Since the start of October, Thailand has been experiencing its worst floods in half a century. The economic concerns have hightened as major industrial estates have also been inundated.
With the exception of Samut Prakan and Rayong, seven major industrial estates have been affected by the floods thus far. The situation remains fragile, and a few factors bear watching, including the flood threat to inner and central Bangkok, the commercial heart of Thailand.
The current flood crisis has created a major supply shock for the country, with economic devastation being felt in the key manufacturing, agricultural and tourism sectors.
The foremost impact is in the manufacturing sector. We all know that key manufacturing bases are concentrated in Bangkok and adjacent areas such as Pathum Thani, Samut Sakhon, Samut Prakan, Ayutthaya, Chachoengsao, Chon Buri and Rayong. These industrial areas have all been affected by the floods.
Specifically, the province with the largest manufacturing base is Ayutthaya, where manufacturing (6.1 per cent of Thailand's gross domestic product) has been severely affected.
So far seven industrial estates (including Rojana industrial park, Saha Rattana Nakhon industrial estate, Hi-Tech industrial estate and Bang Pa-In industrial estate) have been forced to shut down over the past few weeks.
Japanese investment makes up the bulk of the operations in these estates and most specialise in auto parts and electronics.
Because many companies are auto parts suppliers, the flooding has caused supply-chain disruptions and shutdowns for auto producers in other parts of Thailand (including the eastern seaboard) even though they are less, or not at all, affected by the floods.
Anecdotal, manufacturers have stopped operations since early October and such shutdowns have been extended.
The Industrial Estate Authority of Thailand estimates that affected industrial estates in Ayutthaya may take 3-5 months or more to fully return to normal operations.
The agriculture sector is also badly hit. This is severely affecting the livelihood of Thais living in the central rural areas.
The northern and central parts of Thailand are key agricultural centres, cumulatively accounting for 46 per cent of the country's agricultural GDP output.
The Ministry of Agriculture and Cooperatives recently reported that 10 million rai of cultivated land is so far damaged, of which 8 million rai is rice paddy.
Main-crop paddy production was expected to reach 25 million tonnes this year, but this could now be cut by 6-7 million tonnes.
As a comparison, Thailand produced about 30 million tonnes of rice and exported about 9 million tonnes in 2010. A production loss of 6-7 million tonnes would be equivalent to about 22 per cent of total annual rice production.
The effect on inflation is likely to be two-fold: from food price increases, such as for rice, due to production losses; and from food price increases due to hoarding. Rice constitutes about 1.8 per cent of weight in the CPI basket.
Local rice traders have estimated that rice prices could rise by 20-25 per cent because of the floods and the government's rice mortgage scheme. A 20-25 per cent increase in rice prices alone could add between 0.4-0.5 percentage points to headline CPI in 2011, all else equal.
The flood crisis has also affected Thailand's tourism sector. Among the top tourism areas in Thailand are Bangkok, Hua Hin, Phuket, Krabi, Chiang Mai, Koh Samui and Pattaya, to name but a few. The fourth quarter cool, dry season is typically the peak tourist season.
With areas like Ayutthaya fully inundated and Bangkok also facing a flood threat, tourist arrivals are likely to be temporarily hampered in the last quarter of 2011.
Anecdotally, we can all see that there have already been tourist booking cancellations. Tourism revenue makes up about 5-6 per cent of GDP.
Sensitivity analysis would show that a decline of 10-30 per cent in tourist arrivals for one to three months would shave between 0.2-0.6 percentage points from GDP growth.
Looking ahead, there are certain things we all should be watching out for:
1. The magnitude of the flood impact on Bangkok, which accounts for 24 per cent of Thailand's GDP. So far, only the western and eastern parts of the capital have been affected, sparing the major commercial area of central Bangkok.
2. Whether the floods will affect other industrial bases such as Rayong on the eastern seaboard, which has so far been spared.
3. Policy measures to alleviate flood conditions and the pace at which the flood waters recede. This will affect how quickly the repair work can start and industrial operations can normalize.
Indeed, major research houses have estimated that the flood impact could take 1.0-1.5 percentage points off Thailand's pre-flood crisis 2011 GDP growth forecast of 4 per cent, given the plant shutdowns, agricultural losses, and tourism impact.
The flood crisis since September will mean that the fourth quarter of 2011 will be hard hit, with expected growth in the range of -1.0 per cent to 1.1 per cent year-on-year.
Furthermore, the short-term price impact from agricultural losses and hoarding means inflation may rise to the vicinity of 5 per cent by year's end.
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