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Recovery coming but risks seen in 2015, Citigroup says

LEADING GLOBAL banking group Citi cautiously forecasts a recovery for the Thai economy, but says the country needs to be prepared for global economic risks next year, including a stronger US dollar.

Jun Trinidad, Citi economist and strategist for Thailand and the Philippines, says the recovery will be driven by increased public spending and pent-up demand following the stabilisation of the political situation.

The ruling National Council for Peace and Order's plans to accelerate state spending along with establishing the budget for 2015 has helped the situation. Public investment will take the lead, while the private sector still needs assurance of fiscal credibility and confidence.

Pent-up demand could translate into the release of between Bt50 billion and Bt60 billion. The political unrest stalled demand, causing savings to shoot up to 40 per cent of GDP, which is significantly excessive given that the jobless rate is at a stable 1 per cent.

"I have never seen such [a high] savings-to-GDP ratio," Trinidad said, predicting moderate growth this year.

He projects the economy to grow by 0.5 per cent year on year, which is moderate but shows a gradual recovery.

"I am ruling out a V-shaped recovery because, for one, household debt ratios are pretty high. Second, there is so much slack in the industrial sector."

Right now household debt is about 80 per cent of GDP, restricting domestic consumption.

Exports will recover mildly from the past two quarters. This is not as strong as previously anticipated because of the slow global recovery. The European economy remains weak, while Japan's has recovered somewhat.

As for the United States, Citigroup downgraded the growth forecast for 2014 to 2.3 per cent from 2.6 per cent last month and 2.8 per cent two months ago, mainly reflecting the weakness in first-quarter activity as well as a slower housing outlook. Tapering of the US Federal Reserve's quantitative easing is expected to persist with a possible interest-rate increase soon. This is where emerging markets, including Thailand, will be challenged, as the dollar is expected to strengthen.

Trinidad said "it pays to gets things fixed" and get Thailand's house in order to buffer the effects of a stronger dollar. The baht this year is expected to range between 32.50 and 32.70 to the dollar and in 2015 average 33. The Thai currency risks weakening to 35 because foreign funds may flow out of the country.

Therefore Thailand must bring about reforms to build on its strength for the Asean Economic Community's implementation next year, where it will play a crucial part in terms of logistics given its advantage of being at the centre of the region. Investment will be needed in roads, dual-track railways, and sea- and airport expansion to improve border trade.

Trinidad said Thailand and Asean would have to look at the Chinese market in a different perspective. From exporting intermediate goods that will end up in developed economies that are currently struggling to recover, Thais will have to focus on targeting China's domestic market. Agricultural and electronic goods as well as tourism can attract Chinese spending.

While many may be caught in the "growth scare" of Chinese GDP missing double-digit growth, Trinidad said 7.3 per cent for 2014 and 7.0 per cent for 2015 were not bad. Chinese President Xi Jinping is calling for the markets to see the growth as a "new norm" as the slow growth has not affected the labour market.


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