Govt spending to remain growth engine this year

Economy January 15, 2016 01:00

By Yuthana Sethapramote
Graduat

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Thailand’s economic recovery was lacklustre in 2015. Gross domestic product expanded by 2.9 per cent in the first three quarters of last year. The major reason was the slowdown in global economic activity. As a result, Thai exports diminished by a 5.3 per



 

Moreover, weak private consumption and investment also affected economic performance. Government spending was the only engine that supported the economy last year.

In the final quarter of 2015, we expect that both exports and private investment continued to contract. However, private consumption is expected to rebound slightly, thanks to the government’s tax incentive for year-end shopping. In sum, we forecast Thailand’s GDP growth at 3.0 per cent in 2015.

This year, global economic activity is anticipated to continue slowing. Last week, the World Bank cut its global growth forecast to 2.9 per cent, down from 3.3 per cent in its last projection. Therefore, based on the National Institute of Development Administration’s macro-econometric model, we forecast Thailand’s GDP growth at 3.6 per cent in 2016.

The major engines for growth in 2016 will still be public expenditure, especially in mega-project investment. I expect private consumption and investment in 2016 to increase by 3.8 and 2.7 per cent respectively.

Despite the decline in export value in 2015 and an ongoing global slowdown in 2016, I still anticipate that export value this year will increase by 2 per cent. Including tourism revenues and other services, export volume will increase by 4.3 per cent.

Even though the Thai economic situation is expected to improve in 2016, the current pattern of growth at 3-4 percent per annum is projected for the near future, down from an average of 5 per cent before the global financial crisis.

This new normal of economic growth is happening not only in Thailand but also globally. The sluggishness in world trading volume is expected to continue at least into the near future.

In Thailand, domestic demand has limited ability to push economic growth in the long term. For example, the government policy to boost private consumption, ie the tax-rebate policy for first car buyers in 2012, could not provide sustainable growth.

Therefore, we believe that the recent tax incentive for year-end shopping cannot provide enough of a multiplier effect to boost the economy in 2016.

Overall, the economy in 2016 and the near future is expected to expand more slowly than in the past. Therefore, short-term government stimulus packages are not necessary.

Consequently, the government could focus on public investment that could provide infrastructure for long-term economic development. While private investment is weak because of uncertainty in both the global economy and the domestic political situation, public investment could expand with minimal crowding-out effect.

Furthermore, education reform and research and development could be the important factors that contribute to Thailand’s long-term economic growth. Therefore, government incentive schemes should emphasise these objectives.

Measures such as tax incentives for private firms to provide support to education could lead to improvement in the quality of human capital. Additional incentives for firms to invest in R&D to develop competitiveness of Thai products could provide more long-term benefits to Thai economy than incentives for short-term consumption.

Yuthana Sethapramote PhD is with the Graduate School of Development Economics, National Institute of Development Administration; e-mail yuthana.s@nida.ac.th.

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