2.6 Economic projection for High case
The Thai economy in 2008 will be able to expand at the minimum rate of 5.5 percent under
conditions that (i) The world economy expands not lower than 4.0 percent. Exports sector can adjust and
compete along with the higher cost of production. Export volume of goods and services has to increase at
least by 8 percent. Given above conditions, export value is likely to grow by a minimum of 16 percent and
tourism revenues will increase by approximately 8-9 percent. (ii) The budget disbursement has to be at least
85 percent of overall budget for government and state owned enterprises. (iii) Consumer and business
confidences recover after plummeted in the second quarter. (iv) Crude oil prices subside in the second half
of the year owing to increases in OPEC’s oil supply and lower oil demand in the world market. Moreover,
oil prices are likely to adjust from the higher than fundamental price during the seven months. Average
Dubai prices for 2008 should not exceed 110-115 USD per barrel.
"...Base on the assessment of supporting and risk factors as well as higher-than-expected growth
in the first half of 2008, the Thai economy is likely to expand by 5.2-5.7 percent with 85 percent
probability. ..."
3. Economic Management in the remaining of 2008
In the remaining months of 2008, the government needs to continue with the risk management of high
oil prices and inflation which are expected to continue with some volatility. Exports and tourism promotion
should also be continued. Disbursement of government budget for projects to empower and develop
grassroot and community economy needs to be accelerated and to ensure that budget reach the target as
planned. Such measures should be implemented in parallel with the measures to continuously promote an
improvement in energy efficiency, and the use of alternative energy in order to achieve the planned target.
Meanwhile, the government should expedite the implementation of long-term measures, particularly
projects for infrastructure development, transportation and logistic system development and mass transit
system in Bangkok and its vicinities, and hasten financial measures to strengthen production and
management efficiency for small and medium scale enterprises. Management guidelines are as follows:
(1) Although oil prices have been eased since August, mounted upward pressures on production costs
still await for price adjustment accordingly. Thus, pressure on cost of living remains. Therefore, it is
imperative for the government to alleviate the excess burden from the rising cost of living.
(2) In response to twin shocks from sub-prime and oil prices crisis, the global economic prospects
are deteriorating. The slowdown in the world economy has become broad-based and covered Asian economies; in
particular Japan and China which are important export markets for Thailand. In this respect, it is necessary
to continuously enhance competitiveness of export sector and promote new markets.
(3) Expedite budget disbursement of government and state enterprises to support economic
activities, particularly SML projects, and disbursement of local authority budget in order to help alleviate
the impacts from rising costs of living.
(4) Stabilize price of agricultural commodities during the harvesting season in the last 4 months
of 2008. The government also needs to ensure the sufficiency of energy crop supply to meet the demand for
gasohol production.
(5) Implement marketing measure to promote tourism especially for the coming high season of tourism
beginning from September. In the first half of the year, tourism was constrained by high oil prices, rising
air fare and the competition from the Olympic Game in China.
(6) Monitor oil market closely so that the government could timely adjust oil price stabilization
policy when necessary. In this respect, as the oil prices moderate to a stabilized level, the exemption of
petroleum excise tax and oil fund surcharge should be reviewed in order to ensure and promote continuous
energy saving.
