Signs of slowdown abound
After two years of disappointing economic growth weighed down by domestic political tensions, many had hopes that 2008 would be different.
Thailand returned to democracy with a clear victory by the People's Power Party in late December, raising hopes that new Prime Minister Samak Sundaravej could push forward with needed infrastructure investments and policy initiatives required to open up economic growth.
The year started off well enough, with Mr Samak and his finance minister, physician Surapong Suebwonglee, taking steps to reinforce the message that Thailand welcomed foreign investment, such as the scrapping of capital controls on foreign inflows and issuing clear statements that the Foreign Business Act would not be tightened.
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| Despite numerous stimulus measures, the economy looks set to slip back into sleep mode in the second half under the weight of high prices. |
The infrastructure megaprojects, first floated by the Thaksin Shinawatra government earlier in the decade, were dusted off and given new life by the Samak government.
Overall, the economy posted relatively strong 6% growth in the first quarter, with private investment and consumption both picking up well from the sluggishness of the year before and exports continuing to perform strongly.
Private consumption grew 2.6% in the first quarter, up from 1.5% average growth in 2007. Private investment meanwhile rose 6.5% year-on-year in the first quarter, compared with average growth of 0.5% in 2007.
But sentiment turned abruptly starting in April, as the government engendered widespread public distrust and apprehension with its clumsy moves to amend the 2007 constitution.
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| A tough balancing act: Policymakers need to help people cope with higher prices while maintaining fiscal prudence, transparency and efficient implementation. |
The People's Alliance for Democracy, the protest group that helped bring down the Thaksin Shinawatra government through widespread protests in Bangkok in mid-2006, immediately accused Mr Samak and the PPP of seeking to whitewash the corruption investigations against Mr Thaksin over the past two years.
The political bickering could not have come at a more inopportune time, as the global economic environment turned decidedly negative due to soaring oil, food and commodity prices. Inflation jumped to a 10-year high at 7.6% year-on-year in May, putting pressure on consumers and businesses alike.
Investor sentiment has now turned decidedly bearish, as a result of higher production prices, uncertain economic trends and political uncertainties. Consumer confidence has fallen as disposable household income drops from higher living costs.
Government growth targets of 6% for 2008 now look overly optimistic, as the Thai economy increasingly looks to be headed for another year of self-inflicted, lost opportunities.
Policymakers have been scrambling to ease the pain of higher living costs through added spending for community development programmes, a new debt-suspension scheme for small-scale farmers and tax breaks for individuals and listed companies.
The March tax plan raises tax waivers by half to the first 150,000 baht in income. Companies with paid-up capital of under five million baht will also receive tax waivers for the first 150,000 baht in profits. Additional profits will now be subject to a three-step ladder of 15%, 25% and 30%, a clear benefit compared with the former 30% flat corporate tax.
Small community enterprises with revenues of less than 1.2 million baht per year will also be given tax waivers for three years, while the property sector received a boost through lower asset-transfer and mortgage-registration taxes.
The Finance Ministry even announced it was considering a new social welfare programme to help ease pressure on the poor, involving the distribution of food coupons exchangeable for basic foodstuffs and consumer products.
Yet it remains to be seen whether the measures are sufficient to help the economy navigate the current storm when oil prices have doubled since last year at about $140 per barrel by June.
The baht, which appreciated strongly throughout 2007, has since reversed course, due in part to capital outflows and the current account becoming a deficit because of oil prices.
Thai exports, initially targeted at 12.5% growth for the year, have continued to rise impressively, albeit at a pace behind import growth. But questions about the US economy will remain a risk factor.
Thai policymakers will have a difficult course to manoeuvre over the next several months by balancing the need to assist a public coping with higher prices while maintaining fiscal prudence, transparency and efficient implementation.
Efficient fiscal spending will be crucial, particularly once the 2009 budget begins in October. Delays in implementation and disbursals were major impediments for the economy in 2007.
Given Thailand's relatively healthy public finances, investment under the 2009 budget should be increased to help match higher material costs. Resources also need to be set aside to help low-income groups - while farm price increases have benefited rural communities, the cost of key inputs, such as fertiliser and oil, have similarly increased.
An expanded, well-targeted 2009 fiscal budget and clear progress in the megaproject programme could go a long way toward restoring business and consumer confidence. With monetary policy now needing to be tightened to help keep inflation in check, fiscal spending will be crucial to help ease the pain of higher prices and to maintain growth.
