Leaders of industrial and banking conglomerates have sounded a cautionary note on the business outlook for 2007, as several big challenges are looming on the horizon, especially the rapidly strengthening baht.

So what would happen to the Thai export machinery if the dollar depreciated 50 to 70 per cent to Bt18-19 per dollar?

Kan Trakulhoon, president of Siam Cement Group, one of the country's largest industrial conglomerates, told a panel discussion held by the Federation of Thai Industries that there is a possibility the dollar will plummet that

far down in the next four or five years.

The reason is that the US twin deficits keep worsening and there is no end in sight so other currencies will go up as the dollar continues to fall.

Early last year, SCG's projection was Bt37.5 per dollar. Then it was revised to Bt35.5 per dollar last October. Now, the exchange rate is already in the Bt35 range.

Another panellist Boonsithi Chokwatana, chairman of Saha Pathanapipul, asked why the Thai authorities have found it difficult to keep the baht stable whereas the yen or the yuan are still relatively stable against the US dollar.

Dr Vichit Suraphongchai, executive chairman of Siam Commercial Bank, explained that the Japanese government had adopted a zero interest rate policy so the yen isn't an attractive target for global funds.

As the dollar falls, fund managers need to shift their investments around the world and they tend to go where they can make a good return.

As for the yuan, the Chinese authorities still keep tight control on its movement so it isn't attractive either.

In the case of Thailand, the exchange regime is now internationalised, making it difficult to manage the exchange rate.

Kan of SCG urged Thai businesses and industries, especially those relying on export markets, to move quickly up the value chain, further increase their operational efficiency and go overseas if they can do so.

He suggested that other Thai firms join SCG in overseas road shows to explore new opportunities and boost their image in foreign regional markets such as China, Vietnam, Malaysia and Indonesia.

Spreading out investments into regional markets is another way to maintain competitiveness, he said, adding that SCG would invest around Bt30 billion overseas this year.

Kan said Thai manufacturers also need to invest more in research and development to create their own technologies as fierce competition has made it harder to buy advanced technologies from other countries.

For SCG whose annual sales are more than Bt200 billion, the R&D budget for this year is Bt700 million and the amount will be doubled to an annual Bt1.4 billion in the next few years.

"In the last two years, we spent only Bt350 million for R&D. In 2005, the spending was only Bt160 million," said Kan.

Dr Vichit of SCB said it's now more difficult to make predictions on the economic outlook, but urged Thai firms to continually boost their longer-term competitiveness.

Besides currency-risk management, Vichit said marketing and branding are no less important if companies are going to stay competitive.

Boonsithi said: "I'm not good at figures but my gut feeling is that this year is going to be a very tough year for us. I can't see how the country's economy can become better in the near term."

He added that the rising and unstable baht has also made it difficult for exporters to survive as their margins are very thin.

Vichit, meanwhile, said the government should also consider putting the country's ballooning foreign exchange reserve to more productive use.

"While the demand for baht is considerable, why don't we turn our dollar reserves into other assets? This method will also ease pressure on the value of baht," he said. For example, Dubai has turned its huge petro-dollar reserve into funds for investing in new buildings, bridges and hotels.

The Chinese government, whose international reserves have also ballooned to a record high, has also invested heavily in infrastructure projects.

As for Thailand, Kan said the government should also put more money using international reserves into infrastructure schemes, especially for logistics in order to boost Thailand's international competitiveness.

He said Vietnam is now a good example because it has invested heavily in infrastructure.

"Last year's demand for cement in Vietnam was 32 million tonnes, outgrowing that of Thailand for the first time," said Kan. "Our demand was around 29 million tonnes last year. For 2007, the Vietnamese cement consumption will likely top 36 million tonnes. That was our peak back in 1996. Looking forward, Vietnam's cement demand is projected to reach 49 million tones in 2010."

Nophakhun     Limsamarnphun,

Chalida     Ekvitthayavechnukul

The Nation