Economic Projection of 2008
Actual Data Projection 2008
2005 2006 2007 May 26_f Aug 25_f
GDP (at current prices: Bil. Bht) 7,095.6 7,830.3 8,469.1 9,418.6 9,410.4
GDP per capita (Bht per year) 109,440.9 120,763.4 128,319 142,705.6 142,577.1
GDP (at current prices: Bil. USD) 176.2 206.6 245.4 292.5 284.3
GDP per capita (USD per year) 2,715 3,186.40 3,718.2 4,431.9 4,307.5
GDP Growth (at constant prices, %) 4.5 5.1 4.8 4.5-5.5 5.2-5.7
Investment (at constant prices, %) 10.6 3.8 1.4 8.5 6.2
Private (at constant prices, %) 10.6 3.7 0.5 9.3 7.3
Public (at constant prices, %) 10.8 3.9 4.0 6.0 3.00
Consumption (at constant prices, %) 5.3 3.0 2.7 4.7 3.5
Private (at constant prices, %) 4.5 3.2 1.4 3.8 3.2
Public (at constant prices, %) 10.8 2.3 10.8 10.0 5.0
Export volume of goods & services (%) 3.9 8.5 7.1 7.3 8.5
Export value of goods (Bil. USD) 109.4 127.9 150.0 171.3 174.8
Growth rate (%) 15.2 17.0 17.3 13.3 16.5
Growth rate (Volume, %) 7.4 11.2 10.9 6.3 8.0
Import volume of goods & services (%) 8.7 2.6 3.5 10.0 8.4
Import value of goods (Bil. USD) 117.6 126.9 138.5 169.8 171.2
Growth rate (%) 25.8 7.9 9.1 22.0 23.6
Growth rate (Volume, %) 18.4 1.3 3.5 11.0 9.5
Trade balance (Bil. USD) -8.3 1.0 11.6 1.5 3.6
Current account balance (Bil. USD) 1/ -7.6 2.2 15.8 6.0 7.5
Current account to GDP (%) -4.3 1.0 6.4 2.0 2.6
Inflation (%)
CPI 4.5 4.7 2.3 5.3-5.8 6.5-7.0
GDP Deflator 4.5 5.0 2.7 5.5-6.0 5.5-6.0
Unemployment rate (%) 1.8 1.5 1.4 1.5 1.5
Source: Office of National Economic and Social Development Board. August 25,2008
Note: 1/ Reinvested earnings has been recorded as part of FDI in Financial account, and its contra entry
recorded as income on equity in current account.
Oil price in 2008
During the first half of 2008, average oil prices continued to increase from 90.4 US dollar per
barrel in January to 133.04 US dollar per barrel in July while an average price of the first seven months
recorded a significant growth of 76.5 percent compared to the same period of last year. This was a result of
tight market condition as demand continued to grow particularly those from Asian and Middle-East countries
while world supply remained stable. Moreover, a continued depreciation of US dollars has encouraged the
investment funds to reallocate its investment portfolio toward consumer products mainly oil and agricultural
products. In July, oil prices continued to rise sharply and reached its highest at 140.77 US dollar per
barrel (Dubai price) on 4th of July. Fortunately, oil prices started to decline since the middle of July and
currently stood at 109.45 US dollar per barrel. Recently, analysts from several institutions have projected
that oil prices are likely to fall toward the rest of this year with several underlying factors as follows:
1. World oil demand is expected to decline as a result of a potential downturn in world economy.
The International Energy Agency (IEA) forecasted that global oil demand in 2008 will expand by 1 percent
slightly lower than 1.3 percent in 2007. In addition, oil demand in North America and Europe is expected to
decrease by 2 and 1 percent respectively. On the other hand, demand in Asia/Pacific will continue to grow by
3.9 percent with Japan and South Korea as the major contributors.
2. World oil supply is expected to accelerate as a result of expansion in oil production capacity
from both OPEC and Non-OPEC countries. According to the latest IEA report, the difference between supply and
demand in the forth quarter was revised downward from 1.7 million barrel per day to 0.88 million barrel per
day. However, it is expected that the overall demand in 2008 will exceed supply by 0.52 million barrel per
day.
