Political factors are a key concern that could restrict consumer and business confidence now that the honeymoon period with the military government has passed. The interim government is at a dangerous stage in office, and could come under attack any time, directly or indirectly, by beleaguered rivals, unhappy citizens, or even military-appointed groups with political interests.

Delays in the constitution-drafting process and political reform could cause restlessness in society. Disappointment could be sparked by any government failure to keep its promise, or by further attempts by the military to entrench itself politically.

A political risk also lies in the government's ability or otherwise to confront obstacles through the use of its own resources and credibility, otherwise it could be knocked out before the last round, leading to further political uncertainty and an erosion of confidence.

The recent attack by the National Legislative Assembly (NLA) on the Lottery Act proposed by Deputy Prime Minister and Finance Minister MR Pridiyathorn Devakula proved that the interim government will not enjoy close co-operation as easily as the Thaksin government did.

Close aides and grassroots supporters of the deposed Thaksin could create additional undercurrents of political pressure. Rivals of the interim ministers, along with those who stand to lose or have already lost as a result of scrutiny of their assets, are waiting at the door to attack the government.

There is a risk that political uncertainty could turn to political turmoil.

"We have to closely monitor the issues, although the political risk will be lower than this year. It would be better if the government does as it has promised as disappointment could erode confidence," said Usara Wilaipich, a senior economist for Standard Chartered Bank (Thai).

Chulalongkorn University lecturer Somphob Manaragsan said the government should take into account the experience of the Anand Panyarachun government because the current situation has some haunting similarities. He said Anand's government encouraged a market economy, but overlooked political reform, resulting in bloodshed in May 1993.

As Thai economic momentum is expected to continue smoothly next year, driven by domestic demand and exports, it is likely to be beleaguered by risk factors, particularly the global economy.

The world economy next year could adversely affect the local economy with expansion slower than expected, as Thailand depends largely on exports, accounting for 60 per cent of gross domestic product (GDP).

The outlook for the US economy is gloomy with economic growth in the third quarter at only 1.6 per cent, following 5.6 per cent growth in the first quarter and 2.9 per cent in the second quarter. It is widely forecast that US GDP will expand slowly next year.

Despite the expectation of a soft landing in the world's largest economy, the US economy needs to be closely monitored, particularly in the housing sector. Moreover, the size of the current account deficit and the budget deficit will result in a continuity of the global imbalance, which leads to fluctuations in capital movement and foreign exchange rates.

A recovery of the Japanese economy and the Euro zone would not help boost the world economy much and correct the global imbalance. Also, growth of Asian economies cannot help resist the strong tides of the world economy.

The World Bank estimates that next year world economic growth will be 3.3 per cent, compared with 3.9 per cent this year. The slowdown will cause world trade volumes next year to expand 7.3 per cent, down from 9.7 per cent.

Thailand would inevitably be hit if the US economy experiences a hard landing or even a gradual economic slowdown. A sluggish world economy and depreciating dollar would significantly affect Thailand's exports as domestic consumption alone would be insufficient to keep the economy growing smoothly.

The weak economy itself hurts US consumption, negatively affecting Thai exports. The strong baht against the dollar will have more impact on exports. Tourism and the stock market would also be adversely affected by a gloomy world economy.

"If global economic problems arise, it will affect us in three ways. As a result, we have to prepare and manage risks efficiently," said Somphob.

After being affected by skyrocketing oil prices over the past few years, Thailand has to take a close look at energy supplies. Geopolitical risks, which remain high, will have a crucial influence on energy prices, as no one can foresee what will happen in international politics, particularly in the Middle East or North Korea.

"If there is no problem with global security, oil prices will not be a threat," said Somphob.

More importantly, people have to live with higher oil prices as the government will not subsidise retail oil prices any more, and its policy to encourage alternative energies has not made progress.

"Although the oil price has recently declined, it could become volatile again and push inflation up, though it is likely to be lower than this year on average," said Usara. The crude oil price at the Dubai market surged to US$65.89 (Bt2,354) per barrel on average, higher than $57.95 in the first quarter and $64.79 a barrel in the second quarter.

She said the fluctuation of oil prices, along with rising wages and increasing farm prices, could encourage inflation. Thus, interest rates would decline slower than expected. The key interest rate was likely to decline in the middle of the year.

Natural disasters and disease remain factors likely to influence the economy next year as the country has already seen over the past few years. Drought in 2004 and floods in 2005 happened unexpectedly, having a severe impact on agricultural and other related sectors such as commerce. The worsening global environment has become an unpredictable factor that needs urgent attention.

Drought can lead to lowered production and farm income, which will adversely affect domestic consumption and economic growth. Flooding not only has a negative impact on the farm sector, but also on commercial and other sectors. The agricultural sector is generally affected more by drought than flood.

The drought lessened farm production significantly with a 6.1-per-cent contraction in 2005, but farm income kept rising by 16.6 per cent, thanks to 24.1 per cent higher prices. This year's flooding slashed production by 7.2 per cent in October, but it continued to grow by 6.5 per cent over the first 10 months, along with 25.5-per-cent growth in prices and 33.7 per cent for farm income.

The tsunami and avian flu have long affected tourism and exports. The number of tourists in the first quarter of 2005 significantly decreased, by 8.6 per cent on year, before picking up with 1.9-per-cent growth in the second quarter.

Government investment, if delayed, could be a threat to the economy. Although it will not be the key engine driving the economy next year, it represents 17 per cent of GDP, which is significant.

Anoma Srisukkasem

The Nation