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Published on August 3, 2007

They have announced that they would be shutting down their businesses and laying off about 2,400 and 1,900 workers respectively. A month ago, Thai Silp Southeast Asia Export and Import, a textile company, also went bankrupt and laid off 5,000-6,000 workers.

Across the country, labour-intensive factories and plants are battling through hard times. What is going on with Thai industries? Is the strong baht alone responsible for these economic woes?

It is easy to blame the baht for the eroding competitiveness of Thai industries. Last year they were exporting their goods and converting the US dollar proceeds into baht, getting something like Bt36-Bt37 to the US dollar. Now with the exchange rate hovering around Bt33-Bt34, their profit margins have been badly squeezed because of the costs they incur.

The Bank of Thailand has been waging a fierce battle to curtail the baht's rise but the Thai currency has appreciated sharply along with the Philippine's peso and South Korea's won. The current account surplus and the capital inflow into the Thai stock market have largely driven up the baht's value.

Thailand had already recorded a current account surplus of US$6.2 billion (Bt209.6 billion) in the first half of this year. International money managers have also shifted their investments into Thai equities, the price/earnings ratio of which remains the cheapest in the region. The Stock Exchange of Thailand index breached 800 in early July as investors bet on the country's smooth transition to democracy and an economic recovery next year.

But the capital inflow has complicated economic conditions by pushing up the value of the bath and thus giving labour intensive industries a hard time. The future of such industries looks bleak indeed.

In fact, Thai industries have been warned all along about the need to adjust the way they do business in order to stay competitive or improve their productivity. But they are too slow to make the necessary adjustments. The appreciation of the baht is only one of many problems facing Thai industries, which are also facing rising operating costs, higher labour costs, intense competition, labour shortages and problems related to inefficient management.

You may be surprised to learn that Thailand is facing a labour deficit. We do not have enough low-wage labourers and hi-tech workers. About two to three million migrant workers from Burma represent Thailand's largest pool of cheap labour, while foreigners are dominating hi-tech industries. We do not lack labour at the middle level.

Thai industries have been complaining about the labour shortage for quite some time. Turnover is also high as workers move in and out all the time, making it difficult to provide them with proper training and improve their skills.

Most multinational exporters are doing fine because they are part of a global production network. Overall, the global economic environment has been so sound that Thai exporters continue to register double-digit growth. But labour-intensive exporters are having a difficult time keeping up.

Thailand is now arriving at a critical juncture. It needs to transform itself into a truly middle-income economy because it no longer can compete against China or Vietnam. And we are now witnessing some significant adjustments going on.

Capital flow into Thailand goes through five channels. Let's call them, in the words of Dr Ekniti Nitithanprapas of the Finance Ministry, the "Five Rivers" - Ping, Wang, Yom, Nan and Pasak. They are current account, foreign-direct investment, equity, debt, and bank loans. So far capital flow is almost a one-way street, making it difficult for banking authorities to manage baht stability.

But monetary policy is only one tool. It can't solve all the complicated problems facing the Thai economy. The Thai central bank can't cut interest rates so steeply because it would face problems with its bond issuance, which would be necessary to sterilise its foreign-exchange intervention.

Now is a good time to take advantage of the baht's rise to upgrade Thai industries through imports.

If industries start to import new equipment, they will improve their production capacities and enhance their competitiveness. Many economists say that imports should recover next year with improved domestic demand and growing confidence in the political atmosphere.

The authorities have already approved a package of foreign-exchange liberalisation measures to make it easier for Thai industries to invest abroad. Listed companies now will be allowed to take more money out of the country to do this.

Fund managers have been allowed to invest their private funds abroad to gain better yields. The Bank of Thailand may also set aside a portion of its foreign-exchange reserves to establish a sovereign wealth fund, which would invest in foreign assets.

Exporters have been permitted to hold their dollars longer, while residents of Thailand and companies have also been allowed to open foreign-currency accounts at local banks.

All of these measures are aimed at encouraging capital outflow but also at improving the management quality of Thai industrialists, money managers and investors. They are part of a medium- to long-term adjustment of the Thai economy as a whole. We have to succeed on this front otherwise we will compromise our prospects of gaining more prosperity.

 Thanong Khanthong