Thailand second to China as top investor market - Independent Online

During 10 turbulent years in Thailand, Kittiratt Na-Ranong tackled jobs ranging from president of the stock exchange to manager of the national soccer team, an underperforming outfit nicknamed the War Elephants.

Now, Kittiratt, 54, has taken on a task with significant implications for fund managers such as Templeton Emerging Markets Group executive chairman Mark Mobius, for market-leading companies such as Intel and Toyota Motor and for consumers of the world’s most important staple food, rice. Kittiratt said as deputy prime minister and finance minister his task was to convince investors the government could build defences to prevent the recurrence of floods that last year inundated thousands of factories critical to global supply chains as well as a swath of the paddies that supply 29 percent of international rice shipments. As the waters slowly receded, they laid bare this Southeast Asian country’s extraordinary economic importance to the rest of the world.

Thailand is second only to China among the world’s best emerging markets for investors. The ranking looks at a series of measures such as market transparency and prospects for growth over the next four years. Thailand’s tiny, $303 billion (R2.3 trillion) stock market as of February 22, accounted for just 0.6 percent of the market value of world equities. As of 2011, its gross domestic product per capita was a mere $5 281 less than half that of Mexico’s. The country is prone to disruptions, ranging from coups d’état and civil strife to tsunamis and floods. Yet Thailand has developed such successful electronics and auto industries it now produces from 35 to 40 percent of all computer hard-disc drives and, in 2010, built more light trucks than Japan. In agriculture, besides being the world’s biggest rice exporter, Thailand ranks number one in rubber and number two in sugar. The country that brands itself the Land of Smiles has consistently remained one of the world’s top 20 tourism destinations, attracting more visitors in 2010 than Greece. Even as the government of Prime Minister Yingluck Shinawatra begins spending a promised 480bn baht (R121bn) on dykes and post-flood reconstruction, it’s working on a longer-term goal – the transformation of an economy heavily dependent on cheap-labour exports into a more consumption-driven model. Its populist strategy is to give 67 million Thais more spending power by raising urban wages by 40 percent to about $10 a day and guaranteeing farmers they will receive a price for their rice that’s as much as 44 percent above the market rate. Such government initiatives, on top of the chaos caused by the deluge, could inflict a big extra cost on Thai-based manufacturers, rice exporters and their customers worldwide. Hit by floods While Kittiratt predicted Thailand’s economy would grow 7 percent this year, Singapore-based Credit Suisse economist Santitarn Sathirathai said the rate might be only 3 or 4 percent. The Thai rice price surged 28 percent from July to mid-November, when it reached a three-year high of $663 a ton. Templeton’s Mobius is making a big bet on the government’s strategy paying off – and on the Thai economy.

Thai stocks comprised 21 percent of the $16.9bn Templeton Asian Growth Fund as of January 31 – second only to Chinese stocks. In the fourth quarter of 2011, despite the floods, Thailand’s SET index jumped 12 percent to become the world’s fourth-best performer. It has risen a further 11 percent this year as of February 22. As Kittiratt and Yingluck, Thailand’s first female prime minister, implement their reconstruction programme, Thai companies like cement makers and banks will cash in on a construction-led boom this year, said Aberdeen Asset Management, Scotland’s biggest fund manager. From 1971 to 2010, Thailand’s annual GDP growth averaged 6 percent despite coups and financial crises. As buoyant as the Thai economy is, the human and economic cost of last year’s floods has been immense. About 800 people died, economic growth in 2011 probably plunged to 0.1 percent from a forecast 4 percent, and total damage to the $346bn economy could reach $46bn, the government estimated. Spectacular comebacks In 1998, in the wake of the Asian financial crisis, its economy contracted 10.5 percent before rebounding to grow 4.4 percent the next year. Since then, the country has staged spectacular comebacks from a 2004 tsunami and 2006 coup – and the debilitating political protests that followed.

