2.4 Economic projection for 2007: 4.0-4.5 percent GDP growth, 2.0-2.5 percent headline inflation and 3.0-3.6 percent of current account surplus to GDP In the first quarter, Thai economy expanded by 4.3 percent, closed to previous quarter with the export remaining to be the main growth engine. Public current expenditure and investment started to improve, providing a support to economic growth momentum. However, private consumption and investment slowed down more than expected in the previous forecast on March 6, 2007. For the rest of 2007, Office of the National Economic and Social Development Board (NESDB) considered positive factors which would contribute to favorable economic growth including (i) inflation tends to decline (ii) downward trend of interest rates would stimulate consumption and investment. Moreover, larger income tax deduction for interest payment on housing loans from 50,000 to 100,000 baht would help stimulate residential demand. (iii) The acceleration of the disbursement of the government budget and state enterprises investment under the government steering economic policy are ongoing and public investment projects are expected be ready to disburse in the latter half of the year. (iv) Employment continues to expand. Furthermore, latest economic indicators in April suggested positive signs of stable manufacturing production and increase in import of manufacturing machineries and equipments, and raw materials and parts. Nevertheless, some downside risks associating with economic conditions remain and may deter the recovery including (i) the world economy downward trend that would affect exports and tourism. There is a possibility that the world economy would slow down more than expected if there were the recession of the US real estate sector, the burst of overheated stock market in China, and a sharp rise and fluctuation in oil price due to international political risks, climate conditions and natural disaster. (ii) The oil price remains high and fluctuating according to increasing world demand and contracted production capacity by the OPEC (iii) personal income base might be adversely affected by the employment which signaled the downtrend together with the slowdown of average agricultural commodities price. In addition, real interest rate which encourages spending and investment has yet to adjust downward, provided that the inflation decreased at a faster pace than lending rates and (iv) consumers’ and businesses’ confidence have declined and remains low under domestic uncertainty. Thus the government has obligation to resume economic and political confidence by proceeding to general election as scheduled, passing major laws and investing in the announced mega projects. Based on key assumptions, assessment of latest economic indicators in the first 4 months of this year, including positive and risk factors, NESDB considered that it is less likely for the economy to grow within the range of 4.5 — 5.0 percent since the recovery of private consumption and investment has not yet fully realized. Therefore, the projection is revised to 4.0 — 4.5 percent with the midpoint of 4.2 percent, down from 4.0 — 5.0 percent range and midpoint of 4.5 percent in the previous forecast on March 6, 2007. Main component that contributes to economic growth is the expansion of export sector while domestic demand slows down. Economic stability would remain favorable with the low unemployment rate of approximately 1.5 — 2.0 percent, headline inflation rate down to 2.0 — 2.5 percent and the current account (1) The revision of the economic growth. There are downward revisions on domestic demand and a larger reduction in inventories than the previous projection. However, upward revision on export volume growth would partly offset downward revision on domestic demand. Therefore, downward revision on economic growth is not substantial. The components of 2007 economic growth forecast are as follows - Downward revision on projection of private expenditure from previous projection of 3.8 percent to 2.2 percent following the considerable slow down in private spending in the first quarter, higher oil price which depresses purchasing power and consumer confidence which has no clear sign of recovery. Moreover, signal of spillover from export to employment and consumer spending is unclear since income nominated in baht earned from export of goods with high local content was affected by the appreciation of the baht. Meanwhile, high growth export items including computer and components, integrated circuits, cars and accessories and parts use a low local content. - Downward revision on projection of private investment from previous projection of 5.0 percent to 1.5 percent. Latest economic indicators showed that private investment contracted by 2.4 percent in the first quarter and the business confidence remained low, indicated that the private investment has not yet recovered. However, investment value of application submitted for privilege granted from the Board of Investment (BOI) in the first 4 months increased by 69 percent and investment value of application approved increased by 63.6 percent. This indicated that private sector is planning to invest next year. In the meantime, the projection of public investment, measured at a constant price, remained unchanged at 4.0 percent. - Upward revision on government current spending due to speeding up of disbursement during the beginning of 2007 partly from teachers’ honorarium disbursement and expediting budget for the well-being strategies at provincial level (5,000 million baht) and budget for community development project following the Sufficiency Economy approach (5,000 million baht). It is expected that in 2007, government expenditure at constant prices will expand by 6.3 percent, higher than earlier projection of 5.0 percent. - Upward revision on export volume growth from 5.4 percent to 7.9 percent in line with favorable trend of 8.5 percent export volume growth during the first 4 months of 2007, after 8.7 percent growth in the fourth quarter of 2006. Furthermore, the slowdown in main export items such as electronics parts and vehicles is less than anticipated. Electronics parts export to china, in particular, increased considerably resulted from growth potential of the Chinese economy. In addition, export volume to ASEAN, Middle East and India, which have economic growth potential in 2007 still increased. Export price gained from the rising price of rice and rubber which benefited from high oil price and accelerating demand from China. Therefore, export price was revised upward from 2.5 percent to 4.5 percent. However, rise in export value would be contributed mainly by higher export volume. Export value would increase by 12.4 percent in US dollars term but grew only 4 percent in Baht term due to Baht appreciation. - Downward revision on import volume growth from 5.0 percent to 3.8 percent since investment and capital goods import have not recovered as expected. However, average import price move in a rising trend faster than anticipated because of increasing oil price In addition, commodity price has not slowed down as much because Chinese economy still grew steadily and maintained higher demand. Therefore, import price was revised upward from 3.0 percent to 4.5 percent, causing the import value to increase by 8.3 percent, slightly higher than the growth of 8.0 percent in the previous projection. This is due to the downward adjustment of import price despite the upward adjustment of import volume from 4.6 percent to 5.0 percent. The reasons for downward revision of import volume are as follows, (i) the economy in the first quarter still relied more on rundown inventories and decreased import volume. (ii) Investment recovery is slower than expected. However, import is likely to rise in the latter half of 2007 since raw materials and parts import apparently increased in April. It is possible that capital goods and raw materials and parts import would move upward because of high export growth and stronger Baht than expected.(Continue to).../Downward revision..