THAILAND

External factors get worse, say economists

Growth is unlikely to meet the government's 4% target this year since the global economic doldrums look set to undo the positive effects of the government's massive spending, say local economists.

With external factors exacerbating, public investment this year might not be able to spur recovery, according to Sethaput Suthiwartnarueput, a veteran economist.

While Thailand remains strong, with a stable fiscal status and balance payment and robust banking and corporate sectors, the government's target of achieving growth in a range of 4% to 5.5% this year is unlikely to materialise.

The country cannot rely on public investment as its contribution to GDP was 15% compared with 60-70% of exports, he pointed out.

"Look at 2009 as an example. The government injected massive funds into the system, but they help support growth of only 0.9%," said Dr Sethaput.

"In the first three quarters of last year, the overall situation was much better than now, and yet we grew by 3.1%. I'd say we'll outperform if we manage 3%

[this year]," said Dr Sethaput at an IOD directors briefing entitled "The Global Economy 2012" yesterday.

Dr Sethaput also pointed out that the fundamentals of the euro zone are much better than the US's. The euro zone's budget deficit is 4% of GDP, while the US's is 10%. As well, the euro zone's public debt is at 80% of GDP, while the US is at 100%. However, the euro zone's problems are more difficult to resolve due to that fact that it is hard to find mutual consent of all 17 members and the fundamentals of the members are different.

"I believe the euro zone will be split eventually, as some countries should not have joined the group in the first place. But I can't say when that will happen," said Dr Sethaput.

The global economy is also facing a high risk of a confidence crisis, especially in financial institutions, heightening the fear of bank runs.

Consequently, liquidity in the system will be frozen, and capital will flow to US Treasuries, thus causing the greenback to strengthen against most currencies including the baht.

Supavud Saicheau, managing director of the research group of Phatra Securities, agreed the major concern is the confidence crisis.

"Actually, liquidity is not a problem so long as the central banks of Europe, the US and Japan keep injecting funds into the system. What matters is that people must have confidence in the financial institutions' credit," said Dr Supavud.

He said that this is the first time Merrill Lynch has stepped up its prediction of a 40% chance of a worst-case scenario in Europe from 20% normally.

In the best case, Merill Lynch projected the world economy would grow by 3.5%, with a contraction of 0.6% in Europe and 2.1% in the US.

The world economies are all connected, he added, and Europe is the weakest link. If Europe crashes, China will follow suit, said Dr Supavud.

Dr Supavud said if China is forced to a hard landing, a nasty market shock will ensue. This is because most investors are confident China will remain strong and are not prepared for the worse.

Meanwhile, Bank of Thailand governor Prasarn Trairatvorakul said that the central bank has been closely monitoring the global situation after the World Bank cut the world growth projection to as low as 2.5%.

The International Monetary Fund also said it requires US$500 billion in order to meet the world's financial needs.