2. Economic Projection for 2007 The Thai economy of 2006 showed favorable growth with stability. Concurrently, the fundamental of the economy was sound and stable as observed in several key economic indicators such as low unemployment rate, declining public debt to GDP and lessened inflationary pressure as a result of (1) upward interest rate adjustment in the earlier period which softened credit expansion and (2) falling oil price since August. Moreover, the interest rate remained stable since the middle of 2006 before policy rate cuts twice at the beginning of 2007 and some financial institutions started to lower their lending rates thereafter. Consumer confidence has also improved since September and business sentiment has started to pickup. All of these positive factors will continue to support the economic growth in 2007. Nevertheless, there are still some downside risks associated with the economic outlook in 2007, both external and internal factors. External factors include a global slowdown led by a slowdown in the US economy. A cooling down of US real estate sector could be severe which could put depreciation pressures on the US dollar, while the US twin deficits problem still persists. Moreover, it is likely that crude oil price will be higher than in the first two months of 2007 and still volatile due to the production constraints of petroleum industry. Meanwhile, the US-Iran disputes over Iran's nuclear program have not yet eased. On internal fronts, attention should be on continuing slowdowns of domestic consumption and investment. It is important to create understanding and restore confidence from people, both domestic and foreign by such measures as making pubic relations based on precise facts and enhancing opportunities for trade and investment. 2.1 Positive Factors in 2007 2.1.1 Lower inflation and financial pressures will be favorable factors for strengthening people's purchasing power and confidence. (1) Average oil price is likely to be more stable in 2007: In 2006, the Dubai oil pricestable in 2007: In 2006, the Dubai oil price stable in 2007: In 2006, the Dubai oil price However, high average oil price in the first eight months of 2006 resulted in a high average price of 61.52 USD per barrel, up by 24.2 percent from 2005. The decline in oil price during the last quarter of 2006 was the incentive for OPEC to reduce the oil capacity in November 2006 and February 2007. However, the oil price continued to decline during the first two month of 2007. Main reasons are as follows: (i) Global oil demand slowed down (ii) Oil inventory of OECD increased above the normal level (iii) Temperatures in the winter was warmer than usual and (iv) Spare production capacity increased to 2 million barrel per day in 2006 from 1.5 million barrel per day in 2005. In 2007, crude oil price is expected to be approximately at the same level of 2006. Crude oil price will stabilize during the beginning of the year and will increase at the end of the year since the demand tends to increase faster than the production. Nonetheless, the increase in spare capacity to almost 2 million barrel per day would help reduce the pressure on oil price. In February 2007, International Energy Agency (IEA) forecasted that world oil supply in 2007 will be 86.0 million barrels per day, increasing from 84.7 million barrels per day in 2006 (with a growth rate of 1.5 percent). Meanwhile, the world oil demand will increase from 85.1 million barrels per day in 2006 to 86.7 million barrels per day with a growth rate of 1.6 barrel per day or 1.9 percent compared with an increase of 0.6 barrel per day in 2006. More than half of such demand increase in the world market will be from an increased demand in the US and China. The oil demand of oil exporters will also increase, stimulated by rising income from oil exporters in the past 2-3 years. Moreover, it is expected that the stock of oil products in OECD will decrease to the normal level in the mid of 2007. In tandem with higher demand compared with 2006, it is likely that oil price will rise at the end of 2007. However, average oil price of 2007 will be the same as 2006 in which that it will remain high in the first half of the year. - On 6 February 2007, Energy Information Administration (EIA) forecasted West Texas Intermediate (WTI) in 2007 to be on average of 59.5 US dollars per barrel, lower than 66 US dollars per barrel in 2007. WTI price is generally 3-5 US dollars per barrel higher than the Dubai price.(4) - On 2 March 2007, referring to Global Weekly Economic Monitor by Lehman Brothers, the Brent future price of 2007 is forecasted at 69 US dollars per barrel, up from 66 US dollars per barrel in 2006. The Brent price is approximately 3-8 US dollars per barrel higher than Dubai price.(5) (2) Inflation rate is likely to be contained. As a result, purchasing power and confidence of consumer will improve. Inflation rate decreased from 5.9 percent in the first half of 2006 to 3.5 percent in the latter half of 2006. It has continuously declined to 3.0 and 2.3 percent in January and February 2007 respectively. Core inflation decreased to 1.6 percent and 1.4 percent in the first two months of 2007 comparing with 2.3 percent of the year 2006. Inflationary pressures were eased due to a decrease in oil price, an appreciation of Thai Baht and recent interest rate upward adjustment. Moreover, the lower level of consumer confidence also led to a slowdown of domestic demand. It is expected that pressures on the inflation rate will continuously decline in 2007 due to decreases in the oil price and the consumer products price (i.e., steel and agricultural products). Baht appreciation also helps reduce the cost of imports. In addition, private consumption has continued its deceasing trend. (3) Interest rate has declined and will be lower for the rest of 2007. This is due to lower inflationary pressures and slowdown in domestic demand. Meanwhile, financial liquidity was high and the Baht has appreciated. The monetary Policy Committee cut policy rate by 25 basis points in the meeting on 17 January 2007. Recently, the committee decided to further lower the rate by another 25 basis points on 28 February 2007. As a result, the policy rate (R/P 1 day) decreased to 4.50 percent, lower than the Fed Fund rate by 75 basis points. Following the policy rate, financial institutions have responded by gradually lowered the saving rates since January 2007. Siam Commercial Bank was the first bank who cut the lending rate (MLR) from 7.75 percent to 7.5 percent per annum on 1 March 2007. The average of 12 month-time deposit of five large commercial banks in Thailand was 3.875 percent, decreasing by 0.63 percent from the end of 2006. Specific financial institutions reduced their saving rates by 0.25 - 0.5 percent and the Government Housing Bank also lowered the interest rates of housing loans for retail customers from 7.75 to 7.5 percent. As for the rest of 2007, the policy rate is expected to be cut by 50 -100 basis points due to a slow recovery of private expenditure and investment. Moreover, the Baht will appreciate further as a result of high pressures on the US dollar and downward inflationary pressures. Moreover, liquidity in the financial system remains high. Thus, interest rate will be on the downtrend. Nonetheless, real interest rate will not decline significantly due to a declining inflation rate. Hence, the impact of loosening monetary policy could be limited. ******************************************************************************************************** (4) Short-Term Energy Outlook, EIA, 6 February 2007 (5) Global Weekly Economic Monitor, Lehman Brothers, 2 March 2007 ********************************************************************************************************(Continue to).../2.1.2 Income..