Thailand Expects Minimal Economic Impact Despite Rising Oil Prices

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RISING OIL PRICES

Minimal economic impact expected
By THE NATION
2011-03-1

Economic growth should drop no more than 3% if spike does not continue longer than 3 months

The Bank of Thailand remains confident that economic growth this year would not dip below 3 per cent, despite the surge in oil prices.

"If the spike continues for no more than a few months, the economic impact will be minimal. An impact could be seen if the spike goes longer than three months. But gross domestic product growth should not fall below the lowest range of our forecast," Mathee Supapongse, senior director for the domestic economy, said yesterday.

Oil price movements are the only point of concern following the violence in the Middle East, as bilateral trade has so far remained intact. The Middle East accounts for 12 per cent of imports, mostly crude oil.

Exports - mostly automobiles, textiles and electronic products - to the region account for only 5 per cent of the total, and most are destined for Saudi Arabia and the United Arab Emirates, which remain immune from the chaos.

The Bank of Thailand forecasts GDP growth at 3-5 per cent this year, assuming an average oil price below US$100 per barrel. Bangchak Petroleum expects the crude oil price to range $95-$100 per barrel.

Many securities houses are raising oil price forecasts for this year due to the political developments in Libya and other countries in the Middle East and North Africa.

Brent crude futures traded around $112 a barrel yesterday following a reduction in Libyan crude exports, which Bank of America Merrill Lynch estimates may be the eighth-largest oil supply shock since 1950. If prices remain above $110, energy's share of world GDP would be at record levels.

The Thai government has tried its best to maintain the cost of living, which could on higher oil prices. The Oil Fund is spending Bt4 per litre of diesel to keep its retail price below Bt30. The government believes that if the diesel price exceeds Bt30, the cost of goods would be raised and push up inflation. At the current subsidy rate, the Oil Fund is spending Bt247 million per day or Bt7.4 billion per month. It has already used up more than Bt8 billion to keep the diesel pump price below Bt30, leaving a balance of Bt21.8 billion.

Oil prices have climbed over 16 per cent from last year.

According to TMB Bank's research house, TMB Analytics, inflation would rise 0.5 percentage point for every 10-per-cent increase in oil prices.

TMB Analytics said in a note that it takes no more than one month for oil price hikes to push up headline inflation, which includes items with price volatility like fuel and food. And it takes six months to push up core inflation, which excludes the items with volatile prices, by 0.2 percentage point.

If this happens for a short while, gross domestic product (GDP) would remain intact.

Production costs would rise 2.2 per cent for every 20-per-cent increase in oil prices. The hardest hit industries would be transport, power generation and construction, as their costs would rise 8.9 per cent, 6.2 per cent and 6.2 per cent.

The impact on agriculture is 2.7 per cent. Though the impact on the food industry is only 2.1 per cent, it contributes 5 per cent of GDP.

According to Bank of Thailand data for January, inflationary pressure was huge due to higher demand and production costs. The labour market was tight, with the unemployment rate at a historical low of 0.7 per cent. Loan extensions expanded 14.4 per cent from the same period last year, while deposits grew 11.3 per cent. Thailand witnessed net capital inflows of $985 million, mostly through bond purchases and short-term loans by Thai banks.

Private investment expanded 13 per cent, with an improvement in all categories, while private consumption revved up 4.7 per cent due to higher purchasing power as well as continued government spending.

Exports surged 21.4 per cent while the manufacturing production index improved 3.4 per cent, thanks mostly to the textile, petroleum, automobile and electric appliance industries.