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Published on January 2, 2008

The economic outlook will remain highly volatile, due largely to the unsettled political situation following last month's general election.

Apart from high oil prices and the global economic slowdown, political risk has become a characteristic of Thailand in recent years and is expected to continue.

Many cautiously welcomed the December 23 election, the country having effectively been under military rule since the coup on September 19, 2006. The positive sign is that the country is now back on a democratic path, although there is clearly still a long way to go.

"The election did not solve the political crisis," said Kanit Sangsubhan, director of the Fiscal Research Institute, commenting on the ongoing attempts by the People Power Party (PPP) to form a coalition government.

Observers believe that if the Democrat Party were to lead a coalition administration the political risks would be less serious. The Democrats won a landslide victory in Bangkok constituencies, reflecting how the middle class perceived political risk and tries to manage it.

However, if the PPP, which won the largest number of House seats overall and is likely to lead the next government, takes power, it is likely that political risk will remain a significant concern.

This is because the PPP is seen as likely to create a further round of political confrontation between its supporters and opponents by granting an amnesty to ex-prime minister Thaksin Shinawatra and former leaders of the Thai Rak Thai Party, who are banned from politics for five years.

During the election campaign, PPP leader Samak Sundaravej often verbally attacked the head of His Majesty the King's advisers, the Privy Council. Samak's ultra-right leanings have created doubt among many people as to how he could embrace the crucial issue of national reconciliation.

Any renewal of great political uncertainty would restrain the potential for economic growth this year.

Continuing high oil prices, meanwhile, pose a further risk to the economy. The likelihood currently seems that crude will remain close to US$100 (Bt3,400) a barrel.

Alternative fuels cannot yet substitute for petrol and diesel. Ethanol comes at a price because it drives food prices higher, as farm products are used as the raw material for energy production.

The urban poor would as a result be hit particularly hard by the rising cost of living, in particular dearer food prices. The challenge is how to balance food prices with available alternative fuels.

The Finance Ministry has predicted that inflation this year will average 4 per cent.

Fiscal Policy Research Institute adviser Olarn Chai-pravat believes the incoming government should use the exchange rate to moderate cost-push inflation caused by high oil prices.

This means the baht must appreciate further against the US dollar, which would have its own downside risk for exporters as it would make their products more expensive in the world market.

While some observers do not feel this alone would dent exports too significantly, others believe a world economic slowdown would encourage price-cutting among competitors in other countries. Labour-intensive industries such as textiles, shoes and leatherware would then face further difficulties in competing with cheaper products from China and Vietnam.

Finance Minister Chalongphob Sussangkarn has said the new government should address this issue, arguing that the solution was to transfer labour into newer industries such as electronics, automobiles and information technology. However, this it is not a simple task, because it takes time for workers to acquire new skills.

Chalongphob believes 2008 economic growth could exceed 5 per cent if political chaos can be avoided.

He is optimistic the new government will further liberalise the economy, in parallel with developing the welfare state and pursuing populist policies.

Many analysts are concerned, however, that by pursuing populist policies the government will waste money on handout schemes.

They call on the new government to focus on productive investment instead.

Wichit Chaitrong

 The Nation