Will terrorism derail the Thai economy?

Since the 9/11 attack, terrorism has gained broad attention in economic literature and research concerning its direct material damage and long-term impact on the local economy. Thailand, which happens to be the most visited country in Southeast Asia, recently witnessed such casualty where in two consecutive bomb blasts added to concerns over slowing economic growth in a country that has already been struggling with years of political unrest.

On Monday, Thailand witnessed its worst ever terrorist attack when a powerful blast ripped through Bangkok’s popular Erawan Hindu shrine, which is surrounded by shopping malls and hotels and is considered to be Bangkok’s commercial heart. The blast that claimed lives of over 20 people, including nine foreigners, was clearly aimed to hurt foreigners. The blast wasn’t the single dreadful event as it was followed by another explosion at a pier on the Chao Phraya River that flows through Bangkok; however, no injuries were reported as the pier was closed.

The market reaction to the incident was brutal. Thai Baht, the local currency, plunged to its lowest levels in more than six years against USD while the nation’s stock market registered steepest decline in a year.

The explosions in the capital city threatens to derail the tourism sector, which happens to be few of the remaining bright spots for Thailand’s struggling economy. Thailand’s tourism had just started improving with the number of foreign tourist increasing by 37.6% y-o-y during the April-June quarter. Improvement in tourism sector, however, failed to counter weak exports, which contracted 5.5% during April-June quarter. According to data released on Monday by the National Economic and Social Development Board, Thailand’s GDP registered a modest growth of 0.4% in the three months through June as compared to the previous quarter.

Moreover, the economy, already weighed down by slowing manufacturing and contracting exports, had just witnessed its worst drought in a decade. Several months of dry weather in 2015, resulting a 15-20% fall in rice output from one of the world’s largest rice exporters, is also expected to hurt income and impact domestic demand. The blasts could further affect consumer confidence, which according to ANZ-Roy Morgan index, marked sixth straight decline in the July release.

On top of it, Monday’s incident resurfaced the threat of renewed violence similar to the army’s protester eviction in 2010 that ended with the seizure of military power in May 2014. This raises concerns over a possible slowdown in tourist arrivals, which could further dent nation’s current account balance. According to the latest data, country’s current account surplus as of June stood at $890 million, down from $2.1 billion in the previous month. For an emerging economy like Thailand, narrowing current account poses additional risk to the economic recovery when the Fed is considering to hike interest rate by the end of this year.

According to a Citi Bank report, historical occurrence of such violent episodes had triggered sharp fall in monthly tourist arrivals and lead to a 26.8% quarterly plunge in non-resident expenditures (source: cnbc.com). Immediate economic effect from Monday’s blast would be reflected in economic numbers for August and September; however, long-term economic consequences of the bombing are yet unclear. With the Thailand economic outlook already clouded by drought and Chinese currency devaluations, officials should respond quickly to regain confidence over the safety of tourists.

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“Original analysis is provided by Admiral Markets”