building mega project “how to maintain economic stability?” 1.varang wiriyawit 2.sirinipha...

Building Mega Project “How to Maintain Economic

Stability?”

1. Varang Wiriyawit 2. Sirinipha Sutatam3. Saowanee Sittichai4. Achara

Boonyawongvirot

Introduction :

An increase in long-term competitiveness and stimulate economy

According to building mega project, there are 2 possible outcomes.

Further pressure the current account and other external stabilities

Objectives:

How to choose the projects?

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 the capital assembling should be to stabilize the economy; how the policies to stimulate saving should be pursued to narrow saving- investment 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

Intermediate Infrastructure

is a project that worth more than THB 1 billion.

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.

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 Investments :

Goals

o Supporting the improvement of the country

o Improving standard of living

o Increasing efficiency

o Stabilizing investment

Mega Project :

Mega Project Investments by Sectors :

The benefits of investment in Mega-project :

To compensate public investmentthat 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 factorso Economic performance

o Government efficiencyo Business efficiencyo Infrastructure

To increase long-term potential growth


o Increase net capital stock


o Increase labor efficiencyin order to raise ratio of capital and labor andTFP (total Factor Productivity).

o Increase capital investment

As there is a reduction in labor force, the government needs to increase capital investment instead.

2538 2543 2548

The percentage change in labor

force

2.15 1.79 1.3

To reduce the long-term stability risk


As building Mega Project will increase competitiveness, it will also lead to

o Increase income

o less dependency on foreign countries

o solve long-term balance of payment problem

o Increase income distribution

Impacts of Mega project on economic system

Impacts of Mega project on Macroeconomics

Macroeconomics Variables

Economic Growth

Private Investment

Inflation Rate, and

Current Account

Crowding in effectCrowding out effect

Keynesian Economics Theory :

Public Investment

Real Interest Rate

Private Investment

GDP

Public Investment

GDP Return to Capital

Private Investment

GDP

“Multiple Effect”

Private Investment

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

Positive Relationship

By Vector Auto Regression Method (VAR)

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

VAR

NAFF

Macro Model

Economic Growth 0.1 0.6 1.0

CA Deficit 0.6 0.8 1.0

Private Investment 0.2 0.7 2.1

Core Inflation Rate 0.004 - 0.3

Variables

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 :

Cost Overrun

The impacts of these risks often cause the uncertainties to the projects and effect the confidence of investors.

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 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.

The External Risks :

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



The effect of both decrease in GDP growth of trading partner and increase in Dubai crude oil price



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 %

Public Debt- Dollar- Yen- Euro, Pound, สวิ�สฟรั�งส

6,9048,287474

15,09115,031

312

4,49810,14

6373

29.8167.252.47

Total 16,402 33,913 15,087

100

Source of Fund :

Allowing Private Sectors to invest in the project as Public Private Partnership (PPP)

Issuing new documents

o Securitization

Financing From Stock Exchange

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 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.


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.


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 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.

- This is differ from Co investment with Priva te Sectors because there is another amoun

t of funds from an investment of private se ctors.

- It is normally in short term financing and b orrows directly for commercial banks.

Mega project induces a continuous investment in Private Sectors

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.

Dividend Growth Model

P =t

D (1+g)0

(r-g)

P = Price of Stockr = Required Rate of Return g = Dividend Growth

D = Dividend

t

0

Impact on Stock Exchange :Financing may not has impact directly on stock exchange but it has direct impact on constructionbusinesses.

Impact on Prices

The investors expect that mega project leads to an expansion in economy and finally leads to and improvement of stock exchange.

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?

Being more flexible about size of the projects, and duration of the investments

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 .

Reducing the budget deficit by stimulating household saving

In order to maintain budget deficit within 3 % of GDP, government should

QUESTION 1 :

The projects’ sizes may need to be allow for cushion in absorbing additional shocks.

QUESTION 2 : How to choose the

projects?

The projects that create positive profits and can operate without additional finance from the government

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 projects that have been studied about financial/economics possibilities

QUESTION 2 :

The project that aim to solve the weakness of Thai economy for example by enhancing competitiveness

QUESTION 3 : How the capital assembling should be to

stabilize the economy?

The important basis of the capital assembling of the Mega-project are

QUESTION 3 :

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 .

o Maintain financial economic stability Promoting foreign direct investment (FDI) by

o Provide financial fundamentals of investment such as securitization and guaranteeo Promote corporate governance o Improve human capital

QUESTION 3 :

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.

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.

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.

The paper could further study the Mega project investments by separating it into two types which are


o The Main Investment Projects;

These include the investments on Mass Transit in Bangkok, Water System Improvement Country-wide, Housing for the Low-income people, Expressways, etc .

consist of the 13 new projects, totaling THB 1.4 trillion, or 80% of the total Mega project investments.

o The Supporting Projects;


However; the investment frameworks have been re-adjusted to go in line with the strategic plan and the Main Investment Projects.

are the investment projects already listed in the government plan with their budgets having been prepared.

Thank You For Your Attention

building mega project “how to maintain economic stability?” 1.varang wiriyawit 2.sirinipha...

Documents

project of investment

mega project slide

building mega project

o increase capital investment

o increase income o

benefits of investment

o increase labor efficiency

public investment