Posted on 24 October 2007

 

Source: Bangkok Post, October 24, 2007

High oil prices and a volatile baht will add to economic risks in 2008, according to Bandid Nijthaworn, a deputy governor for the Bank of Thailand.

 

The trend of a weakening US dollar could put upward pressure on regional currencies and cause volatility.

 

In addition, he said, the world oil price has risen rapidly since earlier this month and could push up product prices, hurting economic growth.

 

However, foreign capital inflows have so far been within the central bank's expectations, Dr Bandid noted.

 

The central bank, meanwhile, said in the October issue of its quarterly Inflation Report that foreign capital flows had returned to emerging markets in September as the dollar depreciated due to the US sub-prime mortgage downturn.

 

The US Federal Reserve's interest rate cut by half a percentage point last month reinforced the dollar's weakening trend.

 

''The volatility of the dollar against the euro and Japanese yen is expected to intensify as the euro tends to strengthen in line with [Europe's] strong economic growth. And the yen is likely to continue to be volatile because it has been heavily used by investors in carry trade in the past,'' the report said.

 

Investors averted possible losses from sub-prime problems in emerging markets by shifting funds to dollar-denominated assets in July.

 

The nominal effective exchange rate, which compares the baht to currencies in other trade competitors and partners on a trade-weighted basis, strengthened by 0.7% in the third from the second quarter.

 

''The baht weakened against the euro and yen [in the third quarter], although it appreciated against the dollar and most regional currencies,'' the report said. The real effective exchange rate, which removes inflation, strengthened 0.2% in the third from the second quarter.

 

The central bank has increased its average 2007 oil price assumptions (West Texas Intermediate) to $78 from $76 per barrel in its base case as crude prices rose on recent tension between Iraq and Turkey. The bank's base case calls for the oil price to increase to $84 per barrel in 2008.

 

The central bank predicted that the oil price, in the worst case, would average $80 per barrel in 2007 and $94 per barrel in 2008.

 

Based on this assumption, the central bank has revised its economic growth forecast for this year to a range of 4.3% to 4.8% from 4-5% earlier, and has maintained the forecast for 2008 at between 4.5% and 6%.

 

The central bank forecast headline inflation in a range from 1.8% to 2.3% in 2007 and 1.5% to 2.8% in 2008. It estimated core inflation, which excludes food and energy, at 0.8% to 1.3% in 2007 and 1-2% next year.

 

 

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