Risks abound for 2014, so let's keep focused

Risks abound for 2014, so let's keep focused

The new year is right around the corner, yet most people feel they are not quite ready for 2014 as plans have been put on hold or completely revised amid all the uncertainties surrounding the economy, not to mention the political impasse.

Indeed, risks abound for our economy next year but we should not be too focused on short-term risks. To achieve sustainable growth, it is important for both government and businesses to address the country's structural challenges and to stay proactive investment-wise.

The restlessness of the past few weeks encapsulates what has been a year full of surprises.

We entered 2013 with high hopes as the economy was riding robust consumer spending. With massive QE (quantitative easing) liquidity global investors gave us a vote of confidence by means of capital inflows. By mid-year, however, the investment theses were broken. The US Federal Reserve caught everyone off-guard by signalling that the era of QE might end sooner than later, resulting in an abrupt capital outflow from emerging markets. Private consumption and investment spending became lacklustre, and credit standards were tightened in response to signs of rising delinquency.

Moreover, the political impasse has added an extra bit of uncertainty to our economic outlook. The timing is precarious as the tolerance for Thailand's risks has become much lower in the eyes of international investors, given the improving economic outlook among the G3 economies. This makes monitoring the risks in 2014 critically important.

So what is in store for next year?

It looks like we will begin it with a cloud on the horizon. The political impasse has generated negative sentiments and potentially delays businesses from committing to any major investments.

Indeed, many households have already been getting more cautious _ cutting back on their holiday shopping. The deadlock has also put huge uncertainty over the future of the much-needed infrastructure investment. Government investment associated with the infrastructure programme had initially been viewed as an important driver for Thailand's growth in 2014. Its delay will not only depress growth next year; it will also ruin investors' confidence in Thailand as an investment destination.

The QE tapering will also happen at some point of the year. There are good reasons to believe that any market reaction to the tapering is likely to be less severe than what we saw in 2013.

Long-term interest rates have started normalising somewhat from extremely low levels at the beginning of the year. Also, part of investors' fears about tapering reflected uncertainty about the identity of the next Fed chair.

With the possibility the next leader could come from outside the institution, the forward guidance on interest rates did not seem particularly credible. But it is important to keep in mind that the era of the cheap dollar is ending. Governments and large corporations which get their long-term funding from the bond market will have to cope with increasing costs.

With the shrinking of the excess global liquidity, the rounds of asset-price appreciation could come to an end. The drop in the price of assets results in negative wealth effects for many middle- and upper-income consumers. Among low-income households, the level of indebtedness is also particularly high. All this suggests there is less room for domestic demand to provide additional support for the economy.

Yet, every cloud has a silver lining. QE tapering will happen when the US economy is judged to be strong enough. As it is still the world's largest economy, the United States' positive economic outlook bodes well for global growth. The IMF puts growth at 3.6% for 2014, which is 0.7 percentage points higher than what it expected for 2013. This time around, the global growth engine is the turnaround of advanced economies, and not just the US. The Euro Area is also expected to return to growth after two years of recession.

For Thailand, it means that exports to G3 economies should expand after declining in the past two years.

SCB Economic Intelligence Centre expects Thailand's overall exports to gravitate back to the normal path, although we will still not see double-digit growth.

Even with so-so growth for 2014, business should still be looking out for ways to tackle structural challenges. These are not cyclical issues and will not go away once the economy improves; on the contrary, the problems will intensify.

On top of the structural challenge list is labour scarcity. There are reported shortages of labour across the spectrum of human resources, from unskilled workers needed on construction sites to managers and professionals with high levels of education.

These shortages are a symptom of complex underlying problems such as 1) low productivity gains during the past decade; and 2) labour skills mismatches which reflect either education that is too low in quality or fields of study that are not in high demand by employers. An education reform that addresses these problems is crucially needed.

In addition, our flagship electronics industry is heavily concentrated on products such as hard disks and laptop integrated circuits that could become obsolete in the near future. Modern technology investment into the manufacturing sector is needed if Thailand is to ride the global wave of economic recovery. It is thus important for Thailand to keep itself attractive in the global investment arena.

So despite the weak headline GDP numbers and short-term uncertainties in the upcoming year, productivity-enhancing investments should still be on the agenda. A wait and see approach for investment is not necessarily the best bet for 2014. In times of turbulence, it is important to stay focused on the foundations for the sustainability of our economy. And this requires us to invest not only in physical infrastructure but also in young minds.


Sutapa Amornvivat, PhD, is Chief Economist and Executive Vice-President at the Economic Intelligence Centre, Siam Commercial Bank. She has international work experience at IMF, ING Group and Booz, Allen, Hamilton. She received a BA from Harvard and a PhD from MIT. eic@scb.co.th EIC Online: www.scbeic.com

Do you like the content of this article?
COMMENT (1)