Building Mega Project “How to Maintain Economic Stability?”

1. Building Mega Project “How to Maintain Economic Stability?” Varang Wiriyawit Sirinipha Sutatam Saowanee Sittichai Achara Boonyawongvirot

2. 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

3. 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 saving- • investment gap, or current account deficits?

4. What is “Mega Project”

5. 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.

6. Mega Project Investments :

7. Mega Project : • Goals • Supporting the improvement of the country • Improving standard of living • Increasing efficiency • Stabilizing investment

8. Mega Project Investments by Sectors :

9. 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 • Economic performance • Government efficiency • Business efficiency • Infrastructure

10. The benefits of investment in Mega-project : • To increase long-term potential growth • Increase net capital stock

11. The benefits of investment in Mega-project : • Increase labor efficiency in order to raise ratio of capital and laborand TFP (total Factor Productivity). • Increase capital investment As there is a reduction in labor force, the government needs toincrease capital investment instead.

12. 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 • Increase income • Increase income distribution • less dependency on foreign countries • solve long-term balance of payment problem

13. Impacts of Mega project on economic system

14. Impacts of Mega project on Macroeconomics Macroeconomics Variables • Economic Growth • Private Investment • Inflation Rate, and • Current Account

15. Crowding out effect Crowding in effect Public Investment Public Investment Real Interest Rate GDP Return to Capital Private Investment Private Investment Private Investment GDP GDP Keynesian Economics Theory : “Multiple Effect”

16. 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.

17. 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.

18. Summative impacts of public investment through other studies • Economic expansion developing countries developed countries • Inflation Rate • Interest Rate

19. Summative impacts of public investment through other studies • Current Account Deficit • Private Investment • Exchange rate

20. Impacts on Thailand’s Macroeconomics Increase in public investment by 10% • Private Investment 0.7 • Economic Growth 0.1 Positive Relationship • CA Deficit 1.0 • Core Inflation Rate 0.003 By Vector Auto Regression Method (VAR)

21. Expansion of economy between regular investment, baseline and full mega project By National Accounting Forecasting Framework Method (NAFF)

22. CA Deficit – GDP Ratio between baseline and full mega project By National Accounting Forecasting Framework Method (NAFF)

23. SummationResults from Analyzing Methods Variables VAR NAFF Macro Model • Economic Growth0.1 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

24. Impacts on Stability of Fiscal Sustainability and Foreign Countries • Fiscal Stability

25. Impacts on Stability of Fiscal Sustainability and Foreign Countries • Stability of foreign countries

26. The External Risks of the Mega project and Economics Stability

27. The Operational Risks of the Mega project : The impacts of these risks often cause the uncertainties to the projects and effect the confidence ofinvestors. • 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.

28. 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.

29. 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.

30. 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.

31. 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 %

32. The effect of the declining in GDP growth of trading partner Effect on Economic growth Effect on Current Account

33. The effect of increase in Dubai crude oil price Effect on Economic growth Effect on Current Account

34. 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

35. The effects of external risks on current account

36. 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.

37. Financing Method and its Impact on Financial Market

38. 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.

39. Source of Fund : • Budget and Profits of State Enterprises • Loans • Domestic Loans • the government can borrow from commercial • banks directly or the government may choose • to issue the government bonds. • External Loans • borrowing from aboard in other currencies. • is efficient methodin order to support • enormous project, but it has currency risk.

40. Ratio of Internal and External Debt

41. Ratio of public debt by currencies

42. Source of Fund : • Financing From Stock Exchange • Allowing Private Sectors to invest in the project • as Public Private Partnership (PPP) • Issuing new documents • Securitization

43. Sources of Mega Projects’ Funding

44. Impact on Financial Systems : • Short-Term and Long-Term Interest Rates • if mega project leads to a continuous • investment in private sectors, then • short-term interest rates can be higher. • economy expanding may cause inflation in • the future which leads to higher short-term • interest rates. • For long-term interest rates, they can reflect • inflation in the future and unbalanced of • demand and supply of long-term bonds.

45. 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. • 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.

46. Impact on Financial Systems : • 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. • 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.

47. Impact on Financial Systems : • 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. • Co-investment with Private Sectors • Same as Borrowing Directly From Commercial • Banks

48. 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.

49. 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.

50. Dividend Growth Model D (1+g) P = Price of Stock t 0 P = r = Required Rate of Return t (r-g) g = Dividend Growth D = Dividend 0 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.