Q+A: What is driving Thai export gains, what are the risks?

BANGKOK (Reuters) - Thailand's exports look set to outperform those of its big Southeast Asian peers this year as the global economy recovers, a trend that should underpin export-driven stocks and the baht.

The gains in Southeast Asia's second-largest economy coincide with the emergence of China as Thailand's top market this year, overtaking the United States and reflecting a structural realignment as exporters adjust to a new reality in which U.S., Japanese and European consumers are no longer the main markets.

This raises questions -- from the risks that could arise from further monetary tightening in China to whether the high-flying baht will spoil the party.

Here are some questions and answers on Thai exports, which are equivalent to over 60 percent of gross domestic product.

CAN THE GAINS BE SUSTAINED?

Thai exports have started 2010 with healthy annual gains that topped 23 percent in February and 30 percent in January.

That performance may ebb in coming months because of a base effect. Still, they should outperform big trade-dependent Southeast Asian peers.

The Bank of Thailand expects exports to grow as much as 21.5 percent this year after a fall of 14 percent in 2009. The state planning agency, NESDB, predicts 15.5 percent growth and private economists see 13-15 percent growth.

That would outpace its neighbors. Indonesian exports are seen up 12 percent this year, trade official Ardiansyah Parman forecast. The Philippines government has forecast 7-9 percent growth and Malaysia's government 6-7 percent.

Thai industrial goods account for 65-70 percent of exports in dollar value, led by electronics, autos and parts, electrical appliances, and plastics -- areas benefiting from the global recovery as big importers rebuild inventories.

Thailand is also the world's biggest exporter of rubber and rice, which are both seeing a rise in demand. Rice prices are up almost 20 percent since November. Agricultural products contribute 15-20 percent of Thailand's total exports.

WHAT IS THE LIKELY IMPACT ON THAI MARKETS?

The exports outlook is expected to boost earnings and the shares of trade-sensitive companies, such as Delta Electronics Cal-Comp Electronics, KCE Electronics, Thai Union Frozen Products, top chicken exporter Charoen Pokphand Foods and GFPT.

Investors are already pricing in these expectations.

TUF shares, for example, are up 20 percent so far this year and KCE is up 49 percent, both blasting past a 4.5 percent rise in the benchmark index.

Analysts say the baht, already up 3.2 percent this year against the dollar, will also find support from a trade surplus this year. It will likely be smaller than in 2009 as imports rise faster than exports, but a surplus nevertheless.

The exports outlook is adding to expectations the central bank will raise rates by 25 basis points in June or sooner.

WILL THE RISING BAHT DERAIL EXPORTS?

The baht is the third-strongest currency this year against the dollar among Asian units monitored daily by Reuters, suggesting its exports face a slight disadvantage against regional competitors.

Thai exporters complain about the baht's strength but analysts say they appear to have adjusted fairly well.

The baht's rise in turn makes imports cheaper. In Thailand's case, that helps offset the export hit from a stronger currency because about 40-45 percent of imports are semi-finished goods and raw materials used in exports.

Thai exporters also hedge currency risks. Asia's biggest canned-tuna exporter, TUF, for instance, reported a foreign exchange gain over the past five years even as the baht rose 14 percent against the dollar.

Exports dropped 14 percent last year, when the baht gained 4.4 percent against the dollar, but its nominal effective exchange rate was little changed. The export fall was due mainly to the collapse in global demand. In 2006, exports grew 17 percent despite a 16 percent rise in the baht.

WHAT WILL HAPPEN IF CHINA TIGHTENS CREDIT?

Thai exports have shifted toward fast-growing markets after long relying on the United States, Japan and the euro zone, which now account for about 30 percent of exports, down from about 50 percent a decade ago.

In the first two months of this year, China became Thailand's biggest market. In 2009, exports to China accounted for 10.6 percent of the total, up from 7 percent five years ago. The United States had a share of 10.9 percent last year, down from 16 percent five years ago.

Southeast Asian countries take 15-17 percent of Thai goods.

These changes stir concern Thailand could be vulnerable to an external shock during any tightening of credit by China, which is also a major export destination for other Asian countries.

China has already tightened policy this year and the latest

output and inflation figures showed an economy with considerable momentum and mounting price pressures.

Most economists say Thailand could escape relatively unharmed as Thai exports to China are mainly equipment and materials that China will use in re-exports. The top four shipments to China last year were automatic data processing machines and parts, rubber, chemical products and tapioca.

Source: the Commerce Ministry

(Editing by Neil Fullick)

($1=32.43 Baht)

(Additional reporting by Viparat Jantraprap; Editing by Jason Szep)