As much as I would love to focus on just the fun Pattaya has to offer, it’s getting pretty difficult to ignore what’s happening to this country. Thailand increasingly feels like it’s being ripped apart.
Hundreds to thousands of people daily are protesting in Bangkok’s streets against the government and, now, the national police. Prime Minister Samak Sundaravej, pigeon-holed as a puppet for deposed PM Thaksin Shinawatra, has become a national joke and his 6-month administration has yet to pass a law or even fill most of the ministerial positions needed to do so.
Deadly attacks have spiked again in the South after months of relative calm. The country’s finance minister admits he’s relying on Buddhist texts to steer monetary policy while, across the globe, financial institutions are removing Thailand from their lists of places to invest. And, meanwhile, the country’s major opposition party has decided that bickering with Cambodia over U.N. recognition of an ancient temple is more important than dealing with any of these issues.
It’s hard to believe it could get any worse. But it just might. Because looming above all Thailand’s problems with corruption, politics and incompetence is a threat to the country’s economy not seen since the crash of 1997: a so-called “Inflation Tsunami.”
Even as Thailand’s leaders have frittered away the past months arguing, suing and back-biting each other, the country has been barreling down the road to financial ruin. Inflation soared to 8.9% in June and is universally predicted to top 10% this month and as much as 12% in August. And that’s just consumer-rate inflation. Thailand’s Producer Price Index for June soared to 18.6%, meaning manufacturers were eating almost 10% of inflation rate on behalf of consumers, something that will not continue.
“The idea (of the inflation tsunami) is very basic,” explains the respected economic blog Thailand Crisis: “Higher prices spread from raw materials and commodities to intermediary goods, then to finished goods. Business margins start to be under severe pressure. At some point they can’t take it anymore, so they increase their own prices, even for services. That increases pressure on the people who, in turn, start to demand higher wages, etc.”
More than just a vicious circle, the secondary effects do more than simply go around and around, they grow larger and stronger with each revolution, just as a tidal wave will suck all the water from the beach before crashing down on it, destroying everything in its wake.
Thailand More Vulnerable to Worldwide Problems
Fueled by runaway oil prices, wildfire inflation is not limited to Thailand, of course. The Philippines’ inflation rate hit 14% last month and the same “tsunami” term is being used to describe threats to Pakistan, India, Turkey, Brazil and others across the developing world. Even the United States is threatened by the tsunami effect.
“Whether it is anecdotal or statistical evidence, I see inflation everywhere, and this is where the financial tsunami cometh,” wrote Bennet Sedacca, president of Florida-based money-management firm Atlantic Advisors LLC in a June 25 report. Sedacca wrote that current financial-market conditions remind him of “someone standing on a lonely beach, armed with only a small bucket, trying to stop a rare tsunami that hits the shores.”
The threat to Thailand, however, may even more grave due to a host of questionable economic, policy and political decisions made by its leaders as well as the composition of the country’s economy.
Price controls, fuel subsidies, cheap credit, budget deficits, pork-barrel spending and a weakening currency are all exacerbating the oil-driven inflation problem. Factor in the external effects of worldwide inflation – skyrocketing airfares, airline cutbacks and a threat of global recession – and Thailand is poised to crumble under the weight of soaring prices and plummeting revenues.
A host of airlines last week announced cuts in long-haul routes to Thailand, stating they believed the Tourism Authority of Thailand’s projection of 15 million visitors this year was overstated. Lufthansa executives said they saw tourist arrivals increasingly at most 13 million for the year. Two days later, several short-haul low-cost carriers announced route cuts of their own, citing low passenger loads and rising fuel costs. And all of that comes after Thailand’s own flag carrier, Thai Airways International, dropped its direct New York service and scaled back it’s Los Angeles-direct route.
And today, just as this story was published, TAT sharply cut its 2009 projected growth to just 3.3%. The original projection was a 10% increase in international travelers to a total 17 million.
