Exorbitant commodity prices (including oil) - from late February to early June this year – have raised analysts' eyebrows; many wonder whether the sharp increases were justified by fundamentals. However, dearer commodities were eventually sold off in light of recent economic data wherein some positive signs have appeared, though still pointing to a global economic contraction and/or below-potential growth this year. The global turnaround that may gradually achieve a foothold over the remainder of this year and into next year should be supportive to commodity markets.
A recent study conducted by KASIKORN RESEARCH CENTER (KResearch) has shown that volatile oil prices (that normally lead to other commodity market volatility) – likely triggered by signs of the global recovery – would almost inevitably impact the Thai economy, among the Asian countries with the highest oil intensity rate. The correlation between oil prices and the CPI, as well as that between oil prices and the import value, is very high for Thailand compared to peers. This implies that Thailand's price levels and trade balance may be put at risk if oil prices move upward in the future. Our study also indicates that Thailand's trade balance may deteriorate if commodity prices rise further.
The Thai policymakers may have to brace for an upward trend in inflation, possibly around 4Q09 and into 2010, and need to be ready to take appropriate actions to sustain economic growth. The Bank of Thailand (BOT) may be challenged by greater complexity when it comes to pursuing their monetary policy movements during the initial stages of economic recovery that may be accompanied by accelerating inflation and soaring funding costs. The BOT may also be challenged by Baht volatility, especially if Thailand's trade balance worsens due to rising imports and oil prices in line with the global turnaround, in particular, from late 2009 to 2010.
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