Commodity woes pose threat to Thailand's recovery

Commodity woes pose threat to Thailand's recovery

By Anchalee Koetsawang

BANGKOK (Reuters): Thailand's economic recovery may be
thwarted by falling world prices for its key commodities and a
rapidly firming baht which could undercut exports and generate
less revenue for farmers, analysts said on Thursday.

Although commodities exports account for only 10-12 percent of
Thailand's country's gross domestic product (GDP), the farm
sector's importance has become pronounced during the crisis.

The sector not only provides a safety net for the country at a
time when the unemployment rate is soaring as economic turmoil
triggers an avalanche of bankruptcies, the resilient sector might
also be able to help stimulate domestic demand.

Farmers' incomes in 1998 have been boosted by the weaker baht
and an extraordinary increase in rice demand. Rice was one of the
few commodities this year that enjoyed robust prices.

Thailand is the world's top exporter of rice and a leading
exporter of sugar, rubber, tapioca and shrimps.

But analysts said the farm sector was unlikely to see two
golden years in a row. Farmers are likely to be hit by a double
whammy next year as world rice demand drops and the baht firms.

"The problem is posing a serious social threat to the
government. Although the farm sector accounts for only around 10
percent of GDP, it employs almost 50 percent of the workforce,"
said Supavud Sacheau, an economist at Merrill Lynch.

"With the economy yet to fully recover and the world economy
expected to grow at a slower pace next year, Thailand will still
need a solid farm sector as a cushion," he said.

Merrill Lynch forecasts that the world economy will grow by
1.2 percent in 1999 versus 1.7 percent seen this year.

Growth in the Organization for Economic Cooperation and
Development countries next year is projected at 1.1 percent from
1.9 percent forecast for 1998.

Experts forecast that the world rice import demand next year
could drop between 3.75-6.75 million tonnes from a record 26.75
million tonne seen this year.

Drought caused by the El Nio phenomenon ravaged rice crops in
many countries and sent rice imports soaring in 1997 and 1998.

Resumption of normal weather patterns should cause world rice
trade to shrink and rice prices are expected to fall in line with
softer demand. Traders predicted that rice prices could drop by
at least 10 percent from the 1998 level.

Sugar, another key export from Thailand, is unlikely to see
any major reprieve early next year as Indonesia, the biggest
Asian sugar buyer this year, has front-loaded its imports and
therefore might not need to commit to its usual buying program
from January and May, analysts said.

The International Sugar Organization (ISO) says the world
sugar price turnaround might not take place until the 1999/2000
crop cycle.

As for rubber, the International Natural Rubber Organization
forecasts that it saw no real or substantial improvement in
rubber prices until mid-1999 or later.

Merrill Lynch's Supavud forecast that the first and second
quarter of next year would be a critical time for the Thai farm
sector and the government because of commodities problems,
especially in the rice industry.

"The prices are expected to be lower than this year. The baht
is stronger and therefore will generate less income in baht
terms. The output itself is forecast to be low due to pest
outbreak and lack of water," he said.

"This means farmers will receive less income from selling less
rice at lower prices," he said.

Vichai Sriprasert, president of the rice exporting firm
Riceland International, told Reuters rice mills and exporters
were being hit by liquidity problems as commercial banks were
reluctant to lend.

"Mills have no money to buy rice from farmers because
exporters who lost money from rice trade delayed the payment.

"They were both to blame. Commercial banks were reluctant to
lend to them because they had misused the rice loans in the past
by investing in the loss-making property sector," he said.

"If mills have no money, farmers will be directly affected
because mills buy paddy from them," he said.

Arporn Chewakengkrai, an economic advisor to Thai Prime
Minister Chuan Leekpai, told Reuters the government was mapping
out measures to help mitigate the impact of the lower commodity
prices and stronger baht.

"The government is working to ensure sufficient credits to the
farm and agribusiness sectors. It has set a guaranteed price for
paddy and will look for ways to provide additional incomes for
farmers," she said.