With the baht closing in on a two-year high and investors clamouring for relief, the central bank yesterday promised to keep a closer eye on the foreign-exchange market. However, it reiterated it had found nothing unusual so far.
Public investment will expand only slightly next year as the Thai Kem Kaeng Program will just about compensate for the reduction in the government’s on-budget investment in 2010.
The medium-term outlook is sobering, with growth expected at 3.5 percent in 2010 and likely remaining below potential for the next three years. Because the Thai economy is largely dependent on final demand in advanced economies, a return to pre-crisis rates of economic growth (a full recovery vs. a rebound to pre-crisis levels) will require a combination of (a recovery of demand from advanced economies and a rebalancing of the sources of growth to reduce Thailand’s dependence on demand from advanced economies. Neither process is likely to be swift. Recovery from a financial crisis is a lengthy process that involves the rebuilding of balance sheets, and the IMF estimates that half of the losses in the financial system in advanced economies are yet to be recognized.
Long-term growth will require improving productivity and greater focus on distributional issues. Imbalances present before the crisis remain, but the crisis has increased the urgency of reforms to improve productivity, enhance competitiveness, and promote more equitable growth. Openness to trade and investment have been – and will continue to be – essential to Thailand’s long-term growth. However, a return to high growth will require boosting domestic consumption and developing additional sources of external demand.
The export collapse in 2009 has been the most severe in Thailand’s recent history
The key risk to the global recovery lies in the need to get the timing of withdrawing fiscal and monetary stimulus just right. Withdrawal of fiscal stimulus too early may lead to another negative demand shock and a negative expectations spiral, whereas withdrawing the stimulus too late may lead to high inflation, further weakening of the US dollar, and possible asset price bubbles. In Thailand, for example, more than ten years since the 1997/1998 financial crisis banks still have bad loans in their books and the government still holds a large amount of debt related to the recapitalization of financial institutions. Given the expected length of recovery, it is important not to withdraw stimulus programs too soon, before the recovery is on a firm footing. On the other hand, macroeconomic imbalances are accumulating and eventually fiscal and monetary authorities, especially in the US, must consolidate their fiscal position and withdraw liquidity.
The export collapse in 2009 has been the most severe in Thailand’s recent history. The magnitude of the decline has been unprecedented. Since 1957, there have been nine episodes where exports contracted for at least six consecutive months. Losses to date are more than double those in the 1997-98 Asian financial crisis and the 2001 “dot.com” bubble turmoil. Thailand’s export performance tracked developments in world merchandise trade, which dropped around four and eight percent in the 1997 and 2001 meltdowns, respectively, but 22 % so far during the current global financial crisis.