Risks abound for 2014 but let's not lose focus

ผู้เขียน: Sutapa Amornvivat, Ph.D.

2014 is right around the corner, yet most people feel that they are not quite ready for the New Year as plans have been put on hold or completely revised amidst all the uncertainties surrounding the economy, not to mention the intense political impasse. Indeed risks abound for our economy next year but we should not be too focused on short-term risks. To achieve sustainable growth, it is important for both government and businesses to address the country's structural challenges and to stay proactive investment-wise.

The restlessness in the past few weeks encapsulates what has been a year full of surprises.

We entered 2013 with high hopes as Thai economy was on the back of robust consumer spending. With massive QE liquidity, the global investors gave us a vote of confidence by means of capital inflows.  By mid-year, however, the investment theses were broken. The US Federal Reserve caught everyone off-guard by signaling that the era of QE might end sooner than later, resulting in an abrupt capital outflow from emerging markets. Private consumption and investment spending became lackluster, and credit standards were tightened in response to signs of rising delinquency.

Moreover the political impasse has added an extra bit of uncertainty to our economic outlook. The timing is precarious as the tolerance for Thailand's risks has become much lower in the eyes of international investors, given the improving economic outlook among the G3 economies. This makes monitoring the risks in 2014 critically important.

So what is in store for 2014? 

It looks like we will begin the year with a cloud on the horizon. The political impasse has generated negative sentiments and potentially delays businesses from committing to any major investments. Indeed many households have already been getting more cautious-cutting back on their holiday shopping. The deadlock has also put a huge uncertainty over the future of the much needed infrastructure investment. Government investment associated with the infrastructure program had initially been viewed as an important driver for Thailand's growth in 2014. Its delay not only will depress growth next year; it will also ruin investors' confidence in Thailand as an investment destination.

The QE tapering will also happen at some point of the year. There are good reasons to believe that any market reaction to the tapering is likely to be less severe than what we saw in 2013. Long-term interest rates have started normalizing somewhat from extremely low levels at the beginning of the year. Also part of investors' fear about tapering reflected uncertainty about the identity of the next Fed chair. With the possibility that the next leader could come from outside the institution, the forward guidance on interest rates did not seem particularly credible. But it is important to keep in mind that the era of cheap dollar is ending. Government and large corporates who get their long-term funding from the bond market will have to cope with the increasing cost of fund.

With the shrinking of the excess global liquidity, the rounds of asset-price appreciation could come to an end. The drop in the price of assets results in negative wealth effects for many middle- and upper-income consumers. Among low-income households, the level of indebtedness is also particularly high. All this suggests there is less room for domestic demand to provide additional support for the economy.

Yet, every cloud has a silver lining. QE tapering will happen precisely because and when the US economy is judged to be strong enough. As it is the world's largest economy, positive economic outlook for the US bodes well for global growth.  The IMF puts growth at 3.6% for 2014, which is 0.7 percentage point higher than what it expects for 2013. This time around the global growth engine is the turnaround of advanced economies, and not just the US. The Euro Area is also expected to return to growth after 2 years of recession.

For Thailand, it means that exports to G-3 economies should expand after declining in the past two years.  SCB Economic Intelligence Center expects Thailand's overall exports to gravitate back to the normal path, although we will still not see the double-digit growth.

Even with so-so growth for 2014, business should still be looking out for ways to tackle structural challenges. These are not cyclical issues and will not go away once the economy improves; on the contrary, the problems will intensify.

On top of the structural challenge list is labor scarcity. There are reported shortages of labor across the spectrum of human resources, from the unskilled workers needed in construction sites to managers and professionals with high levels of education. These shortages are a symptom of complex underlying problems that include: 1) low productivity gains during the past decade; and 2) labor skill mismatch which reflects education that is too low in quality or in a field of study that is not in high demand. An education reform that addresses these problems is crucially needed now.

In addition, our flagship electronics industry is heavily concentrated on products such as hard disk and laptop integrated circuits that could become obsolete in the near future. Modern technology investment into the manufacturing sector is needed if Thailand is to ride the global wave of economic recovery. It is thus important for Thailand to keep itself attractive in the global investment arena.

So despite the weak headline GDP numbers and short-term uncertainties in the upcoming year, productivity-enhancing investments should still be on the agenda. A wait and see approach for investment is not necessarily the best bet for 2014. To navigate our economy during the time of turbulence, it is important to stay focused on the foundations for the sustainability of our economy. And this requires us to invest not only in the physical infrastructure but also in the young minds.