Domestic demand, not politics, will determine gdp growth

MR Pridiyathorn Devakula

 Many businesspeople are worried about the consequences of political conflicts for the economy. I would therefore like to use this column to communicate with businesspeople to lessen such concerns.

Last year, the major contributor to economic growth was foreign trade. Out of the total GDP growth of 4.8 per cent last year, 3 per cent was contributed by net exports (export-import), while private consumption, public investment and private investment contributed only 0.8 per cent, 0.2 per cent, and 0.1 per cent to GDP growth respectively.

But this year, foreign trade may not contribute at all to GDP growth, owing to an economic slowdown in key export markets and an increasing demand for capital goods to serve the Kingdom's manufacturing capacity expansion. Net exports for the first three months of this year turned out to be negative and will continue as such. GDP growth therefore has to rely more on the expansion of domestic demand - ie public investment, private investment, and domestic consumption.

A substantial increase in public investment can be expected as the government has announced several infrastructure investment projects including the expansion of the mass-transit system in Bangkok and vicinity, a dual-track railway between cities, the expansion of Suvarnabhumi Airport, the construction of a reservoir and a water distribution network.

Some of these mega-projects are long overdue and the public has been waiting for quite some time for them, while bureaucrats are also ready to push them out. Therefore, the projects will be launched without delay.

Private investment has evidently increased in recent months. Increased import growth in January and February was mainly due to increases in capital goods used for capacity expansion and raw materials for manufacturing production.

The private investment index picked up in the fourth quarter of last year and has kept on growing at a fast pace, while the manufacturing production index reached as high as 14.7 per cent in February of this year. Capacity utilisation has continuously increased although it dropped slightly in February due to some industries having completed their capacity expansion.

Moreover, nine out of 11 large private projects - focused on upstream petrochemical and upstream chemical industries as well as energy projects - which had sought to invest in the Map Ta Phut area and been put on hold for sometime, have been recently approved by authorities. This is an indication that the bureaucrats are willing to support these long overdue private investment projects.

The government's mega-projects, a series of investment-promotion policies and the approval of the nine pending projects by bureaucrats have rapidly restored the confidence of private investors. As a result, operators in many sectors- automobile, retail, telecommunications and real estate to name a few - have started up their projects. It is clear that private investment will be crucial in driving economic growth in 2008.

The private consumption index also increased markedly in the first two months of this year.

Even more interesting was the hike in farm incomes in January and February in terms of both quality and price. An increase of 29 per cent in February was a record in recent years and numbers in March and April are expected to be even higher as the price of rice has escalated incredibly.

Such increases in farm income would eventually lead to a substantial rise in private consumption since farmers make up the majority of the population in Thailand. Once the prices of agricultural produce increase, sales of consumer products as well as durable goods such as motorcycles, electrical appliances and pick-up trucks increase in step. As a consequence, private consumption will definitely be another major contributor to GDP growth this year.

What's most interesting is that the significant increase in farm prices and farm income that we are currently experiencing is not the result of any government policy.

Even amid political conflicts, produce prices still remain high and help bolster economic growth.

The public investment projects that have already announced are going forward swiftly and will proceed no matter which political party governs the country since these projects are in the best interests of the people and the country. The only doubt is whether private investment recovery can be sustained if political conflicts become more intense or even lead to political changes.

The recent increase in private investment started in the fourth quarter of last year and has continued until now. This has happened a) because certain industries are currently running at almost full capacity and need to expand and b) once the election date was announced, private investors were confident the elected government would support private investment as all parties stated in their policy platforms that they would do so.

At this moment, the first factor has not changed much; many industries still need to expand their capacity. Current political conflicts involve entirely political issues and do not involve investment policy at all.

If businesspeople consider this carefully, they would realise that regardless of which party runs the country, private investment, which is much needed at the moment, would be encouraged.

Furthermore, if those in the private sector realise the significance of their role in the economy and play their part in response to the actual supply and demand situation without being too concerned about political conflicts, private investment would experience major growth this year. And the three economic engines - domestic consumption, public investment, and private investment - would be able to drive the Kingdom's economy entirely and completely cover the loss of net exports. However, to ensure the continued growth of private investment, those in the private sector must realise their crucial role and carry on with their duties despite the political situation.

Until next Monday.