Bloomberg News

Thai Floods Test Yingluck as Damage May Rise to $1.6 Billion

October 05, 2011

(Updates with new forecasts starting in second paragraph.)

Oct. 5 (Bloomberg) -- Thailand’s worst floods in at least 50 years may slow economic growth and cause $1.6 billion of damage, posing the first leadership test for Prime Minister Yingluck Shinawatra since she took office two months ago.

The deluge swept across the country from late July, killing 237 people, displacing 2.6 million others and damaging almost 10 percent of rice farms in the biggest exporter of the grain, data from the Department of Disaster Prevention and Mitigation and the Ministry of Agriculture and Cooperatives show.

Economic losses from the floods and weakening overseas demand for Thailand’s electronics, textiles and agricultural goods may complicate Yingluck’s efforts to meet a pledge to raise the minimum wage. Flood damage may reach 50 billion baht ($1.6 billion), the University of the Thai Chamber of Commerce estimates, stiffening resistance to mandated pay increases.

“The 300 baht minimum wage was a promise made by the politicians to win votes, so they must pay for the additional increase,” said Atthayuth Leeyavanija, a member of Thailand’s central wage-setting committee who represents employers. “Raising wages to 300 baht a day nationwide would have a severe impact on businesses.”

Yingluck’s government has deployed about 10,000 soldiers to aid flood victims and extended rice-price guarantees to shield rural incomes, while the finance ministry last week cut its 2011 growth forecast to a range of 3.8 percent to 4.3 percent, from 4 percent to 5 percent.

Factory Closures

The University of the Thai Chamber of Commerce, a private institution founded by the chamber, said the impact of flooding, including an earlier deluge, may total 76 billion baht, cutting 0.8 percentage point from economic expansion.

The government estimates the most recent floods may cause as much as 30 billion baht of damage, Deputy Prime Minister Kittiratt Na-Ranong said today. Costs so far amount to about 20 billion baht, central bank Governor Prasarn Trairatvorakul said.

More than a hundred factories producing auto parts, food and electronics have temporarily closed because of floodwaters, according to the Federation of Thai Industries. Indorama Ventures Pcl, which says it’s the world’s largest producer of polyester, shut factories in Lopburi province that make wool yarns and polymers, the company said on Sept. 27.

“We didn’t expect the impact to spread from the agricultural sector to the industrial sector,” Tanit Sorat, the federation’s vice-president, said yesterday by phone. “This will threaten economic growth because declining production could reduce incomes and weaken consumption at a time when demand from overseas buyers is slowing.”

Ancient Temples

At least 40 factories including plants operated by Danish shoemaker ECCO Sko A/S and Japanese food and beverage producer Ajinomoto Co. have closed at an industrial estate near Ayutthaya, where floods are threatening to damage World Heritage-listed temples, Narapote Thewtanom, deputy governor of the Industrial Estate Authority Thailand, said today. Operations may not return to normal for three months, he said.

Rising waters threatened to damage crops in 60 of Thailand’s 77 provinces, Kasikorn Research Center said in a report on Sept. 19. Losses in the agricultural industry may total 20 billion baht, it said.

“This flooding is the worst in at least 50 to 60 years,” Kittiratt, who is also the commerce minister, said Sept. 26.

Rice Damaged

Thailand, which supplies about 30 percent of world rice exports, cut its forecast for production from the main harvest by 12 percent to 22.73 million metric tons after floods damaged crops, the farm ministry said in a statement today. About 3.07 million tons of rice may be damaged, it said.

The benchmark SET Index has tumbled 18 percent over the past month, the most in Asia, as threats to the global recovery led investors to pare bets on emerging markets. The baht has weakened 4.2 percent against the dollar in the same period.

Thailand’s inflation rate has so far weathered the floods, easing to a six-month low of 4.03 percent in September as a fuel-price slide countered a climb in food costs.

Flooding won’t have a significant impact on inflation through crop damage since vegetables account for just 1.4 percent of the consumer-price index’s goods basket, Permanent Secretary for Commerce Yanyong Phuangrach said two days ago.

Rate Pause

The damage caused by flooding has “increased the chance of the central bank pausing rate rises,” said Pornthep Jubandhu, an economist at Siam Commercial Bank Pcl in Bangkok.

The Bank of Thailand raised its benchmark rate by a quarter of a percentage point to 3.5 percent on Aug. 24, the ninth such increase since the start of July 2010.

Thailand’s two-month old Cabinet plans to spend 7.2 billion baht to assist farmers affected by the floods. The government also agreed to extend its rice-price guarantee program to the second harvest from the end of February.

Yingluck’s Pheu Thai party won a majority in elections in July by appealing to rural voters in the north and northeast, where average incomes are about one third that in Bangkok, according to data from the National Statistical Office. Those areas, whose voters also helped propelled Yingluck’s brother Thaksin Shinawatra to three election victories between 2001 and 2006, are among the worst-hit by this year’s seasonal floods.

The effect of the inundation may not be serious enough to threaten Thailand’s new government, said Somjai Phagaphasvivat, a lecturer at Bangkok’s Thammasat University.

“The government has a strong base that will continue to support Yingluck because of her brother,” he said by phone. “There will be a lot of criticism, but not to the point where the rhetoric will turn to street action.”

--With assistance from Daniel Ten Kate in Bangkok. Editors: Sunil Jagtiani, Tony Jordan

To contact the reporters on this story: Suttinee Yuvejwattana in Bangkok at Suttinee1@bloomberg.net Supunnabul Suwannakij in Bangkok at ssuwannakij@bloomberg.net

To contact the editors responsible for this story: Tony Jordan at tjordan3@bloomberg.net; Stephanie Phang at sphang@bloomberg.net


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