SINGAPORE, March 8 (UPI) -- Thailand's GDP growth surprised on the upside for the fourth quarter of 2004, supported by robust consumer demand, yet the growth momentum is loosing steam and the economy should slowdown further this year despite a raft of mega infrastructure spending planned.
The National Economic and Social Development Board (NESDB) has kept its economic growth forecast unchanged for this year at 5.5-6.5 percent, while the Ministry of Finance is projecting economic growth of 6 percent this year and most economists from the private are forecasting growth toward the 5.0-5.5 percent level.
By comparison, GDP growth in 2004 ended at 6.1 percent, well below the 8 percent Prime Minister Thaksin Shinawatra had first hoped for and the 6.9 percent recorded in 2003.
Officials are already warning that the twin impact of higher oil prices-filtering through as the government cut down diesel fuel subsidies-and a possible drought will have a negative impact on the current growth forecast.
A drought is currently afflicting most of the country with water in at least three to four dams declining significantly. "If the rain absence continues until May when the rainy season starts, it would certainly affect GDP growth," warned Ampon Kittiampon, head of the state planning agency.
The drought hit the fourth quarter economic results by significantly affecting output in the agricultural sector. Agriculture contracted 5.9 percent in the fourth quarter alone due to drought and the return of the Avian flu.
Another uncertainty is the pace of the tourism sector's recovery from the Dec 26 tsunami. Foreign arrivals in January, which account for an important chunk of the economy, fell 26 percent year-on-year and preliminary figures show a continued decline for February.
Still, despite higher oil prices and bird flu, fourth quarter GDP growth came in stronger than anticipated, up 5.1 percent year on year. This was still the slowest quarterly growth in 10 quarter.
"The latest growth figures from Thailand confirm that the economy continued to lose momentum in the fourth quarter. Risks to year on year growth are on the downside even though the quarterly q figures still show signs of life," said Usara Wilaipich, economist at Standard Chartered. "We expect Thailand to post even slower growth year on year in the first half of 2005 before strongly rebounding in the second half. Significantly increased public sector investment will replace private consumption and exports as key drivers of growth from 2005 onwards," she added
Some economists point that the fourth quarter data and the January economic data releases are indicative of resilient domestic demand conditions.
January private investment growth index rebounded by 5.1 percent year on year from a 7.4 percent contraction in December, while motor cycle sales and import of capital goods also rebounded in the same period.
"The rebound in investment growth towards end 2004 and early 2005, in our view, is primarily led by construction sector activity related to infrastructure projects and capacity expansion in the building materials, petrochemicals, and auto parts & components sectors. We expect 12-14 percent year on year investment growth in the first quarter and second quarter versus 16.2 percent year on year growth in Q4 2004," said CSFB in a research note.
Looking ahead, domestic demand story is expected to continue to remain robust in the first half of this year by most economists, who point that fiscal expenditure, expected to start in the second quarter, will complement this picture.
The reconstruction of the tsunami-affected areas of Thailand should also help to offset some of the near-term weakness in tourism receipts.
But economists also warned about some worrying economic trends: the widening of the trade balance and the fiscal deficit.
Indeed, this is something the government is well aware of.
Finance Minster Somkid Jatusripitak recently warned that unless the economy is restructured to reduce the reliance on high imports, Thailand may experience a recession within two years.
Thailand's current account posted a deficit of $942 million in January, the largest deficit since April 1997, after a surplus of $1.37 billion in December. This reflected the country recording its biggest monthly trade deficit in eight years in January, at $1.48 billion, as imports during the month rose 33.6 percent on year, while exports only grew 11.6 percent.
"Export growth has been decelerating and given the stepped up spending on infrastructure projects, trade deficits could be the norm," noted Wong Chee Seng, economist at DBS Bank.
The likelihood of a fiscal deficit this year is also rising. Generous middle-class tax allowances introduced during Thaksin's first term, which aimed to stimulate the economy, and higher government outlays could increase the deficit significantly.
"Fiscal policy is a potential source of upside risk to the outlook," said Michael Spencer, Asia chief economist at Deutsche Bank.
Government spending rose 7.3 percent in 2004 (13.7 percent in the fourth quarter alone), the fastest growth since 1996.
Economic restructuring is one of the four major tasks the government has identified for its current four-year term that began with the re-election of Thaksin in February. The other tasks are poverty eradication, education reforms, and streamlining the bureaucracy.
