4. Thai Economic Outlook for 2011
Thai economic situation in 2011 is likely to improve continually from the previous year. The supporting factors for this expansion are as follows: (i) global economic recovery and; (ii) higher income level of grass root consumers following the increase in salaries of government officers and private employment as well as a rise in farm income due to an increase in major crop prices. Nevertheless, there remain risks that require close attention, especially the tendency of the rising inflation due to a higher oil price, the shortage of labor supply in some industries and the volatility of capital flows.
-Supporting Factors for Thai Economic Expansion
(1) The improvement of the global economic situation, especially that of US economy, has brought more stability to the world economy, even though there are several threats faced by many countries. The momentum of global economic recovery will support the expansion in export, production, and tourism sectors of Thailand. Moreover, Thailand’s diversified export markets will alleviate the impact of economic decelerations in major countries.
(2) An increase in income levels of grass root consumers remains an important source of economic growth for Thailand. The supporting factors included; (i) an increase of civil servants and private employees’ salaries; (ii) the tendency of the rising farm income owing to the increase in major agricultural product prices; and (iii) the low unemployment rate. Besides, the ongoing welfare schemes or “Pracha Viwat”, especially the measures to lower the cost of living and the increase of income for SMEs, will be another supporting factors for an expansion of private consumption.
(3) The financial institutions will be more stable as the present NPLs registered at only 1.90 percent while the economic liquidity stood in a good position. Excess liquidity in commercial banking system in the fourth quarter of 2011 was as high as 1.24 trillion baht which will ease the credit approval process and, thus, support the current economic expansion.
(4) It is expected that, in 2011, the tourism sector will continue to grow steadily with an approximated foreign tourists of 16.8 — 17.0 million persons. Thus, the related businesses in production and services sectors are likely to improve.
-Risk Factors and Limitations
(1) The world economic revival is still fragile, especially the sluggish economic recovery of EU and Japan, which will be a threat to the recovery of the world economy. On the other hand, the situation in the rest of the world is improved considerably. However, there are still some possible risks as follows:
Japan Economy: several sectors in Japan economy still face with difficulties: (i) the export sector tends to be decelerated at a high pace if the economic growth of Japan’s main trading partners, such as China, dramatically decline; (ii) the industrial sector has not yet to fully recover as revealed by the PMI level. The average PMI in the fourth quarter of 2010 was only 47.6 (PMI lower than 50 means deceleration in the industrial sector), continuously declined from the second and the third quarter which registered PMI of 54.1 and 50.8 respectively; (iii) there was a trivial expansion in private consumption due to a high rate of unemployment and an unchanged in wage rate; and (iv) public debt recorded a very high level which is expected to reach 200 percent of GDP. As a consequence, S&P lowered its credit rating for Japan to AA- from AA in January 2011 which was the first downgrade since 2002.
EU Economy: there are several risks faced by EU economy: (i) the public debt in many EU members still registered a very high level. A fear of sovereign debt crisis will lead the financial institutions to tighten their credit issuance and also elevate the cost of credit. Then, a recovery of economic activities will be limited, especially in a private consumption and investment which are the major EU economic drivers for 2011; (ii) there is a limitation for EU to use fiscal instruments. EU announced its fiscal consolidation plan aiming to reduce its fiscal deficit to 3.0 percent to GDP in 2012, while, in 2010, the fiscal deficit was 6.0 percent to GDP. Thus, in order to reach its target level, EU must reduce a substantial amount of government spending in 2011 and 2012; (iii) inequalities and differences in economic structure of those EU members will worsen the situation. It can be seen that the EU economic recovery in 2010 was solely leaded by a high economic growth of Germany whereas other EU members’ economies were still fragile and had instable economic conditions; and (iv) there is a high possibility that interest rates will be higher mainly due to an increase of inflation driven by a rising oil price. The decision to increase policy rate by ECB will be one of factors preventing EU members to be fully recovered.
US Economy: there are several risks for the US economy: (i) there was a sluggish improvement in labor market, reflected by a high unemployment rate and a reluctance to increase wage rate; (ii) the construction sector experienced a slow expansion; (iii) there was a rapid increase in fiscal deficit during the crisis and a high public debt. However, it is believed that the US economy in 2011 will grow steadily and the problem of the US fiscal condition tends to become a major risk to the world economic expansion in the future periods.
