Unfinished business

Innovative policies that focus on consumption have borne fruit on some fronts, but concern remains that the country's fundamentals need further strengthening if it is to withstand tougher global competition as well as external shocks

By PARISTA YUTHAMANOP

Shopping anyone? Local spending has been one of the main engines driving growth.

Even with shocks such as the violence in the southern provinces, the bird flu outbreak and soaring oil prices, the Thai economy continues to enjoy strong growth in 2004.

Economists remain confident that growth for the year should range from 6% to 7%, thanks to a pickup in private investment, steady growth in domestic demand and exports.

But growth targets have been revised downward due largely to changes in the global environment. The Finance Ministry, which had projected economic growth as high as 8.1% for the year, cut its projections by a full point due to the sharp rise in global oil prices.

Concerns have also been raised about the impact of rising global interest rates and a slowdown in the Chinese economy could have on local growth. First-quarter growth, at 6.5%, proved to be a disappointment, due to the greater-than-expected impact the bird flu outbreak had on the agriculture sector.

For the government, ensuring sustainable, stable economic growth with full employment is crucial for accomplishing the broader objective of raising standards of living throughout the population, particularly among lower-income rural groups.

Opening new export markets, restoring domestic and foreign investor confidence and supporting private investment have been the key policy platforms underpinning the government's economic strategy.

The drive to strengthen domestic consumption activity to help the Thai economy to be more resilient in the face of external shocks, known as the "dual track" policy, has won plaudits from local and international economists alike as a new development paradigm.

A common sight despite efforts to eliminate poverty.

Yet many key development policies remain in a nascent state, making it difficult to assess whether the paradigm has truly accomplished its goal of transforming the economy, particularly considering that growth in strategically important sectors such as electronics, petrochemicals and agriculture can be attributed to a cyclical global upturn as much as to any specific government strategy.

Low domestic and global interest rates over the past three years have similarly played a beneficial role in supporting the growth of domestic consumption, corporate debt restructuring and performance of the financial sector.

But by 2005, interest rates are almost certainly expected to increase as inflationary pressures have already begun to increase. While economic activity is expected to moderate with an increase in rates, the hope among policymakers and businesses alike is that a rebalancing would not undermine the quest to achieve long-term sustainable growth.

At the same time, authorities in 2004 have moved to implement structural changes to help support future economic expansion, most clearly seen in policies toward the financial sector and capital market.

The financial master plan, enacted in early 2004, is expected to result in the 84 current banks, finance companies, foreign institutions and credit fonciers being cut in half within the next year. Licences for finance companies, credit fonciers and international banking facilities will be phased out, with the sector reduced to two types of licences, full-service and retail banks.

Foreign banks will be consolidated under a single presence concept, with existing operators allowed to apply for subsidiary status and open a handful of new branches over the next three years.

In the capital market, regulators initiated a number of reforms aimed at supporting the growth of institutional investors and funds in the market. A derivatives market is planned for mid-2005, giving investors access to risk management tools such as interest rate and index futures. Development of the bond market also received considerable attention from policymakers, who hope that a vibrant and liquid debt market will help give companies an alternative to bank loans and equity when searching for capital financing.

In terms of international trade, perhaps no government in Thai history has been as proactive as the current one in making economic ties a central tenet of its international relations policies. Numerous initiatives toward bilateral free-trade agreements have been launched to help deepen Thailand's trade and investment ties with the international market and counter the snail's pace of multilateral talks under the World Trade Organisation. By mid-2004, talks were in progress with countries such as the United States, China, Japan, India and Australia, among others.

Efforts to expand Thai market share in the world trade arena complement sectoral strategies to strengthen the country's industrial competitiveness. Five key strategic industries _ food, fashion, automobiles, tourism and IT and electronics _ have been designated for special attention and incentives. Tax authorities have also moved forward with restructuring the import tariff structure for a number of raw materials and intermediate goods used in key industries.

For the domestic market, development initiatives such as the One Tambon, One Product programme have shown mixed results in its aim at creating new entrepreneurs. While the programme has certainly helped raise awareness and access of some small producers to a broader domestic and international market, critics question the programme's long-term viability given a lack of product variety and value-added content.

Three years after the Thai Rak Thai party took office, most businesses and investors credit the government for its pro-business, proactive approach to economic management. But with global uncertainties looming large, it remains uncertain whether the consumption-led approach of the past several years poses a risk for the future.

Household debt levels have soared over the past years, raising concerns about whether a new debt crisis could occur if growth turned downward, leading the Bank of Thailand to begin tightening controls on the property market and credit card issuers.

Other critics note that little progress has been made in addressing the country's competitive weaknesses, particularly in the educational sector, while the government's decidedly interventionist approach has led to distortions and imbalances in the market.