3. Economic Projection for 2007
Thai economy in the first three quarters of 2006 showed a favorable growth. Concurrently, the fundamental of the economy was also sound and stable as observed in several key economic indicators such as low unemployment rate, declining public debt to GDP and lessened inflationary pressure as a result of upward interest rate adjustment in the earlier period and falling oil price since August. Moreover, interest rate started to be stable and confidence in the economic fundamental has been restored encouraging higher capital flows from abroad into the stock market. Consumer confidence has also improved since September. All of these positive factors will continue to support the economic growth in 2007. Nevertheless, there are still some downside risks associate with the economic outlook, from both external and internal factors including a global slowdown, the US twin deficits problem which could materialize and put depreciation pressures on the US dollar and possible rising and volatile oil price due to the production constraints of petroleum industry
3.1 Economic Factors/Conditions in 2007
(1) Average oil price is likely to be more stable in 2007: In 2006, the Dubai oil price declined sharply since September. This was due to big sell-off of hedge fund in the future oil market in order to speculate and the oil supply of OECD inventories were also built up. The declining oil price was also a seasonal adjustment. However, high oil price in the first eight months led to average oil price in the first eleven months of 61.70 USD per barrel up by 25.96 percent from 48.98 USD per barrel in the same period of 2005. At the same time, domestic retail prices of Benzene 95 dropped from 28.49 baht per litre on September 1, 2006 to 25.69 baht per litre on December 1, 2006. High speed diesel prices also declined from 27.54 to 23.84 baht per litre during the same period.
(2) Inflation tends to decline which will lead to higher purchasing power and consumer confidence. Headline inflation declined from 5.9 percent in the first half of 2006 to 3.6 percent in the third quarter and continued its decline to 2.8 percent in October. However, the inflation increased to 3.5 percent in November due to flood which have led to rises in prices of fruits and vegetables. The downtrend was resulted from a decrease in oil prices and high commodity prices' base in the latter half of 2005. Core inflation also declines from 2.7 percent in the first half of 2006 to 1.9 percent in the third quarter. This declining trend was carried over to October and November as the core inflation decreased to 1.8 and 1.7 percent, respectively. It is, therefore, expected that inflationary pressure will be lessen in 2007 due to following factors (1) a decrease in oil price (2) a slow down in commodities prices especially in steel and agriculture product (3) an appreciation of Thai baht that resulted in decrease in import prices (4) an increase in interest rates during 2005-2006 which would caused higher real interest rate and increase caution of private spending. This was apparent in a continual slowdown in personal credit since the beginning of 2006. Personal credit growth were 11.7, 9.7 and 7.7 percent in first, second and third quarter of 2006, respectively comparing to growth rate of 16.1, 11.0 and 14.9 percent during the same period of 2005. Meanwhile, time deposits increased.
(3) Interest rates have been more stable and showed a clear trend which, will consequently encourage higher credit expansion, especially credit for real estate sector. Business sector will also be able to estimate their financing cost easier. In the first half of 2006, the Bank of Thailand raised the policy rate (R/P 14 days) four times, shifting from 4 percent at the end of 2005 to 5 percent in June. It has been kept at the same rate since then. Subsequently, commercial banks have raised their interest rates such that the average of 12-month time deposit increased from 3 percent to 4.38 percent in the third quarter. The average MLR rate increased from 6.63 percent to 7.63 percent in the first half of 2006 and a slight increase to 7.75 percent in the third quarter. In 2007, it is expected that there will be no significant adjustment because the economic growth is somewhat near the potential output, without a sign of unemployment problem. Furthermore, a recovery of private investment, a smaller surplus in current account and fiscal deficit policy will reduce an excess liquidity in the financial sector in 2007. There will also be some downside risks of higher oil prices which would put more inflationary pressure. In all, interest rate tends to remain at the same level or only a slight downward adjustment.
(4) The consumer confidence has improved since September 2006, supporting the stabilizing adjustment of private consumption. The survey of consumer confidence, conducted by the University of the Thai Chamber of Commerce, showed that the consumer confidence has been on an upward trend since September. Consumer Confidence Index increased from 79.1 in July to 82.1 and 83.5 in September and October, respectively.
3.2 Risk factors
3.2.1 The world economy and other external factors which would put limitations on the economic growth and stability in 2007 are as follows:
A slowdown of the world economy in 2007 and its impact on exports and tourism. The world economy has continued its downward trend since the latter half of 2006. The US adopted the tightening monetary policy over the past 2 years by uplifting interest rates to help easing inflationary pressure and a current account deficit. Consequently, the household consumption has slowed down and investment in real estate sector declined in line with larger current account deficit. The Chinese economy also showed a slowdown in 2006 as a result of rising interest rate and limited credit xpansion to cool down overheated investment.
