The Thai economy will probably grow by less than 2% this year if exports recover too slowly, as the political turmoil has delayed budget disbursements for megaprojects and dampened domestic consumption, says a senior Finance Ministry official.
Somchai Sujjapongse, director-general of the ministry's Fiscal Policy Office (FPO), said the political conflict that brought anti-government protesters into the streets has damaged the economy, and the caretaker government is not in a position to move forward with a 350-billion-baht water management plan and other projects worth a combined 2 trillion baht.
Previously, economists and FPO analysts had hoped that state spending this fiscal year would be the main engine of economic growth. But the first five months of fiscal 2014 passed with no sign of a solution to the political crisis.
"It is obvious that we need to cut our growth projection, as we had taken the huge budget into account in our previous estimation," said Mr Somchai.
In December, the FPO forecast 2014 economic growth in a range of 3.5% to 4% and export growth of 6.5%, while the Commerce Ministry anticipated 5% growth in exports.
Mr Somchai said that while the global economy has potential for improvement this year, the lag time before purchasing power shows up in large economies will take a toll on Thai exports. This is mainly due to the dispersion of parts suppliers around the globe.
"It means that our clients can shift their orders to another country if they are unsure about our situation, causing a disruption in logistics," he said.
If Thailand is unable to form a new government this year, the country will have trouble in fiscal 2015 starting in October. Fourth-quarter consumption would be severely hampered because public spending is a significant support in times of lower private-sector investment.
"Even though public investment accounts for only 17-18% of GDP, it is crucial for economic development when other sectors are weak," said Mr Somchai.
So far, 40% of the 2.525-trillion-baht expenditure budget has been disbursed. Some 45 billion baht of the total budget cannot be released because it consists of expensive projects requiring cabinet approval.
In line with the deteriorating economy, the FPO has voiced concern over the rising trend of non-performing loans (NPLs) at state financial institutions and the delay in rice pledging payments to farmers.
The office has begun to monitor the rising pace of NPLs at state banks. While overall NPLs at state banks are a mere 5% of the total, and for commercial banks the average is just 2%, a recent Bank of Thailand report said bounced cheques had risen to 15% in terms of value from just a one-digit figure in years past, especially cheques from small and medium-sized enterprises (SMEs).
This is a sign that the crisis may be spreading from the public sector and agriculture to the broader financial sector.
"We signalled the state banks to be alert, even the banks that have no chief executive yet, and suggested they closely follow up on their clients' debt-servicing capability," said Mr Somchai.
In the meantime, the Bank of Thailand says net capital outflow of US$172 million (5.68 billion baht) in January was far below a net $2.35 billion pulled from the country in December, due to a downshift in foreign investors' sell-off of Thai stocks and bonds and a reduction of hedging activities after the baht's retreat at that time.
"Capital outflows [in January] were not substantial," said Don Nakornthab, director of economic policy at the Bank of Thailand. He noted that foreign direct investment in the same month was fairly high at $1.91 billion.
Chantavarn Sucharitakul, an assistant governor of the central bank, said capital outflows slowed despite the onset of political violence.