Businesses will have to brace themselves for a period of increased uncertainty as higher oil prices are lasting much longer than expected while external volatility is set to intensify.

After achieving a comparatively stronger growth rate than its regional peers over the past few years, mainly thanks to supportive government policies and ongoing recovery momentum after the 1997 crisis, the Thai economy looks poised to slow down in conjunction with a weakening current account.

The National Economic and Social Development Board has slashed its economic growth forecast range for the year by a full percentage point to 4.55.5% from 5.56.5%.
Gross domestic product in the first quarter was up only 3.3% yearonyear, the lowest growth figure in four years as the economy was battered on several fronts, including the aftereffects of the Dec 26 tsunami, continued violence in the South, a resurgence of bird flu, drought and soaring oil prices. The Finance Ministry has cut its economic growth projection for this year to 4.6% from 6%.

As if the tsunami, bird flu and southern violence didn't do enough damage, continued strength in oil prices and the threat of a period of global financial instability mean the economic clouds are unlikely to lift soon by PARISTA YUTHAMANOP

The Bank of Thailand, meanwhile, is likely to reduce its own economic growth forecast range for 2005 from 4.55.5%, given that the outlook for investment and consumption was much grimmer than expected in April.

Tourism, one of the main contributors to Thailand's GDP growth, was severely hit during the first quarter by the tsunami catastrophe and the bombings in Hat Yai, previously thought to have been relatively insulated from southern unrest.

Looking ahead, a slowdown in industrialised economies, an expected easing of China's economic growth and the longerterm trend for a stronger baht will likely squeeze export performance.

However, the baht looks likely to depreciate from now until the end of this year due to a temporary rebound in the dollar and the weakening current account.

Not all export sectors will be evenly affected by the negative factors. Exporters whose brand names are well known and which have markets outside the United States, Japan and Europe, such as airconditioner, furniture and textile manufacturers, look set to outperform their peers.

Electronic product exporters will be hurt by the downturn in global demand while agricultural products will be hit by their lower output as a result of the drought and the imposition of protectionist trade measures by importer countries in the first half.

The drought and the runup in oil prices will be major dampeners on the economy this year, as they have caused domestic consumption to fall off along with a weakening current account.

The government's measure to subsidise oil retail prices through the Oil Fund, which was introduced in January 2004, managed to help shore up overall economic growth last year, but the endresult will be a double whammy for the economy when the government is forced to deal with the incurred losses amid all the other factors dragging down economic growth.

The subsidy measure has also come at the expense of the private sector failing to adequately improve efficiency and shifting to less oildependent operating equipment. As of the first quarter, the price of Dubai crude had risen 43% yearonyear to $40 per barrel from $28 per barrel. The central bank now expects crude prices to average $44.50 per barrel for the remainder of this year.

For the first quarter, the consumer price index, core consumer price index, and producer price index rose 2.8%, 0.7% and 9.6%, respectively, from the same period last year. Domestic consumption sagged in the first quarter as consumer spending shifted away from buying durable goods given the higher oil prices and rising interest rate trend.

On this point, according to one central bank research report, every $10 per barrel increase in the Dubai crude oil price raises retail fuel prices by 3.60 baht per litre and household expenditure by 0.8%.

On the trade front, the trade deficit surged to $4.9 billion while the current account deficit hit $3 billion for the first four months, with the expectation now that the economy will either run a slight deficit or surplus in the current account for the full year.
The higher inflation and weakening current account are likely to force the central bank to raise the 14day repurchase interest rate again to avoid a further runup in inflation.

As it had hoped to support overall economic growth, the central bank vacillated over its policy rate hikes in the first half of the year, resulting in the gap between local and overseas interest rates, in particular the US Fed Fund rate, widening. However, those rate hikes that it did make, beginning last year, have not led to a corresponding rise in commercial banks' interest rates as liquidity has remained ample in the money market. However, the rising trend in the policy rate has prompted businesses to adjust themselves for higher rates going forwards.

A ROCKIER ROADThe steadily higher interest rate trend will result in domestic consumption easing off.

They can browse, but will they buy, and for how much longer?