The Thai economy will face a threat caused by three factors - high spending by oil producing countries, the correction of the US current-account deficit, and rising interest rates - that will lead to volatility in the global economy and financial markets, according to the Bank of Thailand.

Speaking at a luncheon hosted yesterday by the Rotary Club of Thon Buri, deputy governor Bandid Nijathaworn said the world economy for the next 18 months would be quite unpredictable due to higher oil prices, inflation and interest rates. But the central bank will continue to stabilise the economy to prepare for upcoming fluctuations and to facilitate the private sector. He insisted the economy remained in a satisfactory condition, including inflation, the current account, international reserves and foreign debt.

Bandid said the 23 oil-exporting countries, whose overall current-account surplus is expected to reach US$520 billion (Bt19.7 trillion) this year, would play a key role in the global economy and financial markets. Their investment in the latter will affect capital movements, asset prices and interest-rate trends across the globe. And they will influence the world economy if they reinvest in new energy resources, he said.

Their expected overall current-account surplus has increased from $87 billion over the past four years due to sky-rocketing oil prices. Oil exporters are now more likely to invest in financial products rather than in deposits or real investment, Bandid said.

"We have to monitor how the rich oil exporters will spend their money because it has a significant impact on the world economy and financial markets. The market says they are the new power of the world economy," he said.

The Organisation of Petroleum Exporting Countries deposited money in commercial bank accounts during the second oil shock. These banks later gave loans to developing countries, partly causing a debt crisis in Latin American countries.

Moreover, Bandid said the upward interest-rate movement that has pushed up investment costs would increase vulnerability in the global financial marketplace as investors have been more cautious about risks, particularly in emerging markets.

Risk aversion in May hugely affected Thai stock and foreign-exchange markets as the United States, Japan and euro-zone countries remained in a cycle of rising interest rates, the deputy governor said.

Bandid said the expected additional depreciation of the US dollar and higher interest rates to correct the US current-account deficit would have a widespread impact on the global economy and financial markets.

The market believes the US current-account deficit of 6.4 per cent of gross domestic product is not sustainable, and that interest rates and a weak dollar are currently not enough to curb the problem.

The market also realises that every country should help reduce the global imbalance, especially Asian countries that have posted a trade surplus with the US by allowing their currencies to appreciate.

Bandid said the Bank of Thailand had agreed to help solve the global imbalance in order to reduce risk in the world's financial markets. Otherwise, volatility would further dampen the global economy.

Meanwhile, Bandid said there was now less need to raise the policy interest rate after seeing an improvement in the inflation rate in July. Inflation is decreasing not only from a high base effect but also from decreasing inflationary pressure, he said.

Lower inflationary pressure will encourage domestic consumption and economic growth, he said.

Anoma Srisukkasem

The Nation