The political crisis will affect four economic factors, although the extent of any impact is unpredictable, according to Naris Chaiyasoot, director-general of the Fiscal Policy Office, said yesterday.

Four key mechanisms that are sensitive to politics are consumer and investor confidence, the public sector, international trade, and financial markets, said Naris.

As a result of political tensions, consumers may reduce their spending and investors may delay investment plans, he said. The consumer confidence index dropped slightly when the political waters started roiling in the beginning of the year. The index dropped to 82 in January and 79.6 in February from 82.5 in December, according to the University of the Thai Chamber of Commerce.

The investor confidence index fell to 45.2 in January from 45.9 in December last year. Investment produces goods for domestic consumption, and investment related to government projects may be postponed until political tension settles, said Ekniti Nithithanprapas, head of macro-economy team research.

Investment related to exports, however, will proceed without delay if demand in overseas markets expands, he said.

If political uncertainty continues, it may also affect public spending in the fiscal year 2007, the budget for which has yet to be approved by the government.

Investment in mega-projects would also be delayed, in particular projects related to mass-transit and logistics improvements under a scheme to modernise the country.

Political instability is unlikely to have a negative impact on the export sector unless it turns violent. Ekniti said so far exports of goods and services had not been affected.

But it would slow demand for imports due to a drop in domestic consumption and delayed private and public investment, which would improve the current-account balance.

If the situation does not turn violence, the central bank will likely further increase the policy rate in order to curb inflationary pressure. In the case of violence, the Bank of Thailand may hold back on raising rates.

International capital inflows may move to safer markets than the Stock Exchange of Thailand if the political deadlock persists. However, if the deadlock ends quickly, that would boost the stock market, Ekniti added. The negative wealth affect would lead to less spending by those making money from the capital market. Without violence, the office forecasts economic growth this year at between 4.5 to 5 per cent.

Embattled Prime Minister Thaksin Shinawatra insists he will not step down, while the People's Alliance for Democracy leading the protestors continues to demand his resignation, accusing him of losing his legitimacy to rule.

Wichit Chaitrong

The Nation