 While Kittiratt said recent flood-related damage would be short-term, Thailand will always be threatened by inundation. In July, torrential rains started falling in northern Thailand. An area larger than Greece became a world of water. Factories operated by companies such as Honda Motor and Canon were swamped. Even companies that stayed dry, like Toyota, couldn’t escape the impact as their parts makers went under. Although many companies predicted 2012 production would bounce back, the effect on their bottom lines was not easily erased. On December 12, Intel, the world’s biggest chipmaker, reduced its fourth-quarter revenue forecast by $1bn. On January 10, Ford said its Asia-Pacific and Africa operations would post a loss. Biggest investor Japanese companies fared even worse. In December, Toyota said the Thai floods would cost it $1.53bn as the car maker slashed its profit forecast for the year ending in March by 54 percent. But Toyota chief executive Akio Toyoda said in November the company didn’t consider reducing investment in Thailand. Selling the plan In January, the government announced its plan. It approved 350 billion baht for flood defences . Kittiratt, the man selling the plan, said in dealing with the floods, there’s no room for failure. Survival is a historical challenge for Thai governments. Since 1946, Thailand has been rocked by 15 successful or attempted coups and 28 changes of prime minister The last coup, in 2006, overthrew the elected government of Thaksin Shinawatra, Yingluck’s brother. Tensions culminated in 2010 in violent street protests in which 92 people died. Yingluck, a 44-year-old rookie politician, assumed office in August. Any new bout of revolving-door leadership could threaten flood-prevention efforts, Aberdeen’s Adithep said. A bigger risk to Thailand’s stability could be the royal succession. King Bhumibol is the world’s longest-reigning monarch, having ascended the lotus throne in 1946. As military and civilian strongmen came and went, Bhumibol remained Thailand’s sole stabilising presence.. By comparison, his heir, twice- divorced Crown Prince Maha Vajiralongkorn, 59, has had to fight off unwelcome publicity about his personal life. A more immediate concern is the performance of the present government. Yingluck, who has a master’s degree in public administration from Kentucky State University, entered politics last year after a career as an executive in her family’s companies. Abhisit Vejjajiva, opposition Democrat party leader and a former prime minister, questioned Yingluck’s qualifications as a head of government. But Jetro’s Iuchi said his meetings with Yingluck gave him confidence in her abilities. Yingluck declined to be interviewed. In 2010, Thailand was by far the biggest rice exporter, shipping 9 million tons. In the same period, its nearest rival, Vietnam, shipped 6.7 million tons. Overtaken by Vietnam At a waterfront warehouse on the Chao Phraya River, veteran rice exporter Chookiat Ophaswongse predicted that in 2012, Thailand’s rice exports would plunge by 30 percent. Apart from flood disruptions, the government’s willingness to pay above-market rates to farmers is making Thai rice noncompetitive, said Chookiat, 57. As of February 22, the price of Thai rice, an Asian benchmark, had fallen about 15 percent from its November peak. Investor Marc Faber is more optimistic. He said he didn’t expect the floods to have any impact on Thailand’s long-term prospects. In 2000, Swiss-born Faber, who oversees $300m at Hong Kong-based Marc Faber, moved his family home to Chiang Mai, a 1 000-year-old walled city 700km north of Bangkok. In October, floods seeped into the house he built on the banks of the Ping River. Faber, 66, publisher of the Gloom, Boom & Doom Report, said he’d continue to invest in Thailand. Similarly, US-born Bill Heinecke, who owns hotels managed by Four Seasons Hotels and Marriott International in Thailand as well as his own Anantara-brand resorts, has made a bigger bet on the country than most. Heinecke, 62, gave up his US citizenship in 1992 to take Thai nationality. Since then, his Minor International has been rattled by the Asian financial crisis, the tsunami and a political protest in 2007 that closed Bangkok’s two airports for a week, stranding 400 000 travellers. During the worst times, Heinecke’s hotel occupancy rates plunged to less than 20 percent, he said. And yet his business has grown from a single hotel to 70 resorts, 1 200 restaurants and 200 retail stores. Shares of Minor International, in which King Bhumibol owns a 2.2 percent stake, rose more than 12-fold in the 10 years ended on February 22 – five times the increase in the benchmark index. In November, Heinecke went ahead with the opening of his latest, riverside Anantara hotel. This was at the height of the floods, with the swollen Chao Phraya reaching the edge of the hotel’s lawns. “We weren’t going to change the plan,” Heinecke says. “Thailand has a habit of bouncing back.”

Destructive inflationism - Asia Times Online

I was struck recently by a question posed by CNBC's Simon Hobbs to Marc Faber - investor, analyst and financial writer extraordinaire: "In Steve Jobs' new biography, Walter Isaacson talks about a conversation that he had with Rupert Murdoch, and Steve Jobs says that for commentary and analysis the axis today is not liberal versus conservative. The axis now is constructive versus destructive. Which side of that line do you think you fall on?"