Chinese Economy: the probability of China’s economic hard landing will pose a threat for 2011. The deceleration is expected to be caused by a tightening financial policy due to a fear of overheating economy experienced in the previous period. As a high economic growth drives the commodities and real estate prices to increase rapidly and, once combined with the expected higher oil price in near future, the rate of inflation tends to increase at a very high pace. Thus the Chinese government might consider using tightening policies such as reducing the target level of credit issuance and increasing the interest rates. The evidence shows that, on 8th February 2011, China increased its policy rate (one year loan) by 0.5 percent to 6.1 percent which is the third time since October 2010 and this will directly affect the Chinese private investment.
(2) A higher oil price will drive inflation and interest rates higher which will cause a broad impact on the Thai economy. The consumer and investor confidences will be reduced. Further, the cost of production will be higher. This, in turn, might restrain both new investment and employment. It is also likely that trade balance will decline in such situations. Thus, under such situation, Thai economy, in general, tends to grow slower than forecasted.
(3) The instable political conditions and conflicts among Thais remain unfolded. However, political uncertainty continues to exist and might unfavorably affect consumer confidence and foreign tourists. At the same time, it will also adversely affect investment, especially the foreign direct investment.
(4) There will be insecurity in agricultural sector and farm income due to climate change and a higher cost of production caused by an increase in oil price.
(5) The capital flows will be more volatile since many countries implement widely different monetary policies, especially to that of US. It is expected that, in 2011, the US tends to experience low interest rates and will continue its implementation of quantitative easing (QE2). This will bring a great difference between US economy and developing economy, like those in Asia, which surely will face a continuously increase in interest rates. Then, the volatility in capital flows would yield instabilities in baht currency, stock market and real estate price.
(6) A shortage of labor supply in some industries will be one of the main obstacles to the expansion in the industrial sector. The shortage in labor supply not only causes some industries to lose their competitiveness, but also drives the cost of production and inflation to be higher.
- Key Assumption for 2011 Projection
(1) The world economy in 2011 tends to expand by 3.8 - 4.2 percent while the global trade volume is expected to increase by 6.6-7.6 percent, an upward revision from the previous forecast which anticipated the world economy and the global trade volume to increase by 3.6-4.0 and 6.5-7.5 percent, respectively.
(2) Average Dubai crude oil price in 2011 is predicted to be 85-95 US dollars per barrel, an upward adjustment from the prior projection at 80-90 US dollars per barrel. Supporting factors to the rise of oil price include: (i) the higher demand for oil in accordance with the expansion of the world economy, particularly Asian economies, as well as the domestic price stabilization in many countries, especially developing countries; (ii) the speculation in crude oil due to the imbalance of non-OPEC countries’ oil production and the higher demand for oil; (iii) climate change as well as the longer winter and; (iv) conflicts in oil producer countries and countries around Middle East.
(3) Export prices of goods in US dollar terms is forecasted to rise by 5.7 percent with the major supporting factors including; (i) the development of export prices of agricultural products due to the higher global demand and the lower production volume as a result of natural disaster; (ii) the rise of domestic wages and oil price and,; (iii) the increase of prices after the government stabilization policy on commodity prices during the economic contraction. This brings about an upward adjustment of export price growth from the earlier forecast. Meanwhile, import prices in US dollar term are projected to expand by 6.5 percent, an increase from 5.3 percent due to the revision of expected oil price.
(4) Number of foreign tourists in 2011 is expected to be 16.8-17.0 million persons, an increase from 15.8 million persons in 2010.
- Economic outlook for 2011 :
Thai economy is forecast to expand between 3.5-4.5 percent, a deceleration from the 7.8 percent growth in 2010. Meanwhile, inflation rate is anticipated to be in the range of 2.8- 3.8 percent comparing to the rise of 3.3 percent in 2010. Also, Thai economy is likely to have a current account surplus at 3.5 percent of GDP, a reducing from 4.6 percent in 2010.
