Bracing for a tough year ahead

SIRIPOL YODMUANGCHAROEN

By PHUSADEE ARUNMAS

Food and transport costs rose substantially in the first half of 2008 on the back of skyrocketing oil prices, posing monumental challenges for several governments around the world in harnessing cost-push inflation and mapping out measures to help alleviate hardships faced by local consumers.

Thailand's inflation hit a peak in a decade in July 2008, gaining 9.2% year-on-year, before easing in October in line with a drop of oil prices.

In October 2008, the country's inflation as measured by the consumer price index stood at 3.9%, dropping significantly to 2.2% year-on-year after a steady rise from more than 6% in April to 7.6% in May, 8.9% in June and 9.2% in July before easing to 6.4% in August.

Costs of rice and rubber, of which Thailand is the world's largest exporter, have also plummeted on worries that demand might fall as the world economy slows.

For the first 11 months of 2008, inflation stood at 5.9%. The Commerce Ministry projected the country's inflation for the entire year would stand at between 5.6% and 5.9%.

``The inflation rate in Thailand is now growing at a slower pace like in other countries. We don't expect deflation,'' said Siripol Yodmuangcharoen, the permanent secretary of the Commerce Ministry. ``In 2009, the inflationary situation will be different, as the world economic crisis is expected to erode the purchasing power of the world's consumers.''

He predicted consumer prices would rise in 2009 by an average of 2.5% based on Dubai crude oil prices of $50-60 a barrel and an exchange rate of 35-36 baht to a dollar.

The ministry's inflation-rate forecast is a far cry from the deflation predictions by some academics, who have based their calculations on crude prices at $40-50 a barrel and not taken into account the exchange rate.

``Actually, the exchange rate has an impact on the inflation rate. We also have wages in the calculation,'' said Mr Siripol.

He believes the exchange rate will weaken further next year by about 15% to 18% and the weak baht would affect local manufacturers, who depend on imported raw materials.

On the other hand, the ministry forecast the baht weakness will benefit Thailand's farm-product exports, as it will help strengthen the competitiveness of the Thai products in the world market and lift their local prices.

``Although domestic paddy prices fell to 12,000 baht per tonne in April compared with its historic high of 15,000 baht in April, the prices are still relatively higher than what we had seen over the past few years when they stood at only 5,000 to 7,000 baht per tonne,'' said Mr Siripol. ``It is unlikely in the future the prices of paddy would fall to those low levels again and so are the prices of other agricultural products.''

On the global scale, the G-20 rich nations agreed at a recent meeting on three principles to heal the world economy by maintaining the credibility of the financial system, reducing trade barriers and using fiscal policy to stimulate economic growth. The commitments would bode well for most economies, especially in terms of international and domestic trade, which will in turn increase the purchasing power of global buyers, Mr Siripol pointed out.

More importantly, Thailand's public debt is relatively low. The government could thus apply fiscal policy to stimulate the economy and this will help circulate more money in the country and increase the local purchasing power. ``This will help ward off deflationary conditions.''

However, the ministry remains concerned over increasing layoffs in the manufacturing industry and salary cuts in light of the economic slowdown.

The Internal Trade Department has thus been assigned to closely monitor product prices, including meals and consumer goods, to ensure that manufacturers adjust the prices in line with lower raw material prices.

The Commerce Ministry has also set up an operation room to monitor agricultural prices in the world's leading futures markets such as gold, copper, aluminium, soybeans, oil palm and maize, to keep abreast of the latest world developments and keep its raw material-price database updated.

In 2009, the Commerce Ministry will modernise and add more products to the basket it uses to calculate the consumer price index (CPI) and inflation.

For the inflation calculation system, the ministry plans to increase the number of products surveyed to 390 from 374 items, updating some in line with changing consumer behaviour.

For example, flash drives or digital memory cards would replace film as almost all cameras are now digital.

The ministry's Trade and Economics Indices Bureau will also change the base year in line with data from the National Statistics Bureau, with research on household spending set to be updated every five years.

The inflation-rate calculation would soon be based on 2008 data instead of 2002 figures. The ministry will start using the new product basket and base year in the survey in January 2009, with the first updated CPI information to be released in February.

As well, the collection of price information will focus more on modern-trade stores rather than fresh markets.