some excerpts from Mobius' Bloomberg article,

Mark Mobius, whose Templeton Asset Management Ltd. has invested in Thailand for two decades, said stocks in Southeast Asia’s second-largest economy are cheap and the currency is undervalued by 14 percent.

“We like Thailand because we buy cheap stocks with a cheap currency,” Mobius, who helps oversee $20 billion in emerging- market assets at San Mateo, California-based Templeton, said at a seminar in Bangkok today. “That’s why we are in Thailand.”

On particular plays and sectors, the article says,

Mobius said his fund prefers consumer-related stocks and commodities. The trend for copper, platinum, nickel and crude oil is up, he said.

“When there is increasing money supply in the system, commodities prices go up,” Mobius said. “You get more money chasing limited supply.”

PTT Pcl, Thailand’s biggest energy company, and Siam Cement Pcl, the No. 1 Thai producer of cement and building products, are among stocks held by Templeton, he said. The fund also owns shares of Siam Commercial Bank Pcl, the nation’s No. 2 lender by market value, and Kasikornbank Pcl, the country’s third-largest lender by assets.
It should be said that Mobius' tapers his optimism with his concerns about political instability (see here) I suppose in the end, it all comes down to decisions about your risk tolerance, available cash flow, investment time-horizon, knowledge of particular sectors and companies, and ability to navigate the political labyrinth to your own advantage. This last point is especially true as far as Thailand is concerned. Lastly, below are three different forecasts from the previously cited Reuters article.

CARL RAJOO, ECONOMIST, FORECAST IN SINGAPORE

'Customs cleared trade data came in better than expected, climbing quite significantly on the month, across both exports and imports. Exports climbed close to 6 percent on the month, while imports climbed an impressive 20 percent on the month.

'The external sector in Thailand is beginning to show much stronger signs of the 'green shoots' we have by now heard so much about.

'The improvement in the data sends a clear signal that Q3 could be a turning point in the down-cycle of Thailand's external sector as export orders return, helped in part by the improving import demand outlook from China.'


CHARL KENGCHON, ECONOMIST, KASIKORNRESEARCH CENTRE

'I think we've started a see a more moderate sign of contraction. Thai export growth improved slightly in June with the 25.9 percent figure. The economy has become a bit more stabilised.

'Having said that, we shouldn't jump to the conclusion that this is a real recovery. Yes, we see signs of moderation but you wouldn't call it a recovery. A recovery is probably when you see a contraction of maybe 10 percent or even less.'

'We should see exports continue to improve in the upcoming quarter.'


USARA WILAIPICH, ECONOMIST, STANDARD CHARTERED BANK

'Thai export growth improved slightly in June. However, imports rebounded at a faster pace due to higher demand for imports of raw materials and higher oil prices. So we could see a narrower current account surplus in June.

'Thai exports recovered at a slower pace than other Asian countries because of the smaller proportion of electronics goods compared with Asian countries such as Singapore, South Korea and Taiwan.

'Looking forward, we should see exports improving in the third quarter, given seasonal demand for Christmas and inventory rebuilding. For imports, we still expect it to recover at a faster pace than exports due to higher demand for raw materials locally and the impact of high oil prices. All in all, we expect the current account surplus to narrow further in the second half of this year.'

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