Sigh of relief as the US avoids fiscal cliff

Deal expected to benefit Thai exports through greater demand, more stable greenback

The US lawmakers' decision to avert the "fiscal cliff" has given the Thai economy short-term relief, as this can foster export demand and return some stability to the global financial markets.

Boonchai Charassangsomboon, executive director of the macroeconomic policy bureau at the Finance Ministry, said as the US could avert the "fiscal cliff" its economic recovery would continue, and that as the US was the world's largest economy it would contribute to global growth.

If there is no renewed shock in Europe, the global economy is expected to expand 3.9 per cent this year, up from an estimated 3.5 per cent growth last year. In this situation, Thailand's exports in US dollar terms are expected to expand by 10 per cent this year, up from 3.9 per cent in 2012.

"However, we still have to watch how US politicians will negotiate on spending cuts in the next two months," he said.

The Finance Ministry has projected that the Thai economy will expand 5 per cent in 2013, decelerating from an estimated growth of 5.7 per cent last year. Last year's growth was largely driven by a substantial rise in domestic consumption.

Kulaya Tantitemit, senior expert on macroeconomic policy at the Fiscal Policy Office, expects further capital inflows to Asia, including Thailand.

"The baht will slightly edge up against the US dollar. It should be 30.7 per dollar on average this year," she said.

Charl Kengchon, managing director of Kasikorn Research Centre, said that the approval of the bill gave a big boost to the global economy. The centre anticipates 10- to 15-per-cent growth in exports this year, allowing the Thai economy to expand 5 per cent.

"The resolution of the 'fiscal cliff' issue also eases the volatility of the US dollar, which will benefit exporters," Charl said, adding that this approval is a good sign that US lawmakers will be able to reach a deal on the debt ceiling and spending cuts in the next two months.

In 2011, the world's largest economy imported goods worth $27 billion (Bt819 billion) from Thailand, 11.8 per cent of the Kingdom's exports.The baht yesterday reached the strongest level in 10 months. After gaining 3.1 per cent in 2012, the currency rallied 0.7 per cent to 30.38 per dollar in Bangkok from 30.60 on December 28, a level not seen since February, according to data compiled by Bloomberg.

Thai stocks yesterday joined the global rally. While European stocks rallied to a 19-month high, the Stock Exchange of Thailand Index on its first trading day in 2013 rose 1.11 per cent to 1,407.45 points, a level unseen in 16 years and 11 months. While saying that the market was boosted by the US lawmakers' decision, SET president Charamporn Jotikasthira warned investors to beware of risks as the market's price to earnings ratio was as high as 18.25 times.

Analysts previously were concerned that an automatic tax rise and spending cuts as austerity measures could lead the US economy to a 0.5-per-cent contraction. It was forecast that the fiscal cliff would spike unemployment to 9.1 per cent from its current level of 7.9 per cent. If all policies are extended, the economy will grow 2.4 per cent.

The US Senate, in the first hours of January 1, approved the proposals to head off more than $600 billion in tax increases and spending cuts set to start taking effect yesterday. Just an hour before the policies would take effect, the US House of Representatives passed the budget legislation, breaking a year-long impasse. President Barack Obama said he would sign the bill after the 257-167 vote.

The bill will delay by two months automatic spending cuts scheduled to start this month as Republican lawmakers abandoned their effort to add further reductions to the deal. It reinstates tax cuts that expired on December 31 on taxable income of individuals up to $400,000 and of married couples of up to $450,000, leaving top earners with a marginal tax rate of 39.6 per cent, up from 35 per cent last year.

Why the 'fiscal cliff' matters

- Under the January 1 deal, taxes will remain the same for the middle class and only be increased for individuals earning more than US$400,000 (Bt12.15 million) and couples earning more than $450,000 a year. Spending cuts totalling $24 billion over two months aimed at the Pentagon and domestic programmes will be deferred.

- The White House and lawmakers will plunge into a new round of budget brinkmanship, which is certain to revolve around Republican calls to rein in the cost of Medicare and other benefit programmes.

- Without a deal, $600 billion (in the form of spending cuts and tax increases) would be sucked out of the economy, plunging the United States into recession.

- In 2011, the world's largest economy imported goods worth $27 billion from Thailand, or 11.8 per cent of the total.

- KResearch forecasts 10- to 15-per-cent export growth for Thailand thanks to the January 1 deal, allowing Thailand to register 5-per-cent economic growth in 2013.

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