Energy prices, meanwhile, show few signs of declining, raising the importance for the country to improve the efficiency of energy usage and conservation. Economists also point to the need to raise the competitiveness of the industrial sector and labour force for sustainable growth.
FISCAL POLICY
Deficit spin to counter inflation
WICHIT CHANTANUSORNSIRI
Fiscal policy is set to evolve significantly over the next few years as policymakers seek to prop up economic growth and raise disposable income to ease the pain of soaring inflation.
Early planning for the fiscal 2009 budget starting in October calls for spending of 1.835 trillion baht against revenues of 1.58 trillion, resulting in a deficit of 249.5 billion or 2.5% of GDP. The current 2008 budget of 1.66 trillion baht, in contrast, calls for a deficit of around 1.8% of GDP.
Fortunately for economic planners, the country's finances are sufficiently sound to cope with added spending and debt without undermining long-term credibility. Public debt, for instance, stands at just 38% of GDP, well below the legal maximum of 50%. Fitch Ratings, a credit agency, notes that Thailand's fiscal position ranks at the top among similarly rated BBB+ countries.
Pornchai Thiraveja, the director of the budget and fiscal policy division of the Fiscal Policy Office, said a more expansionary fiscal stance was critical in a period of slowing economic growth and rising prices. Policy needed to focus on helping the public, particularly the poor, cope with the burden of higher living costs.
"GDP growth alone cannot answer the question of how to achieve sustainable economic development in the current environment," Dr Pornchai said.
While the fiscal 2009 budget does expand social spending for the poor, more needs to be done to facilitate income growth, employment and more equitable income distribution.
One programme currently under study by the Finance Ministry is to pass out food coupons to the poor over a six-month period to help the public cope with rising expenses. In principle, the coupons could be redeemed for basic foodstuffs and consumer goods, although authorities have yet to announce how the coupons would be distributed, redeemed or who would be eligible for participation.
According to the National Economic and Social Development Board, about six million people earn less than the poverty line of just under 1,400 baht per month.
Dr Pornchai said the food coupon concept was the right strategy to help ease the economic pain among the poor, but noted that many countries, in order to limit waste, chose to simply distribute food directly to the poor.
Another complication for fiscal planners working under a period of rising inflation is the impact on investment plans, including the 1.7-trillion-baht infrastructure megaproject programme. The mass-transit megaprojects, for instance, initially budgeted at 770 billion baht for five new routes in Greater Bangkok, now are expected to cost 15% more to help cover the rising steel, cement and labour expenses.
Estimates for the overall 2009 budget may face new revisions considering the shifts in the economic environment. The initial budget bill was designed based on 2009 growth forecasts of 5.5% and inflation of 3.5% - analysts now expect growth to likely fall under target and inflation to come higher, considering that for the first five months of 2008, inflation rose 5.8% from last year.
Out of the 1.835 trillion baht allocated under the 2009 fiscal budget, current expenditures account for 1.332 trillion, or 72.6% of total spending and 9.7% higher than the year before. Investment expenditures are budgeted at 407 billion baht, representing 22% of the total budget and up 1.6% from the year before.
Spending through state financial institutions, meanwhile, has increased under the Samak Sundaravej government. The populist programmes initiated under Thaksin Shinawatra earlier but sidelined by Surayud Chulanont have been revived, including a debt moratorium for small farmers, added funds for the People's Bank microfinance programme and the village investment fund scheme.
The Bank for Agriculture and Agricultural Co-operatives estimates that more than 334,000 farmers with debt of less than 100,000 baht each are eligible for the programme, which started on April 1 and runs until March 2010. As of early June, more than 280,800 farmers nationwide are expected to participate, which involves a suspension in debt payments and training programmes aimed at helping improve productivity and labour skills.
The People's Bank, meanwhile, expects to lend five billion baht in small loans to 250,000 people this year to help support small-scale business ventures. Another 40 billion baht was allocated under the 2008 budget for the SML programme, where grants are offered to villages to help finance community investment.
INFLATION
An old foe rearing its head
PARISTA YUTHAMANOP and PHUSADEE ARUNMAS
A major headache faced by economic policymakers worldwide in 2008 is how to best handle soaring inflation. Rapid price increases, which for a time were limited to emerging countries with phenomenal growth like China and Vietnam, have now turned into a worldwide epidemic and even Thailand is not spared.
