2.2.3 Risk factors
Key risk factors in 2008 will be high oil prices which put more inflationary pressures and slower-than-expected growth of the world economy. Nevertheless, a continuation of restructuring in real sector in
order to improve competitiveness as well as an improvement in energy efficiency will help ease the impact of oil prices surge.
(1) Oil prices are likely to remain high due to tight market condition. Average Dubai
price in 2008 is expected to fall in the range of 80-85 US dollars per barrel, higher than 68.83 US dollars per barrel in 2007. Recently, the average Dubai oil price in January 2008 stood at 87.72 US dollars per
barrel and slightly declined to 85.57 US dollar per barrel on the 4th February 2008. It is expected that oil prices will be leveled off in the second half of the year as a result of moderate world growth and possibility of production increases from both OPEC and Non-OPEC. Nonetheless, the annual average Dubai price in 2008 is expected to be higher than the 2007 average price due to following factors:
(1.1) Tight market condition since world oil consumption particularly from Non- OECD Asia and Middle-East itself is expected to grow faster than supply. World oil consumption is projected to rise by 1.6 million barrels per day while oil supply is expected to increase by 2.8 million barrels per day which consists of 1.9 million barrels from OPEC and another 0.9 million barrels from Non- OPEC countries. Spare capacity is expected to remain at 1.5-2 million barrels per day. However, EIA estimates that higher Non-OPEC production and planned additions to OPEC capacity will gradually increase the spare capacity from its current level of 2 million barrels per day to more than 4 million barrels per day at the end of 2009. In addition, it is expected that OPEC will decide to maintain its current production capacity (on 5 March 2008 held in Vienna), but they will steadily increase their capacity from mid-year onward. With respect to
fundamental factors mentioned above, it points toward tight market condition and highly volatile influencing by such temporary factors as follows:
- Geopolitical tension especially in major OPEC countries. Recent unrest in Nigeria has repeatedly
become critical since ex-leader of a minority group announced its preparation to attack several strategic
crude oil production plants. Meanwhile, political conflicts among the Middle-East countries, for example, the case of Iraq and Turkey or Iran and UN could put further upward pressure on prices. Particularly when there is a political unrest occurs in those countries, it will consequently cause the refinery plants
to temporarily shut down. However, it is expected that those conflicts will wind down during the second half of the year, together with expected higher production capacity. As a result, oil prices could possibly remain
stable or be somewhat lower.
- Level of US crude oil stocks. During 2007, US crude oil stocks had continually declined for several consecutive weeks and reached its lowest level of the past years. However, the situation has steadily
improved since the beginning of 2008 with the current level of 300 million barrels. If this trend persists, thus, uptrend of oil prices could be possibly softened. Most importantly, during the last few years, US crude oil stocks have becomes a significant psychological factor to oil prices as it leads to potential speculation in future trading market. Oil prices movement in future markets is closely correlated
with future spot prices. Therefore, it has often been used as an indicator to represent oil price future trend as well as to specify opportunities for hedge fund to make profits through
speculation.
(1.2) World economic slowdown could lift some pressure off oil price heightening, especially a slowdown in the US economy that could be worst than expected. Effect from spill over in 2008 toward other major economies, such as China, Japan, Asia and Europe, would be more severe than 2007. Thus,
it is expected that world oil demand would be expanding at slower rate and help ease pressures on oil price.
However, OPEC countries had made an announcement in January that it might reduce their production if the world slowed down significantly, in order to maintain oil prices and oil exporting revenue.
(1.3) The US dollars tend to weaken further. Many analysts expected that economic and financial conditions for the US economy will become deteriorated and would make the US dollars to depreciate more. This will build up incentive for hedge funds and institution investors to diversify their risks from
holding debt instruments or investment portfolios in US dollars to purchase forward in other commodities particularly gold and oil. In the mean time, expectation on further US depreciation would induce oil producing country to maintain oil prices at high level in order to compensate their oil exporting
revenue following the depreciation of US dollar. Meanwhile, oil producing countries in Middle East still peg their currency with US dollar.
