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Published on March 25, 2008

External risk factors, including a looming US recession and high oil prices, pose grave threats to the local economy, several top economists warned yesterday.

The US economy is expected to slow down sharply, and it will affect the global economy, Bank of Thailand Deputy Governor Bandid Nijathaworn said yesterday.

"The situation in the US has been rapidly deteriorating for the past three weeks. Policy-makers don't have time even to consult books [to seek solutions]," Bandid told an audience at a seminar yesterday organised by the Nation Multimedia Group.

The global economy has shifted into a new paradigm in which US influence is on the wane, while that of China, the Middle East and key emerging markets are on the rise, Bandid said.

He urged the public to adapt to the fast-changing marketplace, as the US dollar was crumbling in value and credibility.

The weak dollar creates high inflation worldwide, and it is forcing other currencies to appreciate, he noted.

While some exports to the US may be affected, overall Thai exports will suffer a mild impact, as many central banks, such as those in the EU, the UK, India, China and Australia, have resisted pressures to cut rates to fight inflation.

Crude-oil prices will likely remain high for a long time, pushing up production costs, he said.

Domestic demand has shown signs of recovery but it remains fragile due to unfavourable conditions, Bandid said.

He supported a government spending plan to boost growth. However, he urged the administration to exercise prudence and discipline to ensure that responsible fiscal policies are pursued.

Bandid did not directly answer a question about the direction in which local policy rates is headed.

He said the central bank has to guard against rising inflation, which could destabilise the economy if left unchecked.

"As bank loans have expanded since the fourth quarter, current commercial bank rates should accommodate private investment needs," he said.

He backed the state's move to invest in mega-projects but urged the government to prioritise them to ensure orderly expenditure is maintained.

Supavud Saicheua, managing director of Phatra Securities, said Thailand and the rest of Asia could decouple from the US and avoid a downturn by boosting domestic consumption to offset falling demand in the US market.

It is time for Asia to be less dependent on the US as the buying power of US consumers have fallen sharply, he said.

Asia can decouple because the region has a massive current-account surplus, he said.

With big changes taking place, Supavud urged the central bank to allow the baht to appreciate to offset inflation and restore price stability.

"A 10-per-cent rise in the baht against the dollar could significantly lower the cost of importing oil," he said.

He also expressed support for the government's plan to amend the Constitution to strengthen political parties.

The local economy is expanding this year at a time when many economies are contracting.

Foreign investors are cautiously optimistic about Thailand, he said, as it had lagged behind regional markets during the past few years.

He believed investment would be the key driver for future growth.

Supavud projected the Stock Exchange of Thailand (SET) Index to touch 900 points this year.

Political uncertainties have forced foreign investors to shift more than Bt10 billion from Thai stocks into the local bonds, SET chairman Pakorn Malakul Na Ayudhya said yesterday.

"Investors prefer certainty to risks. Political risks are out of control," he said.

"As political uncertainties persist, investors have allocated more money into bonds," Pakorn said at yesterday's seminar.

In focus are a likely dissolution of political parties, the two- and three-digit lottery case and a proposed amendment to the Constitution.

Kongkiat Opaswongkarn, CEO of Asia Plus Securities, is equally optimistic Thai stocks will rise in the second half of the year.

Global liquidity remains high, but investors are currently nervous, so they are holding more cash, he said.

He expects the SET Index to reach almost 1,000 points this year.

He said once the political climate cleared up, the index could advance with support from a relatively low price-to-earnings (P/E) ratio, averaging 11 today.

"The Thai market is now shielded from the sub-prime crisis, with the index having lost only 2 per cent, compared with 12 per cent by Wall Street," he said.

"The local P/E ratio remains low, while profits at many listed firms should grow 24 per cent this year," Kongkiat said.

Somchai Jitsuchon, research director at the Thailand Development Research Institute, suggested the government could recruit skilled labour from neighbouring Malaysia and Singapore to move the country's knowledge-based economy forward.

Meanwhile, Deputy Prime Minister and Finance Minister Surapong Suebwonglee said the government would today submit a Cabinet budget worth Bt18 billion to be used for villagers and debt moratorium for farmers.

The government will also launch a "back to school" project soon to improve productivity among workers.

Wichit Chaitrong

The Nation