Thai Govt Needs New Economic Tricks In The New Year

[webfact]

EDITORIAL

Gov't needs new economic tricks in the new year

By The Nation

External factors will put heavy pressure on the Thai economy in 2011. Can the Abhisit administration survive these and a new election?

The Abhisit government will face a less favourable economic landscape in its third year of office as far as external factors are concerned. To begin with, the US economic recovery in 2011 will continue to be far from robust, largely due to the persistent high unemployment rate of nearly 10 per cent and the collapse of house prices.

Even though other economic indicators such as the US stock market, domestic consumption figures and retail sales have shown signs of improvement, the overall US economy remains fragile. This means that the Federal Reserve will continue with its second round of "quantitative easing" (QE 2), with US$600 billion to be pumped into the economy in the first six to eight months of 2011.

This massive money printing measure will further depress the US dollar and lead to a massive capital inflow into emerging markets around the world, especially in Asia, where economic fundamentals are comparatively stronger than the rest of world. Thailand will not escape this scenario, as evidenced by the high level of foreign capital inflows in 2010.

A weaker dollar will also effectively elevate the baht to a new high, with analysts forecasting that the Thai unit could reach Bt28 per dollar in the new year, compared to the current Bt30-per-dollar average.

In fact, the baht was Asia's biggest currency gainer in 2010, appreciating more than 10 per cent against the dollar. Further gains of the Thai unit will reduce the competitiveness of the country's exports, thus hurting the economic growth rate, largely because exports account for more than 60 per cent of Thai GDP. As a result, the economic growth rate is forecast to slow to 4-5 per cent in 2011, compared to 7-8 per cent in 2010.

In addition, the US's QE2 measure will inevitably contribute to economic bubbles in emerging markets worldwide. In this context, the Bank of Thailand is expected to further raise its policy interest rate at least twice in 2011, bringing the rate up to 2.5 per cent from the current 2 per cent. Higher interest rates will inevitably dampen economic growth.

Another key external factor is the eurozone's public debt issue. Greece and Ireland have already resorted to European Union and International Monetary Fund bail-outs, while Portugal and Spain remain vulnerable. This will hurt the prospects of exports from Thailand to markets in the eurozone, whose basic problem is the vastly different economic fundamentals among member countries using the euro as the single currency. This also prevents weaker members from devaluating their currency units to solve their deficit problems.

Last but not least is the China factor. In 2011, the prospects for the world's second largest economy after the US will not be as bright as the previous year, mainly because of the threat of rising inflation and asset bubbles. In fact, Chinese authorities have already put a brake on the economy by raising interest rates and bank reserve requirements to fight inflation, which rose to a high of 5.1 per cent in November. Such a monetary policy tightening will inevitably slow down the Chinese economy, which is a major market for exports from Thailand and other Asean countries. Thai shipments to China alone accounted for more than 10 per cent of the country's 2010 exports, so a weaker Chinese demand will hit the country's GDP growth, which heavily relies on external trade. In 2010 China served as a powerful counter-balance to the sharp slowdown in demand from the US and Europe. This might not be the case in 2011.

Overall, the Abhisit government will need to rely more on domestic demand and other drivers of economic growth, given the less favourable external outlook. For example, a new set of populist policies, which will be announced shortly as a New Year gift to the Thai people, may help ease inflationary pressures because there will be additional state subsidies to reduce the cost of living for the grassroots population. However, these measures - such as a cap on diesel prices at Bt30 per litre, free electricity for households using 90 units or less per month, and cooking gas subsidies - are very addictive and will create a long-term fiscal burden.

Unless there are effective exit strategies for these measures, the country will risk a huge fiscal deficit in the near future, and that would be a big problem for the Abhisit government to deal with - if it survives beyond the next election.

-- The Nation 2010-12-31

[asiawatcher]

Could not agree more about the USD and I think it will go lower than 28.

[Honolulu]

I could see it going to 26

Could not agree more about the USD and I think it will go lower than 28.

[bigdod]

So....I'm guessing now's not the best time for me to buy a car...... all my money is in GBP (pounds) Do any of you guys (or ladies) have any idea whether this is the way its going to be or will USD/GBP recover anytime in the forseeable future....?? I know how to earn money and I sure know how to spend it.....but all the stuff inbetween is like voodoo to me.....