Slower Thai Economy Growth Expected

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YEAR-END SPECIAL

Slower growth expected

By Wichit Chaitrong

The Nation

A much tougher 2011 is expected after this year's impressive performance by the Thai economy, which is forecast to have expanded by between 7 and 7.5 per cent.

Many research houses have predicted economic growth next year will be in the region of 4 to 5 per cent, largely due to a slowdown in exports resulting from a debt hangover in Europe and the weakening recovery in the United States.

The government has high hopes that domestic consumption and investment will substitute to a large extent for any deceleration in exports. It plans budget deficits for the current fiscal year, which runs until September 2011, and the next fiscal year.

Budget deficits are planned to continue until 2016, largely due to rising current spending on matters such as salaries for civil servants and medical bills and the need to invest more in infrastructure, including double-track rail lines, high-speed trains and mass transit.

Moreover, the government has agreed this year to increase wages across sectors ranging from minimum wages to the salaries of civil servants and politicians.

Leading up to a general election next year, Prime Minister Abhisit Vejjajiva and Finance Minister Korn Chatikavanij will soon launch a new economic package aimed at supporting the grass roots via social welfare and state-bank loans.

The Pracha Wiwat (Delivering People's Priorities) package, which Korn said would account for 1.5 per cent of government expenditure next year, is expected to shore up domestic consumption as well as narrow the wide income gap between the rich and the poor.

However, critics view the new package suspiciously, fearing that the government is merely throwing public resources at voters in a bid to win political popularity ahead of the election.

"Wasting public resources is a matter of concern, as it could also lead to a bad-credit culture, when people get easy money from state banks," said Teerana Bhongmakapat, dean of Chulalongkorn University's Faculty of Economics.

Paiboon Nalinthrangkurn, chairman of the Federation of Thai Capital Market Organisations, said the package was small and would not have a significant impact on the economy. He said it would only serve to brighten the government's image.

In defence of the package, Korn said the government had to take care of 24 million workers who are currently not covered by the social-welfare scheme, and many of whom have difficulty accessing credit.

"When the government does not have such a programme, the media blame us for not taking care of the poor, but when we do it, you brand it negatively as populist policies," he said.

While public investment will play an important role if the government can speed up project implementation, experience suggests that investment projects are often delayed.

The problem of complex legal processes delaying projects is expected to be tackled by the government next year if it is re-elected. However, hidden factors such as corruption also hold up project implementation, and these are issues that will not go away.

Fiscal policy will play a key role next year, while monetary policy has its limitations due to the threat of inflationary pressure and further capital inflows.

Korn, who usually works smoothly with the Bank of Thailand, is unhappy with the central bank's latest interest-rate hike. "It could negatively impact economic growth," he said.

As the central bank and the government have different objectives in managing the economy, unfavourable economic conditions could spark a serious conflict. The government wants higher growth over the short term, while the central bank seeks economic stability, which sometime means sacrificing high short-term growth.

The market expects the central bank to increase the policy interest rate further next year, by 75-100 basis points from the current 2 per cent, which would lead to an increase in commercial-bank lending rates and higher financial costs for both businesses and consumers. Higher interest rates are also clearly in the picture in an attempt to rein in rising food prices.

At the Monetary Policy Committee's meeting on January 12, the impacts of the Pracha Wiwat scheme on inflation will also be in focus. As this should lead to higher spending, which should somewhat absorb the drop in exports next year, inflation could be driven up, and hence prompt an even greater rate increase.

However, the dilemma is that higher interest rates will attract more capital inflows, which would lead to further appreciation of the baht against the US dollar.

Capital inflows are also expected to continue next year, as the United States is weakening its currency to drive the domestic economy. Foreign funds will flow to markets that offer high yields, including emerging markets such as Thailand. The baht has risen by more than 10 per cent against the greenback this year.

Korn believes capital inflows will mean trouble for exporters, in particular small and medium-sized enterprises. He expects the US Federal Reserve will inject more liquidity into the economy, and that part of the funds will flow to Thailand.

Many exporters and economists blame the central bank and the government for allowing the baht to strengthen so dramatically this year.

Bank of Thailand Governor Prasarn Trairatvorakul, however, has warned exporters that they should not hold false hopes that the authorities can go against market forces.

Managing the exchange rate is one of the biggest challenges next year, and one that will have an impact on economic growth.

"The government and the central bank have to agree first that capital inflows do more harm than good to the economy," said Ammar Siamwalla, a prominent economist at the Thailand Development Research Institute.

Supavud Saicheua, managing director of Phatra Securities, said: "Eventually, the central bank will impose capital controls on inflows, since it will not be able to further withstand a worsening of its balance sheet resulting from previous market interventions."

However, the relatively high prices of Thai financial assets and the slower economic growth rate might not invite the capital flows that economists and policy-makers fear, Teerana said.

"Infrastructure investment projects, railway tracks and mass-transit schemes can crowd in private investment next year, if planned wisely. But I don't see a clear plan of how the government will integrate city development with such rail projects," he said.

Rail projects, in particular linking southern China to southern Thailand, could suck resources into China or lead to expansion of cities in China and Malaysia, while they might be of little benefit to Thailand, he warned.

Table: Economic Health

Thailand is destined towards a slower growth rate next year, chiefly with a drop in exports, which currently constitute more than 60 per cent of GDP. Here are key projections.

Item/ NESDB/UBS/Standard Chartered/HSBC/Bank of Thailand

GDP/3.5-4.5/4/4.4/5.3/3-5

Total consumption/4.1/3.8/na/na/na

Exports/11.7/0.6/10/na/na

Imports/13.4/-1.2/na/na/na

Inflation/2.5-3.5/2.3/3.7/3.6/3-5

Source: Compiled by The Nation

-- The Nation 2010-12-21

[asiawatcher]

There are a hellluva lot of holes in this summary. It really indicates wrongful cash disbursements to unnecessary sectors (such as pay rises for politicians) where money should be sent to - as per other topics today - such as hospitals who have not paid wages or creditors for 10 months or more!

Korn should look at a very large picture and if anything, put a wage freeze on all public servants in Thailand and a 'cap' on the top earners, until the rocky road of politics is sorted. It is no easy task for any Govt to be on top of all the issues but like fires, you put them out one at a time an try to prevent them recurring. Start with corruption at all levels from the ground up and claw back funds.

[BlackJack]

lots and lots of businesses in Thailand do not pay tax

none contribute but still want hospital care

bit of a catch 22

[SantiSuk]

Err - what weakening US recovery? That was last month's take. US analysts are currently a lot more optimistic, albeit more sanguine about H2 2011. Keep up with the game please Thailand.