(2) Upward inflationary pressures will lower real spending power and consumer confidence. Headline inflation in January recorded 4.3 percent, higher than 2.3 percent in 2007 and 3.2 percent in December 2007. Core inflation was 1.2 percent due to higher cost of production, including oil, raw materials, and wages. As a result, entrepreneurs had asked for price elevation in many categories. Ministry of Commerce (MOC) had authorized price adjustment in following categories: oil palm, soy bean oil, daily products, brown sugar,
fresh butter, coffee, processed foods (noodle, fried rice, and instant noodle) and public boat transportation. In February, additional items were allowed to adjust prices, namely steel bar and cooking gas. Moreover, electricity fee (Ft) had been adjusted upward by 2.75 baht per unit, during February to May, in response with higher gas price. Due to increases in producer price index (PPI), by 7.0 percent in
the fourth quarter and 10.0 percent in January 2008, and continued high production cost, producers would push their burden on higher production cost toward consumers especially during recovering domestic demand for goods and services.
Nevertheless, appreciation of baht and high price base in the later half of 2007 could soften price increases in the later half of 2008.
(3) Slowdown in the world economy could be more severe than previously expected, from following factors: (1) oil prices remain high (2) US economic slowdown could be more severe than expected if sub-prime
problem persist through out 2008. Moreover, spill over effects to US and Europe financial market would increase fluctuation in world financial market and put downward pressure on US dollars. Latest economic data
confirmed ongoing problem in the US economy and slowdown in exports in many countries, including China, Japan, Europe, Taiwan, South-Korea, and Singapore. (3) Signs of cooling down in Chinese economy become more certain following a slowdown in export volume and investment, higher production cost, rising inflation, increase in inventory as well as increase in excess capacity. A slowdown in Chinese economy, key market to absorb world exports especially for Asian economies, would pose a problem and be constraint for exports of
other Asian countries. In addition, if China lowers their export price to maintain market share and lower their inventory would increase competition between China and others Asian countries in the third market.
2.3 Key Assumptions for 2008 Projection
2.3.1 The global economic growth in 2008 is expected to grow by 4.1 percent, revised down from 4.5 percent growth assumed in the previous forecast, and slowing from 4.9 percent in 2007. The downward revision was mainly observed in major advanced economies namely the US, the Japanese, the EU and Chinese economy. It is expected that the global prospect will continue to face with several risk factors including persistent problem of subprime market lingering into 2008, major currencies correction and tightening monetary policy to help lessen inflationary pressure for the case of China, and rising inflationary pressures fuelled by oil
price rises.
2.3.2 Dubai crude oil price is projected to be averaged in the range of 80 - 85 US dollar per
barrel, revised upward from 75 - 80 US dollar per barrel in the previous estimates and higher than 68.83 in 2007. Dubai oil prices averaged 87.72 US dollar per barrel in January and 85.57 on 4 February 2008, rising with tight oil market condition. It is likely that oil prices will leveled off in the second half of the year following the slowdown in global economy and stabilizing of the US dollar. Nevertheless, strong baht and price stabilization measures should help ease pressures on production cost and inflation.
2.4 Economic projection for 2008: 4.5 - 5.5 percent GDP growth with 3.2 - 3.7 inflation rate.
(1) In the press release on the 25th of February 2008, Office of the National Economic and Social
Development Board (NESDB) revised the 2008 economic projection upward to 4.5 - 5.5 percent, from 4.0 - 5.0 percent in the earlier release on December 3, 2007. The reasons behind this revision are as follows:
(1.1) Latest economic indicators in the last quarter of 2007 showed that overall economic performance has gained stronger economic momentum.
