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Asia dispatches: Thailand and Tracking Japan

Because of the Memorial Day holiday, there will be no issue on Monday. We will be honoring US war veterans by sunning ourselves on the beach, a change from my Manhattan childhood when we used to cheer and wave flags at the veterans of both World Wars on parade. Disillusionment with the Vietnam administrations, student deferrals, and the end of the draft mean nobody in my extended family served during any US war after Korea. The same is true of the last three presidents' families. I think our country has lost some of the glue that helped keep us together.

Because it is a holiday in Thailand, I have a long dispatch from Paul Renaud in Bangkok, where Paul runs the website:

Unrest does not dim strong exports and other upbeat economic indicators for Thailand. Investors must balance the advantages and concerns, not ignoring or exaggerating their weight.

The Thai currency remains firm and hardly moved against the US$ during the May uprising. The Baht is up some 20% on the euro more than 10% on the Swiss Franc this year. The SET stock index is still up 5.26% over the past 3 months despite some minor corrections as much over world trends as local risks. While the local market is shut for a holiday today, I expect it will pick up Monday.

Thai exports rose for the 6th month in a row now, up 35% YOY. All export sectors showed positive double digit growth while imports showed a 46% rise. Exports of agriculture and processed food rose 27.5%; manufactured goods 37.1% (April). While May (with the uprising) could show a short term dent, Thai exports should continue growing. “The political unrest has not affected the Thai export sector as there were no shutdowns of airports ore seaports”, said Commerce Minister Porntiva Nakasai. She predicted exports would grow 14% this year, to US$ 172 bn, the Euro crisis notwithstanding.

Concerns exist over 'high political risk'; the impact of the spread of discontent to the northern regions where there was no trouble earlier; and the potential problem of royal succession. I think most of this is already priced/discounted in the local stock market and currency, neither of which moved much during the uprising.

The new budget, passed last night, addresses many social disparities. This [and the arrest warrant for Thaksin Shinawatra] will divide the red shirts.

The Thai government expects tax revenues to rise by nearly 9% this year and the economy to expand 3.5%-4.5% in 2010. I think GNP may grow even faster, as the government will now spend for on new stimulus.

Here are some key factors in favor of Thailand:


1) Ease of doing business: Thailand ranks 12th in the world, according a World Bank study, “Doing Business 2010”.

2) Low taxes: Forbes’s “Tax Misery Index 2009” has Thailand well down the list.

3) Expats: An HSBC survey of more than 3000 expats ranks Thailand the 3rd best place to live, behind only Canada and Australia. Thailand ranks number one or two in making friends, easy of finding a place to live, health care, entertainment and social life.[Paul and my cousin Simon are expats in Thailand.]

4) Modern industrial estates: Thailand has more than 50 industrial estates, zones, and parks, a big attraction. Transport facilities provide infrastructure and corridors and Suvarnabhumi, named the world’s 5th best large airport (by Airports Council International).

5) Liberal investment policy: Thailand has no foreign equity restrictions on manufacturing and allows 100% foreign ownership in most service industries. There are no restrictions on foreign currency remittances, no export requirements. and no local content requirements.

6) Experience: Thailand offers businesses world-class expertise, experience and knowledge. It has strong supply chains. High switching costs keep investors here.

7) Reserves: Thailand’s has US$ 150 bn in foreign reserves, 15 trillion Baht in Bank savings accounts, and among the least leveraged corporate balance sheets anywhere.


International investing means comparing and balancing country advantages and disadvantages. Of course this country still has some serious political issues ahead. I am surprised at how often Westerners point out problems here, while at the same time completely ignoring their own grave problems.

I remain excited about the low stock valuations, high dividends, and underleveraged balance sheets of many Thai listed companies which remain on my strong buy list. None of my choices are in the yoyoing tourism sector. Read past the 'if it bleeds it leads' headlines.”

In another Asian dispatch, Chris Loew writes from Japan in response to my quick reply to a reader asking my views on Paul Krugman saying that the US is tracking Japan with a 15 year year lag.

Krugman argues against premature tightening. Chris says the source for the New York Times pundit is congressional testimony by Richard C. Koo’s (of Nomura Reseach) (, which first developed the tracking theory. Koo looked at the fiscal stimulus, monetary accomodation, and quantitative easing meausres of Japan 1980-1995 and US policies since 2008. There is a startling parallel. Yet Mr. Koo (like Krugman) thinks continued stimulus measure are needed despite their failure in Japan. Writes Chris: 

Japan did spend its 'loads of loot', on property speculation, and when that bubble burst, it fell into a balance sheet recession (using cash to pay off debt instead of consume or invest), as is the US.

Koo makes the point that it is very hard politically to maintain peacetime stimulus deficit spending, but allowing a slide back to recession costs more (I assume because without corporate profits and jobs, govt. tax revenue declines and more interventions are required) and extends the recovery period.

Here are some points from the Koo study:

When someone saves money or pays down debt in a national economy, GDP will shrink unless someone else steps in to borrow and spend those saved or repaid funds. In a normal economy, the task of equating savings and borrowings is performed by interest rates. But in a balance sheet recession, demand for funds can remain far less than the supply even with interest rates at zero because there are so few borrowers.

As a result, unborrowed funds remain trapped in the financial system, constituting a leakage from the income stream and a deflationary gap in the economy. If left unchecked, this gap will throw the economy into a deflationary spiral as the economy loses demand equivalent to the saved but unborrowed funds each year. And that is exactly what happened during the Great Depression.

Although the panic has subsided, all the balance sheet problems that existed before the Lehman shock are still with us. These problems are likely to slow down the recovery or smother it altogether unless the government offsets the deflationary pressure from private sector deleveraging. In other words, the recovery so far was the easy part, and the hard part of repairing millions of impaired balance sheets has just begun. This is no time to be complacent and cut fiscal stimulus; that should not happen until it is certain that the private sector deleveraging process is over.

The dangers are from premature fiscal tightening. The key lesson from the Japanese experience is that fiscal support must be maintained for the entire duration of the private-sector deleveraging process. This is an extremely difficult task for a democracy in peacetime, because when the economy begins to recover, well-meaning citizens who dislike reliance on government will argue that since fiscal pump-priming is clearly working, it is time to reduce (what they see as wasteful) government spending.

But if the recovery is actually due to government spending and the private sector is still in balance-sheet-repair mode, premature fiscal reform will invariably result in another meltdown, as the Japanese found out in 1997 and the Americans in 1937.

The Japanese mistake in 1997 not only produced five quarters of negative growth but also increased government debt by nearly 100 trillion yen or 30 percent and prolonged the recession by at least five years. The U.S. mistake in 1937 was so devastating that it took the massive military expenditures of the Second World War to pull the country out of recession.”

Back to Chris: “A point where it may be different is that the US still has positive population growth and thus a need for more housing. However, the idea that the US will spend itself out of a recession because we have a consumption mentality while the Japanese have a saving mentality may not be valid, as Koo points out that the US household savings rate is now higher that of Japan (approx 4% US and 3% Japan in Koo’s chart).”

This information is being provided to enlighten readers on the current debate, but neither Chris nor I will risk making predictions or telling governments what to do.