FPO: Thai recession has bottomed out

ECONOMY

The Thai economy has reached its lowest point and should recover steadily thanks partly to state stimulus programmes, says a leading official.

Mr Korn discusses the economic outlook at a Public Debt Management Office briefing yesterday. TAWEECHAI TAWATPAKORN

The Fiscal Policy Office yesterday revised its economic outlook to a 3% contraction for 2009, with a range of -2.5 to -3.5% overall.

The new outlook represents a slight improvement from forecasts made in April, when the FPO projected the economy would contract 3.5% this year.

"Fiscal spending has helped buffer the impact of the downturn," said Ekniti Nitithanprapat, director of the Finance Ministry's macroeconomic policy planning section. "After a 7.1% contraction year-on-year in the first quarter, we see that fiscal stimulus programmes have begun to have an effect, with the second quarter expected to show a contraction of 4-5% year-on-year."

Declines will continue in the third quarter, with the economy projected to contract 3-4% year-on-year, he said.

A return to growth is expected in the fourth quarter, with the FPO forecasting growth of 2-3% year-on-year.

Since the beginning of the year, the government's measures to jump-start growth have included tax breaks for new homebuyers and a 116-billion-baht supplementary budget, which has funded free education for students. It also included public utility subsidies for the poor plus 2,000-baht cheque handouts to workers earning less than 15,000 baht per month.

A second stimulus programme will commit 1.4 trillion baht to develop new infrastructure including mass transit, agriculture and social services.

But Dr Ekniti said fiscal policy is at its limits, so that additional spending programmes could jeopardise the country's long-term financial position.

Under current budget plans, public debt is projected to jump, from 40% of gross domestic product now, to 60% by 2013, a level last seen during the 1997 economic crisis.

In his view, with fiscal spending already stretched, further stimulus can only come from monetary policy, including lending policies, interest rates and exchange rate policies.

The Bank of Thailand in the first half of the year cut its one-day policy interest rate by a full 2.5 percentage points to the current level of 1.25%. The central bank has also supported credit guarantee programmes aimed at facilitating access to loans by the private sector, particularly small and medium-sized business borrowers.

An additional one percentage point off interest rates could boost economic growth by 0.3 to 0.4 percentage points.

Increasing bank lending by 100 billion baht would similarly raise growth by between 0.2 and 0.3 percentage points per year, while every one-baht depreciation in the exchange rate against the US dollar would add 0.3 percentage points to growth, he said.

A weaker baht would not necessarily help exporters increase sales, but it would boost their earnings in local currency terms, said Dr Ekniti.

The price of crude oil is another major factor for economic growth. Each $10 increase in crude oil prices is estimated by the FPO to depress growth by 0.3 percentage points and to spur inflation by as much as 0.5 points.

The FPO's latest economic forecasts assume a budget disbursement rate of 94% for the 1.83 trillion baht in spending set for the fiscal year ending September.

Disbursement from last October to May has run at 60% of the full-year budget, with half of the 116 billion supplementary budget spent to date.

The latest forecasts assume the economic contraction of Thailand's 14 key trading partners will average 2.1%, slightly more pessimistic than the 2% contraction estimated in March.

Dubai oil prices are forecast to average $61.20 per barrel this year, up from a projection of $50 in March.

The baht is now expected to average 34.7 against the dollar this year.

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