Political worries cloud Thai economy
Thaksin Shinawatra’s business affairs have caused controversy
The coup attempt in Thailand is likely to bring further difficulties for an already faltering economy.
Stock, bond and currency markets are likely to be
extremely nervous about the unfolding situation, especially in light of
the political uncertainty of recent months, analysts said.
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My business partners in Thailand seem to be relieved and feel that the country will move forward
Richard Kamalanathan, Kuala Lumpur
But observers believe it is too early to say what the
outcome will be and whether Thailand’s troubles will have an impact on
other economies throughout South-East Asia.
“This is not going to bode well for investor sentiment
but people will need to see a clearer picture to react properly,” said
Michael Every, a strategist with RBC Capital Markets.
Earlier this month, the Asian Development Bank
downgraded Thailand’s growth forecast for 2006 and 2007, citing
“political uncertainty, higher oil prices and rising interest rates”.
It believes the Thai economy will grow just 4% this
year, lagging behind its regional rivals such as Malaysia and Indonesia
and some way off the 7% growth forecast for the whole of Asia.
Ironically, Thailand’s economy was beginning to recover
from the body blow of the 2004 tsunami earlier this year when political
problems began to hinder its performance.
For Thailand generally and the region as a whole, they are very vulnerable to global economic trends
Wesley Fogel, Lombard Street Research
The 2004 tragedy was a major setback for the Thai
economy, severely hitting tourism in the south-west of the country, one
of country’s major sources of revenue.
It had a dramatic effect on economic performance, knocking back growth in 2005 to its lowest level since 2001.
As tourists returned to Thailand at the end of 2005, the
economy began to pick up, seeing growth of 5% in the second half of the
But the economy has found itself increasingly hampered
by rising inflation and falling investment, something which the
government has struggled to deal with.
Oil and inflation
Like many Asian economies which are major oil importers, soaring global oil prices have hurt Thailand.
Inflation, driven by rising energy costs, accelerated last year to 4.5%, its highest level in seven years.
When the government reduced fuel subsidies in July 2005 – in order to save it more than $2bn a year – pump prices rocketed.
Tourism has steadily recovered after the 2004 tsunami
The effects were quick to filter through and overall consumer prices rose by an average of nearly 6% in the first half of 2006.
Concerns about inflation prompted the Bank of Thailand to raise interest rates four times in the first half of 2006.
At the same time, the country’s public finances have been deteriorating.
Thailand’s trade balance swung into deficit in 2006 for
the first time since the Asian financial crisis of 1998 as costly fuel
imports also forced its current account balance into deficit as well.
The Thai government’s attempts to kickstart its economy
this year have been hampered by the ongoing political uncertainty that
was sparked by the Prime Minister’s business dealings.
Millionaire tycoon Thaksin Shinawatra’s decision to sell
his family’s investment in telecoms company Shin Corp to a Singaporean
business last year was hugely controversial and sparking widespread
April’s annulled election and uncertainty about next
month’s planned poll have hit both domestic and foreign investment,
while consumer confidence has dropped.
Thailand’s caretaker government in place since Spring
has been unable to pass a budget for next year, the prospect of which
is now receding further.
This hiatus has had a major impact on economic prospects
since ministers were looking towards a series of multi-billion dollar
construction projects to boost the country’s economy.
Soaring oil costs have hurt Thailand
About $42bn was earmarked for schemes to build new
roads, housing, schools and boost water resources, many of which now
must be in doubt.
Attempts to privatise mainly state-owned companies, a cornerstone of Mr Thaksin’s economic policy, have also begun to founder.
The sale of $800m in shares in EGAT, the state
electricity generating firm, were abandoned after protest by unions and
Drinks firm Thai Beverage was also forced to abandon a
$1bn flotation on the stock market after protests from anti-alcohol
groups, a development which eroded confidence among foreign investors.
Although Thailand continues to see strong export growth
and has high hopes for a free trade agreement with the US, most
observers believe its economy is facing challenges needing stability if
they are to be solved.
“For Thailand generally and the region as a whole, they
are very vulnerable to global economic trends,” said Wesley Fogel, an
economist with Lombard Street Research.
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