Consumer confidence dropped even lower than it had during the 2008 financial crisis. And economic loss was reportedly as high as US$46 billion, making it one of the world’s most costly natural disasters.

In response to the flooding, the Bank of Thailand promptly eased interest rates to 3 per cent so as to facilitate economic recovery, while the government approved three financial decrees, totalling 700 billion baht (US$22.5 billion), for rehabilitation and long-term water management systems. This said, the government stimulus package has had a limited impact, due to a delay in passing the budget bill.

Thailand is gradually recovering, but some effects of the flooding still remain. Only the tourist industry seems to have fully recovered, with the number of tourist arrivals rising to 1.95 million in January, up 9.5 per cent from the previous month. Exports fell by 6 per cent compared to the previous year, due to the short-term supply shock, while imports saw a 4.2 per cent drop. On the other hand, data from the Board of Investment shows that 70 per cent of the 800 flood-hit Board of Investment-supported industrial operators had resumed operations. Most prospective Japanese investment in unaffected areas will also continue as previously planned, which will be important in bringing new growth.

Thailand’s Ministry of Labour reported that 51,000 workers have been laid off and another 160,000 are idle, but are being paid 70 per cent of their normal wages. These figures are not overly worrisome though, as the unemployment rate was as low as 0.5 per cent during the pre-flood period. Domestic demand has also improved, and the country’s fiscal outlook is healthy with moderate budget deficits, low public debt and large foreign reserves providing room for the government’s stimulus plan. It is expected that with the stimulus and reconstruction, Thailand’s economy should be back to pre-flood levels by the third quarter of 2012, and that annual GDP growth should be close to 6 per cent.

A much longer-term worry is that last year’s flooding considerably damaged Thailand’s reputation as a safe environment for offshore investment. In mid-March, for example, Honda decided to establish a US$337 million plant in Indonesia, though the company had originally intended to build it in Thailand. This was seen to be a result of the flooding, as well as unclear communication from the Thai prime minister during her visit to Japan in March.

Though the Thai economy has managed to grow through years of conflict, political stability will be required to help restore confidence during the post-flood period. Unfortunately, the government is pursuing various agendas that could deepen the political divide rather than foster stability. The submission of a reconciliation proposal to the House of Representatives for urgent consideration — despite the opposition calling for more time to consider its recommendations — and the proposed amendments to the Thai constitution could bring the temporary ceasefire to an end. It is still unacceptable for many to destabilise Thailand’s monarchy or judicial system and consider ‘reconciliation’ with an amnesty to all red-shirt leaders and to drop or annul corruption charges brought by the Assets Scrutiny Committee against the Thaksin administration.

But prolonged and unresolvable political disagreement could reduce the country’s attractiveness as a destination for investment. Slackening demand from the US and the euro zone, which are the main purchasers of Thailand’s goods and services, could also threaten exports. Meanwhile, rising world oil prices, a cut in government subsidies and an increase in minimum wages in the Bangkok Metropolis by 40 per cent are adding to inflationary pressure. Thai-owned labour-intensive industries and small and medium enterprises will be adversely affected, as this is adding to their costs and undermining their competitiveness. The cost of living is also soaring due to higher energy prices and a shortage of certain commodities, such as palm oil. These price hikes could become politically sensitive, as they could cause even pro-government loyalists to turn against the country’s leaders.

Flood-prevention programs can only restore the country to its pre-flood condition — they will not contribute to its long-term growth. The government should thus put an end to its populist policies and focus on improving productivity instead. Investment in infrastructure should also be encouraged; Thailand would benefit greatly from initiatives such as the Greater Mekong Subregion, particularly with Myanmar undergoing huge reforms. It will still take years, of course, before the repercussions of the flooding truly subside. But there are promising signs that, economically at least, Thailand may have started on the road to recovery.

Pisit Leeahtam is Dean at the Faculty of Economics, Chiang Mai University, and was formerly deputy minister of finance in Thailand.

Cynn Treesraptanagul is a research assistant to Pisit Leeahtam.