Fundamentals strong, but Kingdom faces external risks, seminar hears

Economy October 02, 2014 01:00


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THAILAND'S sovereign and financial-institution ratings remain stable, and continue to be supported by fundamental strength, although downside risks remain such as relatively weak global growth and a challenging domestic operating environment, Fitch Rating

Speaking at the rating agency’s “Global Risks & Thailand’s Economic Outlook” seminar, James McCormack, managing director and global head of Fitch’s sovereign and supranational group, said the Thai economy was still challenged by many external risks, especially the world’s economic issues.
“The economy is relatively strong in the US, but relatively weak in Europe,” said McCormack, noting that economic recovery in the United States would result in higher interest rates there, which was good for Asean and Thai exports.
He said the economic weakness in Europe, meanwhile, had not had any significant impact on Thai exports. Exports to the euro zone account for less than 10 per cent of the Kingdom’s overseas shipments. 
“However, economic weakness in Europe will negatively impact tourism revenue in Thailand. European tourists accounted for 27 per cent of all arrivals in Thailand from January to July this year,” he added.
McCormack said Thailand was, however, isolated from major global geopolitical risks, and that the country’s domestic politics was a bigger consideration. 
He told the forum that the potential slowdown in China would not have any significant effect on the export sector. Sales to China account for less than 10 per cent of overall Thai exports.
However, tourist arrivals from China are growing quickly, and are responsive to local news. 
China itself is undergoing an urbanisation process, he said, but the country has not yet shown any bubble in its real-estate sector.
“In terms of the Thai economy, our expectation is that we will see additional support from the public sector, which will be reflected in our projection going forward, and the growth rate that we expect to see in 2015 is 4 per cent, which is significantly higher than this year’s growth,” said the managing director.
He said increases in public spending and investment would not result in a deterioration of Thailand’s public finances, as the government’s finance sheet was quite strong. 
“Those public measures and government spending on infrastructure, which have been under discussion for many years, will support growth not just in terms of the measures themselves, but in the effects on private-sector growth going forward,” McCormack said.
The only internal risk for Thailand is if the government is unable to move the policy agenda forward, as consumer and investor sentiment would then be seriously affected, he said.
Thailand’s ratings are supported at “BBB+” by Fitch, with a “stable” outlook, driven by the strength of its external finances, moderate public indebtedness and a credible monetary-policy framework.
McCormack said these fundamental strengths had repeatedly helped the economy to bounce back from natural disasters and political turbulence over the past decade. 
Fitch does not anticipate any change in its Thailand ratings or economic outlook based on the government’s initiatives, he added.
Meanwhile, Kirida Bhaopichitr, a senior economist at the World Bank, said on the sidelines of the seminar that the institution would lower its forecast for 2014 Thai gross-domestic-product growth from 3 per cent – the level predicted in June – after seeing lower private investment, lower exports and lower domestic consumption.
The World Bank will announce its new economic forecast on Monday, she said.
She said public investment, including the government’s economic packages aimed at increasing income among grass-roots people, was the right way to boost the economy.
Government investment is normally only 4-5 per cent of GDP, compared with 18-19 per cent for private investment. Government investment before the economic crisis in 1997 came in at 8-9 per cent of GDP, Kirida said.
She said the government could boost the economy through the speedy and more complete disbursement of the fiscal budget.
Normally, 70-80 per cent of the budget is drawn down each year, but if disbursement were 100 per cent, the economy would get a significant boost, she added.
When exports are slowed by structural problems and domestic consumption cannot be driven significantly because of high household debt, the government should focus on investment that leads to higher incomes, said the economist. 
When people have more income, they can spend more and the economy will start growing again, she added.
Kirida said during the “Road Ahead – Thailand’s Economic and Capital Market Outlook” panel discussion at yesterday’s seminar that Thailand would have to move up from a middle-income to a high-income country – and the key to this was education policy and skills development.
She raised the example of South Korea, which was able to move up to the status of a high-income country thanks to human development.