2.1.2 Income from export and tourism will increase and help support economic growth despite a slower pace than in 2006. It is expected that the export and tourism sectors will not expand as much as they did in 2006 due to constraints from the world economy especially a slowdown in the US, Chinese, Japanese and European economies. Export volumes will not slowdown significantly following a soft- landing of the global economy and thus will continue to support economic growth. However, export value is expected to slow down more than export volume because price of goods will increase only slightly from a high base over last 2-3 years. Tourism is expected to continually expand. Tourism Authority of Thailand set the target of foreign tourist at around 8.0 percent growth rate, based on 13.78 million international tourists in 2006. The increase will support hotel and restaurant sectors in Thailand. The supporting factor works through public relations in order to make a better understanding and the safety of tourists, the agreement on facilitation and visa entry exemption for the tourists (no more than 30 days). 2.1.3 Government budget and investment budget of state enterprises will support economic growth if budget disbursement rate is not less than 80 percent of overall budget. In fiscal year 2007, the government approved larger amount of government and SOEs investment budget than the budget in the fiscal year 2006. The budget ceiling in fiscal year 2007 is 1,566,200 million Baht, increased by 15.2 percent from the fiscal year 2006. Investment budget is 374,721 million Baht. Meanwhile, SOEs investment budget approved by the cabinet is 369,302 million Baht, higher than 303,430 million Baht in fiscal year 2006. Expediting government budget and SOEs's investment fund will help stabilize the economy and build strong foundation for sustainable development under the condition of limited effectiveness of monetary policy.2.2 Risk factors The world economy and other external factors which would put limitations on the economic growth and stability in 2007 are as follows: 2.2.1 A slowdown of the world economy in 2007 will be the constraint on exports and tourism. The world economy has continued its downward trend since the latter half of 2006. The US adopted the tightening monetary policy over the past 2 years by raising interest rates to help easing inflationary pressure and a current account deficit. Consequently, the household consumption has slowed down and investment in real estate sector declined while large current account deficit has continued. The Chinese economy also showed a slowdown in 2006 as a result of rising interest rate and reserve requirements of banks and limited credit expansion to cool down the overheated investment Economic trends of key economies in 2007 are as follows: The US economy will expand by 2.7 percent, softened from 3.4 percent in 2006, due to the slowdown in real estate sector. The EU economy will increase by 2.1 percent, slowing down from 2.8 percent in the face of tightening monetary and fiscal policies aiming at reducing fiscal deficits as well as raising value-added tax in Germany by 0.3 percent in January 2007. The Japanese economy will grow by 1.9 percent, lower than 2.2 percent in 2006 in tandem with the slowdown of investment cycle, consumption and export. The Chinese economy is expected to slowdown from 10.7 percent in 2006 to 9.7 percent in 2007 following a slowdown trend of exports which has been led by the US economic slowdown, the Chinese RMB appreciation, the scheme of export tax duties and capital gain tax that could further investment slowdown. The Asian economy (excluding Japan and China) tends to slow down as a result of a downtrend of US, Japanese and Chinese economies which, in turn, lead to a slowdown in exports, especially of electronics products. The slowdown was also caused by more stringent trade policies of the US and Europe. Nonetheless, domestic demand is expected to support the growth momentum of the Asian economies, and partly offsets the moderation in the external sector. The declines in policy interest rates and inflation rates, more positive business perceptions as well as the sound fiscal and financial sectors will be important factors to support Asian economic growth. Particularly, investment is likely to accelerate in Malaysia and Indonesia which will partly offset a slowdown in export. Hence, the economy is not expected to experience a sharp slowdown. Some risk factors that could lead to hard landing of the world economy are as follows: - Oil prices continue to be at high level andremain volatile due to rising world demand. On the supply side, the production capacity has been tight and there are possible risks from Hurricane season as well as geopolitical conflicts such as over North Korea's nuclear program and Iran's nuclear program. - Large US twin deficits (current account and fiscal account) continue to be a concern which exacerbated business confidence on the US dollar and, thus, deferred demand for dollar. This, as a result, put depreciation pressure on US dollar in the latter half of 2006. This become downside risks to countries owning large amount of US dollar denominated securities and equities and dollar deposits such as China, Japan and oil exporters (including Russia and Norway). Should these countries lose confidence in the US economy and US dollar currency, huge capital outflows from the US could be resulted or it will lead to big US dollar or dollar-denominated securities sell-off (6) in order to hold other currencies. The US dollar would, therefore, rapidly depreciate. In the meantime, falling asset prices in US dollar will also affect wealth of those countries7 and will continue its effects on global financial market as well as those dollar holder countries. It is expected that in 2007, the dollar will depreciate against Euro and Japanese Yen (from 117 Yen per dollar in 2006 to 112 Yen per dollar in 2007 and from 1.32 dollar per 1 Euro to 1.28 dollar per Euro in 2007) - More risks remain, notably a sharper than expected slowdown in the US economy from the slowdown in business investment, automotive and real estate sectors. A cooling down in US real estate sector might occur briskly due to interest rate upward adjustment over the past two years. This would affect demand for residential to slowdown severely and create additional excess housing stocks. Housing price could decline significantly which will lessen asset value and jeopardize wealth of household and consequently affect private consumption. Credit quality of financial institutions will deteriorate as a result of lower collateral asset value. There will also be continual effect on employment due to declining investment in real estate construction - Other factor that would affect global economy to abruptly slow down is the geopolitical conflicts such as disputes between the US and Iran over the nuclear program. ********************************************************************************************************* (6) Central bank of Russia, United Arab Emirates and Switzerland started to hold Yen-denominated assets. ECB sold US dollar and bought Yen currency instead. (7) Francis E. Warnock estimated that 10 percent depreciation of US dollar and 10 percent devaluation of stocks and debt securities price will lessen the wealth of countries owned US currency and US dollar- denominated securities by 4 percent of GDP. Further information:Might a Disorderly Resolution of Global Imbalances Affect Global Wealth?", IMF Working Paper No. 06/170 *********************************************************************************************************(Continue to).../ 2.2.2 Internal risk..