Transcript Building Mega Project : How to Maintain Economic Stability?

Building Mega Project
“How to Maintain Economic Stability?”
1.
Varang Wiriyawit
2.
3.
4.
Sirinipha Sutatam
Saowanee Sittichai
Achara Boonyawongvirot
Introduction :
According to building mega project, there are 2
possible outcomes.
An increase in long-term competitiveness and
stimulate economy
Further pressure the current account and other
external stabilities
Objectives:
The methods of proceeding the Mega project
without an effect in the economic stability have to
answer these 3 questions :
What the projects’ size should be in order to
maintain economic stability?
How to choose the projects?
How the capital assembling should be to stabilize
the economy; how the policies to stimulate
saving should be pursued to narrow savinginvestment gap, or current account deficits?
What is “Mega Project”
Mega Project :
Mega Project is a large-scaled investment by the
public sector in a certain period of time. The value
of each project is to exceed THB 1 billion.
Mega Project can be divided into 2 groups
Physical Infrastructure
is a project that worth more than THB 1 billion.
Intermediate Infrastructure
is a project that aim to improve the country’s
social infrastructure.
Each project of investment can consist of
several smaller schemes of investments, but the
aggregated value must exceed THB 1 billion.
Mega Project Investments :
Economic
Sector
Purposes
Mass Transit
Increase transportation efficiency, reduce
the lose of energy and raise the standard of
living
Transportation
Improve transportation system, lower cost
and increase competitiveness
Housing
Improve residence area for low-income
Water System
Improve water system
Education
Improve education systems and human
resources
Health Care
Improve Medical and Health under the same
standard across country
Others
Improve the stability of electricity and
energy sectors
Mega Project :
Goals
o
Supporting the improvement of the country
o
Improving standard of living
o
Increasing efficiency
o
Stabilizing investment
Mega Project Investments by Sectors :
The benefits of investment in
Mega-project :
To compensate public investment
that have been reduce after economic crisis,
which leads to a reduction in the amount of
capital reserve.
If there are an economic expansion, there will
be a bottleneck in the economic.
To increase competitiveness
Which can be measured by 4 factors
o Economic performance
o Government efficiency
o Business efficiency
o Infrastructure
The benefits of investment in
Mega-project :
To increase long-term potential growth
o Increase net capital stock
The benefits of investment in
Mega-project :
o Increase labor efficiency
in order to raise ratio of capital and labor and
TFP (total Factor Productivity).
o Increase capital investment
As there is a reduction in labor force, the
government needs to increase capital
investment instead.
The percentage
change in labor force
2538
2543
2548
2.15
1.79
1.3
The benefits of investment in
Mega-project :
To reduce the long-term stability risk
As building Mega Project will increase
competitiveness, it will also lead to
o Increase income
o Increase income distribution
o less dependency on foreign countries
o solve long-term balance of payment problem
Impacts of Mega project on
economic system
Impacts of Mega project on
Macroeconomics
Macroeconomics Variables
Economic Growth
Private Investment
Inflation Rate, and
Current Account
Keynesian Economics Theory :
Crowding out effect
Crowding in effect
Public Investment
Public Investment
Real Interest Rate
Private Investment
GDP
Return to Capital
Private Investment
Private Investment
GDP
GDP
“Multiple Effect”
Other Studies:
Easterly and Robelo(1993), and Serven(1996):
investment in transportation, communication and
non-military could stimulate the economy.
Barro (1990) and Romer(1987):
following the Endogenous Growth Theory, the
economic expansion will permanently adjust to
new higher equilibrium.
Other Studies (con.) :
Aschauer(1996):
public investment has a negative impact on
private investment.
Agenor and Montiel(1996):
in developing countries, budget deficit has a
less effect on interest rate.
Hemming, Kell and Mahfouz(2002):
GDP multiplier is relatively a positive in
developing countries, and vice versa.
Enders and Lee(1990):
Government expenditures (G) have a positive
relationship on CA deficit.
Summative impacts of public
investment through other studies
Economic expansion
developing countries
developed countries
Inflation Rate
Interest Rate
Summative impacts of public
investment through other studies
Current Account Deficit
Private Investment
Exchange rate
Impacts on Thailand’s Macroeconomics
Increase in public investment by 10%
Private Investment
0.7
Economic Growth
0.1
CA Deficit
1.0
Core Inflation Rate
0.003
By Vector Auto Regression Method (VAR)
Positive
Relationship
Expansion of economy between regular
investment, baseline and full mega project
By National Accounting Forecasting Framework Method (NAFF)
CA Deficit – GDP Ratio between baseline and
full mega project
By National Accounting Forecasting Framework Method (NAFF)
Summation Results from Analyzing
Methods
Variables
Economic Growth
VAR
0.1
NAFF
Macro Model
0.6
1.0
CA Deficit
0.6
0.8
1.0
Private Investment
0.2
0.7
2.1
Core Inflation Rate
0.3
0.004
-
Impacts on Stability of Fiscal
Sustainability and Foreign Countries
Fiscal Stability
Impacts on Stability of Fiscal
Sustainability and Foreign Countries
Stability of foreign countries
The External Risks of the Mega
project and Economics Stability
The Operational Risks of the
Mega project :
The impacts of these risks often cause the
uncertainties to the projects and effect the
confidence of investors.
