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ECONOMY

BOT urged to cut policy rate to boost domestic demand

WICHIT CHAITRONG

THE NATION

BANGKOK: -- With the Thai economy likely to be adversely affected by the persistent euro-zone crisis and weaker global economy during the remainder of the year, the central bank should respond by cutting the policy interest rate in order to boost domestic demand, an economist and a business leader said yesterday.

Anusorn Tamajai, dean of the Faculty of Economics at Rangsit University, said the household-debt burden carried by the banking sector in the European Union coupled with the level of public debt had caused the crisis in the euro zone.

Many EU countries have also implemented populist policies, which has led to unsustainable public debt, he said.

The overall euro-zone economy showed no expansion in the first quarter, with the full-year forecast now being for a contraction of 0.5 per cent, or for the currency area even entering recession, Anusorn told a seminar.

While no further debt defaults have occurred, EU leaders are providing bail-outs for ailing economies while planning for the establishment of a Europe Stability Mechanism with funding of €500 billion (Bt19.5 trillion). The German government is, however, reluctant to join the scheme due to domestic political issues, he said.

The European Central Bank is likely to buy government bonds in order to support weak countries, he added.

The Thai economy, meanwhile, will expand further in the second quarter, with gross-domestic-product growth expected to come in at 6.7-7.7 per cent due to pent-up demand following the severe floods of late last year, said the economist.

He also said the policy rate should be cut from the current level of 3 per cent, as there would be no inflationary pressure over the remainder of the year.

He expects headline inflation for the full year to be in a range of 3 to 3.5 per cent, down from 3.8 per cent last year.

GREEK EXIT

Anusorn said the country should expect the worst-case scenario of a Greek exit from the euro zone and Spain requesting an International Monetary Fund bail-out.

While the baht should have strengthened this year, the Kingdom is running trade and current-account deficits, so the currency is instead expected to weaken due to a lower supply of US dollars, he said. Overall, however, he said he was more worried about local political conflict rather than the impact of the EU sovereign-debt crisis.

Korrakod Padungjitt, deputy secretary-general of the Federation of Thai Industries, told the seminar that while industrial output had expanded 11 per cent in the first half, growth would decelerate in the second half.

He said he agreed with Anusorn that the Bank of Thailand should cut the policy rate to support industries adversely affected by the weakening global economy.

With exports to Europe representing 9.4 per cent of overall Thai shipments, the direct impact of the EU crisis would not be great, he said. However, the indirect impact will be more significant, as other Asean countries and China also sell to Europe, with many of their products comprising materials and components bought from Thailand.

Among the top 10 Thai export sectors to Europe, only computers/parts and machinery/parts still expanded in the first half of the year.

Meanwhile, he expects the garment industry to move some of its production to other Asean countries, while the ceramics industry has been seriously affected by the minimum-wage hike and the high price of gas.

The industrial sector is greatly concerned about Thailand's high labour costs when compared with those in other countries in the region, he said. Looking forward, only "green" industry will be able to survive in the future due to heightened environmental awareness in communities, he added.

Manoon Siriwan, an energy expert, told the seminar oil prices could not be predicted, and that the weak US economy, the European crisis and a slowdown in the Chinese economy this year had all had an impact on their direction to date, as had economic sanctions on Iran.

Fundamentally, oil prices should drop due to lower demand from major economies, but the geopolitical conflict in Iran has had a counter-effect, which means prices have not fallen as sharply as they might have done, he said.

-- The Nation 2012-08-08