Inflation may push Thailand's economy down,
but...exports to the rescue?

A year ago, a strong baht threatened Thailand's exports. Exporters feared they would lose competitiveness on world markets.

A year later, the situation has completely changed. The baht has depreciated and there are signs that Thailand's exports have "decoupled from the major economies of the US, Europe and Japan" with demand for exports in Asian and Middle East markets remaining strong.

Exports are the factor that could keep growth up at previously forecasted levels, according to economic forecasts just released by the Fiscal Policy Institute of the Foreign Ministry.

Export volume is forecast to increase 8% from last year up from 7% last year. Measured in US dollars, exports are expected to grow 20.3%, revised upwards from 13.5%.

The growth forecast remains unchanged at 5.6% but consumption and investment have been revised downwards due to rising inflation (food, energy) and political uncertainty.

Household Consumption Increase Over Last Year

Consumption is still expected to be higher than last year, with real consumption rising 3.5% versus 1.4% last year.

Food inflation has increased rural household income which is expected to boost consumption in rural areas. The 10% increase in minimum wages together with cost of living allowance adjustments for many employees will also boost consumption.

A new active fiscal policy has generated a lot of government spending that could boost household consumption. Tax cuts for small businesses and individuals may also boost consumption. Increased spending in local rural development programmes such as the People's Bank microfinance programme or the SML village grant programme may also boost consumption. Coupons for the poor to purchase food and essential goods are also in the works.

Inflation: The Looming Shadow

The forecast for inflation has jumped to 7.2% from 4.5% in March. In May, inflation hit a 10-year high of 7.6%. Over the first five months of the year alone prices rose 5.8%.

Out on the street the perceptions of consumers is that inflation is even higher.

Jasmine rice, a staple food, has jumped to 200 baht for a five-kilogramme bag from 125 baht last year. Food purchased at food stalls or at food courts has jumped from 20-25 baht to 30-35 baht this year. As consumers have to spend more on basic essentials, overall consumption is likely to drop.

Price guarantees for farmers could raise food prices at the expense of consumers.

The wildcard, of course, is oil prices, which were revised from $93 to $116 per barrel in the latest forecast (Dubai oil price benchmark).

Oil prices could go a lot higher. They are already near 140 per barrel. If they reach $165 then double-digit inflation above 10% becomes a likelihood.

To combat this looming inflation, the Bank of Thailand is projected to tighten monetary policy and increase interest rates by a full percentage point by the end of the year to 4.25%. The one-day repurchase rate, a key policy interest rate used by the Bank of Thailand, has remained unchanged at 3.25% since mid-2007.

When the cause of inflation is increased oil prices (supply shock, oil shock, cost-push inflation) raising interest rates may not push inflation down.

An interest rate hike could also push consumption downwards as people delay large purchases such as automobiles and homes financed by loans.

Vocabulary:

a strong baht, baht appreciation - a baht that is worth more, that is more valuable (for example, baht moves from 40 per dollar to 32 to dollar)  การแข็งตัวของค่าเงินบาท  

a weak baht, baht depreciation - a baht that is worth less, that is less valuable (for example, baht moves from 32 per dollar to 40 to dollar) ค่าเงินบาทอ่อนตัว

competitiveness on world markets - baht is more valuable so goods are more expensive and less competitive to other goods on international markets ความสามารถใจการแข่งขันกับตลาดโลก

decoupled - not connected to (for example, Thai exports are decoupled from the US market, meaning if the US market declines, Thai exports will stay be strong) 

minimum wages - the lowest hourly or daily wage that ค่าแรงขั้นต่ำ

boost consumption - increase consumption กระตุ้นการบริโภค

cost of living allowance (COLA) - money given to employee to help cope with rising cost of basic goods such as food and gasoline

adjustments - small changes การปรับ

in the works - they are working on it, not yet finished กำลังอยู่ในระหว่างดำเนินการ

a looming Shadow - a shadow that is getting bigger and bigger, and more frightening เงาที่คืบคลานเข้ามา

perceptions of consumers - what consumers think ความเห็นของผู้บริโภค

a staple food - a basic food, the most important food in the diet, rice in Thailand อาหารหลัก

basic essentials - the most important goods in everyday life, such as food cooking gas, soap, shampoo, etc...เครื่องใช้ไม้สอย และสิ่งของจำเป็นในชีวิตประจำวัน

a wildcard - an uncertain effect, an unpredictable factor ปัจจัยที่เป็นไม่สามารถคาดการณ์ล่วงหน้าได้ 

a benchmark - a value or price used as standard to measure other prices against เกณฑ์มาตรฐาน

double-digit inflation - inflation 10% or over ภาวะเิงินเฟ้อเกินกว่า 10%

a likelihood - something that will probably happen (over 50% chance) สิ่งที่น่าจะเกิดขี้นได้

looming inflation - inflation that seems likely, a threat of inflation ภาวะเงินเฟ้อที่อาจจะเกิดขึ้นในไม่ช้า

combat this looming inflation - do something to stop the likely inflation การรับมือและแก้ไขภาวะเงินเฟ้อที่กำลังจะเกิดขึ้น

projected to - forecast to คากการณ์ว่า

tighten monetary policy - raise interest rates to reduce liquidity and credit in the financial system ใช้มาตรการทางการเงินที่เข้มงวด เช่น เพิ่มอัตราดอกเบี้ยเพื่อเพิ่มการไหลเวียนของเงินตราในระบบ

a supply shock - when the price of important raw materials increases, putting a deadening effect on production and economic activity  ภาวะที่ได้รับผลกระทบต่อหน่วยการผลิตและระบบเศรษฐกิจสืบเนื่องมาจากการปรับตัวสูงขึ้นของราคาวัตถุดิบ

an oil shock - when the price of oil rises suddenly ภาวะที่ราคาน้ำมันปรับตัวสูงขึ้นอย่างรวดเร็ว

cost-push inflation - when the cost of producing goods increases (more expensive raw materials, higher wages, etc.) so producers much raise prices for the goods they sell

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