Thailand impact seen if global growth misses 2%

Thailand impact seen if global growth misses 2%

Thailand's economy could fall into a recession if the global economy expands by less than 2% for more than a year, but infrastructure development and election spending bode well for the country's growth prospects, says an economist.

In January the International Monetary Fund (IMF) lowered its estimate for global economic growth in 2019 by 0.2 percentage points to 3.5%, its second downward revision in less than five months after cutting its global economic growth forecast to 3.7% in October 2018.

The IMF made clear that the biggest known risks to growth are the Sino-US trade disputes and the possibility of Britain exiting the EU without a deal.

Slimmer returns on short- and long-term government bonds across the globe could also spark a recession, given how higher interest rates will cause the yield spread between short- and long-term bonds to go negative, said Somprawin Manprasert, executive vice-president of Bank of Ayudhya.

An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term ones of the same credit quality. This type of yield curve is considered a predictor of an economic recession.

But an imminent recession is unlikely because Thailand's consumption growth is poised to improve on the back of election spending and government spending on major infrastructure projects, Mr Somprawin said.

The economist said Thailand's economic growth is projected to continue expanding in the long run, thanks to public investment in infrastructure megaprojects.

Despite a change in government administration, infrastructure investment projects will continue because many projects have already been implemented and have a binding clause stipulated by the act on major public investments, Mr Somprawin said.

Nearly 200 billion baht worth of state investment is estimated to be pumped into the economy from October to March, according to the Budget Bureau.

The bureau targets 90 billion baht worth of investment budget to be taken out in the first half of fiscal 2019, which started last Oct 1, and a further 100 billion baht of undisbursed budget from the fiscal year will be drawn in the same period.

Financial markets are expected to face short-term volatility due to geopolitical conflicts, the Sino-US trade dispute and interest rate normalisation by the US Federal Reserve.

But market participants anticipate that the Fed will not accelerate its rate hikes because such a move will result in a negative yield gap between short-term and long-term government bonds, Mr Somprawin said.

Based on historical investment data, equity investment still produces the highest return for long-term investment, averaging 10% per year, while fixed-income securities have an average investment return of 2-5%, said Chatkaew Groatong, head of the alternative investment department at Krungsri Asset Management (KSAM).

In KSAM's view, external factors still pose investment risks, therefore investors should diversify into different asset classes such as stocks, fixed-income securities, real estate investment trusts and infrastructure funds.

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