Thailand's impressive economy could be in for a serious test this year

While many developed countries are still bemoaning the pace of their recovery, Thailand's export-led economy is growing at an impressive clip.

While many developed countries are still bemoaning the pace of their recovery, Thailand's export-led economy is growing at an impressive clip.

Last year, export growth was over 28 per cent, and the number of foreign visitors to the country grew 12 per cent. Meanwhile, private investment was up more than 13 per cent, while domestic consumption increased nearly 5 per cent.

Granted, the country suffered a brief recession last year, with the economy shrinking 0.6 per cent in the second quarter and 0.3 per cent in the third quarter, but the strong export growth helped the economy to reverse course and grow 1.2 per cent in the last three months of last year.

That meant that for all of last year, the GDP of South East Asia's second-largest economy grew by 7.8 per cent, a strong performance within the region and a figure that the US and European countries can only dream about.

Considering that political turmoil on the streets of Bangkok in April and May last year left 91 people dead, Thailand's economic strength is even more remarkable. During the upheaval, the army moved into the city twice to clear anti-government protesters demanding the resignation of the prime minister, Abhisit Vejjajiva.

However, while tourism in the capital took a temporary hit, Thailand's exports and personal consumption grew throughout the unrest. Nor has economic growth been affected by ongoing instability on three of the country's borders. Just last month, clashes between Thai and Cambodian forces on the country's eastern border left eight Cambodian soldiers and three Thais dead.

Thailand's economy, then and now, seems immune to its political problems, yet its resilience will be tested anew this year.

First, the anti-government demonstrations last year, which protested against the legitimacy of Mr Abhisit's unelected government, were only postponed, rather than eliminated, by a government clampdown and the arrest of several opposition leaders on terrorism charges.

At the time of this writing, the Puea Thai party, Thailand's main opposition party, was preparing to submit a parliamentary motion of no confidence in the prime minister because of his government's use of force to disperse protesters last year.

Opposition was also temporarily abated by the prime minister's commitment to dissolve parliament and hold new elections, which he says he will do by June this year.

However, Mr Abhisit has promised fresh elections before and failed to deliver, so no one can be certain that elections will take place on schedule.

A peaceful transition will also depend not just on whether elections are held, but whether the outcome is accepted, since opposition leaders are sceptical that Mr Abhisit will go quietly if he loses.

Clearly, given the level of distrust between the opposing parties, there is a strong possibility of fresh protests and more political volatility even if voters go to the polls in the coming months.

Second, the Thai economy is not expected to grow so robustly this year. Thailand's strong growth and rising domestic prices and incomes could lead to a spike in inflation this year, particularly if oil prices continue to rise.

There are also worries that export growth this year will be limited by the sluggish recovery of developed countries and by the continued appreciation of the Thai baht.

At the moment, there are no signs that Thai inflation is out of control. Headline inflation in the country is only 3.03 per cent, and unlike many central banks, the Bank of Thailand has not been afraid to raise interest rates, doing so four times since July last year. However, Thailand's National Economic and Social Development Board has forecast that economic growth will be more fragile this year, slowing to between 3.5 per cent and 4.5 per cent. So fending off the economic impact of another period of political instability could be more difficult this time around.

At the same time, although Thailand's rising commodity prices and growing exports are good news for the country's manufacturers and farmers right now, a bout of inflation might make popular anger against the government even more intense.

Thailand's resilience is undoubtedly impressive to date, but the economy is not out of the woods just yet.