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Chance for new course seen in economic woes


PRIME Minister Chavalit Yongchaiyudh will hold face-to-face talks with exporters to come up with methods to boost sagging exports at the first-ever Thailand Export Summit, to be held in Pattaya on May 25. That is the kind of consensus-building James Mitchell, a Singapore-based strategist at Salomon Brothers, would probably like to see more of as Thailand tries to nurture asset deflation and value creation in its economy.

From an Asean perspective, Mitchell sees an emerging policy trend among the central banks, which have been applying the brakes to asset price inflation. Since the beginning of this year, all of the equity markets in Asean, from the SET Index to the Kuala Lumpur Composite-Price Index, the Philippines SE Composite Price Index and the Singapore DBS 50 Price Index, have declined.

In its latest edition, The Far Eastern Economic Review goes so far as to call the sharp stock market decline in the region over the past couple of months a ''spillover from the troubles of Southeast Asia's new sick man: Thailand".

Mitchell looks upon this phenomenon as a good opportunity for the countries to start looking for fresh directions to maintain their economic wealth. In Thailand, he says that Bangkok financiers, manufacturers and exporters should have already formulated strategic ideas about how to move the economy up the value-added ladder.

The problem is the communication gap between the private sector and the government, which is at the mercy of the policy-making dominance of the military-minded Gen Chavalit, upcountry businessmen disguised as MPs and technocrats.

Obviously, Thailand cannot continue bank on its past economic success, the heady days when earnings growth averaged 20 per cent. In 1995, the corporate earnings of listed companies fell to an average of 5 per cent from about 30 per cent at the peak of the bubble economy.

Last year, earnings dropped by almost 5 per cent. This year, Salomon Brothers expects corporate earnings to be flat, growing at best by less than 5 per cent.

If earnings are going to return to their former levels, the economy needs to create more value. Mitchell sees an investment trend away from bank, finance and property stocks which triumphed during the bubble economy toward ''real" sectors such as telecommunications, technology, transport, power and petrochemicals.

This structural change, if successful, will provide a fresh platform for Thailand to boost its gross domestic product growth. With greater wealth, the economy can afford to re-invest in value creation, which will further bolster GDP growth in a reinforcing process.

Dr Mark Sundberg, head of Salomon Brothers' Economic Research, said despite growing concern about economic stability, the economy, whose 1996 growth dropped by two percentage points to 6.7 per cent from the previous year, will register growth of less than 6 per cent this year. Although this growth rate is mediocre by Southeast Asian standards, it is still high by world standards.

Sundberg noted that between 1970 and 1995, South Korea and Taiwan both experienced declines in GDP growth of over two percentage points in seven different years.

Sundberg and other Salomon Brothers analysts admitted that are still considerable uncertainties over the Thai economy, with exports expected to experience low growth in the near future. The debt cycle in the banking and finance sectors will not peak until the middle or the end of next year, yet the amount of the increase will not be as significant as feared, they said.

Other near term issues involve the pressure on the baht, which, however, is basically sound and not highly overvalued. Interest rates will be kept high because the banking regulators aim to defend the baht. There is no quick fix for instituting macroeconomic instability.

Salomon Brothers believes that the current account deficit is going to improve, falling to about 5.5 per cent of the GDP in 1996, which will relieve some exchange rate pressure and ease interest rates. It expects interest rates to fall a further 75 basis points before the end of the year.

In the medium term, Salomon Brothers expects exports will pick up and post double digit growth.





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