4.2 Economic Projection for 2008: The Thai economy will enter 2008 with more favorable domestic conditions than in 2007. However, external risks are associated with the increase in oil prices and the world economic slowdown.
Key Themes
- In 2008, the Thai economy is likely to grow at a faster rate than in 2007. This is owing to the recovery in domestic demand for private investment and consumption, higher government budget deficit and its disbursement acceleration, and the progress of state enterprise’s investment in the mass transit system. Domestic demand recovery will offset the impact of slowdown in exports.
- Fundamental domestic conditions tend to improve, including general political conditions and, consumer and business confidences. Interest rates are expected to remain at the current low levels. Household incomes are expected to increase in all income classes, along with increasing farm income following the increase in agricultural prices, wages and salary increases for government and state enterprise officials, and 1-7 baht minimum wage increase (Effective in January 1, 2008). Corporate profits are likely to be negatively affected by higher oil prices. However, the impacts of baht appreciation is expected to be less than in 2007 as baht is likely to fluctuate in a narrower range.
- However, there are remaining key downside risks in 2008, in particular, rising oil prices and the world economic slowdown. The slowdown in the world economy can be more severe than previously expected due possibly to 3 main conditions: (1) Oil prices increase and their volatility under tight market conditions (2) Geopolitical concerns and (3) Subprime problem and market corrections in US real estate sector as well as their spill over effects to financial and commodity market in Asia and Europe, which are prolonged to 2008. These downside risks can adversely affect consumer and business confidences and spill over to real economic activities through raising production cost and lowering aggregate demand. In cases of more severe impacts of risk factors, consumption and investment are likely to recover at a slower pace and exports could slowdown sharply. In such cases, the Thai economy in 2008 is likely to expand at a slower rate than in 2007.
- In 2008, energy efficiency will continue to improve and demand for alternative energies such as gasohol, bio-diesel and NGV tends to increase. This changing energy consumption behavior will lead to a better economic adjustment to a surge in oil prices. In addition, the uses of energy-saving and small cars are likely to increase continually, promoted by tax incentive under Eco car and E20 promotion scheme. In this respect, car manufacturers such as Honda, Tata motors and Ford have prepared their production lines and are ready to launch small and energysaving cars to the market in 2008.
4.2.1 Supporting factors for the Thai economy in 2008
(1) Consumer and business confidences are improving. In particular, political certainty has been restored as the general election date and the setting up of new government are scheduled. Business confidence index started to increase in August 2007 and continued to September as entrepreneurs increasingly expected that various fundamental factors are improving such as lowering interest rate, stable exchange rate and a better prospect of political environments. As for consumer confidence, the situation has been stable since July. Encouragingly, August saw better confidence towards economic outlook.
(2) Accelerating government budget disbursement to meet the target of 94 percent of total government budget in 2008 together with the speeding up of state enterprise investment projects: Government budget for fiscal year 2008 is planned for 1,660,000 million baht, 6.0 percent higher than that of fiscal year 2007. Current and investment expenditures are at 1,209,546.8 and 404,677.3 million baht, respectively, 6.5 and 8.0 percent higher than those of fiscal year 2007. Fiscal deficit is set at 165,000 million baht. With respect to the state enterprise investment expenditure, government approved the budget of 289,756 million baht and additional 53,581 million baht investment plan for PTT Public Company Limited, with its associated disbursement target of 90 percent of total investment expenditures. Key investment projects includes mass transit system, doubletrack rail project (Chachoengsao — Sriracha - Laem- Chabung Port), Thai Airways’procurement of aircraft and project of electricity transmission lines which, together, are amounted to approximately 40,000-50,000 million baht.
(3) Interest rates in 2008 are expected to stabilize at current levels, at least throughout the first half of 2008. At present, the policy rate is at 3.25 percent while an average Minimum Loan Rate (MLR) of 5 large commercial banks is at 6.99 percent, declined from 7.63 and 7.13 percent at the end of Q1 and Q2 respectively. The 12 months deposit rate gradually decreased from 2.38 percent at the end of Q2 to 2.32 percent in October, while the 3 months deposit rate has declined to 2.125 percent. In October, an acceleration in inflation rate resulted in slightly negative real saving rate. Together with the improvement in consumer confidence, negative saving rate will stimulate domestic spending.
