Momentum harder to sustain

Economic policy planners were busy revising growth forecasts in 2002 as exports performed better than earlier expected and the government's fiscal stimulus policies spurred domestic demand.

Prime Minister Thaksin Shinawatra's bold announcement to upgrade the country's economic growth forecast to 4.5% for the next several years raised scepticism at first.

But strong domestic consumption has enabled the government to take credit for the success of its ``dual track'' policy, aimed at strengthening the internal economy simultaneously with exports. Foreign economic commentators have also been taking notice.

Key off-budget spending programmes, such as the Village Fund, have been almost completely disbursed, with around 74 billion baht out of the approved 80 billion baht, injected into the grass-roots economy.

But not all sub-districts used the money to create productive projects so that the fund would be revolving. Some communities merely used the fund as a lending tool for villagers to cover past debts.

The Sept 11 events of 2001 turned out to have had only a slight impact on exports. The export trend was worrisome in the first quarter of 2002 but began to improve in the second quarter in line with external demand. Some exporters shifted their market focus to Asian countries to escape the slowing trends in the major economies.

In its latest revision, the Bank of Thailand expected the economy to achieve growth between 4-4.5% in 2002.

The central bank said that while the country had experienced extensive floods, these will have only a minor impact on economic growth. The improvement in crop prices helped increase spending in rural areas.

The main cloud hanging over the domestic and world economies going forward is the growing likelihood of some type of US military action against Iraq. The potential impact on the US economy, oil prices and overall market confidence cannot be underestimated.

The US Federal Reserve's interest rate cut by 0.5 percentage points in November has confirmed fears of a weakening US recovery. Analysts had seen the slowing of strong US domestic consumption, especially in house and car sales.

The Fed expected its most recent rate cut to 1.25% to help sustain strong consumption throughout the coming year.

Low inflation has fuelled concerns that other economies will follow Japan's road to deflation, in which the decline of product prices has led to dismal domestic consumption and stalled economic activity overall. Even Fed chairman Alan Greenspan, in an address on Dec 19, acknowledged that the spectre of deflation, which would harm the economy even more than inflation, could no longer be ignored.

Among local authorities sounding the alarm about deflation was Chakramon Phasukvanich, the head of the National Economic and Social Development Board. But the Bank of Thailand discounted such fears, saying low inflation was a result of an appreciating baht and declining oil prices, rather than weakening demand.

However, an uneven recovery across the manufacturing sector and low capacity utilisation have been cause for the government to be more cautious.

The central bank has been asked by the Finance Ministry to accelerate debt restructuring of all remaining loans. Banks, meanwhile, are once more being asked to reduce the gap between deposit and lending interest rates to help improve the efficiency of monetary policy.

One major development for the financial markets came mid-year, when the government approved the issue of up to 780 billion baht in new state bonds to offset losses incurred by the Financial Institutions Development Fund.

Total losses incurred by the FIDF from its intervention in ailing banks and finance companies was estimated at 788 billion baht. The bond programme, policymakers said, would help clear market uncertainties once and for all about how the country would account for the losses.

Interest on the bonds will be paid through the government budget, while principal will be gradually paid off over a period as long as 29 years through profits gained from investments of international reserves.

A first lot of savings bonds issued under the programme, totalling 305 billion baht and with maturities of five- and seven-years, were fully subscribed by retail investors in only several days.

Commercial banks were encouraged to lend more in 2002, especially to small and medium-sized enterprises and start-up companies. The banking system's lending rose by 2.9% in the third quarter of 2002 to 5.45 trillion baht, compared with a 0.5% increase in the same period of 2001. Specialised financial institutions, such as the Government Savings Bank, through the People's Bank project, have lent 5.2 billion baht to 351,000 retail borrowers nationwide. However, the project has yet to deliver consistent performance as a development fund for the poor.

In a bid to continue its grass-roots stimulus projects, the government has asked the bank to co-operate with the Bank for Agriculture and Agricultural Co-operatives and the Small Industry Finance Corporation (recently renamed the SME Bank) to extend loans to retail borrowers up to at least 10 billion baht in 2003.

The government also asked the Government Housing Bank to increase its lending to low-income home buyers and help the Thai Asset Management Corp to restructure its property loans.

Authorities have also announced a plan to issue title deeds for land under cultivation, excluding forest reserves, totalling 174 million rai nationwide, so that the land deeds could be used as collateral for loans. But as 2002 drew to a close, Mr Thaksin was starting to face heavy criticism that the implementation of the policy could result in the money ending up in the hands of the wrong people.

But while the expansion of credit among lower-income segments of society has been a key state policy goal, it has to be balanced against concern about another consumer credit bubble.

The central bank moved in the fourth quarter of 2002 to tighten the rules for credit card issuers, capping interest rates at 18% and lifting minimum salary requirements for applicants to 15,000 baht a month.

A woman weaves silk cloth in Nakhon Ratchasima. The Village Fund has been almost completely disbursed, with 74 billion baht of the approved 80 billion baht, injected into the grass-roots economy.

The rules reversed the abolition of minimum salary requirements earlier in the year.

The new rules also give the central bank authority for the first time to supervise non-bank card issuers, as they have to comply with the same rules applied to banks.

But the central bank said effects of the change on the overall economy would be minimal, given that lending to non-bank card holders was less than 1% of the total credit outstanding.

The government strongly believes that the economy will continue to perform well in 2003, thanks to continuing confidence and strength of consumption demand.

Interest rates are expected to remain low throughout the year, benefiting investment and consumption.

Low inflation is expected to be an impetus for economic recovery by reducing business's operating costs.

The central bank has estimated that oil prices will not increase significantly if the US invades Iraq, given an adequate world oil supply.

Nonetheless, the government has prepared an extra budget of 30 billion baht to keep the economy afloat in the light of unfavourable external conditions.On the manufacturing front, electronic products, television and radio sets, iron and steel and automobile parts were export stars in 2002.

These industries, along with the beverage industry and vehicle manufacturing industry were key engines for growth in 2002.

Private consumption was mainly boosted by increased motorcycle and passenger car sales.

The industrial sector had a utilisation ratio of just 60% at the end of October, still far below the pre-crisis level of 80%.

This factor remains a cause for concern.

Private investment began a recovery in March, boosted mainly by the government's stimulus policy for real estate and machinery installation, in line with its attempt to increase domestic demand.

External stability was strong as international reserves averaged $37.7 billion for the first nine months of 2002, compared with $33 billion at the end of 2001.

The trade balance remained in surplus with continued strong tourism income contributing greatly.

The balance of payments remained in surplus mainly due to modest capital outflows.

Economists now widely anticipate the US recovery to take longer than earlier expected, while it is possible that the Fed will further cut interest rates, especially if economic impact from a possible war is significant.

Japan's economic outlook is bleak given its bad loan problems, deflation and high unemployment.

The European economic recovery is expected to be modest in the next year, due to weak domestic consumption and investment.

In Thailand, the acceleration of spending would help sustain economic growth throughout 2003.

But a key question remains whether the economy has enough strength to weather the increasingly volatile global financial environment.

The government has campaigned vigorously to address all the fundamentals, improve the education system, increase information links between rural communities and their markets and fight corruption.

If these goals are met, the productivity of the country, and the economy, will improve.

Above all, government decisions must be free from bias toward groups with vested interests, which was a major reason that economic policy and reform have gone awry in the past.