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HomethailandgeneralEvaluating the impact of war

Evaluating the impact of war

Geopolitical conflicts have tested the Thai economy the past few years, with Russia's invasion of Ukraine continuing as Israel and Hamas renew hostilities in the Middle East.

The expected war in Gaza is likely to have a ripple effect on energy prices and affect other trade partners in the region.

According to the International Trade Promotion Department, Israel is Thailand’s 40th-largest trading partner and sixth in the Middle East.

In the first eight months of this year, trade between Thailand and Israel amounted to US$857 million, growing by 1.15%.

Thailand exported $546 million to Israel, an increase of 12.6%, while imports from Israel decreased by 14.2% to $311 million.

In terms of tourism, Israeli tourists were regarded as an emerging market before the pandemic, totalling 194,081 arrivals in 2019.

This year, Israelis have been one of the few markets to outperform their pre-pandemic tally with around 190,000 arrivals in the first nine months, mostly families, with average spending of 70,000 baht per trip, higher than the market average of 48,000 baht.

Wars often have unintended consequences and Thailand faces economic risks without a proper plan to mitigate the impact.

HIGH DEMAND FOR FOOD

Phusit Ratanakul Sereroengrit, director-general of the International Trade Promotion Department, said if Israel’s economy is affected by the war, it could change trade, investment and commerce with other countries, including Thailand.

If the conflict can be resolved within 1-2 weeks, Israel may recover similarly to previous conflicts, said Mr Phusit. However, if a war drags on, it will take a longer time for Israel’s economy and business confidence to recover, he said.

Thailand may have an opportunity to increase exports to Israel because of the war, including rice, canned seafood, processed fruit, rubber and rubber products, medical instruments and pharmaceutical products.

Negative impacts could include delays and higher shipping costs for Thai products to Israel and imports from the Middle East such as diamonds, fertiliser and chemicals, said Mr Phusit.

Although Thailand could expand its food exports, shipments of non-essential items to Israel such as automobiles and auto parts, jewellery and gems may be affected as Israeli consumers reduce their purchases during a war, he said.

In addition, Israeli entrepreneurs may delay travelling to trade shows in Thailand, said Mr Phusit.

“The International Trade Promotion Office in Tel Aviv is monitoring the economic and trade situation daily, analysing the impacts and suggesting timely solutions,” he said.

The department also engages in discussions with the private sector to understand the obstacles and potential export opportunities for Thailand to replace the Israeli market if the war is prolonged, said Mr Phusit.

Thailand’s top five exports to Israel comprise automobiles and auto components, gems and jewellery, canned and processed seafood, wood and wood products, and rice.

The top five imports from Israel consist of polished diamonds and jewellery, fertiliser, electrical machinery and parts, electronic circuit boards, and vegetables, fruit and seasonings made from vegetables and fruit.

There are around 29,000 Thai workers employed in agriculture in Israel.

HISTORICAL CONTEXT

Ratasak Piriyanont, senior vice-president and macro-strategist at Kasikorn Securities, said the current Israeli-Arab conflict represents the deadliest fighting between the two in 50 years.

The Yom Kippur War in 1973 caused Wall Street’s S&P index to tumble by 60% over one year, oil prices soared by $11 per barrel, and gold prices skyrocketed from $100 per ounce to $160.

Global GDP plummeted from more than 6% prior to the Yom Kippur War to less than 2% in 1974, said Mr Ratasak.

“If the conflict between Hamas militants and Israel doesn’t last long, such as 1-2 weeks, the economic impacts could be minimal,” he said.

Smoke billows as Israeli rockets hammer Gaza City on Oct 10. (Photo: Reuters)

LIMITED IMPACT

Poonpong Naiyanapakorn, director-general of the Trade Policy and Strategy Office, said the fighting is expected to have an indirect impact on the global economic recovery.

The global economy is in a state of cautious recovery worldwide, with tight monetary policies and elevated interest rates affecting consumer purchasing power and producer costs, he said.

