Thailand: Going for growth

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The latest data on Thailand’s consumer confidence shows that Thais are beginning to look more positively on the future, as the government moves to boost growth and restore the country’s infrastructure after last year’s devastating flooding.

According to recent comments made by the permanent secretary of commerce, Yanyong Puangrach, in December 2011, the Consumer Confidence Index (CCI) rose for the first time since the flooding began in July. This has been one of the most tangible signs of the impact being made by a raft of fiscal and monetary measures undertaken by Prime Minister Yingluck Shinawatra’s new administration.

The country’s CCI, which is based on a survey of 3250 people nationwide, hit 21.4 points, up from 18.5 points in November, largely on the back of high expectations for positive results from government spending on flood rehabilitation and rebuilding programmes. Additional influences expected to lift consumption include Chinese New Year expenditure and a rise in the salaries of civil servants, set to take effect this month.

Yet the December CCI results were calculated on a scale ranging from 0 to 100. Thus, although December’s results were a welcome uptick from the previous month, the index remained well below the 50-point level, indicating that overall confidence remains low. This highlights consumers’ concerns regarding the cost of living and commodity and oil prices, Yanyong said in a recent article published by the Bangkok Post.

In addition, Yanyong announced that from now on, the Ministry of Commerce’s internal trade department will monitor consumer goods prices, a key public demand that surfaced in the survey.

The belief is that, in the medium term, such a step may help ease the inflationary pressures the country is now experiencing, provided the government acts on the internal trade department’s findings.

Inflation has indeed been a growing concern. Yanyong referred to a poll of economists’ median forecasts that indicated inflation for December 2011 had likely hit 4%. The average predicted inflation rate for the whole of 2011 also increased to 3.81%, up from 3.3% in 2010, Yanyong said. He also projected inflation in 2012 to continue to hover between 3.3% and 3.8%.

Yet in December, the consumer price index (CPI) hit 112.77 points, down 0.48% from November’s CPI increase of 4.19% – the steepest decline in 15 months – but an increase of 3.53% from December 2010.

This decline during the last two months of 2011 was attributed to receding floodwaters, which reduced the prices of consumer goods, particularly fresh food. Indeed, the core CPI, which excludes energy and food, rose 2.66% in December compared to the same month of 2010 and was up 0.11% from November 2011’s rate of 106.98. The permanent secretary said the average core CPI for 2011 was 2.36%.

Calculating the true economic impact of the floods will be a crucial challenge for the central bank, as it considers whether or not to make another change to interest rates when it meets in late January. At the end of November 2011, the Bank of Thailand lowered its benchmark rate to 3.25%, a cut of 0.25 percentage points and the first rate cut since April 2009, and many anticipate another cut at the end of the month.

Yet while the CPI will be a major factor scrutinised by the central bank and the monetary policy committee, it is just one of several issues under consideration. The central bank will also have to determine whether the rise in prices is a temporary result of the floods, or if there is something more fundamental happening in the economy.

Another cut in interest rates might help a slowing GDP growth rate, as well. In late December, the central bank said GDP rose only 1.1% in 2011, less than an earlier estimate of 2.6%. Another interest rate cut to spur growth, however, could run the risk of fuelling further inflation.

Government spending on infrastructure projects could also give the economy a boost without the need for further monetary policy loosening, however, such government programmes to restore infrastructure hit by the floods will be costly. Indeed, faced with the need to secure more funding, on January 5, 2012, the government announced a draft decree that would transfer responsibility to the central bank for BT1.14trn ($35.78bn) of debt incurred during the 1997 economic crisis, freeing up BT65bn ($2.04bn) per year currently allocated for debt payment. Crucially, the move will allow the government to incur additional debt, opening up hundreds of billions of baht to fund the new loans and investment programmes necessary to rebuild the country.

Under the country’s budget rules, debt service obligations are required to remain under 15% of budget expenditure, which is currently set at BT2.38trn (74.71bn) for fiscal year 2012.

Thailand’s finance ministry thus expects the economy to grow by between 4.5% and 5.5% in 2012, though local economists have said global economic conditions may undo the effects of the government’s spending. Whether or not that happens depends very much on what the central bank does in its next meeting and how well the government delivers on its promises to boost the economy and restore the country to its pre-deluge state.

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