Flooding in Thailand
Thailand is battling through the worst flooding in decades. The floods have severely affected over 30 provinces in north and central Thailand, taking a devastating toll on the people there. Estimated damages now range between 1-2% of GDP. Six main industrial estates in the Ayutthaya and Pathum-thani provinces have flooded, impacting over 1,000 factories and supply chains in electronics, electrical and automotive industries. Major retailers have been forced to suspend operations of distribution centers due to logistics disruption. Agriculture is also severely hit with more than 10% of the rice plantation area affected. Based on the data released, Thailand would need at least a month to drain away the current floodwaters.
The banking sector is among the other sectors we expect will be negatively impacted. As a result of a downgrade in projected GDP growth by the Thai central bank of about 2% for 2011, we anticipate bank earnings could drop by more than 2%. We would expect margins for consumer companies could also be hard hit as a result of higher raw material prices as well as higher distribution costs. However, that could balance out if those companies are able to raise prices. We anticipate energy companies should not be impacted as negatively given that demand for energy will likely be increasing.
While the consequences of the flood damage will negatively impact Thai corporate earnings, we believe the long term outlook for Thailand remains strong. In addition to the corporate tax cuts and various stimulus packages that have already been announced, the Thai government plans to spend Bt400 billion (US$13 billion) on investments in dams, irrigation and water management to restore the country. We believe Thailand should also remain an attractive place for foreign direct investment (FDI) due to location advantages, a supportive business environment and highly competitive workforce. While devastating in the near-term, we believe that impact from the flooding should prove short-lived, and that Thailand should recover well from this disastrous event.