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Published on December 26, 2007

New hope has emerged after the general election was successfully conducted, as the new government is expected to bring about rising domestic investment and consequently increased confidence and consumption.

However, many uncertainties, both local and foreign, will still put pressure on the economy next year, including oil prices, the sub-prime mortgage crisis in the US, potential higher inflation and the trend of rising interest rates.

Consumers and savers should stay locked in a cautious mode in their investment next year. Here is a list of five key "don'ts" for next year.

1. Don't keep your confidence low

Businesses and consumers should trust the newly elected government, no matter which party steps into office or who becomes prime minister. Confidence is what the country needs most now after the all the gloom of the past two years.

The military coup had shaken the confidence of local and foreign investors because it abruptly threw democracy out the door. The subsequent political uncertainty has caused the economy to wallow in the doldrums over the past 15 months. Foreign investors could barely accept the military-installed government and its temporary policies while consumers have been afraid to spend out of concern for their future.

The new government should plug the political and economic vacuum. It will continue with investment projects, which will spur private investment and eventually put the economy back on the road to recovery. But if consumer confidence remains weak, the economy will not be able to drive forward on all engines.

2. Don't speculate on the baht

The baht is expected to be hit by waves of volatility next year amid the global imbalance from the United States' twin deficits and sub-prime mortgage crisis. Global capital will be ready to pour into high-return markets but could pull back any time when investors realise they are holding high-risk assets.

It is actually a good opportunity for Thais to stash foreign currencies in their bank accounts now that the Bank of Thailand allows the public to buy other currencies without obligations. They could buy whenever the baht appreciates against any currency.

Considering next year's economic fundamentals, the baht is likely to strengthen slightly due to the forecast current-account surplus. The Kingdom is likely to witness robust imports of capital goods for investment expansion but the growth rate will not yet match that for exports.

Thai investors could pick up any foreign currency when the baht appreciates. However, they would not know when the baht is already at an appropriate level to sell for other currencies. They could suffer a loss from the investment if the baht continues to gain in value from the capital inflows or current-account surplus.

But they could always find a way out by investing in strong currencies like the Australian dollar, which offers security to investors from not only its reliable low risk but also higher return. But such investment must be held long enough to ensure that investors do not incur a forex loss when they convert back to the baht. And they also have to keep in mind that the expected profits from forex spreads and deposit interest rates must cover the fees that banks charge for making deposits and withdrawals.

3. Don't speculate on gold

 Gold is the world's most secure asset and should be part of everyone's portfolio, as its price rises in the long run. The gold price, however, moves in concert with the oil price in the short and medium term.

The oil price is expected to continue surging in the first half of next year before levelling off for the rest of the year. It could fluctuate due to geopolitical factors and speculation by hedge funds.

Investors could strike out if they buy and sell gold during those volatile times, as the gold price could be jerky in line with the oil price. The baht's movement also plays a key role in gold prices, making it more difficult for players to speculate on the gold price.

4. Don't overspend

Although consumers have been facing a higher cost of living due to rising prices of goods and services, they should not add to the upward pressure on prices by overspending, overstocking and asking for exorbitant pay rises.

Such behaviour could bring about relentless inflation from both cost-push and demand-pull factors. This would threaten domestic economic stability and steady growth.

Soaring oil prices have caused manufacturers to raise the prices of their goods to offset higher transportation expenses. Actually, manufacturers could not hike prices easily when demand softened over the past year. But they have ended up raising prices, as they could no longer endure skyrocketing costs, while domestic demand has begun to pick up.

When consumers anticipate inflation in the future, they could rush to stock up on daily necessities before prices rise. They might also tend to splurge on renewed confidence in the economic and political situation.

The more they speed up and upsize their purchases, the more pressure they put on inflation from the demand side.

The surging cost of living could motivate workers to request a higher minimum wage, which could spawn demands for better wages and salaries throughout the country. This inevitably leads to higher costs of production, which would contribute to another round of product price adjustments. The end result is cost-push inflation.

5.Don't overborrow

Everyone hopes for an economic recovery in the coming year, but no one should get overextended. Economic growth indicates improving incomes but consumers should not use their future income unreasonably for present spending.

Although interest rates are likely to bottom out soon, consumers should not grab this opportunity to buy everything they want on instalments. It is a great time to borrow for practical, long-lasting possessions like homes. But it is also a time when consumers could fall into a credit trap with lures such as easy-access personal loans for luxury or unessential items.

The repayment burden would increase if interest rates start moving up in the second half of the year. The burden would be even heavier if personal incomes do not jump as expected.

Anoma Srisukkasem

 The Nation