After winning his Constitution Court assets-concealment case, Prime Minister Thaksin Shinawatra now faces the tougher task of managing the economy, which has ground to a virtual halt.

Thailand is suffering from an export slowdown, with flat growth year-on-year in the second quarter of 2001, compared with 14 per cent in the fourth quarter of 2000 and 27.5 per cent in the first quarter of 2000.

Since exports account for about 50-60 per cent of gross domestic product (GDP) growth, the downturn is expected to badly hurt the economic growth rate this year.

"The bad news is that this slowdown is occurring against a backdrop of some of the weakest economic demand in the region," according to Goldman Sachs' Asia-Pacific Economic Quarterly, August edition.

Growth in private consumption in the first quarter of this year eased one percentage point to 3.1 per cent year-on-year, while the contraction in private investment deepened to minus-5 per cent on-year from minus 0.2 per cent in the fourth quarter of 2000.

The Goldman Sachs report said: "Weakening domestic demand amid an export slump pushed down the headline real GDP growth in the first quarter to 1.8 per cent year-on-year from 3.2 per cent in the previous quarter. Stripping out inventory accumulation leaves GDP growth at an even more anaemic 0.9 per cent year-on-year."

In his article "Thaksin's Thailand" in the August 9 edition of The Asian Wall Street Journal, David Roche, president of Independent Strategy, a London-based investment consultancy, also expressed his grim outlook for the Thai economy, which he said was teetering on the brink of recession.

"Domestic demand probably stuttered to a halt in the second quarter. If you strip out spending on inventories, the Thai economy has probably stopped growing," he said.

To complicate these already aggravated conditions, capital continues to leak abroad. In spite of the export slowdown and weak domestic demand, imports have not fallen because companies over-invoice imports to get dollars out and banks and corporations pay down their foreign-currency loans.

"We see this anomaly as possibly reflecting capital flight disguised in current account transactions [eg. over-invoicing of imports]," said the Goldman Sachs report.

With this persistent capital flight, the baht continues to go downhill. It has weakened by more than 15 per cent to Bt45 to the dollar over the past 18 months. The Bank of Thailand has beefed up its monitoring of trade account transactions. It has also tightened the commercial banks' reporting requirement on their offshore baht trading.

Concern is also rising over the Bank of Thailand's attempt to stabilise the baht as evidenced by the excessive loss in foreign-exchange reserves.

"Investors are keeping a close watch on the central bank's foreign-exchange reserves, as it is under pressure to pay down the debt to the International Monetary Fund in the coming months," said a foreign exchange trader at a local bank.

"Nobody is certain as to what level the banking authorities will tolerate the baht's weakness. If the central bank decides to defend the currency, it will lose the reserves. If not, the baht will fall," the trader added.

Over the next 18 months, Roche said, Thailand is scheduled to pay back more than US$12 billion (Bt540 billion) of external debt, more than one-third of its current foreign exchange reserves of about $32 billion.

The Thaksin government has no strategy to deal with the economic downturn, focusing its resources instead on propping up the rural economy through huge social spending.

"I don't know if they know what they are doing. They are focusing on the piecemeal, while leaving untouched the real sector, which accounts for a [large] chunk of the economy," a senior government official said.

Thanong Khanthong