Govt told to minimise cost of populist policies for rise in investment, warned on euro crisis

The World Bank lowered its economic-growth projection for Thailand to 4.5 per cent this year, Kirida Bhaopichitr, the Bank’s senior country economist, said yesterday.

The European debt crisis and the slow recovery of manufacturing affected by the severe floods last year led the World Bank to forecast growth of the Kingdom’s economy at a much lower rate than that projected by Thai authorities, she said.

She told a news conference that real growth in gross domestic product would be about 4.5 per cent this year, up from 0.1 per cent last year. This is much lower than the growth rate of 5.5-6.5 per cent forecast by the National Economic and Social Development Board, the state think-tank.

She said the European debt crisis would significantly affect Thailand’s exports to the euro zone. Exports to Europe contracted by 16.3 per cent in the first quarter of this year, and this decline is expected to continue.

The share of Thailand’s exports to Europe was 10.1 per cent of the total last year. Indirect exports to Europe through China will also be affected, Kirida said.

Meanwhile, manufacturing affected by the floods is expected to recover fully in the latter part of the current second quarter, not early in the quarter as previously thought, she said.

Kirida said the Thai government should review its populist schemes to save money for investment. These schemes include rice pledging, tax exemption for first-home buyers, tax rebates for first-car buyers, cuts in corporate income tax and diesel excise, increased incomes of civil servants and public employees, free tablet computers and a debt moratorium.

The projects, largely aimed at boosting consumption, would result in public expenditure equivalent to 3 per cent of GDP and forgone revenue estimated to be about 1.5 per cent of GDP in 2012.

"The cost is high when compared with annual investment expenditure of about 5 per cent of GDP," Kirida said.

She said the World Bank did not urge the government to cancel these projects but suggested that it modify them and minimise costs by adopting a targeted approach to help low-income earners.

Kirida warned that there was a high probability that the euro-zone crisis would deepen in next few years, so the government needed to prepare for its impact on the Thai economy by investing more instead of stimulating consumption.

She said more investment would make economic growth sustainable during the threat of global uncertainty.

The World Bank says it is also cautious about the fiscal stance of the country.

The government may be able to borrow as much as Bt1.15 trillion to finance public spending without impact on economic stability. "But if there is a renewed global financial crisis stemming from a prolonged slump in the euro zone, Thailand will run out of fiscal resources within two and a half years," Kirida warned.

Falling prices of agricultural products would also adversely affect Thai exports, she added.

Pull-down

The European Union’s economic slump will also pull down other regions such as the Middle East, the United States and Asia, according to World Bank economists.

"Most East Asian economies are well positioned to weather renewed volatility, as domestic demand has proved resilient to shocks," Bert Hofman, the World Bank’s chief economist for the East Asia |and Pacific region, said via a videoconference from Tokyo.

"Many countries run current-account surpluses and hold high levels of international reserves. Banking systems are generally well capitalised.

"Still, risks emanating from Europe have the potential to affect the region though links in trade and finance," he added.

The EU, the US and Japan together account for more than 40 per cent of the region’s exports, and European banks provide one-third of trade and project finance in Asia.

The World Bank said developing Asia and the Pacific grew by 8.2 per cent last year, a sharp decline from the nearly 10-per-cent growth recorded in 2010.

The Bank projected that growth would moderate further to 7.6 per cent this year, with slower expansion in China pulling down the regional aggregate.