I'll assume that Mr Hobbs sees Marc Faber residing more in the "destructive" camp - and I presume many would consider my


analysis "destructive" as well. We're now in this strange and uncomfortable period of heightened angst, anger and vilification, whether it is in Athens, throughout Europe, or across the US from New York City to Oakland, California. European policymakers have been keen to blame short-sellers and speculators for their bond market woes. The rating agencies are under attack on both sides of the Atlantic. And analysts such as Mr Faber and myself are generally viewed with contempt by those determined to view the world through rose-colored glasses.

From Websters: "Destructionist: One who delights in destroying that which is valuable; one whose principles and influence tend to destroy existing institutions; a destructive."

I tend to view the recent use of "destructionist" in similar light to the vilification of the so-called "liquidationists" and "bubble poppers" (a Ben Bernanke term) from the spectacular "Roaring Twenties" boom and bust cycle. There are those who believe that enlightened policymaking can implement an inflationary cycle and successfully grow out of debt problems. Then there are others that see failed policy doctrine and credit inflation as the root cause of a dangerous dynamic that risks a catastrophic end. Revisionist history has been especially unfair to Andrew Mellon and other "bubble poppers" who warned of the impending dangers associated with the runaway monetary, credit and speculative excess in the years immediately preceding the 1929 crash.

I am of the view that inflationary policy doctrine ("inflationism") is in the process of impairing the creditworthiness of the financial claims that constitute the foundation of the global financial system. Massive issuance of non-productive debt and central bank monetization have irreparably distorted the global pricing of finance and the resulting allocation of financial and real resources.
This backdrop has nurtured destructive speculative dynamics. From my perspective, it is the "destructionist" forces of "inflationism" that today pose grave risk to global capitalism. And, to be sure, the "socialism" of credit risk is at the heart of the monetary and economic quagmires imperiling Europe, the US and nations around the world.

From Wikipedia: "Destructionism is a term used by Ludwig Von Mises, a classical liberal economist, to refer to policies that consume capital but do not accumulate it. It is the title of Part V of his seminal work Socialism. Since accumulation of capital is the basis for economic progress (as the capital stock of society increases, the productivity of labor rises, as well as wages and standards of living), Von Mises warned that pursuing socialist and statist policies will eventually lead to the consumption and reliance on old capital, borrowed capital, or printed 'capital' as these policies cannot create any new capital, instead only consuming the old."

From the "Austrian" perspective, runaway credit booms destroy wealth instead of creating it. There is as well an important facet of inequitable wealth redistribution that returns to haunt the system come the unavoidable bursting of the bubble and the associated devaluation of "printed capital". I believe the current course of reflationary policymaking is doomed specifically because the ongoing massive expansion (inflation) of financial claims is not associated with a corresponding increase in capital investment and real wealth-creating capacity. Governments around the world are - and will be in the future - required to issue massive amounts of new debt to sustain maladjusted financial and economic structures, in the processes prolonging wealth-destructive over-consumption and destabilizing global imbalances. The "Austrians" use the apt analogy of consuming one's furniture for firewood.

As she has a habit of doing, The Financial Times' Gillian Tett wrote an exceptional piece on Friday. "Subprime moment looms for 'risk-free' sovereign debt: When future financial historians look back at the early 21st century, they may wonder why anybody ever thought it was a good idea to repackage subprime securities into 'triple A' bonds. So, too, in relation to assumptions about the 'risk-free' status of western sovereign debt. After all, during most of the past few decades, it has been taken as a key axiom of investing that most western sovereign debt was in effect risk-free, and thus expected to trade at relatively undifferentiated tight spreads. Now, of course, that assumption is being exposed as a fallacy ... As the turmoil in the eurozone spreads, forcing a paradigm shift for investors, the intriguing question now is whether we are on the verge of a paradigm shift in the regulatory and central bank world, too."

Italian yields jumped 16 basis points (bps) on Friday to 6.35%, tacking on another 34 bps for the week. The spread to bunds surged 69 bps this week to 453 bps. One is left pondering how the Italian bond market would have fared had the European Central Bank (ECB) not surprised the market with a rate cut and not continued to aggressively buy Italy's debt. On Tuesday from the FT: "A trader of Italian government bonds said: 'It was meltdown at one point before the ECB came in. There were no prices in Italian government bonds. That is almost unheard of in a big market like Italy. There were just no buyers and therefore no prices.'"