Cost Overrun
The increase in costs of materials and damages
during the construction might expand the size of
the projects.
Project delay
The projects delay can increase the interest rate
risks.
The Operational Risks of the
Mega project :
Financial Risks
The interest rate risk and the exchange rate risk
are the main factors which have an impact on
the costs of Mega-project fund and also the size
the projects .
The External Risks :
The economic slowdown of trading partners
Moving from current account deficit into surplus
of the U.S. might cause a decrease in demand
of U.S market which could reduce Thai exported
amount and directly effect current account and
also GDP growth.
The appreciation of Baht
The appreciation of Baht reduces the
competitiveness of Thai exporters which would
worsen the current account.
The External Risks :
The increase in world oil price
The increase in world oil price directly affect
the economic growth and also could worsen
current account due to the import of oil.
Analyze the External risks of
the Mega project :
Assume that :
The GDP growth of Thailand trading partner
decrease by 1%
The Dubai crude oil price increase by 10 %
The effect of the declining in
GDP growth of trading partner
Effect on
Economic growth
Effect on
Current Account
The effect of increase in Dubai
crude oil price
Effect on
Economic growth
Effect on
Current Account
The effect of both decrease in GDP
growth of trading partner and increase in
Dubai crude oil price
Effect on
Economic growth
Effect on
Current Account
The effects of external risks on
current account
Mega project Management
Framework :
Set up a committee on mega-project evaluation
The government set up this committee in order
to ensure the efficiency an transparency of the
management of the mega-project management.
Set up a holding company of the mass transit
system
The government set up this holding company to
centralize the operational management of the
mass transit system on the basis of a single
operator or a joint owner.
Financing Method and its
Impact on Financial Market
Financing Method and its
Impact on Financial Market :
Mega project definitely need a lot of fund which
government’s budget and other state enterprises’
profits may not enough. Therefore, it is necessary
to find other sources of fund.
Source of Fund :
Budget and Profits of State Enterprises
Loans
o
Domestic Loans
the government can borrow from commercial
banks directly or the government may choose
to issue the government bonds.
o
External Loans
borrowing from aboard in other currencies.
is efficient method in order to support
enormous project, but it has currency risk.
Ratio of Internal and External Debt
2543
2545
2548
Internal Debt
69.1
72
80.1
External Debt
30.9
28
29.9
Ratio of public debt by currencies
2538
2538
2547
Value
%
- Dollar
- Yen
- Euro, Pound,
สวิสฟรังส์
6,904
8,287
474
15,091
15,031
312
4,498
10,146
373
29.81
67.25
2.47
Total
16,402
33,913
15,087
100
Public Debt
Source of Fund :
Financing From Stock Exchange
Allowing Private Sectors to invest in the project
as Public Private Partnership (PPP)
Issuing new documents
o
Securitization
Sources of Mega Projects’ Funding
Impact on Financial Systems :
Short-Term and Long-Term Interest Rates
o
if mega project leads to a continuous
investment in private sectors, then
short-term interest rates can be higher.
o
economy expanding may cause inflation in
the future which leads to higher short-term
interest rates.
o
For long-term interest rates, they can reflect
inflation in the future and unbalanced of
demand and supply of long-term bonds.
Impact on Financial Systems :
Impact on Excess Liquidity
This depends on the method of Financing because
each method has different impact on commercial
banks liquidity.
o
Borrowing Directly From Commercial Banks
This method will change the assets of the
commercial banks directly.
As a result, the liquidity will decrease while
the loan reserves increase.
Impact on Financial Systems :
o
Issuing Bonds or Securitization
If investors and bond holders are not
commercial banks, the investment in term of
savings may decrease.
Then liquidity of commercial banks will
decrease as well as their assets.
o
Borrowing From Aboard
After borrowing, the money will be used in
the project.
However, if commercial banks do not change
the proportion of loan reserves, in the same
direction of an increasing in fund, then
commercial banks’ liquidities may increase.
Impact on Financial Systems :
o
Stock Exchange
lead to a decrease in money supply because
of a withdrawal of savings in order to invest
in stock exchange.
After spending money, the money will back
to commercial banks, but in case that money
does not back to the backs as the same
amount it used, it will lead to a decrease in
liquidity.
o
Co-investment with Private Sectors
Same as Borrowing Directly From Commercial
Banks
Impact on Financial Systems :
Impact on Excess Liquidity
This depends on imported goods as it leads to a
decreasing in bank’s money supply.
However, it depends on the amount of loans
and spending.
Mega project induces a continuous investment in
Private Sectors
This is differ from Co-investment with Private
Sectors because there is another amount of
funds from an investment of private sectors.
It is normally in short-term financing and
borrows directly for commercial banks.