(1.2) Private investment has recovered more rapidly than expected. Several businesses have clearly taken on investment plan under such circumstances of full and almost full capacity in many industries
such as petrochemical, paper, cement products, petroleum products, automobiles, sync metal, tires, electrical
motor, integrated circuits and hard disk drives. In addition, a number of investment projects approved by the BOI in 2007 which have remained in the pipelines are expected to start operation in 2008; some
of which are investment projects in manufacturing with full capacity utilization. Government measures also emphasize in driving and promoting private investment together with the expedition of public investment projects. Therefore, it is likely that private investment growth will be higher than earlier expected. Government already announced the government policy statement and stated the year of 2008 - 2009 to be “Investment years for Thailand”. Stronger investment would benefit employment and thus household
spending. However, imports would also speed up faster than expected.
Thai exports of automobile and parts by markets
(%YOY) ‘03 ‘04 ‘05 ‘06 ‘07 % share ‘07
Australia 70.02 22.09 66.22 21.37 50.66 18.98
Indonesia 176.38 108.32 30.72 -26.61 71.47 8.07
Japan 48.88 -0.62 4.85 24.47 14.03 6.28
Malaysia 34.62 52.37 60.78 6.16 44.19 5.39
Saudi Arabia 84.82 72.67 207.83 30.99 3.55 5.32
Philippine 244.51 28.93 50.46 22.98 24.99 4.16
South Africa -14.64 134.39 65.18 23.00 31.39 2.89
United Kingdom 61.02 33.07 -14.64 56.13 -38.43 2.64
Total export 35.82 38.58 40.94 23.18 26.20 100.00
Source: Ministry of Commerce
Thai exports of computer and partss by markets
(%YOY) ‘03 ‘04 ‘05 ‘06 ‘07 % share‘07
United State -18.86 21.14 23.39 45.02 36.77 22.84
China 94.35 32.31 61.97 0.71 37.02 19.57
Hong Kong 54.15 7.27 82.38 41.13 21.26 9.99
NNetherlands 19.29 11.36 21.29 35.55 13.52 7.59
Japan 1.87 34.19 20.11 14.50 14.26 6.74
Germany 0.05 14.35 30.57 -18.51 54.50 2.58
India 150.28 -24.28 -40.72 4.74 138.91 0.65
Hungary 102.47 -22.93 47.49 24.78 182.97 0.53
Total exports 10.22 12.16 28.99 25.55 16.33 100.00
(1.3) Thai exports, so far, have shown a better performance than expected. More importantly,
Thai exports have become less sensitive to the fluctuation in major industrialized economy as well as the world economy as a whole. Exports had performed well throughout 2007
(i) Diversification of Thai export markets. The share of new export markets has increased, while
those of major conventional export markets like the US and Japan have declined;
(ii) Faster growth and thus more important roles in the world economic growth of the economies that
have become more significant export markets for Thailand. They are China, Asian countries and Eastern Europe. These economies, Asia in particular, have become new growth engine for the global economy which can be seen from increasing share of their economies in the world GDP, and
(iii) Thailand’s competitiveness has been upgraded in electronic and automobiles industries and parts due to production base expansion of multi-national corporations with a secure market networks. In the meantime, shorter product life cycle of electronics products resulting from technological advancement has encouraged faster product development and raised demand to higher level than in the past. Development of products with more digital contents has also become beneficial. As for automobiles, exports to Australia
market have increased following the implementation FTA arrangement, while exports to the Middle East have also edged up due to higher income from oil exports.
(iv) Rising agricultural products (namely rice, cassava, maize and rubber) in 2007 in line with
other commodities prices and oil prices yield export benefit to Thailand. This was partly due to higher demand for energy crops in the world market. It is expected that in 2008 these agricultural product prices will continue to increase following oil price rises. Meanwhile, export prices of rice will rise
following the wheat price as a result of crop damage from the natural disaster in January and lowering rice export from Vietnam.
(Continue to).../(2) In 2008, domestic..