Just to think that there were "just no buyers and therefore no prices" in the world's third-largest sovereign debt market. To have Greek yields last week approach 100%. To have speculative positions in sovereign debt early in the week lead to the eighth largest bankruptcy filing in US history. And there were heightened market concerns as to the safety of "segregated" brokerage assets (in response to MF Global issues) and the integrity of the credit default swap (CDS) marketplace (Greece and beyond). To have G20 policymakers, again, fail to reach a consensus as to how to approach the European debt crisis. To have Greece spiraling out of control.

Well, the wrecking ball has been just chipping away at the bedrock of market faith in contemporary finance. And then to read one of the world's preeminent financial journalists contemplating market "fallacies" and a paradigm shift with respect to the nature of sovereign debt risk.

No doubt about it, it was another troubling week in global finance. But not to worry; the ECB surprised markets with a rate cut and Federal Reserve chairman Bernanke stated that the Fed was readying its mortgage-backed security (MBS) bazooka. The more destabilized world finance becomes, the more our captivated markets fixate on synchronized global reflationary policymaking. For now, faith in policymaking seems to be holding up better than confidence in finance.

There are important reasons why financial crises traditionally often originate in the so-called "money market". Money market assets are generally the most intensively intermediated financial claims. Risk intermediation is critical to the process of transforming loans with various risk profiles into financial claims essentially perceived as risk-free in the marketplace.

As I attempted to address last week, this perception of "moneyness" is an extremely powerful force in finance, the markets and economics more generally. The credit mechanism and resulting flow of finance can work miraculously when markets perceive "moneyness", although things can unravel dramatically when the marketplace begins to fear what it thought was safe and liquid "money" are instead risky and potentially illiquid Credit instruments. Just as there is a thin line between love and hate, there can be an even finer line between Credit boom and bust.

From the concluding sentences of Ms Tett's article: " ... if regulatory systems had not encouraged banks and investors to be so complacent about sovereign risk in the past, markets might have done a better job of signalling that structural tensions were rising in the eurozone - and today's crunch would not be creating such a convulsive shock. It is, as I said above, wearily reminiscent of the subprime tale. And, sadly, that is no comfort at all."

I, as well, see disconcerting parallels to subprime. Especially late in the mortgage finance bubble, a huge and expanding gulf had developed between the market's perception of "moneyness" for mortgage securities and the true underlying Creditworthiness of the debt. Importantly, it was the ongoing massive expansion of mortgage credit that supported home prices and economic growth - all working seductively to further seduce the marketplace into perceiving ongoing "moneyness".

The "terminal phase" of credit bubble excess saw systemic risk expanded exponentially, as the quantity of credit ballooned and the quality of this debt deteriorated markedly. It was both a historic mania and astonishing example of (Minsky) "Ponzi Finance".

These days, sovereign debt (Treasuries, in particular) is being issued in incredible quantities (and at amazingly low yields). The vast majority of this debt is non-productive and of rapidly deteriorating quality. Yet the markets for the most part are sufficiently content to continue perceiving "moneyness".

Part of this "moneyness" is due to the credit cycle reality that, similar to subprime, things tend to look ok even in the perilous late stage of a credit boom. And, importantly, the markets perceive that the Fed, ECB, People's Bank of China, Bank of Japan, Bank of England, and other global central bankers will continue to monetize (accumulate) this debt - in the process ensuring stable valuation and abundant liquidity in the marketplace ("moneyness").

Here's where it gets really troubling from my analytical framework: the more this "new paradigm" takes hold - of the market now recognizing the fallacy of the traditional assumption of "risk-free" sovereign debt (especially in regard to $2.5 trillion of Italian federal borrowings) - the greater the scope of central bank monetizaton anticipated by the markets.

This expectation for reflationary policymaking is increasingly underpinning speculative risk asset markets globally. Especially when it comes to Treasury debt, the markets' perception of "moneyness" is related much more to the expectation of ongoing central bank purchases than it is with (rapidly deteriorating) credit fundamentals. Ironically, the greater the upheaval in global sovereign debt and risk markets, the more willing the markets are to further accommodate Treasury bubble excess.

Increasingly, the key dynamic underpinning global risk markets is the expectation for the Fed and global bankers to ensure the "moneyness" of Treasury and global sovereign debt. Indeed, "risk on" or "risk off" now rests chiefly on the markets' immediate, perhaps whimsical, view of the capacity for the world's central banks to sustain the faltering sovereign credit boom.