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GLOBAL GLOOM: Attacks threaten growth

September 13, 2001

The Thai economy stands at risk of slipping into a decline this year, following terrorist attacks in the United States that crumbled the World Trade Centre's twin towers, badly damaged the Pentagon and now threaten to send the global economy spinning into recession.

Prime Minister Thaksin Shinawatra yesterday emerged from a hastily arranged meeting with security and economic ministers to assure the nation that the effects of the US turmoil would be limited, because his government was gearing the country towards self-reliance.

"We would have been hit harder if we had relied more on exports," he said.

Finance Minister Somkid Jatusripitak declined to speculate about the possibility of a weaker domestic economy resulting from global fiscal gloom.

The Bank of Thailand's (BOT) latest forecast, made before the terrorist attacks, put economic growth this year at 1.5 to 2 per cent.

BOT governor MR Pridiyathorn Devakula, at the time of the latest forecast, said he thought a growth rate of 1.8 per cent was achievable, by his "conservative" estimate.

The forecast was based on projected export growth this year of minus 5 per cent in US dollar terms, but a 10-per-cent increase in baht terms over last year.

The rationale for this was the baht's exchange rate to the US dollar: last year the baht averaged 38 to 40 against the dollar, compared with 44 this year. A weaker exchange rate means exporters draw more baht revenue into the economy.

Even if exports were to contract by 10 to 15 per cent in this year's second half (a worst-case scenario), central bank officials still believe positive growth is achievable because of the positive affects of a weaker baht and accelerated government spending. In this year's first quarter, state enterprises held back investment plans, awaiting a change of government. This resulted in a sharp decrease in spending - a contraction of 42 per cent compared with the same period last year. Investment spending was expected to accelerate significantly in the third and fourth quarters of this year. But now that the US economy might be heading toward recession, because of the fallout from Tuesday's attacks, all the key Thai economic indicators must be revised. A recession in the US means demand for Thai goods, or goods exported from Asia, will fall further, dragging on economic growth in Thailand, Asia and the rest of the world. Commerce Ministry officials had earlier estimated that Thai exports to the US would either be flat or contract by as much as 7 per cent this year.

Those figures must now be revised in the face of a significantly more bleak outlook for the world's largest economy.

Thanong Khanthong and

Jiwamol Kanoksilp



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