The Stock Exchange of Thailand (SET) composite index on Wednesday gained 17.93 points or 2.68 per cent to close at 686.41 points. The trade value was 18.78 billion baht, with 3.29 billion shares traded.
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Downside risks remain should political instability resurface in Thailand and the global decline proved more protracted or steeper than now expected
Inflation has been easing with the slowdown in economic activity and the decline in oil and food prices. After peaking at 9.3 percent in July 2008, 12-month inflation fell to only 0.4 percent in December, although the average for 2009 at 5.5 percent was roughly double the level in 2007. Core inflation averaged 2.3 percent in 2008, within the central bank’s target of 0-3.5 percent. In January and February, prices declined 0.3 percent from the first two months of 2008, but this has been driven primarily by fuel prices, with other prices still increasing year-on-year. Given the increased excess capacity in the economy and the continuing decline in global oil and food prices this year, inflation in 2009 is expected to be negligible.
Export volumes are projected to contract 16 percent in 2009 after a 6 percent expansion in 2008. Exports of services, more than half of which were accounted for by tourism receipts (around 8 percent of GDP) will also be heavily impacted by the slowdown in arrivals from advanced countries (40 percent of total tourists). Accordingly, exports of services are projected to contract by 6.6 percent this year. Import volumes should contract more than exports due to businesses running down inventories and a contraction in overall investment and consumption of imports. Net foreign demand will nevertheless contribute negatively to growth since in real terms exports represent a much larger share of GDP than imports.
Expansionary monetary policy has been employed to help mitigate the impact of the global financial crisis and is starting to be reflected in the financial sector’s lending rates. As inflation rose rapidly in the first half of the year, the central bank of Thailand lowered its policy rate by 50 basis points to 3.75 percent. The decline in inflation facilitated cuts to 2.75 percent in December and 1.5 percent in late February. Market indicators confirm Thailand’s relatively strong financial position. Large foreign exchange reserves, smaller gross financing requirements on both the fiscal and external side, and ample domestic liquidity are among the key strengths in the current crisis. Despite the political turmoil late last year, CDS spreads have risen by about 100 bps less than some other East Asian countries since the onset of the global financial crisis in mid-September.
The contraction would be Thailand’s first since 1998, said Mathew A. Verghis, the World Bank’s Lead Economist in Bangkok. It would follow a decade of growth averaging nearly 5 percent each year.
“Countries like Thailand that have been dependent on manufacturing exports are most affected,” said Verghis, who covers Thailand and four other Southeast Asian countries. The World Bank released its latest forecasts for Thailand and other economies in East Asia and Pacific on Tuesday. The global economic slump shut down what has been, for the past three decades, the main engine for Thailand’s economic growth: exports. As a result, the manufacturing sector has been badly hit. The Thai government estimated that one million or more workers would lose their jobs this year due to the slowdown. In January, the unemployment rate stood at 2.4 percent of the total workforce – a full percentage point higher than the 1.4 percent recorded in December 2008.
So far, the Thai government has enough capacity to finance the first economic stimulus package and the three-year public investment plan. In the face of shrinking revenues, the government estimates its budget deficit to be about 525 billion baht, or 6 percent of Thailand’s gross domestic product, in the fiscal year ending September 2009. It is also seeking loans from domestic and external sources to shore up the budget and support planned investment.
However, the World Bank cautioned that, for public debt to remain manageable, budget deficits will need to be reduced over the next few years and growth needs to return its long-term average, highlighting the importance of using the crisis as an opportunity to enhance growth prospects.
Private consumption in Thailand and investment also grew by more in 2008 than they did in 2007, despite the sharp increase in food and fuel prices. On the other hand, public consumption and investments in real terms have contracted in the first three quarters as a result of slow disbursement rates amidst political instability and slow project completion as raw material prices rose sharply.
The impact of the global financial crisis on the Thai financial sector, on the other hand, has so far been limited.Although risk-sensitive indicators have risen since Lehman Brothers announced its bankruptcy on September 15 th they have been lower in Thailand compared to those in its East Asian peers – prior to the airport closure. Credit default swaps (CDS) spiked in line with global conditions and the stock market is down over 50 percent year-to-date. These were however, less than those in other East Asia economies.
Loan growth in Thailand, however, will slow down next year. As the economy slows down, liquidity in the global markets tightened, and corporate balance sheets weaken, commercial banks have signaled that they will focus more on risk management than on loan growth.
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