Even TAT itself may be quietly writing off the western visitors who have made Pattaya, Phuket and Samui their holiday destinations of choice. A TAT council on sports and recreation last week requested permission to shift resources away from marketing in the West to open more offices in India and China. Even TAT’s (and Pattaya’s) brightest spot over the past three years – Russia – may be in trouble:
“Tourists with high incomes have already been to Thailand and Cuba more than once, and tours there will become simply inaccessible for middle-income clients because of the price,” Inna Beltyukova of Moscow-based travel agent Capital Travel told Russian online daily Kommersant this week.
If Thailand’s elected officials and bureaucrats are worried about all of this, you couldn’t tell it from what they’re saying. Some, in fact, have chosen to play ostrich, simply proclaiming there is no problem and everything is running as normal.
“The Commerce Ministry remains optimistic the oil-price spurt may have run out of gas and that oil prices will not rise as expected in the remaining months, so it has left its annual target unchanged at 5.5 percent for the year,” reported The Nation newspaper last week.
But the Commerce Ministry is not alone. Despite Commerce’s very own figures reporting consumer inflation at 8.9% in June, the Bank of Thailand said it is sticking with its prediction of 4%-5% annual inflation while the National Bureau of Statistics reaffirmed its projection of only 5.3% to 5.8% inflation for the year.
Of course, if Thai officials actually admitted their figures were wrong, they’d also have to explain the reasons behind the sudden price spikes. Justifying to the public that magnitude of economic mismanagement would be nearly impossible.
The reason is because, when you start to dig into the foundation of Thai economic policy, you’ll find its built upon hopes, dreams and speculation.
Take, for example, the idea of price controls. Politicians have been telling Thailand’s residents that they’ve been protecting our best interests by regulating the price of everything from laundry powder to Coca-Cola. Producers were unable to raise prices to the consumer this year on nearly four dozen widely used consumer products. But the prices for oil, sugar, rice and other base commodities have risen so strongly that the government was forced to lift the controls and have not imposed any new ones.
That only fuels the Inflation Tsunami even more, because, rather than let the market adjust prices gradually, the government holds back inflation until it burst through a dam, moving more quickly, strongly and widely than it otherwise would have. Also, If each commodity had risen slowly and independently, the average consumer could have adjusted their budget along the way, rather than face a sudden, unexpected shock the next time they went to the supermarket.
More Market Distortions: Subsidies & Cheap Credit
On the flip side of price controls are an equally damaging force: subsidies. As ThaiCrisis succinctly explains, holding down the price of diesel fuel, for example, prevents prevents people from making rational budget decisions, such as whether to buy a new car or buy items on their shiny new credit card.
Credit, as well, is another factor pushing the country toward economic meltdown. For 32 of the past 50 months, Thailand’s “real” interest rate – the Bank of Thailand’s interest rate minus the inflation rate – has been negative. That means, for all intents and purposes, that borrowed money is not only free, but that the government is actually rewarding borrowers financially by going into debt.
Negative interest rates are a valid short-term economic policy used to lift economies out of recession, etc. But it’s extraordinarily dangerous as a long-term strategy. It distorts rational business planning and leads to the kind of real estate bubble Bangkok and Pattaya are now experiencing.
Perhaps that’s why the Bangkok Post recently reported that 40% of all Bangkok condominium projects now being built will fail in the next two years due to not being sold. There simply were too many buildings put up due to the fact that it cost virtually nothing to finance them.
Pattaya is not far behind. Speaking recently with a friend who owns 24 condos in Pattaya and Jomtien Beach, he said this area’s property market is like nothing he’s ever seen. “Prices keep going up while demand keeps going down. Pricing is being done on pure speculation.”
And, he added, because much of the land sought after by developers is owned by Thais and lying vacant and dormant, there’s virtually no incentive form them to lower prices to sell it. “They’re content to wait until some poor sucker comes along and pays their price.”
With the baht now weakening badly (and this being Pattaya), you know some Farang will do just that. But while the weaker baht may be good news for the British or American tourist who can actually afford the double-priced airfares to Thailand, the falling currency is even more bad news for the Thai economy.