In the press release of 21st February 2011, NESDB maintains the economic forecast as announced on 22nd November 2010; however, the composition of economic expansion was revised according to the new assumptions. Therefore, the economic growth and inflation rate are projected to grow by 3.5-4.5 and 2.8-3.8 percent respectively, while the current account surplus is predicted at 3.5 percent of GDP.
- Projected growth components in 2011
(1) Total consumption expenditure is projected to grow by 3.9 percent, decelerating from the expansion of 5.0 percent in 2010. This is due to a slowdown in private consumption as a consequence of an impact of high inflation. However, the supporting factors for the private consumption expansion include: (i) an increase of civil servants’ salary; (ii) an increase in minimum wage; and (iii) a farmer income base continues to improve. The public consumption expenditure is expected to grow by 3.2 percent as a result of current budget expenditure and carried-over budget expenditure disbursement which tends to be improved.
(2) Total investment is projected to expand by 7.3 percent, slow down from the expansion of 9.4 percent in 2010. Private investment is likely to grow by 8.5 percent, compared to a growth of 13.8 percent in 2010. The deceleration was due to a high base effect as well as a risk from a rise in interest rate and oil price. Public investment is expected to expand by 3.5 percent, compared to a contraction of 2.2 percent in 2010.
(3) Export value of goods in US dollar terms in 2011 is forecasted to expand by 12.5 percent. This is supported by a favorable economic condition of trading partner countries causing a continual increase in demand from foreign countries. Export volume of goods is projected to expand by 6.8 percent, whereas export of goods and services is also projected to grow by 6.3 percent, decelerated from an expansion of 14.7 percent in 2010.
(4) Import value of goods in US dollar terms in 2011 is forecasted to expand by 14.6 percent, decelerating from the growth of 36.8 percent in 2010. Import volume of goods is expected to experience a rise of 8.1 percent, particularly of imports of fuel, raw materials and capital goods. Import volume of goods and services is projected to expand by 8.1 percent, decelerating from a high growth of 21.5 percent in 2010.
(5) Trade balance is expected to register a surplus of 12.1 billion US dollars, declining from the surplus of 14.0 billion US dollars in 2010. This decline was due to the growth of import which is expected to be higher than that of export. The main factor driving an import growth is the import of fuel that tends to considerably grow in 2011. Combined with a surplus of service account balance of 0.5 billion US dollars, the current account is expected to register a surplus of 12.6 billion US dollars or 3.5 percent of GDP, compared to a surplus of 14.8 billion US dollars in 2010.
(6) Economic stability tends to be under inflationary pressure. The average headline inflation is expected to be in the range of 2.8 — 3.8 percent. A projected unemployment rate remains low at 0.9 percent reflecting labor market tightness which is a factor causing a rise of inflation rate.
- Projection Condition for High and Low Cases
(1) The high case scenario: Thai economy in 2011 is projected to grow more than 4.5 percent under the following conditions: (i) world economic growth exceeds 4.2 percent following the resolution of fiscal deficit problem among EU countries, the stabilization of inflation pressures in developing countries by increasing interest rate and implementing a tight monetary policy to prevent the hard landing, especially in China and the growth of US economy remains unaffected by the high public debt problem and a housing market fragility; (ii) there is no serious political demonstration that would affect the consumers and investors confidence as well as the tourism sector; (iii) the annual average price of Dubai crude oil is less than 95 US dollars per barrel; (iv) there is no delay in the budget disbursement under the Thai Khem Khang and the average disbursement rate of current budget is more than 94 percent of total budget; (v) the policy interest rate is less than 3.5 percent; and (vi) there is no severe natural disaster that would affect the growth of agricultural production.
(2) The low case scenario: Thai economy in 2011 is projected to grow less than 3.5 percent under the following conditions; (i) world economy expands less than 3.8 percent; (ii) the domestic political situation is severe and affects an expansion of major production sectors; (iii) the annual average price of Dubai crude oil is higher than 95 US dollars per barrel; (iv) the budget disbursement interval is delayed and unable to prevent the contraction of government spending; (v) the policy interest rate is higher than 3.5 percent which will egatively affect private investment; and (vi) a severe natural disaster occurs and affects he major agricultural productions such as rice, rubber, sugar cane and palm oil.