Trends in the Thai economy for 2007
 

19 January 2007

Dear friends,             

            It is tradition for economists to talk about economic variables and to forecast economic trends during this season. These economic forecasts are used by business people to plan expenditures and investments, as well as by the government to determine upcoming policy.

            As an economist, I see that the 2007 economy will be deeply impacted by external and domestic factors. The main factors that will impact the Thai economy in 2007 include the following.

            Oil prices will tend to decrease

            The demand for oil will slow because the U.S. and Chinese economies will also post somewhat slower growth. This, together global fossil fuel reduction campaigns such as the Kyoto Accord will push oil prices downwards. But the Chinese economy will not slow down too much because Asian currencies should remain strong. So prices for imported oil should decrease in relation to local currencies; therefore, more oil can be imported. For these reasons, the world oil price will not decrease that much.

            The exchange rate will fluctuate

            The U.S. dollar will grow weaker in 2007, but it may become stronger in the second half of 2007 because a weaker dollar will increase U.S. exports but decrease its imports. This will attract a stronger investment flow back into the U.S. because other currencies will appear stronger, thus decreasing investment costs in the United States. And this will reduce asset prices in the U.S. in terms of other currencies. At the same time, money targeting short-term profit will quickly flow out once profits are made. This will weaken Asian currencies compared to the American Dollar.

            Trade-partner economies will slow

            In 2007, the US economy will slow down dramatically due to contraction in its real-estate sector. The forecast is for continued economic deceleration throughout the year. At the same time, the Chinese government has announced policy to cool down its overheated economy. This will slow Chinese exports in 2007, after explosive growth in 2006, due to growth in the economies of its trading partners.

            Thailand’s political situation is clearer but confidence is still shaky

            After the coup, the political air began to clear, and private sector confidence began to more or less return. But the situation worsened again at the end of the year when the Bank of Thailand (BOT) announced measures to prevent baht speculation and required all Thai banks to hold 30 percent of their capital income in reserve, causing investment in the Bangkok Stock Exchange to plummet to historic lows. This situation – together with other long standing situations such as the uprising in the South, negative rumours, and dubious military intervention in the South – have shaken investor confidence. This has discouraged foreign investor confidence once again.The recent bomb explosions in Bangkok in multiple locations have severely shaken this confidence even further.

            These situations and factors will affect the Thai economy in 2007 as follows.

            Inflation should decrease

            This is because the world crude oil price is decreasing. Together with a stronger baht, this will lower the cost of imports. Lower inflation, however, will stabilize the 2007 economy.

            Private sector consumption should begin to recover

            Lower oil prices and inflation rates will encourage private sector consumption. We have already seen signs of this in the third quarter of 2006 when the economy grew by 2%, as compared to the first and the second quarters of 2006, which grew only 1.2% and 0.8% respectively. This is also higher than the third quarter of 2005, which posted only 0.6% growth.

            Exports will slow

            This is because the baht will be stronger and the economies of trade-partners  will slow. At the same time, imports will increase because the baht is stronger, and this may cause an adverse trade balance.

            nvestment in the private sector will still slow

            Decreased investment in the private sector from 2006 will continue into 2007. The reason is that foreign investors still lack confidence in the performance of the provisional government. So, they prefer to wait for clearer policy from the next government. And the fluctuating currency discourages them to invest long term, causing exports to slow and discouraging new investment.

            Economic growth in 2006 indicated a slowdown

            Economic slowdown in 3 quarters in a row in 2006 indicates that the economy will probably post a slow down again in the fourth quarter, a trend which should continue into 2007. Exports will slow due to a stronger baht and a slowdown in the world economy, while imports will increase as a result of a stronger baht, accompanied by a slow down in investments, as mentioned.

            However, the Thai economy will be slightly stimulated by its negative trade balance, but this stimulation will not have much overall impact on the economy because the negative trade balance will be caused by debt payments. Consumption may recover somewhat because oil prices and inflation rates will fall.

            The Thai economy will face some unique challenges in 2007. In response, I would like to propose some ideas for the government as it formulates its economic policy for next year, as follows.

            Short Term. The BOT should consider lowering its interest rates to stimulate domestic consumption and to help slow the strengthening of the Baht because money will flow to higher interest rates. In addition, a lower inflation rate will allow the BOT to be more flexible and to use interest as the tool to manage a stronger Baht.

            Also, the government can stimulate investment in Thailand by supporting the import of new engines to improve productivity and by driving development projects for infrastructure, such as mass transportation, water supply systems, logistics systems, etc. because these project will stimulate consumption and employment. However, domestic capital sources should be the first priority in order to prevent a negative impact on Baht value.

            Long term. The government should give importance to developing labour skill, which will improve productivity. It should also develop financial institutions, and help Thai entrepreneurs and investors, who potentially can invest overseas. This will boost the competitiveness of the Thai economy, allowing it to better adapt itself to fluctuations in the global economy.

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