The Business Development Department last month granted approval to three foreign companies to operate consultancy businesses in Thailand, with a focus on construction of the mass-transit Purple Line linking Bang Sue and Bang Yai.

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Three foreign firms win approval

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.

Key risks to the outlook are (i) political uncertainty and (ii) the timing of the withdrawal of fiscal and monetary stimulus. Increased political tensions may have a long-lasting impact on investment, and withdrawal of stimulus (in Thailand and the advanced economies) must be precisely timed to avoid macroeconomic imbalances (including new asset bubbles) while also ensuring that the recovery is on a sufficiently solid footing.

The domestic content of automotive output in Thailand varies between 50 and 90 percent and averaged about 62%. For Isuzu (the largest pickup producer), domestic value-added is probably closer to 90 percent. Electronic and computer components are largely imported (from Japan), as are most transmissions (from the Philippines and India). Electronic components are of high value added and are used globally by the producers. Moreover, their development requires substantial R&D expenditures. Car manufacturers, as a result, prefer to concentrate the production of these electronic components in their home country – notably Japan – limiting technological spillovers. Only Toyota has a local transmission plant, with the remainder imported from India and the Philippines.

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Stimulus programs were implemented in Thailand throughout 2009, confirming improved expectations, boosting demand and supporting the momentum of the economic recovery.

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.

Most of the infrastructure development in Thailand has been responsive to demand rather than forward-looking. Availability and accessibility appear to no longer be a challenge. The next step for Thailand is to put more emphasis on quality of service delivery, management, and sound regulation.

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