THAILAND: Oil Price Hike Puts New Strains on Economy

By Marwaan Macan-Markar Reprint | | Print |

Marwaan Macan-Markar

BANGKOK, Jun 2 2004 (IPS) - The negative impact of rising oil prices could dampen Thailand’s economic growth just when Prime Minister Thaksin Shinawatra is about to seek a second term in office in general elections seven months away.

According to analysts, the first to be hit in the current oil price hikes will be the Thai stock exchange and the country’s current account balance – two vital indicators of Thailand’s economic health.

The stock exchange’s rise to dizzying heights, seen six months ago, could now be a thing of the past and the country’s forecasted growth rate of over seven percent this year, from last year’s 6.7 percent, could be revised.

This week, the price of oil rose to 41.50 U.S. dollars per barrel following the spate of violence over the weekend in Saudi Arabia where foreign oil workers were attacked by suspected Al – Qaeda militants.

”The impact of the oil price hike is being felt in the stock exchange,” Alan Kam, chief executive officer of Aberdeen Asset Management, told IPS.

”There are many companies feeling the pinch and that will affect the stock market’s performance,” he added.

Kittirat Na-Ranong, president of the Stock Exchange of Thailand (SET), also admits there is a reason to worry. ”The rise in oil prices has been one of the negative factors that have influenced the stock market,” he said.

In December, Thai stocks were hailed as being among the best performing shares in 2003.

On Dec. 18, the SET’s index surpassed the 700-point level in trading for the first time since the 1997 economic crisis. Trading was worth 48.9 billion baht (1.2 billion dollars).

But by the end of the first quarter in 2004, the SET index had slid to join the ranks of the worst performers. The month of May ended with the SET index closing just above 600 points with trading worth around 27.4 billion baht (68.5 million U.S. dollars).

”Thailand was among the top three countries last year, along with China and India,” said Kam. ”But now they are at the bottom.”

The other indicator is the country’s current account reserves, which are not in good health, according to a report released this week.

Thailand’s current account balance slipped into the red in April, which was the first such deficit in two years, stated the Bank of Thailand (BOT) in an economic report released on Monday.

The figures for April were a 19 million U.S. dollar deficit, in addition to a 357 million U.S. dollar trade deficit, revealed the BOT.

In March, on the other hand, this South-east Asian country’s current account had a 208 million U.S. dollar surplus and a trade deficit of 308 million U.S. dollars.

Here again, rising energy costs have been the key reason for the country’s current account deficit.

”The country’s oil bill in April was up more than 70 percent over a year earlier,” the ‘Bangkok Post’ daily commented in an editorial on Monday.

And in an effort to contain the negative impact from spiralling energy costs, the Thai government, this week, unveiled a series of measures with consumers in mind.

They include a freeze on service changes from utilities, such as electricity and mass transport services.

The government is also turning its attention to a slew of conservation efforts, including a possible measure to close petrol stations at 10 p.m.

But an editorial in the ‘Bangkok Post’ wants the government to do more, including reminding ”Thai drivers and consumers about the need for energy conservation (given) the number of large-engined sport utility vehicles and luxury sedans on Bangkok’s roads.”

The current account deficit has also given rise to a scenario that continues to haunt Thailand, namely the financial meltdown of 1997.

According to Tuesday’s ‘The Nation’ newspaper, ”Thailand previously suffered from a current account deficit which partly led to the 1997 financial crisis, when the country was forced to float its currency.”

Prior to the 1997 crisis, the Thai baht was pegged against what was termed as a basket of leading currencies led by the U.S. dollar.

In July that year, Thailand’s central bank delinked the beleaguered baht from the U.S. dollar and let it plummet. It was then that all hell broke loose and the financial ripples from Bangkok were felt throughout the region, from Indonesia to Japan.

The current account, ‘The Nation’ adds, was ”one of the factors that reflected the country’s external stability and its ability to repay foreign debts.”

Leading Thai economists, in fact, are accusing the government of having created the conditions for such a disturbing picture by going slow on the planned economic reforms to avert a repeat of the 1997 financial meltdown.

”The economic structure seems to have remained unchanged since the previous cycle (before the 1997 financial crisis), when the economy and investments rose significantly resulting in a current account deficit,” Kosit Panpiemras, executive chairman of the Bangkok Bank, told reporters.

Nevertheless, analysts like Kam, of Aberdeen Asset Management, believe that the impact of oil prices on the economy – even leading to a dip in the country’s growth rate from seven percent to six percent – should be of little worry to Thaksin’s administration.

”The country can ride this emerging storm and the economic situation will not take a turn for the worse six months from now, when it is close to the elections,” he said.