DON'T COUNT YOUR CHICKENS JUST YET

       Economic indicators of recovery look positive, but we must not be carried away by false hope
       Like the National Economic and Social Development Board, the Bank of Thailand has been particularly upbeat about the prospects of economic recovery in the fourth quarter and next year. Although weakness will continue into the third quarter, by the time we reach the fourth quarter, and barring any more political crises, the Thai economy will stage a rebound.
       Overall, the Thai economy is still registering negative growth of 3.5 per cent this year. But next year the growth will turn positive at 4.5-5 per cent. Gross domestic product will return to the pre-crisis level of the first quarter of 2008, by the fourth quarter of 2010.
       We believe that the Bank of Thailand and the NSEDB are being too optimistic. It is too early to say whether we are out of the woods yet. The month of October will be decisive. By that time, companies, banks and the government will have issued balance sheets, so that we really know the health of the global economy.
       The financial markets will react accordingly, once the October results come out.
       Since the Thai economy still relies heavily on the health of global economic conditions, its growth will continue to be dictated by external factors.
       According to Macquarie Equities Research (August 20), the research house remains cautious on the outlook for Asian equities as a whole, because of concern about the state of global consumer demand.
       "Developed world consumer spending (ie: external demand) remains very weak, credit availability for US and European households continues to tighten, exporter margins are coming under pressure again, and valuations for the externally exposed sectors are not compelling," it warns.
       "Recent data have reinforced that concern. So while some investors have been turning their attention to exporters recently, we caution against this and recommend maintaining a firm focus on companies with domestic growth plays.
       Still, the Bank of Thailand has decided to play it safe by keeping its interest rate at 1.25 per cent for the third consecutive month, saying the recovery of the Thai economy is still fragile. The bank's monetary policy committee said global economic and financial conditions have improved in the second quarter, particularly in Asia and Thailand itself.
       "Nevertheless the committee views that there is still a high degree of uncertainty about the sustainability of the global economic recovery," Paiboon Kittisrikangwan, assistant governor of the Bank of Thailand, said in statement.
       Last year the world started to feel the pinch of the crisis. The financial turmoil heightened in the final quarter of 2008. In the first quarter of this year, the situation remained bleak. This forced governments all over the world to announce huge stimulus packages. The Thai government has also introduced a series of stimulus measures designed to counter the economic downturn. So it comes as no surprise that the figures for the second quarter began to improve. On Monday, the NESDB reported that the Thai economy grew by 2.2 per cent between the first and second quarter, although it still shrank 4.9 per cent year-on-year. This prompted many to jump to the conclusion that the worst is over and that Thailand is now on a recovery path.
       In the US, the sentiment is similar. Ben Bernanke has received a vote of confidence to continue his job as chairman of the Federal Reserve for a second term. Apparently the US does not want to change horses in midstream. Bernanke has been responsible for injecting massive liquidity to save the US financial system from collapsing. He has stopped the bleeding of the US financial system, which has yet to go through any drastic restructuring to see off years of financial bubbles. Unemployment in the US is likely to climb to 10 per cent and the US deficit will reach US$1.5 trillion, somewhat less than the $1.8 trillion projected earlier.
       The US government now projects economic growth this year to record minus 2.8 per cent, compared to a positive growth of 2 per cent for 2010 and 3.8 per cent for 2011. Again, this US projection is rather rosy, considering the fact that drastic corporate and financial restructuring has not yet taken place.
       In the meantime, Thailand's export-driven economy has been hit hard over the past year by domestic political turmoil that has exacerbated the impact of the global downturn. Protesters loyal to fugitive former premier Thaksin Shinawatra are set to rally in Bangkok at the weekend, just four months after derailing a key Asean summit in April and rioting in the capital. If the political situation deteriorates, chance of improvement in the fourth quarter will evaporate.