Story : James Goyder
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The International Monetary Fund (IMF), the international organization that oversees the global financial system, recently announced its prediction that the world economy will grow much more slowly in the next two years as a result of the so called ‘credit crunch’.

It predicts that world economic growth will slow to 3.7% in 2008 and 2009, 1.25% lower than growth in 2007, and goes as far as to suggest that there is a one in four chance of a global recession.

But what will be the impact on Thailand and the rest of South East Asia? According to many experts, while South East Asian economies are by no means immune from what has become a global epidemic they may remain surprisingly resilient.

The United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) recently launched the latest issue of its flagship publication, the Economic and Social Survey of Asia and the Pacific 2008, in which it acknowledges that, ‘The Asia-Pacific region has entered a “phase of heightened uncertainty” amid financial turmoil due to fall-out from the sub-prime credit crisis, the threat from rising inflation and a major slowdown in the United States economy.’

The survey warns that, ‘A sharp downturn in the US would also hit exports from Indonesia, Thailand, the Philippines and Malaysia.’ However there is good news with the survey suggesting that the Asia-Pacific region’s strong macro-economic fundamentals and underlying regional domestic demand will act as a vital buffer to any significant United States downturn.

Meanwhile the Investor’s Business Daily reported that, ‘The Asian Development Bank (ADB) lowered its economic growth forecasts for the region. Though Asian economies grew 8.7% in 2007 — the fastest rate in 20 years — the region is expected to grow just 7.6% this year. Across the region, greater demand and higher transport costs have pushed up the prices of crude oil and food staples such as rice, wheat and palm oil.’ According to the same publication, ‘We are in for a period of moderation of growth in the Asian economies, but I don’t think the full scale has been felt yet.’

Sharing this more pessimistic outlook, in his own inimitable style, is Richard Daughty of the Asia Times. He claims that, ‘If you thought inflation is bad now, you ain’t seen nothin’ yet, because the sheer tonnage of money necessary to pay off everybody’s debts here at the end of a long economic boom caused by, as usual, the creation of excess money and credit by the banks over a long period of time with lax governmental supervision is so huge that it probably totals over a quadrillion dollars.’

Daughty does not believe there is any obvious answer to the problem: ‘I have always staunchly maintained that there always comes a time when NOTHING can be done, and that the only thing that should be done is to prevent the problem by keeping the damned money supply and debt levels constant, as when they are constrained by gold, so that you don’t end up in this damned situation in the first damned place.’

In Thailand The Nation predicted that Asian economies would remain resilient despite the credit crunch, pointing out that, ‘The Asia Pacific saw remarkable growth in both the first half and the second half of last year. Despite the downturn in some major real estate markets and the weakening US dollar, capital continued to pour into the region in the second half of the year.’

The Bangkok Post also felt that the consequences of the credit crunch would be felt in the real estate market warning that, ‘Global direct real-estate investment is expected to drop by at least 30% from the record level of US$759 billion last year due to the decline in American and European markets.’ According to the Post, ‘The situation is being exacerbated by unease about the global economy, in particular about major economies such as the US, the United Kingdom and Japan.’

It issued a cautionary note to the local banking sector recommending that, ‘Thai banks should reconsider the conglomerate banking group model used in Europe and the US. In the wake of the sub-prime mortgage crisis Asian and Thai banks should segregate banking functions with soundness and stability as the priority.’

The Post felt that another potential issue in Thailand might arise from the fact that, ‘Four Thai banks, Bangkok Bank, Krung Thai, Bank of Ayudhya and BankThai, have offshore investments in collateralised debt obligations (CDOs). CDOs have fallen sharply in value since last year due to market illiquidity and the collapse of the US sub-prime mortgage market. BankThai has the largest exposure to CDOs, at $310 million as of the end of last year, followed by Krung Thai bank at $160 million, Bank of Ayudhya at $85 million and Bangkok Bank at $50 million.’

However there was some evidence of a recovery as reported in The Nation, ‘The confidence index on economic outlook moved up from 72.6 points in February to 73.8, according to University of Thai Chamber of Commerce’s survey. The university’s director Thanavath Phonvichai said the confidence index has been rising for five consecutive months, signalling the recovery in confidence.’

The fact that the index remains lower than 100 indicated that consumption has yet to fully recover but the survey also suggested that negative factors affecting confidence included the high oil prices, the sub-prime crisis and the strong baht.