Escalated tension in the Middle East could lead to further increases in energy prices for the remainder of the year, potentially undermining the efforts of central banks in various countries to control inflation, said Mr Poonpong.

He said this could lead to a further cycle of inflation, which would slow the global economy and international trade.

If the fighting is limited to a specific area within Gaza and there are no border closures or complete disruptions of transport systems, it is unlikely to significantly affect Thailand’s exports, said Mr Poonpong.

As Israel and Palestine are not major trading partners of Thailand, and their trade volumes are relatively low compared with global totals, the fighting is unlikely to have a significant impact on Thailand’s trade volume, he said.

Thailand may still feel an indirect impact from the volatile crude oil market, affecting oil production and transport in Southeast Asia, said Mr Poonpong.

He said if the fighting is prolonged, it would shift the cost of international cargo transport and insurance, especially on routes affected by the conflict and delays in transport.

If the Israel-Hamas conflict were to spread to a regional conflict, it would affect more exports to the Middle East, said Mr Poonpong.

GEOPOLITICAL TAKE

Somjai Phagaphasvivat, an independent political analyst, said he believes the conflict between Israel and Hamas will not escalate into a large-scale war unless Israel launches attacks on Iran because it believes it is engaging in a proxy war by backing Hamas.

However, there is a slim chance of this occurring as Iran does not want to interfere in this war, while Israel does not want to start a multi-front war, he said.

Major powers such as China and the US are mostly observing as the conflict has little impact on their economic status, said Mr Somjai.

However, if Israel escalates its long-running shadow war against Iran, he said the adversary could retaliate by targeting the Strait of Hormuz, a critical waterway for the movement of nearly 17 million barrels of crude oil and condensate oil each day.

In addition, the conflict could ratchet up if other militant factions in Palestine and Syria join in attacking Israel.

Given fears the conflict could mushroom into a regional war, global oil prices, stock markets and gold prices may fluctuate, said Mr Somjai.

SUPPLY CHAIN ISSUES

The Russia-Ukraine war and the pandemic already had a significant impact, causing disruptions to the global supply chain, he said.

Global supply chain bottlenecks are unlikely to resolve anytime soon, leading firms to turn their attention to reshoring as an alternative strategy.

The concept involves bringing back production or manufacturing to the country of origin, previously outsourced to other countries, to control costs.

Another option is “nearshoring”, which means outsourcing of corporate operations or services to an area that is close by, typically one that has a free trade agreement (FTA), said Mr Somjai.

An additional strategy that has become popular in recent years is “friendshoring”, meaning sourcing from countries regarded as political and economic allies.

He said Thailand is expected to receive less benefits from the new international supply chain compared with Vietnam because the US is not strongly committed to its alliance with Thailand.

Vietnam has FTAs with many countries, including the 27 nations of the EU, as well as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

These pacts allow Vietnam’s products to be exported to the EU and CPTPP members with zero tariffs.

Weerawat Wirotpoka, senior director of securities analysis at Finansia Syrus Securities Plc, said the conflict in the Middle East might prompt the Federal Reserve to realise there is no need to hike interest rates further.

CLEARED FOR TAKE-OFF

Siripakorn Cheawsamoot, deputy governor of the Tourism Authority of Thailand (TAT), said the conflict in the Middle East should not spill over to other countries in the region, with the number of flights from that area remaining unchanged.

On the contrary, El Al Airlines requested to increase flights to Phuket from 2-3 flights to 4 per week to serve higher demand, both from Israeli tourists who want to return home and high purchasing power among Israelis who want to travel abroad to find some place to stay temporarily.

Flights between Thailand and Israel the past week were fully booked, while other key markets such as Saudi Arabia, which is projected to have 200,000 arrivals to Thailand this year, still have two airline choices: Thai Airways and Saudia Airlines, he said.

“Though events remain unpredictable, the TAT forecasts this conflict will not spread to other countries,” said Mr Siripakorn.

“The Middle East region still has potential to grow this year based on the performance in the first half.”

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