Locally, headline inflation, as measured by the consumer price index, sped to a 10-year record of 7.6% year-on-year and 2.1% month-on-month in May. Year-on-year headline inflation averaged 5.8% in the first five months of 2008.
If the prices continue to increase on par with the pace seen in May for a few more months, the inflation in 2008 could break the record 8% seen during the 1997 economic crisis.
Core inflation, which excludes fresh food and oil prices, increased 2.8% year-on-year in May and 0.7% from April. The pass-through effect of oil to demand has accelerated, considering the core inflation stood at just 1.9% on average in the first quarter.
The producer price index, which measures product prices at the factory, showed that inflationary pressure was in the pipeline. Its pace quickened to 16% in May from 13% in April and 11% year-on-year from the average increase in the first quarter. The index is in line with the increases in raw material prices in the world market.
Pundits say the world has entered an era of permanent commodity-price shock. The claim is validated, judging from the fact that world demand for oil has a slim chance of receding as the incomes of people in emerging economies, especially China and India, are surging while the supply from oil producers stays put.
The prices of crude oil soared 30% in the first quarter of the year from the average prices in 2007. And in a recent official estimate, policymakers said oil prices in 2008 under a pessimistic scenario could jump by 80% from 2007.
In many countries, the inflation has already reached highs not seen for many years. High fuel and food prices have led to public outcries in many countries and unrest in some. The situation is likely to worsen once their governments can no longer bear the burden of fuel subsidies any more.
For Thailand, inflation is vulnerable to changes in oil prices because most goods are carried by road. Therefore, oil and fresh food account for 70% of the consumer price index's total weight.
That the consumer price index comprises many products under price controls may well reflect upward pressure as well.
Rising inflation was a major factor leading to a fall in consumer confidence to a six-month low in May. An official survey showed a marked an increase in the number of respondents who believe that inflation will accelerate.
The Bank of Thailand has forecast that the Thai economy will grow 4.8% to 6% in this year. In any case, it is widely expected to revise its headline inflation forecast upward from 4-5% in line with relentless surges in oil prices.
INFLATION
Central bank sounds hawkish tone
PARISTA YUTHAMANOP
Monetary policy is now biased in favour of curbing inflation, which is expected to accelerate in line with increasing oil prices, according to Tarisa Watanagase, the governor of the Bank of Thailand.
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| ‘‘We are not heading for a recession nor stagflation,’’ says Dr Tarisa. |
Tightening monetary policy would help the central bank keep future expectations of price increases in check. The headline inflation rate of 7.6% year-on-year in May, a 10-year high, could indicate that pressure is building.
Although most inflationary pressure was fuelled by the supply side, the central bank has witnessed lately some evidence driven by psychology, she said.
"Inflation in May was high by historical standards. But it's more important for the central bank to look forward at inflation risk," said Dr Tarisa.
"Domestic demand, in theory, is currently healthy because exports are still going strong. Amid persistent increases in oil prices, there have been adjustments such as price rounding up caused by merchants expectations."
The central bank's Monetary Policy Committee revised its Dubai crude oil price forecast upward in May to an average price of $110 per barrel this year, up from earlier forecasts of $93.
The worst-case scenario for the year was oil hitting $140 per barrel, up from $107. Dubai crude oil prices averaged $91 per barrel in the first quarter.
"At some point, you cannot tell whether it is cost-push or demand-pull inflation. In the end, high inflation could hamper consumer power and economic growth," Dr Tarisa said.
She said rising inflation had put investors on hold because they were not confident about forecasting operating costs and future demand. The rising cost of living could affect low-income earners or those reliant on fixed incomes the most.
"The Monetary Policy Committee normally gives equal weight to economic growth and inflation. At some point, the MPC needs to choose. The MPC may view that growth is manageable, but inflation is not," Dr Tarisa said.
The MPC has maintained its policy benchmark one-day repurchase interest rate at 3.25% since August 2007, but it has signalled more of a bias toward an interest-rate increase in May.
Dr Tarisa said the domestic policy rate was among the lowest in the region, as the real one-year deposit rate stood at -4.5% and the minimum lending rate stood at just 0.37 points above inflation.
