Public and private investment are key

The Nation (28 November 2007)

Is Thailand at the bottom of the down cycle, and can it thus look forward to a domestic demand-led recovery next year after the December 23 election?

It looks increasingly so. But the story is not all rosy. Consumption remains wobbly from the political instability of the past two years. Investment will be the key factor.

"To expect a swift pick-up in household spending is probably too optimistic a proposition," said Frederic Neumann, an economist at Hong Kong Shanghai Banking in Hong Kong in his report entitled "Time to Turn Bullish", published yesterday.

"For this, the electorate appears too traumatised by the turbulent political events over the past two years. In fact, consumer confidence continues to deteriorate even if signs are emerging that the political gridlock is beginning to dissolve. Moreover, low wage growth and rising inflation will keep a lid on private consumption."

The current government of Surayud Chulanont hopes to stimulate consumption by allowing salaries of civil servants and state-enterprise employees to rise 4 per cent. The daily minimum wage of Thai workers will also increase nationwide between Bt1 and Bt7. This in turn will put more purchasing power into consumers' pockets at a time when prices of consumer products and energy and transport costs have been on a sharp upward trend.

But do not expect too much on the consumption side. The key to reviving domestic growth next year should be investment, both public spending and private investment.

"But investment should swing into full force next year after long underperformance. Political stabilisation, low interest rates, and pent-up demand are likely to fuel the rebound in business expenditure. At the same time, the next government, of whatever colour, looks set to raise spending on infrastructure, providing an added boost to fixed capital formation," Neumann said.
MR Pridiyathorn Devakula, former BOT governor and now an economic adviser to the Chart Thai Party, said on Monday that since the new coalition government was likely to stay around for one-and-a-half years, it would likely invest heavily - at least Bt160 billion - on 11 mega-projects, in order to stimulate growth.

He said believes the coalition government will be short-lived because two-thirds of the members of Parliament are somehow linked to the 111 former executives of the defunct Thai Rak Thai Party who have been banned from politics for five years. The major political agenda of the new government will be to push for legislation granting amnesty to those 111 politicians, after which there will be an attempt to rock the boat in order to call a snap election.

Finance Minister Chalongphob Sussangkarn has indicated that companies - particularly in the auto industry - whose investment will be in about US$500 million (Bt16.92 billion), have started submitting applications to the Board of Investment for investment promotional privileges. In Southeast Asia, no other countries match Thailand in the development of the auto industry, because companies like Ford and Honda have made commitments to invest further in Thailand.
Evidence of private-sector recovery can be seen in last month's statistics. While exports jumped 27.7 per cent year on year to $14.52 billion, imports also surged 20.2 per cent to $13.02 billion, DBS Research reported on Monday. The high-growth figures for imports, which are mostly capital goods, reflect a recovery in the manufacturing sector going forward as industries restock their capital goods for production.

Thailand's trade surplus, which stood at $9.9 billion in the first 10 months of the year, will narrow next year with a fall of net exports as imports rises. But Neumann expects that a rebound in both public and private investment will step in to offset the narrowing trade gap.
"We therefore look for growth to accelerate to 5 per cent in 2008, from roughly 4 per cent this year. Perhaps not the bullish scenario that the country is accustomed to, but still reason enough to turn optimistic," he said.