unit: million barrel per day
2005 2006 ---------------2007-------------- ---------------2008_f-------------
Q1 Q2 Q3 Q4 Year Q1 Q2f Q3f Q4f Year
Quantity 84.6 85.3 84.20 84.41 84.45 85.59 84.66 85.68 85.85 87.16 87.22 86.48
Non-OPEC 50.4 51.1 49.19 49.31 49.04 49.40 49.24 48.91 48.98 49.65 49.95 49.38
OPEC Crude 29.7 29.7 35.01 35.09 35.41 36.19 35.43 32.17 32.28 32.72 32.12 32.32
NGL 4.5 4.6 4.57 4.51 4.48 4.54 4.53 4.59 4.59 4.79 5.14 4.78
Supply Demand 0.7 0.6 -1.90 -0.69 -1.15 -1.51 -1.34 -0.92 -0.35 0.56 -0.88 -0.52
3. The US dollar started to appreciate since the beginning of July as a result of market
expectation that Fed will increase its policy rate during the last quarter of this year after a continuous
reduction since the burst of sub-prime crisis. Moreover, capital investment in other regions such as EU is
expected flow back to US as a result of downward expectation in EU economy. Several institutions have
also suggested that US dollar might be currently undervalued thus it would encourage investors to swap their
positions toward US dollar. Since the U.S. dollars started to appreciate, world oil prices have entered its
downward trend which is expected to remain throughout the rest of this year.
According to factors mentioned above, NESDB projects that Dubai oil price will fall in the range
of 110-120 USD with a potential slow down in demand as underlying assumption. It is expected that the
average price of the latter half of this year will fall in the range of 115-125 USD per barrel
a. EIA forecasted that WTI price will average 127 US dollar per barrel and 133 US dollar per
barrel in 2008 and 2009 respectively (adjusted upward from at 122 US dollar in the previous projection)
b. Lehman Brothers expected Brent to average at 115 US dollar per barrel (72.60 US dollar in 2007)
and lower to an average of 93 US dollar in 2009
$/bbl 2007 --------------------2008------------------ Max. Min.
Year Q1 Q2 Q3f Q4f Year f
WTI 72.64 98.03 124.02 142.67 145 127.39 147.79 87.150
Brent 72.60 96.72 122.21 130 110 115 145.51 87.86
Dubai 68.83 91.50 117.02 125 110 110 140.77 84.13
Commodity prices have been on the downtrend since July and are likely to slow down further in the
remaining month: not so-safe heaven
- Commodity prices have increased steadily since early 2007, and surged rapidly in 2008. Surges in
commodity prices, therefore, have raised concerns over their impacts on the costs of living, especially for
low-income earners.
- According to Asian Development Bank’s report, between January 1st, 2007 and August 22nd, 2008,
various commodities enjoyed robust increases. Crude oil price, led the group, with the strongest increase of
98.3 percent and followed by rubber, oil palm, gold, copper and sugar with the price increases of 43.02
percent, 40.08 percent, 31.44 percent 26.40 percent and 23.13 percent respectively
- However, since the beginning of July, commodity prices have been in a freefall as focuses are
increased on global not just US economic weakness. CRB Index (Commodity Research Bureau Index: CRB Index) of
19 commodities fell by 10 percent in July, biggest monthly decline since 10.5 percent drop in March 1980,
when the US was in recession. Crude oil prices declined from their July peak of USD 147 per barrel to USD
112.7 per barrel on August 18. Natural gas plunged 32 percent. Precious metals have borne the increase of
dollar strength with gold price falling from USD 923 a troy ounce in the first quarter to USD 896 a troy
ounce in the second quarter. Gold price continued on its downward trend to lower than USS$ 800 a troy ounce
in July, for the first time since December, 2007 and price of silver falling rapidly. Rice price, another
essential commodity in the developing world is down by 40 percent since May. The same with wheat, copper and
cooking oil.
- Underlying factors for the steadily decline in commodity prices over the last 1-2 months are
including,
- Demand destruction has led to a correction in energy prices. Demand for crude oil and
raw materials have been eased in response to the slowdown of global economic expansion, global slowdown
fears, a reduction of speculation demand on the back of stronger US dollar, fund liquidation as well as
speculative unwinding and de-leveraging.
- The decline in oil prices has resulted in lower inflation are pressures and helped
suppress speculative demand for gold. In August, the net long position decreased significantly with the
liquidation of long position of around 4-5 million troy ounce per week.