Exports could decline in line with global growth slumps in the future, but high agricultural prices will buoy domestic consumption.
"Certainly, we are not heading for a recession nor stagflation. The 6.1% GDP growth in the first quarter beat expectations," she said.
"The only dim spot is investors' lack of confidence in the political situation. Private investment was promising in the first quarter and many industries have nearly full capacity utilisation. Once the situation settles, businessmen should begin investing again."
CURRENCY
Baht poised to dip further
PARISTA YUTHAMANOP
The depreciating baht trend has been bad news for consumers who wish a stronger currency to slow inflation.
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| The invincible baht of 2007 is now history and some analysts now project the exchange rate will drop to 35 to the US dollar by the end of 2008. |
In a possible sign of the cycle turning, the economy posted a $1.8-billion trade deficit in April, as oil imports outstripped the country's robust exports. The trade account posted a surplus of US$1.29 billion on a sharp drop in imports but policymakers believe it was a blip. They believe a deficit is likely to be a continued trend as oil prices continue to jump. Foreign business repatriation and seasonal factors that affect tourism could lead the current account to decline.
The global backdrop has shifted toward an appreciating dollar to baht after US Federal Reserve chairman Ben Bernanke chairman voiced fears about inflation.
His remarks in May have led to anticipation that the Fed would pause in reducing interest rates. It left its key rate unchanged last week at 2%. The Fed had been reducing rates since September 2007, aimed at resolving a credit crisis originated by sub-prime mortgages. The likelihood of a pause has shored up investors' appetite for the dollar.
"The challenges that our economy has faced over the past year or so have generated some downward pressure on the foreign-exchange value of the dollar, which has contributed to the unwelcome rise in import prices and consumer price inflation," Mr Bernanke said in late May.
"We are attentive to the implications of the changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations."
The Bank of Thailand's Monetary Policy Committee (MPC) has also adopted a more hawkish tone on inflation, as the consumer price index rose to a 10-year high at 7.6% in May. Core inflation for May, which excludes food and energy prices, also accelerated to 2.8%, inching closer to the MPC's target ceiling of 3.5% over the next eight quarters.
The benchmark one-day repurchase interest rate has stood at 3.25% from a reduction in July 2007 throughout May. Diminishing returns on savings reflected in the -4.5% real one-year deposit rate are another reason for the central bank to tweak the interest rate. Commercial banks have responded to the central bank's signal by increasing interest rates since early June.
"Core inflation rose by more than expected, mainly as a result of passing along production costs, which could result in higher inflation going forward," the MPC said after its meeting in May. "Should the inflation continue to accelerate, the MPC would stand ready to adjust interest rates accordingly."Higher interest rates would dampen in the short term bottom-line prospects of listed companies whose shares had already suffered from an overall lack of foreign confidence because of renewed political instability. The situation is unlikely to contribute to healthy portfolio inflows in 2008, making the weakening trend of the baht more likely.
Some analysts now project the baht to drop to 35 to the dollar by the end of the year, compared with 33.7 in January, particularly as the trade deficit persists due to high oil import costs.
INFRASTRUCTURE
One hope on the horizon
NAREERAT WIRIYAPONG
A huge infrastructure programme, comprising the so-called megaprojects, has become a major tool of the post-coup government to spur growth, especially through public investment that has stagnated due to political uncertainties.
The megaprojects, initiated by deposed premier Thaksin Shinawatra, have been pushed ahead by the coalition government led by the People Power Party that groups key members of Mr Thaksin's now-defunct Thai Rak Thai party.
The programme has received a big boost in terms of an investment budget of a total 1.5 trillion baht for mass-transit, logistics, education, water-management and health-care projects.
Out of the total outlay, 770 billion baht have been set aside to develop a stretch of 424 kilometres of elevated rail lines and subways in greater Bangkok, targeting to complete the whole loop within three and a half years.
The government recently approved two water-management projects worth a combined 60 billion baht to increase water supply in agricultural areas nationwide, especially during the dry season. The projects include a 43.8-billion-baht scheme to divert water from Mae Hong Son to the Bhumibol Dam in Tak and a 15-billion-baht investment to dredge more than 6,600 natural water resources across the kingdom.
