World Bank warns of falling investment

Bangkok (dpa)

Warning of plummetting confidence in Thailand, the World Bank on Thursday dropped its forecast for economic growth in 2007 to 4.3 per cent.

The Bank's report warned that confidence in the kingdom's investment climate has hit a historic low and must be restored to improve future prospects.

"Low investment confidence - and it is at one of its lowest points - is the Thai economy's biggest weakness in the short-term," said Kazi Matin, the WB's lead economist on Thailand.

The WB previously predicted Thailand's economy would grow 4.6 per cent this year, but on Thursday revised that downward to 4.3 per cent.

Thailand had a coup d'etat on September 19, 2006 that ousted populist but pro-business prime minister Thaksin Shinawatra.

Since then its military-appointed government has implemented several measures that have spooked the foreign business community, including imposing capital controls in December and proposing amendments to the Foreign Business Act in January that will block certain loopholes that allowed foreigners to control local investments without holding majority equity.

Matin noted that the capital controls had been largely lifted, and there were still concerns that the FBA amendments would be retroactive.

"Retrospective application in the proposed amendment increased perception of increased uncertainty and unpredictability about existing policies, something that was uncharacteristic of Thailand," said a WB overview of the Thai economy.

Matin urged the government to reconsider the retroactive clause in the FBA amendment.

Private investment in Thailand last year grew only 4 per cent, compared with 11 per cent in 2005, and even this less than spectacular performance was driven largely by an 18-per-cent surge in foreign direct investment (FDI) last year.

The WB, however, does not expect FDI to lead the way again in Thailand in 2007 because of the policy uncertainties created by the existing government.

"Foreign investors had already made their decision to invest in 2004, when the economy was still pretty stable, so 2006 had the benefit of that," said WB economist Kirida Bhaopichitr. "But going forward, since 2006 was a pretty uncertain year, the private investors in 2006 have decided to hold back on investment they would make in 2007 and 2008."

Matin added, however, that the government's signing of a free trade agrement (FTA) with Japan on Tuesday might induce a return of foreign investments from Japan.

The WB warned that a slowdown in investment may affect Thailand's medium term prospects, which are highly dependent of export-led growth.

Thailand's exports reached $130 billion in 2006, up 18 per cent, with $57 billion accounted for by failing high-tech industries such as machinery, vehicles and parts and components.

Exports are likely to be adversely affected in 2007 by a slowing US economy and an appreciating baht currency.

Matin noted that the baht appreciated 8 per cent against the dollar in 2006, but is now showing signs of stabilising.

The bank estimates that every 1 per cent depreciation of the baht against the dollar leads to a 0.36 per cent increase in Thailand's agricultural exports and a 0.23 per cent increase in in labour-intensive industries, both of which account for 40 per cent of the labour force.

Again, the WB urged the government to improve its investment climate, arguing that high investments will increase imports, reduce the current account surplus and thereby slow the baht's appreciation.

Thailand's macro-economic position in 2006 was very strong, said Matin. The country's current account surplus amounted 1.6 per cent of GDP, with a trade surplus of 2.2 billion.

The strong performance has been partly blamed for the high appreciation of the baht last year.

Bangkok Post

Friday April 06, 2007