- A stronger dollar and a flight from commodities compounded falling prices. The
expectation about shifting in monetary policy stance to tightening biases in a bid to contain inflation
together with US dollar appreciation and also the tight credit conditions resulted in capital outflows from
future commodity market, namely out of commodity indices. It has been estimated that approximately USD 24
billion has flown out of commodity indices in this third quarter, as compared to net inflows of USD 25.8
billion and USD 0.5 billion in the first and second quarter, respectively.
The supply response help suppressed upward pressures on price of some commodities such
as industrial metals, agricultural commodities (i.e. rice, wheat and corn). In general, agricultural prices
have corrected significantly based on improved crop conditions and concerns regarding increased regulation of
commodities markets in the US. The yield of corn in the US is expected to increase to 155 bushels per acre,
for instance.
- On the outlook, commodity prices are expected to trend down further in the remaining of this year
under the following supporting factors:
- With economic slowdown across the board, including in China, and demand for raw
materialseasing, many analysts say commodity markets' high will be challenged. The reduction in demand for
crude oil and raw materials led by cooling down of global economic expansion tends to put the downward
pressures on commodity prices.
- However, volatile commodity prices could easily rise again especially if geopolitical
problems arise or unforeseen weather disasters emerge.
- The fact that commodities are falling does not necessarily mean food prices will also
follow a free fall. Food supply and demand balance remains quite tight.
- In the face of deteriorating global prospects, the decline of crude oil and other commodity
prices will help suppress inflationary pressures and reduce the need for further monetary policy tightening.
Sharp drop in commodity prices could mean inflation figures are close to peak in most of the emerging
economies; especially Asia and thus providing welcome relief for the fragile global economy. If the trend of
falling commodity prices holds, there will be less pressure on central bank to raise interest rate to fight
against inflation—a move that would have slowed economic growth further. Lower commodity prices also mean
lower import bills for developing countries and smaller outlays for subsidies to shield consumers from
expensive food and fuel. In this respect, global inflation is, therefore, expected to peak in the third
quarter and trend down afterwards. Under such outlook, the US, Eurozone and Japan are likely to maintain
their policy rate in the remaining of 2008.
--National Economic and Social Development Board--
-PM-
The Thai economy in 2008 will be able to expand at the minimum rate of 5.5 percent under
conditions that (i) The world economy expands not lower than 4.0 percent. Exports sector can adjust and
compete along with the higher cost of production. Export volume of goods and services has to increase at
least by 8 percent. Given above conditions, export value is likely to grow by a minimum of 16 percent and
tourism revenues will increase by approximately 8-9 percent. (ii) The budget disbursement has to be at least
85 percent of overall budget for government and state owned enterprises. (iii) Consumer and business
confidences recover after plummeted in the second quarter. (iv) Crude oil prices subside in the second half
of the year owing to increases in OPEC’s oil supply and lower oil demand in the world market. Moreover,
oil prices are likely to adjust from the higher than fundamental price during the seven months. Average
Dubai prices for 2008 should not exceed 110-115 USD per barrel.
"...Base on the assessment of supporting and risk factors as well as higher-than-expected growth
in the first half of 2008, the Thai economy is likely to expand by 5.2-5.7 percent with 85 percent
probability. ..."
3. Economic Management in the remaining of 2008
In the remaining months of 2008, the government needs to continue with the risk management of high
oil prices and inflation which are expected to continue with some volatility. Exports and tourism promotion
should also be continued. Disbursement of government budget for projects to empower and develop
grassroot and community economy needs to be accelerated and to ensure that budget reach the target as
planned. Such measures should be implemented in parallel with the measures to continuously promote an
improvement in energy efficiency, and the use of alternative energy in order to achieve the planned target.
Meanwhile, the government should expedite the implementation of long-term measures, particularly
projects for infrastructure development, transportation and logistic system development and mass transit
system in Bangkok and its vicinities, and hasten financial measures to strengthen production and
management efficiency for small and medium scale enterprises. Management guidelines are as follows:
(1) Although oil prices have been eased since August, mounted upward pressures on production costs
still await for price adjustment accordingly. Thus, pressure on cost of living remains. Therefore, it is
imperative for the government to alleviate the excess burden from the rising cost of living.