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| The missing link: The deadline of the 26-billion-baht Airport Link was pushed forward by another year from the previous February 2008 schedule due to rising cost constraints |
On mass transit, despite the serious push, the new train lines have yet to see significant progress, with few receiving partial funding from the Japan Bank for International Co-operation (JBIC).
Four rail lines have been endorsed by the government: one is scheduled to have construction contracts signed this year while the others are in the process of bidding. Another three routes have been under study for environmental impact assessment before they can be proposed for cabinet approval. Construction of the seven routes, plus another two feeder lines, is expected to being in the last quarter of 2008 at the earliest and to play a bigger role in stimulating the domestic economy next year.
Optimistic business leaders have said the government's firm decision to drive the megaprojects forward had helped improve business confidence, as evidenced by the development of numerous massive condominiums along the planned rail lines.
When compared to other governments' stimulus packages, especially those targeted at the poor, the megaprojects could generate more economic benefits in terms of multiplier effects that originate from the construction industry. The mass-transit scheme, in particular, is seen as critical to cut Thailand's imported oil bills at a time when global prices of fuel have shot up to historic highs.
The megaprojects aim to reduce car use by 60% and save up to 100 billion baht in the first phase and 200 billion in the second phase.
The government forecasts the number of Bangkok commuters using the mass transit to reach three million a day by 2013, up sharply from the current 600,000, and to rise to six to seven million no later than 2016.
Kasikorn Research Center said that public investment accounted for 7% of Thailand's gross domestic product (GDP), down from 8.2% seen before the 1997 financial crisis when the government's spending increased by 21% annually.
The latest of the government's megaprojects was Suvarnabhumi Airport, which began operation in late 2006.
The deadline for its supporting infrastructure, the 26-billion-baht Airport Link, was pushed forward by another year from the previous February 2008 schedule due to rising cost constraints. Its construction began in mid-2005.
"Massive investments in megaprojects, which include the expansion of irrigated areas and efficiency improvements of the existing irrigation system, are aimed by the government to help the Thai economy maintain the high growth over the next three to four years," the Kasikornbank affiliate said in a recently released paper.
KResearch estimates as much as three trillion baht would be needed to fulfil the government's megaproject schemes to be implemented from 2008 to 2011, or 750-780 billion baht per year on average, compared to 500 billion baht spent annually over the past five years.
The highest investment would be required in 2010 if the planned projects could be proceeded by schedule, it added.
"The most important factor to substantially push the megaprojects ahead is to finalise the details of project funding and set clear action plans and exact timeframes for the projects' implementation," the paper said.
The government has set three options to raise funds for these projects: soft loans from the JBIC and the Asian Development Bank (ADB), state budget, and government bonds.
According to the Public Debt Management Office under the Finance Ministry, the government would float 290 billion baht worth of domestic bonds to help finance Bangkok's new 760-billion-baht mass-transit megaprojects.
The investment would be spilt into two phases. The first phase, from 2008 to 2012, calls for a tranche of 260 billion baht, including 90 billion baht mobilised from domestic borrowing.
The second phase, which involves the building of the train routes through outer Bangkok from 2010 to 2014, requires an investment of 500 billion baht. Of the total amount, 200 billion baht would be raised from domestic borrowing and the rest from the central budget, offshore borrowing and equities.
But recently, a new problem has emerged, challenging the government's efforts to fulfil its investment plans of the ambitious infrastructure programmes.
Rising oil prices have drastically pushed up the prices of building materials, especially steel, while the increases in minimum wages that began in early June are threatening to push the costs of contractors further.
But the trends are a global phenomenon. International experts say the rising costs have affected infrastructure projects all over the world, mainly those in China where a number of projects are under development.
In Thailand, the Mass Rapid Transit Authority (MRTA) has agreed to raise the prices of two rail lines in progress. One of them is the 23-kilometre elevated Purple Line, for which a 17% increase in the reference price from the original 30 billion baht was proposed to reflect the actual soaring costs.
Despite the slow progress on megaprojects, KResearch forecasts public investment would expand in a range of 5.2% to 8.4% this year, up from 4% last year. It would help drive overall investment in Thailand by 4% to 7.2%, against a meagre 1.4% in 2007, a six-year low.
"Only the Red Line running from Taling Chan to Bang Sue, with a planned investment of 165 billion baht, has gone through the bidding process but so far the real investment in the project has yet to start," the centre said.
