Thai Bankruptcies Rise as Minimum Wage Rolls Out: Southeast Asia

Thai Prime Minister Yingluck Shinawatra
Yingluck Shinawatra, Thailand's prime minister. Photographer: Dario Pignatelli/Bloomberg

Confederate International Co., a Thai family-owned maker of nightwear, lost a German customer of 22 years after last month’s minimum-wage increase in the Southeast Asian nation raised costs.

“They stopped talking to us, even though we have done business together for a long time,” said Veerayuth Sookhattako, 57, owner of the Chiang Mai-based company that ships about 80 million baht ($2.7 million) of apparel to Germany and France each year. “I established this company 28 years ago. I don’t want to let it go, but I may need to close down our business by the end of the year if we can’t get new orders.”

Veerayuth isn’t alone. Last quarter, 7,221 Thai companies closed down, 27 percent higher than in the same period a year earlier, when the worst floods in 70 years swamped most of the country. The figure is also more than double the average of 3,000 in the previous nine years, according to data from the National Economic & Social Development Board.

Prime Minister Yingluck Shinawatra’s government raised the daily minimum wage to 300 baht throughout the country last month, after a similar increase in April in seven provinces including Bangkok. Before the increase, minimum wages ranged from 159 baht in northern Phayao province to 221 baht in Phuket, according to the Labour Protection and Welfare Department.

Government stimulus measures, including the wage rise and increased payments to farmers, come as the country’s manufacturers struggle with a stronger baht and slowing export demand amid a global slowdown.

Baht Strength

“The problem with the Thai minimum-wage hike is there might be competitiveness issues because this will lead to high costs for firms and if there’s no way to offset these costs, it translates into higher inflation for consumers,” said Eugene Leow, a Singapore-based economist at DBS Group Holdings Ltd. “There’s also some concern about how strong the Thai baht is.”

The baht is the biggest gainer this year among 11 widely-traded Asian currencies tracked by Bloomberg. The Bank of Thailand held the benchmark rate for a third straight meeting this month even after Finance Minister Kittiratt Na-Ranong renewed calls for lower borrowing costs to discourage inflows that boosted the baht to a 17-month high in January.

Wages in Asia almost doubled between 2000 and 2011, according to the International Labor Organization, and workers from China to Indonesia have pushed for more pay in recent years to counter rising living expenses. The increases will permanently increase business costs, forcing companies to boost prices, according to a report from HSBC Holdings Plc.

‘Fundamental Change’

“Lately, far more persistent and permanent costs have shot up -- wage pressures are now ubiquitous across Asia’s factories,” HSBC economists Frederic Neumann and Julia Wang wrote in a report last month. “A rise in wages is permanent and should thus prompt a fundamental change in pricing.”

Thailand’s small and medium-sized enterprises will suffer the most from higher wages because they’re labor intensive and don’t earn enough to benefit from reduced corporate income tax rates, according to the government and the central bank.

Costs for Thai companies will rise 6.39 percent on average because of the wage increase, according to state planning agency NESB. Costs will climb 0.57 percent for large companies, and as much as 17.8 percent for small companies, it said.

There are more than 2.9 million small and medium enterprises across Thailand, according to 2011 government data. They account for 99.8 percent of all businesses in the country and generate employment for 9.7 million people, or almost 80 percent of all jobs. These businesses earn 3.5 trillion baht annually, or more than a third of GDP.

Beneficial Effects

Even with factories closing down, Thailand’s unemployment rate is still among the lowest in the world, standing at 0.48 percent in the fourth quarter, down from 0.63 percent in the same period in 2011.

While higher wages will increase costs for businesses and boost inflation, they will also improve the purchasing power of consumers and help bolster economic growth, said Fred Gibson, a Sydney-based economist at Moody’s Analytics.

“By raising the minimum wage, you’re also allowing lower-income households to consume and this will help lift consumer spending,” he said. “It’s a trend we’re seeing across the region, as governments try and spread the beneficial effects of growth. Having a higher minimum wage also is one of the steps that helps you transition into higher value-added manufacturing because there’s more incentives.”

The salary increase boosted labor income by 16.5 percent in the fourth quarter last year, while product prices rose 3.2 percent, according to NESDB. Labor productivity rose an average of 2.3 percent in the last 10 years.

Cheap Products

“Productivity rose much slower than wages,” Suwannee Khamman, deputy secretary general at NESDB, said yesterday at a briefing in Bangkok. “This is not good. It means that we will continue to produce cheap products, while our costs are higher.”

Southeast Asia’s second-largest economy grew a faster-than-expected 6.4 percent last year. Gross domestic product is forecast by the government to rise 4.5 percent to 5.5 percent this year, with export growth predicted to be 11 percent.

For Veerayuth, whose business in Chiang Mai employs 140 workers, the benefits aren’t yet apparent. “My clients said they can’t understand why our country raised wages drastically like this,” he said. “It should be done step by step.”

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