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Floods, debt and trade

November 10, 2011

The economic impact of Thailand's worst floods in over 50 years will be kept at a minimum as long as the country can keep the eurozone and US debt crises at bay.

Bangkok residents are finding it difficult to celebrate Loy Krathong
Bangkok residents are finding it difficult to celebrate Loy KrathongImage: picture alliance / dpa

Authorities in Bangkok are making exhausting efforts to drain the city after the flood. Though some areas have been spared, these are the worst floods Thailand has seen since 1942. The floodwater is not only slowing down the economy and creating an obstacle to every-day life, it is also making it difficult for locals to celebrate the traditional Loy Krathong festival, traditionally celebrated to make offerings, in the form of baskets containing incense and candles, to water spirits.

Residents walk past floats made for the Loy Krathong festival at a flower market
Residents walk past floats made for the Loy Krathong festival at a flower marketImage: AP

It remains uncertain when the water spirits will carry the water out of the country. Jost Pachaly, Director of the German Heinrich Boell Foundation's Southeast Asia office in Bangkok, says it is not necessarily the water level that is the main problem. "People in Bangkok are saying now that even if the worst is over, many areas are still going to be affected by the floods for four or five weeks."

Thailand is a major producer of parts for the automotive and computer industries. As the floods have brought about a halt in production, the Bank of Thailand has recently revised its forecast for economic growth "down from 4.1 percent in July's assessment to only 2.6 percent in October's assessment," says the bank's governor, Prasarn Trulratvorakul.

He says the industries around Bangkok are the hardest hit. "The industrial facilities have been damaged by the water. I think the economy will be feeling the effects of the floods for quite a while."

Automotive industry

Pachaly says production has fallen because industrial facilities have been damaged by the water. That will have an impact on the automotive industry as a whole and could very well have a big impact on the Japanese economy as many Japanese companies produce their automotive parts in Thailand.

A Thai man rides his motorcycle in a flooded street in Bangkok
A Thai man rides his motorcycle in a flooded street in BangkokImage: dapd

According to Craig Steffensen, Country Director for the Asian Development Bank in Bangkok, one of the larger factories in Thailand, Honda Motors, has recently reported it will need six months to get going again, "and I should add that within six or seven months, the rains will probably begin again. So there's really a mad scramble now to repair the damage that has been done."

As Southeast Asia's automotive hub, the Thai economy will to a certain extent depend on its manufacturing sector getting back up and running. But not only. Steffensen says it is arguable how much the slowdown of 1.5 percent in the Thai economy "is due to the floods and how much of that is due to problems in the eurozone and in the US and elsewhere."

Steffensen believes the problems in the Thai economy caused by flooding will have a minimal impact on the world economy. And he thinks that whatever negative impact the floods do have will only be short lived. "I think most people know that Thailand is still bullish…it is a huge base for electronics and petrochemicals. On top of that, it is a world-class agricultural producer. The tourism sector is huge. Thailand has got a lot going for it. The floods aren't going to shut any of this down, either whole or in part, any time soon."

Global rice production

When it comes to the Thai agricultural sector, Thailand is the world's number one producer of rice. Rice will be a "big problem for Thailand but also for its neighbors because most of the country's rice is produced in Central Thailand, which is most affected by the floods at the moment," says Pachaly.

The floods have been bad for manufacturing businesses
The floods have been bad for manufacturing businessesImage: picture alliance / ZUMA Press

The floods are not the only factor putting pressure on Thailand's rice production. Before the rains began, the country's new government this past summer promised to implement policies in favor of rice farmers. Skeptics believed the strategy would put pressure on the price of Thai rice and make it less competitive by making it more expensive on world markets and thus, in the end, reduce the total amount of rice exported from the country. But it appears as though the floods were quicker. According to Steffensen, they have destroyed 3.5 million tons of rice paddy, causing prices to go up 24 percent compared to a year ago. He is nonetheless optimistic: "In the short term, I think prices will go up. In the longer term I don't think it will have much of an effect," as Thailand has up to four crops per year.

He says neither Thailand nor the region will have to go hungry; relief efforts by the Thai government have been organized and coordinated extremely well, both experts agree, and when it comes to international markets, Steffensen suggests other countries, for example the US, could make up for the losses with its own production – a possible solution, albeit a less tasty one.

Author: Sarah Berning
Editor: Grahame Lucas

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