(2) In response to twin shocks from sub-prime and oil prices crisis, the global economic prospects
are deteriorating. The slowdown in the world economy has become broad-based and covered Asian economies; in
particular Japan and China which are important export markets for Thailand. In this respect, it is necessary
to continuously enhance competitiveness of export sector and promote new markets.
(3) Expedite budget disbursement of government and state enterprises to support economic
activities, particularly SML projects, and disbursement of local authority budget in order to help alleviate
the impacts from rising costs of living.
(4) Stabilize price of agricultural commodities during the harvesting season in the last 4 months
of 2008. The government also needs to ensure the sufficiency of energy crop supply to meet the demand for
gasohol production.
(5) Implement marketing measure to promote tourism especially for the coming high season of tourism
beginning from September. In the first half of the year, tourism was constrained by high oil prices, rising
air fare and the competition from the Olympic Game in China.
(6) Monitor oil market closely so that the government could timely adjust oil price stabilization
policy when necessary. In this respect, as the oil prices moderate to a stabilized level, the exemption of
petroleum excise tax and oil fund surcharge should be reviewed in order to ensure and promote continuous
energy saving.
Economic Projection of 2008
Actual Data Projection 2008
2005 2006 2007 May 26_f Aug 25_f
GDP (at current prices: Bil. Bht) 7,095.6 7,830.3 8,469.1 9,418.6 9,410.4
GDP per capita (Bht per year) 109,440.9 120,763.4 128,319 142,705.6 142,577.1
GDP (at current prices: Bil. USD) 176.2 206.6 245.4 292.5 284.3
GDP per capita (USD per year) 2,715 3,186.40 3,718.2 4,431.9 4,307.5
GDP Growth (at constant prices, %) 4.5 5.1 4.8 4.5-5.5 5.2-5.7
Investment (at constant prices, %) 10.6 3.8 1.4 8.5 6.2
Private (at constant prices, %) 10.6 3.7 0.5 9.3 7.3
Public (at constant prices, %) 10.8 3.9 4.0 6.0 3.00
Consumption (at constant prices, %) 5.3 3.0 2.7 4.7 3.5
Private (at constant prices, %) 4.5 3.2 1.4 3.8 3.2
Public (at constant prices, %) 10.8 2.3 10.8 10.0 5.0
Export volume of goods & services (%) 3.9 8.5 7.1 7.3 8.5
Export value of goods (Bil. USD) 109.4 127.9 150.0 171.3 174.8
Growth rate (%) 15.2 17.0 17.3 13.3 16.5
Growth rate (Volume, %) 7.4 11.2 10.9 6.3 8.0
Import volume of goods & services (%) 8.7 2.6 3.5 10.0 8.4
Import value of goods (Bil. USD) 117.6 126.9 138.5 169.8 171.2
Growth rate (%) 25.8 7.9 9.1 22.0 23.6
Growth rate (Volume, %) 18.4 1.3 3.5 11.0 9.5
Trade balance (Bil. USD) -8.3 1.0 11.6 1.5 3.6
Current account balance (Bil. USD) 1/ -7.6 2.2 15.8 6.0 7.5
Current account to GDP (%) -4.3 1.0 6.4 2.0 2.6
Inflation (%)
CPI 4.5 4.7 2.3 5.3-5.8 6.5-7.0
GDP Deflator 4.5 5.0 2.7 5.5-6.0 5.5-6.0
Unemployment rate (%) 1.8 1.5 1.4 1.5 1.5
Source: Office of National Economic and Social Development Board. August 25,2008
Note: 1/ Reinvested earnings has been recorded as part of FDI in Financial account, and its contra entry
recorded as income on equity in current account.