Impact on Changing in Interest
Rates of Commercial Banks :
changing in interest rates in short-term and
long-term
If investing in megaproject leads to excess
liquidity of commercial banks and its reaches
the level that triggers the relationship of
interest rates in financial market and loans of
banks.
Then changes in interest rates in financial
markets will lead to changes in interest rates in
loans rates of commercial banks more quickly.
Impact on Stock Exchange :
Financing may not has impact directly on stock
exchange but it has direct impact on construction
businesses.
Impact on Prices
The investors expect that mega project leads to
an expansion in economy and finally leads to and
improvement of stock exchange.
Dividend Growth Model
Pt =
D0(1+g)
(r-g)
Pt = Price of Stock
r = Required Rate of Return
g = Dividend Growth
D 0 = Dividend
Impact on Stock Exchange :
Impact on Bond Market
Mega project has impact on bond market both in
prices and the development of bond market
structure.
Overview of Financial Market Development
Securitization and Structured Product are other
financial methods that government may choose.
These methods provide several patterns of
development which can lead to disintermediation
process.
Factors that have Impacts on Financing
Global Imbalance Unwind
Increasing in US Interest Rates can impact on
Thailand’s investments in other currencies .
International Stability
An increase in current account deficit affect the
currency which can determine the amount and
term of international loans.
Founding of DIA (Deposit Insurance Agency)
This provides more opportunity of people who
wants to save in several methods.
For example, bonds or securities with high
liquidity, less risks.
QUESTION 1 :
What the projects’ sized should be in
order to maintain economic stability?
QUESTION 1 :
The projects’ sizes may need to be allow for cushion
in absorbing additional shocks.
As a result, the Government should set the projects’
size that keep the budget deficit to be lower than
3% of GDP in order to maintain economic stability .
In order to maintain budget deficit within 3% of GDP,
government should
Reducing the budget deficit by stimulating
household saving
Being more flexible about size of the projects,
and duration of the investments
QUESTION 2 : How to choose the projects?
QUESTION 2 :
In order to choose the projects that effectively
manage the Mega-project funds and also improve
the competitiveness and efficiency of the economy
in long-term, government should invest in
The project that aim to solve the weakness of
Thai economy for example by enhancing
competitiveness
The projects that have been studied about
financial/economics possibilities
The projects that create positive profits and can
operate without additional finance from the
government
QUESTION 3 :
How the capital assembling should be to
stabilize the economy?
QUESTION 3 :
The important basis of the capital assembling of
the Mega-project are
Stimulating private saving
(especially long-term saving )
In order to avoid the external risk from borrowing
aboard, the household saving would be the
essential source of funds to finance to projects.
Promoting foreign direct investment (FDI) by
o
Maintain financial economic stability
o
Provide financial fundamentals of investment
such as securitization and guarantee
Promote corporate governance
Improve human capital
o
o
QUESTION 3 :
If government has to make loans to finance the
Mega project, these loans should be long-term
loans
The external short-term debt would affect the
economic stability by creating the external risk
and reducing the Gross Reserves / Short term
Debts ratio.
Government should be flexible to the financial
changes from globalization that might affect
financing behaviors of the public sector as well
as try to reduce uncertainties in the projects to
boost investors’ confidence.
QUESTION 3 :
The financing method should be set according to
the project’s profile, as most of projects have
long-term pay back period and have short-term
revenue. For example,
o
For projects that have short-term revenue,
the financing method should be
securitization or publishing revenue bond
o
For long-term projects, the financing method
should be publishing long-term government
bond or amortized bond.
Suggestions on this report
Strengths :
There are various analyzing methods. These can
insist the results of each method to be accurate.
There has a seasonal adjustment.
The paper indicates both negative and positive
effects of making mega project.
The paper contains the suggestions.
Weaknesses :
The risk from the movement of oil price could
have impact on the estimation of the variables
in this paper.
There has no adjustment or expectation on the
trend of inflation, thus the analysis may be
deviated.
The paper is written in Thai which would be an
obstacle for most of the foreign investors who
interested in private investment in Thailand, so
there should be an English version for foreign
investors, so that they will understand
Thailand’s plan of investment and be more
confidence to invest in Thailand.
Possible Extension :
The paper can be extended by examining the
performance of the projects year by year.
The paper should further explore the impacts on
poverty and income inequality of the Mega
project.
The paper can also be extended by arranging and
examining which projects are the most urgent to
invest ,and also identifying how necessary it is
to invest.
Possible Extension :
The paper could further study the Mega project
investments by separating it into two types
which are
o
The Main Investment Projects;
consist of the 13 new projects, totaling
THB 1.4 trillion, or 80% of the total
Mega project investments.
These include the investments on Mass
Transit in Bangkok, Water System
Improvement Country-wide, Housing for the
Low-income people, Expressways, etc.
Possible Extension :
o
The Supporting Projects;
are the investment projects already listed in
the government plan with their budgets
having been prepared.
However; the investment frameworks have
been re-adjusted to go in line with the
strategic plan and the Main Investment
Projects.
Thank You
For Your Attention