Most economic indicators have been revised downward, including private consumption and investment. Exports, which are showing a positive trend, are the only engine driving the country's economic growth.

The central bank also changed its inflation forecast yesterday, predicting between 4 per cent and 5 per cent headline inflation this year, up from its earlier estimate of 3.5 per cent to 5 per cent. However, its forecast for core inflation remains unchanged at between 2 per cent and 3 per cent.

"Despite inflationary pressure, core inflation is likely to decline due to the large base effect, the appreciating baht, and the slowdown in domestic demand," said Bandid Nijathaworn, the BOT's deputy governor.

The economic forecast is based on the assumption that the price of Dubai crude oil will average US$61.50 (Bt2,318) per barrel this year. Earlier projections were based on an average price of $57.50 a barrel. The central bank's worst-case scenario has the Dubai crude price averaging $69.30.

Bandid said that if oil prices continued to surge above the baseline assumption, economic growth was likely to be in the lower-range of the projection, between 4.25 per cent and 4.75 per cent.

The BOT revised its economic growth forecast downward by 0.25 percentage points after a monetary policy meeting earlier this month. However, further oil price growth and the resulting impact has exceeded expectations, forcing a second revision. But other risk factors loom. This includes a decrease in investor confidence and the fluctuation and appreciation of regional currencies, Bandid said. However, if the government's budget is spent rapidly, the economy will benefit.

Bandid said the economy was likely to be affected by the slowdown in the government's mega-project investment this year and a delay in fiscal 2007 budget planning, which will affect public spending.

The BOT now forecasts that government investment this year will be Bt564.5 billion, a drop of Bt26.6 billion from earlier projections. Public consumption and investment are predicted at Bt1.55 trillion, down Bt876 billion from an earlier projection.

Growth in public investment is now expected to be between 7 per cent and 8 per cent. Forecasts in January had it between 12.5 per cent and 13.5 per cent. Expectations of between 2 per cent and 3 per cent growth in public consumption remain unchanged.

But the BOT sharply cut its forecasts for private consumption and investment. Private consumption is expected to grow by between 3.5 per cent and 4.5 per cent, compared with earlier estimates of 4 per cent to 5 per cent. Private investment forecasts slid from earlier predictions of between 9.5 per cent and 10.5 per cent to between 7.5 per cent and 8.5 per cent.

"The economy will slow down in the second and third quarters before picking up in the last quarter, when domestic demand will accelerate because of declining inflation," he said.

Bandid said that despite the baht's appreciation, the economy would benefit from export growth that would take advantage of an improved global economy, and particularly Europe and Japan.

Exports are expected to expand between 11 per cent and 13 per cent this year, compared to the BOT's earlier prediction of 10-12 per cent. The economies of trading partners are also expected to grow 4.5 per cent, rather than the earlier estimate of 4.2 per cent, Bandid said.

The deputy governor said the baht was 4.1-per-cent stronger in the first quarter compared with the fourth quarter of 2005, although it hasn't appreciated as quickly as other regional currencies.

The strong baht has not affected exports, which grew quickly in the first quarter of the year.

The trade deficit this year is expected at between $5 billion and $7 billion, down from earlier estimates of $7 billion-$9 billion. The current-account deficit could end the year at $2 billion, compared with earlier forecasts of a deficit between $2 billion and $4 billion.

The central bank's deputy governor said global demand was playing the most important role in the country's export performance, rather than the currency factor, and if the world economy grew rapidly, the affect of the strong baht on exports would be lessened.

The BOT forecasts that regional currencies are likely to be stronger against the greenback due to improved regional economies and the growing twin deficits in the US. In addition, capital inflows will put additional pressure on regional currencies.

Anoma Srisukkasem

The Nation