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Thailand – Worst Flood Crisis in 5 Decades: What Is The Impact?
Malaysia Perspective | 28 December 2011

By The Research Team

Thailand has been hit by the worst flood crisis in 50 years since late July this year. The three-month-old disaster has run across 63 of 77 Thai provinces, killing around 533 people and inundated around 890 factories. As manufacturing and production lines have been disrupted, this article reviews the potential impact of the crisis on Thailand’s economy.

Exports Plunged Due To Flooding

Chart 1: Custom Export

Thailand’s exports slowed down significantly since the beginning of the flood crisis in July with the year-on-year change in customs export dropping from a 38.3% year-on-year gain in July 2011 to a 19.1% gain in September 2011 (highlighted in orange).

This was mainly attributed to the drop in rice exports as the wide spread flood destroyed a vast amount of agriculture crops. As per Chart 1, rice exports plunged tremendously from a 110.6% year-on-year change in July 2011 to -6.1% in September 2011.

The slowdown in export of electronic products contributed to the slowdown in export as well. Operation of hard disk producers like the Western Digital and Toshiba in Thailand have been suspended while operation of Seagate Technology has been disrupted and warned that productions may be delayed. According to IHS iSuppli, Thailand is the world’s second largest hard disk producer after China.

Chart 2: Industry Sentiment Index Electronics and Electric

In the automotive sector, original equipment manufacturers (OEM) like Toyota, Honda, Ford, Mazda, Nissan, Isuzu, Mitsubishi and Hino have suspended their output as well. Operations for camera manufacturers like Sony, Nikon and Canon has been disrupted too.

As per Chart 2, the Industry Sentiment Index for Electronics and Electric has declined since July, meaning that the flood crisis has slashed off confidence from electronics and electric products manufacturers. Having said that, most manufacturers have mentioned that they will maintain their operations in Thailand but urged the government to improve the infrastructures to prevent similar disaster from happening in the future.

The Manufacturing Production Index also showed that the flooding has significantly halted production as it dropped 0.5% in September, 2011, from a year earlier from an upward revised 6.76% in August, 2011.

Chart 3: Manufacturing Production Index Year-on-Year Change

Chart 4: Business Sentiment, Consumer Confidence and Private Investment

The flood has dragged on for almost 3 months, and has destroyed farmlands and halted the supply of food, and caused the consumer confidence index to decline for two consecutive months. The index dropped from its highest level since 2008 financial crisis of 74.4 points in July 2011 to 72.2 points in September 2011.

On the other hand, business sentiment dropped to 48.5 points in September 2011 from 52.2 points in August 2011. A figure less than 50 points means that the business sentiment worsened from the previous month. Private Investment Index has also declined in September to 205.93 from 206.61 in August.

According to the Bank of Thailand, Business Sentiment Index significantly leads GDP and Private Investment Index for one quarter based on its correlations analysis and is definitely not a good sign of Thailand’s 2011 fourth quarter economic growth prospects.

GDP Growth Expected To Slowdown In Fourth Quarter 2011

Based on the above indicators, Thailand’s GDP growth is expected to slowdown in 4Q11 and will result in a slowdown of 2011 GDP growth as a whole. Even though domestic consumption comprises around 52% of Thailand’s GDP and net exports only amounted to around 17% of GDP, Thailand is still heavily dependent on gross exports which amount to around 70% of total GDP (based on 2010 data). Therefore, a slowdown in export will definitely have an impact on the Thailand’s economic growth.

Furthermore, Bank of Thailand has slashed its 2011 economic growth forecast to 2.6% from 4.1% on 28 October 2011 and expects the economy to shrink 1.9% quarter-on-quarter in 4Q 2011.

Chart 5: GDP Year-on-Year Change

Bank of Thailand May Cut Benchmark Interest Rate To Promote Economic Growth
Bank of Thailand (BoT) has eased its policy tightening and maintained the benchmark interest rate at an unchanged 3.5% in its 19 October Monetary Policy Committee meeting. Inflation peaked at 4.29% in August 2011 and eased to 4.03% year-on-year gain in September 2011. However, inflation began to accelerate again in the month of October 2011 to a year-on-year gain of 4.19%, caused by the increase in food prices.

Chart 6: Inflation and Benchmark Interest Rate

Even though the inflationary pressure has increased, the core inflation which excludes raw food and energy prices gained only 2.89% from a year earlier and remains within the target range of 3.0% set by BoT. As BoT is currently more concerned on the slowdown in economic growth caused by external headwinds and the disastrous flooding, it may follow in Indonesia and Brazil footsteps and cut benchmark interest rate in the coming meeting in 30 November 2011 to further promote economic growth.

Weakened 3Q And 4Q Growth Followed By Strong Rebound In 1H 2012

We expect the negative impact of the flood crisis on Thailand’s economy to be short-term and a strong rebound will follow in 1H 2012. Past data showed that natural disasters did not have any long-lasting negative impact on a country’s economy, for example, the disastrous flooding in Queensland, Australia in December 2010 and January 2011, the earthquake in Sumatra, Indonesia in December 2004, and the earthquake in Japan in March 2011.

Chart 7: Natural Disaster No Long-Lasting Impact

In Chart 7, we can see that Australia and Japan recovered within 1 quarter after experiencing natural disasters. While the earthquake in Sumatra did not have a significant impact on Indonesia economy growth as it still achieved a 5.7% GDP growth in 2005, the cooling we see in the chart was mainly due to the strong year-on-year growth of 7.16% in fourth quarter of 2004.

Going back to the Thai flood, Thailand’s government has come out with several flood relief measures as follows:

View Full-Sized Image

Table 1: Thailand Government’s Flood Relief Measures
Source: Standard Chartered Research, iFAST compiliations as of 1 November 2011

In addition, Thailand’s cabinet has agreed on 18 October to widen the budget deficit by THB50 billion in 2012 to fund for post-flood reconstruction and both credit rating agencies Moody’s and Fitch has mentioned that the flood will not affect the government creditworthiness.

No Significant Impact Seen On the Equity Market and Valuation Remains Attractive

Even though the SET Index has declined from its all time high at the beginning of August, we do not see that it was caused by the flood crisis. During the period, there was a global sell-down in equity markets due to risk aversion as investors became concerned that Europe was unable to solve its sovereign debt problem which may lead to a double-dip recession.

Regional markets like Malaysia and Indonesia also saw a major decline in their stock markets during this period. Since then, the SET Index has rebounded strongly after the sell-off and returned to 12.13% in the month of October.

Corporate earnings are expected to chart new-highs in 2011, 2012 and 2013, based on the consensus estimates. Even though we have revised down the consensus estimate earnings using a more conservative approach, the earnings still remain strong (refer to Chart 8).

Chart 8: SET Index Estimated Earning

Chart 9: SET Performance

The SET Index is currently trading at an estimated forward PE of 11.0X and 9.5X for 2012 and 2013 respectively based on our in-house (conservative) estimated earnings. Compared to its fair PE of 12.5X, the potential upside for the SET Index is 13.8% and 31.3% for 2012 and 2013 which we believe is attractive in the long-run. As such, we maintain a 3.0 stars rating on Thailand.

We believe the weakening of economic growth will be short-term and expect a rebound in the first-half of 2012 once Thailand resumes full production with the help of the government’s stimulus programme.

Coupled with the fact that the SET Index is currently trading at an attractive valuation, we advocate investors consider investing in Thai equities. Investors may also choose to invest in funds that invest in the Asia ex-Japan or Global Emerging Markets region to grab relatively higher potential returns from countries like China, Taiwan and South Korea.

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The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

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