September economic numbers show initial impact of terrorist attacks

The market was expecting to see a slowdown in economic activity in September from the terrorist attacks on the US. The economic data released by the Bank of Thailand yesterday, therefore, shouldn’t have much impact on market sentiment. The numbers just confirm that the export-manufacturing sector continues to feel the pain of the worsening global economic slowdown. Meanwhile, domestic consumption remains relatively resilient.

• Production: Due to negative growth in the export sector, the seasonally adjusted manufacturing production index fell 1.8% yoy in September, the first negative growth since March. By product group, integrated circuits suffered the biggest decline (-45.5% yoy), followed by TVs (-29.2%), energy drinks (-26.8%) and hot & cold rolled steel (-22.0%). Production of passenger cars, however, is showing the strongest growth, up 52.6%, on rising domestic sales and exports.

The BOT’s industrial capacity utlization index , meanwhile, increased slightly for the second consecutive month to 52.8%, but it is still 4.2 percentage points lower than the same period in 2000. Like the production index, capacity utilization for the IC and TV industries declined by 59.2 and 22.9 percentage points to 61.1% and 43.5%, respectively. Last year, the BOT had the IC utilization at 120.3%. Utilization of passenger car manufacturing facilities saw one of the biggest improvements, but this is from a very low base. In September automakers were still running at only 39.4% of capacity.

• Consumption and investment: The BOT sees consumer confidence “wilting” based on a 11.2% yoy decline in imports of consumer goods and slowing retail sales. However, the private consumption index remains very steady at around 102 for the fifth consecutive month. Passenger car sales, which were up 48.2% yoy in August and 51.8% in September, clearly indicate that Thai consumers are willing to spend on big-ticket items, given the current attractive prices and financing terms. This is further reinforced by the continuing strong rebound in housing sales.

While consumption looks relatively resilient, new investment is clearly lacking with almost every indicator of private sector investment declining from the previous year and from the last several months. Imports of capital goods in September fell 19.8% yoy, while domestic cement sales contracted by 7.5% and commercial car sales rose only 1.7%. The Bt17.2bn import bill for capital goods in September was actually the lowest level over the last 26 months.

• Public Sector: The Thai government recorded a cash deficit of Bt11.8bn for the last month of its fiscal year. Government revenue in September rose 0.6% yoy to Bt67.7bn, while government spending was up 4.3% to Bt90.7bn.

For the full fiscal year 2001, the Thai government registered a cash deficit of Bt102bn. Revenue came in at Bt876mn (+3.0% yoy) and expenditure Bt770bn (+2.9%). Both numbers were slightly below the budgeted expenditure of Bt910bn and revenue of Bt805bn, but this is still pretty good for a bureaucracy that traditionally under spends its budgets.

• External Sector: Among the economic numbers, we are most concerned about the double-digit decline in exports. In September, exports fell 11.5% to $5,257mn. On one hand it is positive that imports fell 6.8% yoy, which still left Thailand with a trade surplus of $281mn in the month. On the other hand, the decline in imports is a 1-2 month indicator of a continuing slowdown in exports. A large portion of imports, especially capital goods, is used in processing for re-export. In the first nine months of this year, total exports have declined 4.6%, while imports have increased 1.3%. As a result, Thailand has incurred a trade surplus of $1,472mn and current account surplus of $4,135mn. This large surplus has been completely negated by large net capital outflow, leaving a balance of payments deficit of $77mn.

The biggest danger, at this point, is that the narrowing trade surplus and negative balance of payments come back as a factor in the baht-dollar exchange rate. We may not completely agree with all of the Thaksin government’s economic policies, but we do believe that a stable exchange rate is important for domestic business sentiment and that it is prudent to maintain Thai interest rates at the current level until exports begin picking up again. The caveat here, however, is that Thailand’s major regional competitors maintain stable exchange rates as well.

The Bank of Thailand estimates that GDP grew by 1.6-1.7% in the first nine months of this year. Based on the 1.9% economic expansion in the first half of this year, this implies that the Thai economy grew by 1.1-1.4% in 3Q01. By comparison, the US economy contracted by 0.4% and Singapore by 5.6%. We still expect to see the Thai economy to go into a recession from 4Q01 to at least 1Q02, with a gradual pick-up in economic growth by the middle of next year.

We see nothing in these economic numbers which would lead us to change our current sector recommended weightings, especially as recent company visits have reinforced our view. Investors should overweight domestic plays, particularly property, telecom and retail sectors. Buying in the export sector needs to be more selective, however, staying with stocks in the agribusiness sector or with electronics companies with very solid fundamentals. The banking sector, meanwhile, looks the most vulnerable to the economic slowdown over the next two quarters.