Oil price in 2008
During the first half of 2008, average oil prices continued to increase from 90.4 US dollar per
barrel in January to 133.04 US dollar per barrel in July while an average price of the first seven months
recorded a significant growth of 76.5 percent compared to the same period of last year. This was a result of
tight market condition as demand continued to grow particularly those from Asian and Middle-East countries
while world supply remained stable. Moreover, a continued depreciation of US dollars has encouraged the
investment funds to reallocate its investment portfolio toward consumer products mainly oil and agricultural
products. In July, oil prices continued to rise sharply and reached its highest at 140.77 US dollar per
barrel (Dubai price) on 4th of July. Fortunately, oil prices started to decline since the middle of July and
currently stood at 109.45 US dollar per barrel. Recently, analysts from several institutions have projected
that oil prices are likely to fall toward the rest of this year with several underlying factors as follows:
1. World oil demand is expected to decline as a result of a potential downturn in world economy.
The International Energy Agency (IEA) forecasted that global oil demand in 2008 will expand by 1 percent
slightly lower than 1.3 percent in 2007. In addition, oil demand in North America and Europe is expected to
decrease by 2 and 1 percent respectively. On the other hand, demand in Asia/Pacific will continue to grow by
3.9 percent with Japan and South Korea as the major contributors.
2. World oil supply is expected to accelerate as a result of expansion in oil production capacity
from both OPEC and Non-OPEC countries. According to the latest IEA report, the difference between supply and
demand in the forth quarter was revised downward from 1.7 million barrel per day to 0.88 million barrel per
day. However, it is expected that the overall demand in 2008 will exceed supply by 0.52 million barrel per
day.
unit: million barrel per day
2005 2006 ---------------2007-------------- ---------------2008_f-------------
Q1 Q2 Q3 Q4 Year Q1 Q2f Q3f Q4f Year
Quantity 84.6 85.3 84.20 84.41 84.45 85.59 84.66 85.68 85.85 87.16 87.22 86.48
Non-OPEC 50.4 51.1 49.19 49.31 49.04 49.40 49.24 48.91 48.98 49.65 49.95 49.38
OPEC Crude 29.7 29.7 35.01 35.09 35.41 36.19 35.43 32.17 32.28 32.72 32.12 32.32
NGL 4.5 4.6 4.57 4.51 4.48 4.54 4.53 4.59 4.59 4.79 5.14 4.78
Supply Demand 0.7 0.6 -1.90 -0.69 -1.15 -1.51 -1.34 -0.92 -0.35 0.56 -0.88 -0.52
3. The US dollar started to appreciate since the beginning of July as a result of market
expectation that Fed will increase its policy rate during the last quarter of this year after a continuous
reduction since the burst of sub-prime crisis. Moreover, capital investment in other regions such as EU is
expected flow back to US as a result of downward expectation in EU economy. Several institutions have
also suggested that US dollar might be currently undervalued thus it would encourage investors to swap their
positions toward US dollar. Since the U.S. dollars started to appreciate, world oil prices have entered its
downward trend which is expected to remain throughout the rest of this year.
According to factors mentioned above, NESDB projects that Dubai oil price will fall in the range
of 110-120 USD with a potential slow down in demand as underlying assumption. It is expected that the
average price of the latter half of this year will fall in the range of 115-125 USD per barrel
a. EIA forecasted that WTI price will average 127 US dollar per barrel and 133 US dollar per
barrel in 2008 and 2009 respectively (adjusted upward from at 122 US dollar in the previous projection)
b. Lehman Brothers expected Brent to average at 115 US dollar per barrel (72.60 US dollar in 2007)
and lower to an average of 93 US dollar in 2009
$/bbl 2007 --------------------2008------------------ Max. Min.
Year Q1 Q2 Q3f Q4f Year f
WTI 72.64 98.03 124.02 142.67 145 127.39 147.79 87.150
Brent 72.60 96.72 122.21 130 110 115 145.51 87.86
Dubai 68.83 91.50 117.02 125 110 110 140.77 84.13
Commodity prices have been on the downtrend since July and are likely to slow down further in the
remaining month: not so-safe heaven
- Commodity prices have increased steadily since early 2007, and surged rapidly in 2008. Surges in
commodity prices, therefore, have raised concerns over their impacts on the costs of living, especially for
low-income earners.
