Thailand should focus on enhancing infrastructure, as part of reforms that all Asean nations should implement to boost its growth this year, as well as its long-term competitiveness, an HSBC economist has said.
In the report “Asean Perspectives: A sputtering domestic engine”, Leif Eskesen, chief economist for India and Asean, noted that policy-makers must roll out a red carpet of reforms, as domestic demand faced “headwinds”, while external demand might pick up. Reforms could be beneficial, as the countries’ growth rate will be constrained by Fed QE tapering in coming years.
“[For Thailand], infrastructure enhancements are key, underscoring the importance of getting traction on the government’s plans in this area. Skill shortages also need to be addressed, and it is necessary to improve technological readiness and encourage more innovation to allow Thailand to continue to move up the value-added chain. Re-orientation of government spending away from excessive subsidies, including the rice programmes, will help reduce the fiscal deficit and create more space for spending on education and infrastructure,” Eskesen said.
He said the ongoing political turmoil in Thailand has led to a significant drop in consumer and business confidence, and caused damage to the tourism high season. With no near-term resolution in sight yet, the drag from this could prove significant.
The crisis has put the Bt2-trillion infrastructure plan in limbo. And the Constitutional Court has yet to rule on whether the borrowing bill is constitutional. Aside from the tapering of the US quantitative easing, political instability at home also influences capital outflows. Due to foreign capital outflows, Thailand’s foreign reserves as of January 17 stood at US$166.4 billion against $166.5 billion in the previous week. The net forward position also fell from $23 billion to $22.7 billion.
HSBC expected the Thai baht to end 2014 at Bt34 to the dollar and to weaken further to Bt34.5 in 2015.
Eskesen said policy-makers in Asean should not just focus on policies that tighten the screws and wheel in growth in the short-term. They should also focus on policies that help raise these economies’ growth potential and, thereby, the speed they can cruise at without running into problems with inflation and current account deficits.
“This requires structural reforms that can help raise productivity growth, which has suffered over the past several years as access to cheap credit led to an inefficient allocation of capital. Relying on cheap credit to run the growth story also likely led to complacency and, therefore, structural-reform neglect in these countries. It also requires reforms that can help lift investments and increase the quantity and quality of labour input,” he said.
Elsewhere in Asean, the HSBC economist also considered that basic infrastructure was a key constraint, especially for growth in Indonesia. In Malaysia, he said the scarcity of skilled workers was a problem given its status as a high-middle income country. Also, redundancy costs were high, which hurt its competitiveness. In the Philippines he said revenues should be enhanced through tax administration reforms and parallel efforts to broaden the tax base, particularly the rationalisation of tax incentives.