For the past two years, the Bank of Thailand has done everything it could to weaken the baht as it surged to historic highs. But now that the oil Thailand imports so much of has to be paid for in dollars, the BoT has reversed course and is trying like mad to stem the fall of the currency.
Market intervention (selling dollars for baht) has never worked long-term and the BoT is being undermined by Thailand’s elected officials who continue to try to buy votes through spending on needless mega-projects in the countryside. The pork-barrel spending comes at the cost of the country’s budget deficit. The higher the deficit, the more downward pressure on the baht. The lower the baht, the higher the price of oil and the higher the inflation rate goes.
The Inflation Tsunami Rolls On
It’s all good and well to talk macroeconomics and line charts, but what does it mean to your average Somchai – or a visitor to / resident of Pattaya for that matter. True, as the tsunami first began to form, all of this might have been academic to a guy sitting on a barstool at the local go-go bar. But look around and the effects are becoming pretty evident.
Pattaya’s empty bars are but the most obvious sign. While some bars are still packing in enough punters to turn a profit, many bars are proclaiming ’08 to be the worst low season ever. And with some roundtrip fares from the U.S. now at $2,000 and 1,500 pounds form the U.K., it doesn’t look to get any better. Recently the head of one of the largest travel agents in Australia told a luncheon audience that he expects long-haul air travel to drop 40% in the next two years due to fuel surcharges alone. And that, he said, is only if the entire globe doesn’t plunge into oil-fueled recession.
Beyond the airfares, the region is already seeing the effects of inflation. Hotel rates, food, beer prices, taxi fares, and even fees for recreational activities such as jet ski rentals and scuba diving have all increased in recent months as companies have had to increase salaries for staff and pay more for fuel and basic goods. And, of course, Pattaya’s legions of working girls are feeling it even worse, given the dramatic rise in rice prices and the stagnant state of salaries. Pattaya’s mongers will increasingly feel the bite of inflation when the rate their quoted for an evening’s entertainment is suddenly a lot higher than on their last visit here.
The End Isn’t Nigh … Yet
So is financial collapse inevitable? No. But getting control of the tsunami before it washes away 11 years of Thailand’s growth won’t be easy.
The most-common tool to reign in inflation is by raising interest rates, which the BoT almost certainly will do later this week. As we saw above, Thailand needs to raise interest rates a great deal just to put resolve its cheap credit problem. But the BoT is only expected, at most, to boost rates by half a percent.
The fact is there’s only so much the central bank can do. Yes, higher interest rates will strengthen the baht, make oil cheaper and dampen inflation. But it also makes financing more expensive. While economists argue that, in Thailand’s case that’s a good thing, the fact is that developers, big companies and others reliant on credit would cut back investment. Consumers would buy fewer cars, condos and houses. Raise rates too much and the BoT stalls an economy whose growth has already been cut from 6% to 4.5% this year.
The rest is largely up to the government, if it can ever begin functioning as one. Subsidies need to be removed and price controls eliminated. It’s doubtful either will happen entirely. Likewise, don’t expect to see an end to deficit spending. What likely will happen is that the light bulb will eventually go on in the Finance and Commerce ministries and real plans will be formulated to battle inflation. One can only hope it won’t be too late.
Of course, Thailand is not in total control of its destiny. Should oil bust through $170 and the baht weaken to near 40 to the dollar, inflationary pressures and currency market speculation may become too strong. In that case, you’re looking at 1997 all over again. Brits will rejoin at 130 baht to the pound and Americans at 90 to the dollar, but once they arrive they’ll find 2008 prices have doubled overnight. And, as people found out after ’97, those prices never really come down.
Some compare what might happen to what’s happening now in Zimbabwe, with 3,000% inflation. The worst of the skeptics and critics are shouting it quite loudly. It seems hard to imagine, but no one ever really saw the ’97 crash coming until it was too late.
I want to thank the amazing Thailand Crisis blog for assisting me with my research. I strongly recommend you visit and bookmark ThaiCrisis’ site to keep up with the real story behind Thailand’s economy and political structure.
For more stories like this on on Pattaya, plesae visit The Pattaya Ghost.