Country revisits year of challenges in 2014

Economy February 01, 2014 00:00


3,165 Viewed

2014 will be a challenging year for the Thai economy, due to the impact of both external and domestic pressure which may encourage the central bank to slash the economic growth forecast to below 3 per cent, the Bank of Thailand governor said.

Prasarn Trairatvorakul said at a Thai Institute of Directors briefing yesterday that the biggest external challenge comes in the form of credit outflow, especially as a result of the US Federal Reserve’s decision to continue tapering its quantitative-easing (QE) policy because the US economy is getting stronger.

However, despite the decision to taper QE to US$65 billion (Bt2.14 trillion) per month, Prasarn said the current situation of the baht was still good – and the current policy of the BOT was still adequate for the current situation.

“The baht is still stable, so there is no need to for the BOT to use any policy to intervene at this time,” the central-bank governor said on the sidelines of the briefing.

During the briefing itself, Prasarn said the political situation had created uncertainty and the lack of of a permanent government, which in turn had led to low domestic consumption and investment in both the private and public sectors.

He explained that the likely continued lack of a permanent government over the next six months created a political vacuum, with direct and indirect effects on the economy.

Prasarn said such a situation would not affect normal budget spending this year, but the impact would be most prominent in terms of public investment next year.

The indirect effect, meanwhile, is the slowing down of private investment because the government is unable to stimulate private investment through new state projects.

The Monetary Policy Committee last week resolved to revise down the Kingdom’s gross-domestic-product growth this year, from 4.2 per cent. As the new figure will be announced next month as part of the MPC’s meeting minute, Prasarn said that the Thai economy may expand less than 3 per cent this year.

Although the previous prediction had only been made in December, a number of factors had caused it to make the downward adjustment. Among the factors are the ongoing political turmoil, which had led to sluggish domestic consumption and investment, a lack of public spending due to the absence of a permanent government, as well as the below-par performance of the export sector so far this quarter.

The BOT chief added that the domestic political situation had also hampered the country’s ability to benefit from the global economic recovery, which had led to lower-than-expected activity in the export sector and the slowing down of foreign investment due to political uncertainty.

Structural support

On the optimistic side, Prasarn said he believed Thailand’s basic financial structure was still able to support the economy and that if the political situation were not prolonged, the economy should be able to bounce back.

However, if the situation were to be prolonged, it would begin to destroy all of our “immunity”, he said, explaining that there are four factors – or immunities – that are currently keeping the economy intact.

One, Thailand’s market is stable and balanced because the current account is still flowing without interruption and the inflation rate is still at an acceptable level, so there is no need to tamper with the present interest rate since it is suitable for the support of economic growth.

Two, the Kingdom’s currency if flexible enough to cope with the fluctuation of capital inflows and outflows.

Three, the country’s reserves are at a high level and account for 50 per cent of GDP, which is among the highest proportions in the world.

Lastly, Thailand’s commercial banks remain financially strong and they can continue to provide fluidity in the economy. The banks also have large reserves, which can also be used as a cushion for the economy, if need be.

Due to the effects of populist policies, such as the first-car policy and the rice-pledging scheme, household debt has risen and economic momentum has slipped back, Kosit Panpiemras, executive chairman of Bangkok Bank, told the Thai Institute of Directors briefing.

Kosit said he personally felt that if the opposing parties stopped competing through populist policies, and if corruption could be effectively controlled, then “Thailand’s future is going to be bright.”

Narongchai Akrasanee, chairman of MFC Asset Management, said Thailand was “not going to die, but we aren’t going to grow, either”.

He gave an example from recent history when the Kingdom had gone through a similar period of difficulty in 2006, when Parliament was dissolved and there was an interim government. He said that though the global economy may recover, Thailand’s GDP growth this year would be no more than 3 per cent. It is also unlikely that tomorrow’s general election will solve anything, he added.

Despite the political turmoil and rampant corruption, the biggest problem comes from the rice-pledging scheme, he said, as the caretaker government is unable to resolve the problems created under a programme in which more than Bt160 billion is owed to farmers.

Since the current administration does not have the power to increase its budget for the scheme, the large sum owed cannot be repaid and this is beginning to effect rural consumption, Narongchai added.