(4) Household real incomes are likely to increase from salary raise in public sector, increase in minimum wage rate, and rising farm income3 at a faster rate than inflation. These favorable factors; an improvement of consumer confidence, low interest rates and the increase in real incomes are expected to contribute substantially to recovery of household spending in 2008.
(5) Employment continues to increase and rate of unemployment will remain low. This labor market development is also expected to boost household incomes. Employment in the first 3 quarters increased by an average of 1.5 percent from the same period last year, while an average unemployment rate was low at 1.5 percent.
(6) Some of investment projects being granted promotion by BOI in 2006 and 2007 are expected to be start up their operations within 2008. In the first 10 months of 2007, the number of BOI approval projects was 1,126 with total investment value of 583.1 billion baht, increasing by 213.7 percent from the same period of 2006.
Considering BOI approvals, investment is likely to increase in various categories. Promoted investment in chemical products, paper and plastic categories increased by 46.1 percent. Services and infrastructure rose by 359.5 percent. Electronics and electrical appliances increased by 95.7 percent. Mining, ceramics and basic metal production increased by 1,431.0 percent. Agriculture and agricultural products increased by 124.7 percent and light industry rose by 55.3 percent. Approximately 72 percent of overall promoted investment are large projects, of which planned investment exceeds 1 billion baht each. These projects included ecocar production, large-scaled passenger car production for export-oriented, ethanol production, petrochemical and chemical products, electricity generation, shipping services for seagoing ship, hard disk drive, integrated circuits and hotel entrepreneur.
4.2.2 Risk Factors
(1) Oil prices are likely to remain high and volatile due to tight market condition. As a result, it will create an upward inflationary pressure can potentially dampen the world economic outlook than expected.
Average Dubai price is expected to be 68.70 US dollars per barrel in 2007, up by 11.6 percent from 61.52 US dollars per barrel in 2006. In the first ten months of 2007, average Dubai oil price was 64.78 US dollars per barrel, increasing by 4 percent from the same period of last year. Currently, the average Dubai oil price stood at 87 US dollars per barrel and expected to edge up in December as a result of cooler winter and continued tight market condition, though there was an increase in production capacity in November 2007 and with Saudi Arabia’s willingness to increase production in order to ease the market.
In 2008, the average of crude oil price is expected to continually surge during the first half of the year, and will level off in the second half in line with lower world growth and possibility of increase production by OPEC. The average of Dubai crude oil price is projected to be around 75-80 US dollars per barrel 4. Underling factors for higher price prospect are as follows:
Global oil market will remain tight. World oil demand has continued to grow faster than oil supply of non-OPEC countries, putting more pressure on OPEC’s production and low inventories to bridge the gap while its spare capacity is limited. Moreover, an increase of 500,000 barrel per day in production capacity since November 2007 is almost equal to the expansion in demand of the OPEC itself. Meanwhile, crude oil inventories will remain below seasonal average level and is likely that demand for stock accumulation will continue to grow under tight market situation. Geopolitical tension has also become a critical risk factor that could affect supply side. Moreover, expectation of US dollar depreciation will induce oil-exporting countries to maintain oil prices at high levels, as most of them such as Saudi-Arabia have pegged their currencies with US dollars thus the lower value of US dollars result in their lower income In local currency. Under the tight market condition, it is possible for high speculation that in part has put pressure on prices.
(1.1) World oil demand is projected to expand in line with favorable prospect of the world economy, albeit some slowdowns from 2007. Oil demand in China, India, US5, Russia and Middle Eastern countries will continue to be the main drivers of global oil demand. The International Energy Agency (IEA) recently forecasted that the world oil demand in the fourth quarter of 2007 would exceed the demand in the same period of last year by 1.8 million barrel per day. In 2008, it is expected that world oil demand will be at 87.26 million barrel per day, slightly up from 2007 by 1.5 million barrel per day, as compared with an increase of 2.6 million barrel per day in 2007. However, a harsher global slowdown than expected due to ongoing difficulties in the US mortgage market and the impacts of high oil price in 2007 could discourage demand growth and reduce pressure on price during the second half of 2008.
(Continue to).../(1.2) On the supply..