Thailand's Economy to Perform Well in 2011 Despite Price Pressures, the World Bank Says

April 5, 2011

BANGKOK, April 5, 2011 – Despite the recent surge in oil prices, Thailand’s economy will continue to expand in 2011 and the pace of economic activity will move closer to that observed before the global financial crisis, the World Bank said in a new report. However, the risks to the outlook have also increased.

In the report, Thailand Economic Monitor April 2011, the World Bank said Thailand’s economic growth has broadened its base, with domestic consumption contributing more to growth than in the recent past and exports holding up well against the uncertain global outlook. Concerns about high prices of food and fuel are likely to persist in 2011, but the Thai economy is expected to weather these rough currents and post a solid performance during the year.

Thailand closed 2010 on a strong note, posting positive growth in the last quarter after two consecutive quarters of contraction. This momentum should continue into 2011. The World Bank now predicts that Thailand’s gross domestic product would expand 3.7 percent this year. This puts Thailand back on its growth trend after the exceptionally high growth of 2010 and contraction in 2009. It represents an upward revision from the previous estimate of 3.2 percent, based on the improved outlook for advanced economies and the continuation of favorable drivers of domestic demand, especially firm agricultural prices which help boost the income of rural consumers.

Despite this generally favorable assessment, the Bank also believes that risks to the outlook are substantial, citing a number of external factors: the possibility of further oil price increases due to turmoil in the Middle East and North Africa, the follow-on impact on Europe’s debt crisis and the United States’ fragile economic recovery, and the disruption to the auto and electronics industries’ supply chains caused by Japan’s recent earthquake.

The impact of higher oil prices on the Thai economy has been cushioned thus far by the government’s diesel subsidy program and increasing exports of products that also experienced price gains, said Frederico Gil Sander, the World Bank’s Country Economist for Thailand and lead author of Thailand Economic Monitor April 2011. Meanwhile, higher crop prices have helped to increase farm income, boosting overall wages and household consumption accordingly.

However, the World Bank warned that higher food prices could hurt Thailand’s most vulnerable population, those below or just above the poverty line. Also, further hikes in oil prices would eventually hurt everyone.

“Back in 2008, the spike in food prices led to an increase in poverty rates in Thailand for the first time since 1997. This suggests that higher food prices hurt the poorest in society even though many farmers may benefit,” Mr. Gil Sander said. “If oil prices continue to increase to new highs, even those farmers who can sell their crops at higher prices may see the income gains reversed since they will face both a higher cost of living but also higher costs of key inputs like fertilizer.”

The Bank recommended a number of short- and long-term measures to help Thailand manage the risks of spiraling food and oil prices in the future. In the short term, replacing oil price subsidies with targeted assistance programs could help re-direct government support and scarce resources toward the neediest households. The pace of interest rate increases, meanwhile, should carefully balance the need to curb inflation with the impact of higher rates on economic activity during what is still an ongoing recovery.

In the long term, improving energy efficiency and reducing dependence on imported energy would help Thailand manage the risk of another oil price shock, the report said.  Further, as the world population continues to grow and the impact of climate change threatens global food security, investing to improve the reliability of food production could help Thailand respond to another food crisis more effectively.

“Making agriculture more climate-resilient is key to improving agricultural productivity,” Mr. Gil Sander said. “This is the second time in three years that the world is experiencing a sharp increase in food prices, which suggests that the phenomenon is not temporary. Global demand for agricultural commodities will continue to increase. You want to be able to produce more food and do it more reliably to reduce your vulnerability to higher food prices.”

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