The story was also covered in the Bangkok Post, reporting that, ‘Consumer confidence rose for the fifth consecutive month driven by the government’s tax cuts and funding programmes to spur growth.’ However it also warned that the impact of the US mortgage crisis remained a major concern and that many consumers were waiting to see how far the government’s measures would stimulate the economy.

There is still no clear consensus as to what would constitute a realistic solution to these problems. Bret Swanson, writing in the Far Eastern Economic Review, calls for an end to currency manipulation, ‘The great events of the globe increasingly are governed by the movements of world currencies. We need a return to currency stability. But that requires a return to dollar stability. And the dollar is the responsibility of the Federal Reserve.’

The Asian Business Strategy Ezine goes as far as to suggest that, ‘Capital market players need to exercise a fair degree of responsible behaviour and exude confidence to ensure that the bigger picture of global economic wealth is created responsibly and can be sustained.’

While some expert analysts are already proclaiming the end of the credit crunch still others believe that the worst may be yet to come. What is clear is that while the burden of responsibility for the current crisis may lie elsewhere South East Asian economies continue to bear some of the brunt. 

Your Comments

“With the sub prime crisis impacting on many lenders throughout the world it is becoming abundantly clear that borrowing on Thai property with 30 year leases has become very difficult. As most people know foreigners cannot own freehold, so unless individuals have used their Thai wives names as majority shareholders many people are going to have to wait a long time to see real profits rather than perceived profits from their purchases.”
 
Lending Concerns

“I heard that Bangkok Bank in Singapore reined in its lending a few months ago and one has to wonder if that is going to create a bit of panic as many buyers who bought off plan in the last couple of years had probably lined up, in principle, approval with them for projects being completed over the next 12 months. If Bangkok Bank has stopped lending on those projects, then which lenders in the market will step in to replace them and will the same lending criteria apply? These are burning questions but we will have to wait and see on this.

“Anyone wanting to buy into the ‘Thailand story’ should have really satisfied themselves beyond all reasonable doubt that it really is the right place for them. To emphasise this point we have just received buying instructions for four Land and Villa projects in Koh Samui and the buyers are very satisfied with what they have seen and heard over there.”

Mixed Signals

“I think buying interest is certainly slowing down although much of this has to do with the increased strength of each respective country’s currencies. Perhaps the developers have marked up their prices too strongly as sub sales, even though some of the projects were built with materials they forward purchased at less than today’s costs.

“I think a good number of people should stop and think before they buy. In the final analysis there are a lot of mixed signals coming from those who have already bought and those still considering buying. Any prospective buyers should ask a lot of questions and ensure they get the answers in writing and in English.” Tony Arkey

• Tony Arkey is the Principal of Raine and Horne. Established in 1883 Raine and Horne currently has 500 offices throughout Australia and South East Asia. He offers a more international viewpoint on the state of the Thai property market in the current economic climate.

“As per the information we have, Knight Frank Thailand does not see any negative effect from the credit crunch on Thailand. In the Bangkok property market today, any development launched at the market price is still selling very well.  However, if the developer is very greedy and sets a high price, then selling is likely to be very slow.”

Rising Costs

“The major concern for both the developer and the buyer is construction costs, which affect the selling price and which have rapidly increased partly due to a rise in the price of oil. The slowing down of the property market may be partly due to these higher prices as well as people being wary of the future economic situation and the potential for political instability. In our opinion, two major factors to affect the Thai property market will be higher costs and political uncertainty.

“The credit crunch will have a greater affect on countries such as the US, Singapore, Hong Kong and the EU countries which are tied up with the US financial market. A country like Thailand may have a secondary effect from these countries as they may import less from Thailand. But if you see from Thailand export figures even the Baht currency was very strong last year and the country’s export growth was very positive.”

Political Stability

“If Thailand is politically stable then there is the potential for economic growth. Thailand has very high potential because costs are still relatively cheap compared to other countries. However Thailand has been struggling for a few years since the Thaksin government and the coup.” Phanom Kanjanathiemthao

• Phanom Kanjanathiemthao is the Managing Director of Knight Frank Thailand, a commercial and residential property specialist who provide a comprehensive range of agency and professional property consultancy services covering all aspects of real estate.