×

Bangkok bombing exposes frailty of Thai economy

Onlookers near the site of a bomb explosion that took place on August 17, 2015 in Bangkok
Nicolas Axelrod - Getty Images
Onlookers near the site of a bomb explosion that took place on August 17, 2015 in Bangkok

The explosion in Thailand's capital threatens to derail an economy already suffering from a series of vulnerabilities, economists warn.

Central Bangkok witnessed a bomb blast on Monday night local time that Prime Minister Prayuth Chan-ocha called Thailand's worst ever attack. The death toll stood at 22 as of early Wednesday. Several nations including Singapore, Hong Kong and the U.S. have since issued travel advisories, recommending citizens to avoid the vicinity.

"Aside from monitoring human casualties, markets will definitely be watching out for the hit to tourism," Callum Henderson, global head of FX research at Standard Chartered, told CNBC.

Tourism accounts for 10 percent of gross domestic product (GDP) and has been a rare bright spot in a lackluster economy. For example, foreign tourist numbers spiked 37.6 percent on year during the April-June period, while exports contracted 5.5 percent during the same period.

Read MoreThailand's economy isn't a Land of Smiles

Dillip Rajakarier, CEO of Minor Hotel Group, told CNBC on Wednesday that the deadly explosion resulted in a few short-term cancellations from both tourists and business travelers. However, he did not expect it to last in the near-term, adding that October's peak season would be the real test.

"A loss of momentum in the sector (the only firm growth driver in Thailand currently) will present a new downside risk to economic activity," Australia New Zealand Bank (ANZ) said a report on Tuesday.

Specifically, Thailand's current account balance becomes vulnerable if tourism-related export service receipts suffer on the back of Monday's incident and any subsequent political uncertainty, the bank added.

Should the country see a lingering slowdown in tourist arrivals, it might erode the current account surplus—which stood at $890 million as of June, down from $2.1 billion the previous month—and offset the benefit of cheaper oil. Thailand is a significant net importer of oil in Southeast Asia.

For an emerging market such as Thailand, a narrowing current account is even more problematic ahead of a looming Federal Reserve interest rate hike later this year. Countries with a weakening trade balance tend to be more reliant on foreign capital funding, making them prone to capital outflows.

Historical evidence seems to supports this gloomy outlook. Previous episodes of violence, such as the army's bloody eviction of protesters in 2010 that occurred in the same area as Monday's blast, saw monthly tourist arrivals fall sharply, resulting in slack hotel occupancy and a 26.8 percent quarterly plunge in non-resident expenditures, Citi said in a report.

Dented demand

Consumer sentiment in Southeast Asia's second-largest economy has already been falling for six straight months, according to an ANZ-Roy Morgan index released in July, and Monday's attack will likely only worsen confidence and spending.

"In an environment of uncertainty, sentiment and confidence channels will be more adversely affected and this could send negative multiplier effects through key services and expenditure channels," ANZ warned.

Read More Bangkok reels after deadly shrine bombing

Domestic demand in the past has been hampered by high household debt levels and the country's worst drought in a decade, which has severely handicapped the agriculture sector. While agriculture accounts for 10 percent of GDP, it employs more than 40 percent of the country's population.

Several months of dry weather this year likely caused a 15-20 percent fall in rice output, a significant blow for one of the world's largest rice exporters and hurting income generation for workers.

Citi economists believe the damage to domestic demand from Monday's blast will likely show in August and September economic indicators, but they don't expect the negative impact to last beyond three months assuming authorities move quickly to restore security.

"Accelerating fiscal spending, particularly public investments would be crucial in mitigating a demand shock," Citi warned.

Still, Darren Buckley, president of the American Chamber of Commerce Thailand, doesn't expect Monday's attack to change overall investor sentiment. "Long-term investors are resilient, given Thailand's history of instability," he told CNBC on Wednesday, adding that tracking down the culprits quickly will be essential to restoring confidence.