The World Bank yesterday downgraded its forecast for 2007 Thai economic growth to 4.3 per cent from the 4.6 per cent anticipated last November, warning that confidence in the investment climate has hit a historic low.

"While medium-term growth prospects for Thailand are still strong, and even sounder than other countries with strong export competitiveness, the country's short-term prospects are quite depressed. Investors' confidence is at an all-time low. The country has exports as the only driver of growth," said Kazi Matin, the bank's lead economist for Thailand.

Thailand had a coup d'etat on September 19 last year that ousted the Thaksin Shinawatra administration, and a military-appointed government has been at the helm since October. Several unpopular measures have been introduced by the interim government, including revised foreign business laws.

Matin added that despite the highly expected interest-rate reduction next week, there were other factors dampening private investment confidence, including political uncertainty and capital reserve requirements, which have however been relaxed significantly.

Approvals of foreign direct investment applications declined to Bt282.4 billion in 2006, down from Bt342.9 billion in 2005. According to the World Bank, foreign direct investment is as high as 45 per cent of total private investment.

Kirida Bhaopichitr, the World Bank's country economist for Thailand, said the downgrading of the economic forecast for this year was due mainly to the impact of the capital reserve requirements as well as other negative factors, including the New Year's Eve bombs.

She said the Thai economy, both last year and this year, was driven by export growth, while domestic demand has slowed significantly. Export growth is likely to slow to 5.9 per cent this year, compared with 8.5 per cent last year, due mainly to the lower growth of Thailand's trading partners and partly due to the stronger baht.

The real gross-domestic-product growth of Thailand's major markets is expected at 4.4 per cent this year, down from 4.9 per cent last year.

According to Kirida, agriculture and labour-intensive sectors, which represent 20 per cent of exports, are the most vulnerable sector to the baht's appreciation. The World Bank suggested that instead of keeping the currency weak, the country should improve productivity in the agricultural sector as well as upgrading skills and moving workers to other higher value-added sectors.

Private consumption is estimated at 3.5 per cent, hardly changed from 3.1 per cent last year, while public and private investment this year will grow 4.2 per cent and 4 per cent, and not improve from last year's 4.5 per cent and 3.9 per cent, respectively. Imports will increase by 5.9 per cent this year from 1.6 per cent last year.

Matin added, however, that the government's signing of a free-trade agreement with Japan on Tuesday might encourage a return of foreign investment from Japan, but he urged the government to reconsider the retroactive clause in the Foreign Business Act amendment.

"Retrospective application in the proposed amendment increases the perception of uncertainty and unpredictability about existing policies, something that is uncharacteristic of Thailand," said a World Bank overview of the Thai economy.

Jiwamol Kanoksilp,

Piyarat Setthasiriphaiboon

The Nation