Thailand’s hot money problem: echoes of the 1997 Asian financial crisis
William Pesek says a strong baht doesn’t change the fact that Thailand’s military leaders need to make sweeping changes befitting a modern economy to compete with Asian heavyweights
When Thai General Prayuth Chan-ocha grabbed power in May 2014, he thought his battle was against political chaos and corruption. Turns out, it may be with currency traders.
Bangkok is seeing a bull market in irony: Thailand is three-plus years into military rule, its growth lags behind that of the Philippines and Indonesia, and it lacks a savvy strategy to compete with China. Yet, so far in September, the baht has pulled in more overseas investment than India, Indonesia and South Korea combined. Prayuth faces an embarrassment of riches that may seem eerily familiar to students of the 1997 Asian financial crisis.
The latest junta to grab power set out to wash all remnants of Thaksin Shinawatra, a prime minister removed by an earlier coup in 2006, from public life. Thaksin earned comparisons to Italy’s Silvio Berlusconi and, more recently, Donald Trump: a populist billionaire-politician weakening government institutions to benefit family businesses. Even from exile, Thaksin whipped up massive street protests. His baby sister, Yingluck Shinawatra, even became prime minister from 2011 to 2014 before being tossed out.
Thaksin’s sales pitch in 2001 was Trumpian: to overcome losses in living standards and foreign direct investment from 1997, Thailand needed a dealmaking businessman. Yet Thaksinomics focused on buying loyalty through populist handouts to rural communities, not structural reforms. In 2006, military leaders showed Thaksin the door.
Eight prime ministers and myriad protests later, Prayuth grabbed power to cleanse the system. In a strange twist of fate, though, Prayuth is grappling not just with the Thaksin era’s legacy, but also the 1997 Asian crisis. The baht’s 8 per cent surge this year has “hot money” written over it. The cost of insuring five-year Thai debt against default risks is lower than Spain, a developed eurozone economy. Thai bond yields are below South Korea’s, a far more advanced economy.
There are some justifications for baht buying. Bangkok’s current-account deficit is around 10 per cent of GDP and booming tourism has caught investors’ attention. Trouble is, those capital flows outpace Prayuth’s reform progress or Thailand’s ability to absorb them productively and safely.
A strong baht steals Thailand’s competitiveness. About 70 per cent of Thai growth comes from exports. China, India, Indonesia and the Philippines compete for factories, jobs and long-term investment. Prayuth’s team talks of cultivating advanced industries as a “Thailand 4.0” scheme. It says the right things about moving up the value-added ladder and a US$45 billion infrastructure boom, but execution has been glacial.
Acting faster to build better roads, power grids, ports and bridges is key to keeping Toyota, Samsung, and other companies creating jobs, happy. It’s not just about cutting red tape; it’s also about transparency and accountability to reduce corruption and push today’s US$6,000 per capita income level towards US$10,000 and beyond.
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The generals must target human capital. In the latest Organisation for Economic Cooperation and Development student-assessment study, Thailand ranked 54th out of 70 countries. While the junta focuses on old-school pump-priming to boost growth, Thailand risks falling behind in a future dominated by ideas and innovation.
It’s troubling, for example, that Prayuth employed some of Thaksinomics’ strategies: hiring Thaksin’s economic brain, Somkid Jatusripitak, to lead the charge, and doling out financial inducements to rural communities. Such short-termism risks blowing up the national budget with few improvements to education, productivity or innovation.
In July, Somkid displayed understanding, telling a Nikkei Asian Review conference in Bangkok that, “technology, innovation and a sharp business model are the important weapons that a future economic warrior will need to have”.
Prayuth must work faster to upgrade Thailand’s software along with its hardware. The junta also should announce its timeline for a return to civilian rule. That, and a clearly articulated economic blueprint, might encourage capital racing to Thailand to stay.
William Pesek is a Tokyo-based journalist and the author of Japanization: What the World Can Learn from Japan’s Lost Decades. Twitter: @williampesek