Monday, June 30, 2008

Signs of Thai slowdown abound

After two years of disappointing economic growth weighed down by domestic political tensions, many had hopes that 2008 would be different.

Thailand returned to democracy with a clear victory by the People's Power Party in late December, raising hopes that new Prime Minister Samak Sundaravej could push forward with needed infrastructure investments and policy initiatives required to open up economic growth.

The year started off well enough, with Mr Samak and his finance minister, physician Surapong Suebwonglee, taking steps to reinforce the message that Thailand welcomed foreign investment, such as the scrapping of capital controls on foreign inflows and issuing clear statements that the Foreign Business Act would not be tightened.

The infrastructure megaprojects, first floated by the Thaksin Shinawatra government earlier in the decade, were dusted off and given new life by the Samak government.

Overall, the economy posted relatively strong 6% growth in the first quarter, with private investment and consumption both picking up well from the sluggishness of the year before and exports continuing to perform strongly.

Private consumption grew 2.6% in the first quarter, up from 1.5% average growth in 2007. Private investment meanwhile rose 6.5% year-on-year in the first quarter, compared with average growth of 0.5% in 2007.

But sentiment turned abruptly starting in April, as the government engendered widespread public distrust and apprehension with its clumsy moves to amend the 2007 constitution.

The People's Alliance for Democracy, the protest group that helped bring down the Thaksin Shinawatra government through widespread protests in Bangkok in mid-2006, immediately accused Mr Samak and the PPP of seeking to whitewash the corruption investigations against Mr Thaksin over the past two years.

The political bickering could not have come at a more inopportune time, as the global economic environment turned decidedly negative due to soaring oil, food and commodity prices. Inflation jumped to a 10-year high at 7.6% year-on-year in May, putting pressure on consumers and businesses alike.

Investor sentiment has now turned decidedly bearish, as a result of higher production prices, uncertain economic trends and political uncertainties. Consumer confidence has fallen as disposable household income drops from higher living costs.

Government growth targets of 6% for 2008 now look overly optimistic, as the Thai economy increasingly looks to be headed for another year of self-inflicted, lost opportunities.

Policymakers have been scrambling to ease the pain of higher living costs through added spending for community development programmes, a new debt-suspension scheme for small-scale farmers and tax breaks for individuals and listed companies.

The March tax plan raises tax waivers by half to the first 150,000 baht in income. Companies with paid-up capital of under five million baht will also receive tax waivers for the first 150,000 baht in profits. Additional profits will now be subject to a three-step ladder of 15%, 25% and 30%, a clear benefit compared with the former 30% flat corporate tax.

Small community enterprises with revenues of less than 1.2 million baht per year will also be given tax waivers for three years, while the property sector received a boost through lower asset-transfer and mortgage-registration taxes.

The Finance Ministry even announced it was considering a new social welfare programme to help ease pressure on the poor, involving the distribution of food coupons exchangeable for basic foodstuffs and consumer products.

Yet it remains to be seen whether the measures are sufficient to help the economy navigate the current storm when oil prices have doubled since last year at about $140 per barrel by June.

The baht, which appreciated strongly throughout 2007, has since reversed course, due in part to capital outflows and the current account becoming a deficit because of oil prices.

Thai exports, initially targeted at 12.5% growth for the year, have continued to rise impressively, albeit at a pace behind import growth. But questions about the US economy will remain a risk factor.

Thai policymakers will have a difficult course to manoeuvre over the next several months by balancing the need to assist a public coping with higher prices while maintaining fiscal prudence, transparency and efficient implementation.

Efficient fiscal spending will be crucial, particularly once the 2009 budget begins in October. Delays in implementation and disbursals were major impediments for the economy in 2007.

Given Thailand's relatively healthy public finances, investment under the 2009 budget should be increased to help match higher material costs. Resources also need to be set aside to help low-income groups _ while farm price increases have benefited rural communities, the cost of key inputs, such as fertiliser and oil, have similarly increased.

An expanded, well-targeted 2009 fiscal budget and clear progress in the megaproject programme could go a long way toward restoring business and consumer confidence. With monetary policy now needing to be tightened to help keep inflation in check, fiscal spending will be crucial to help ease the pain of higher prices and to maintain growth.

Energy prices, meanwhile, show few signs of declining, raising the importance for the country to improve the efficiency of energy usage and conservation. Economists also point to the need to raise the competitiveness of the industrial sector and labour force for sustainable growth.

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