Trends of key economies in 2007are as follows: The US economy will expand by 2.7 percent, down from 3.3 percent in 2006 , due to the slowdown in real estate sector. The EU economy will increase by 1.9 percent, down from 2.6 percent in the face of tightening monetary and fiscal policies aiming at reducing fiscal deficits as well as raising value-added tax in Germany by 0.3 percent in January 2007. The Japanese economy will grow by 2.3 percent, lower than 2.8 percent in 2006 in tandem with the slowdown of investment cycle and exports. The Chinese economy is expected to slowdown from 10.4 percent in 2006 to 9.6 percent in 2007 following a slowdown trend of exports which was affected by the US economic slowdown, the Chinese RMB appreciation, the scheme of export tax duties as well as the investment slowdown. The Asian economy (excluding Japan and China) tends to slowdown as a result of a downtrend of US, Japanese and Chinese economies which, in turn, lead to a slowdown in exports, especially electronics products. The slowdown was also caused by more stringent trade policies of the US and Europe. Nonetheless, among Asian economies, the Indonesian economy tends to slightly accelerate due to declines in interest rate as well as inflation. The Philippines economy is also likely to be on upward due to an improvement in fiscal balance and financial sector which will support an investment. In addition, remitted earnings of Philippines labors working abroad tend to increase and boost domestic consumption.
Some risk factors that could lead to hard landing of the world economy are as follows:
- Oil prices continue to be at high level and remain volatile due to rising world demand. On the supply side, the production capacity has been tight and there are possible risks from Hurricane season as well as geopolitical conflicts such as over North Korea's nuclear program and Iran's nuclear program.
- Large US twin deficits (current account and fiscal account) continue to be a concern which exacerbated business confidence on the US dollar and, thus, deferred demand for dollar. This, as a result, put depreciation pressure on US dollar in the latter half of 2006 (B) This become downside risks to countries owning large amount of US dollar denominated securities and equities and dollar deposits such as China, Japan and oil exporters (including Russia and Norway). Should these countries lose confidence in the US economy and US dollar currency, huge capital outflows from the US could be resulted or it will lead to big US dollar or dollar-denominated securities sell-off. The US dollar would, therefore, rapidly depreciate or the dollar crisis could be resulted for the worst case scenario. In the mean time, falling asset prices in US dollar will also affect wealth of those countries(C) and will continue its effects on global financial market as well as those dollar holder countries. It is expected that in 2007, the dollar will depreciate against Euro and Japanese Yen (from 115 Yen per dollar in 2006 to 100 Yen per dollar in 2007 and from 1.27 dollar per 1 Euro to 1.30 dollar per Euro in 2007)
- A cooling down in US real estate sector might occur briskly due to interest rate upward adjustment over the past two years. This would affect demand for residential to slowdown severely and create additional excess housing stocks. Housing price could decline significantly which will lessen asset value and jeopardize wealth of household and consequently affect private consumption. Credit quality of financial institutions will deteriorate as a result of lower collateral asset value. There will also be continual effect on employment due to declining investment in real estate construction
- Other factors that would affect global economy to abruptly slow down are (i) the tighter fiscal policy implementation in the EU and Asian economies (ii) a slowdown in electronic cycle and products that will quickly pass on an effect to major exporting countries such as Japan, China, Singapore, Taiwan, South Korea, Malaysia, Philippines and Thailand (iii) an upward adjustment of policy rate in the EU and Japan as it is also possible that the central bank of EU, United Kingdom and Japan will raise the rate by 25 basis point in 2007 and (iv) the political uncertainty, especially in Taiwan as well as geopolitical conflicts such as conflicts between the US and North Korea
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(B) George Magnus, UBS's Senior Economic Adviser analyzed that currently, capital outflows from Asian and oil exporter countries with large current account surplus to the US financial market in order to invest in securities in the US dollar was high, as well as those securities in US dollar currency issued in other markets. Thus, the US is still able to continue its current account deficit. In 2006, it is expected that net capital outflows from Asian and oil exporter countries totaled 650 billion USD. Capital outflows valued 760 billion USD with 260 billion USD from Asian-ex Japan (70 percent came from China) and about 500 billion USD from oil exporter countries (80 percent came from Middle East and Russia). This means that combining capital outflows from China, Middle East and Russia is accounted for 70 percent of total external capital to finance the US deficit. About 65 percent of total capital inflows to the US market were from Japan, China and oil exporter countries including Russia and Norway
(C) Francis E. Warnock estimated that 10 percent depreciation of US dollar and 10 percent devaluation of stocks and debt securities price will lessen the wealth of countries owned US currency and US dollar-denominated securities by 4 percent of GDP. Further information: "How Might a Disorderly Resolution of Global Imbalances Affect Global Wealth?", IMF Working Paper No. 06/170
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(Continue to).../ 3.2.2 Internal risk..