- According to Asian Development Bank’s report, between January 1st, 2007 and August 22nd, 2008,
various commodities enjoyed robust increases. Crude oil price, led the group, with the strongest increase of
98.3 percent and followed by rubber, oil palm, gold, copper and sugar with the price increases of 43.02
percent, 40.08 percent, 31.44 percent 26.40 percent and 23.13 percent respectively
- However, since the beginning of July, commodity prices have been in a freefall as focuses are
increased on global not just US economic weakness. CRB Index (Commodity Research Bureau Index: CRB Index) of
19 commodities fell by 10 percent in July, biggest monthly decline since 10.5 percent drop in March 1980,
when the US was in recession. Crude oil prices declined from their July peak of USD 147 per barrel to USD
112.7 per barrel on August 18. Natural gas plunged 32 percent. Precious metals have borne the increase of
dollar strength with gold price falling from USD 923 a troy ounce in the first quarter to USD 896 a troy
ounce in the second quarter. Gold price continued on its downward trend to lower than USS$ 800 a troy ounce
in July, for the first time since December, 2007 and price of silver falling rapidly. Rice price, another
essential commodity in the developing world is down by 40 percent since May. The same with wheat, copper and
cooking oil.
- Underlying factors for the steadily decline in commodity prices over the last 1-2 months are
including,
- Demand destruction has led to a correction in energy prices. Demand for crude oil and
raw materials have been eased in response to the slowdown of global economic expansion, global slowdown
fears, a reduction of speculation demand on the back of stronger US dollar, fund liquidation as well as
speculative unwinding and de-leveraging.
- The decline in oil prices has resulted in lower inflation are pressures and helped
suppress speculative demand for gold. In August, the net long position decreased significantly with the
liquidation of long position of around 4-5 million troy ounce per week.
- A stronger dollar and a flight from commodities compounded falling prices. The
expectation about shifting in monetary policy stance to tightening biases in a bid to contain inflation
together with US dollar appreciation and also the tight credit conditions resulted in capital outflows from
future commodity market, namely out of commodity indices. It has been estimated that approximately USD 24
billion has flown out of commodity indices in this third quarter, as compared to net inflows of USD 25.8
billion and USD 0.5 billion in the first and second quarter, respectively.
The supply response help suppressed upward pressures on price of some commodities such
as industrial metals, agricultural commodities (i.e. rice, wheat and corn). In general, agricultural prices
have corrected significantly based on improved crop conditions and concerns regarding increased regulation of
commodities markets in the US. The yield of corn in the US is expected to increase to 155 bushels per acre,
for instance.
- On the outlook, commodity prices are expected to trend down further in the remaining of this year
under the following supporting factors:
- With economic slowdown across the board, including in China, and demand for raw
materialseasing, many analysts say commodity markets' high will be challenged. The reduction in demand for
crude oil and raw materials led by cooling down of global economic expansion tends to put the downward
pressures on commodity prices.
- However, volatile commodity prices could easily rise again especially if geopolitical
problems arise or unforeseen weather disasters emerge.
- The fact that commodities are falling does not necessarily mean food prices will also
follow a free fall. Food supply and demand balance remains quite tight.
- In the face of deteriorating global prospects, the decline of crude oil and other commodity
prices will help suppress inflationary pressures and reduce the need for further monetary policy tightening.
Sharp drop in commodity prices could mean inflation figures are close to peak in most of the emerging
economies; especially Asia and thus providing welcome relief for the fragile global economy. If the trend of
falling commodity prices holds, there will be less pressure on central bank to raise interest rate to fight
against inflation—a move that would have slowed economic growth further. Lower commodity prices also mean
lower import bills for developing countries and smaller outlays for subsidies to shield consumers from
expensive food and fuel. In this respect, global inflation is, therefore, expected to peak in the third
quarter and trend down afterwards. Under such outlook, the US, Eurozone and Japan are likely to maintain
their policy rate in the remaining of 2008.
--National Economic and Social Development Board--
-PM-