Building Mega Project
“How to Maintain Economic Stability?”
1. Varang Wiriyawit 2. Sirinipha Sutatam 3. Saowanee Sittichai 4. 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
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 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
To increase long-term potential growth
The benefits of investment in Mega-project :
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.
2538 2543 2548
The percentage change in labor
force
2.15 1.79 1.3
To reduce the long-term stability risk
The benefits of investment in Mega-project :
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 effect Crowding 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
Summation Results from Analyzing Methods
VA R
NAF F
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
Variable
s
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
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 % Public Debt
- Dollar - Yen - Euro,
Pound, สสส สสสสสสส
6,904 8,287
474
15,091 15,031
312
4,498 10,14
6 373
29.81 67.25 2.47
Total 16,402 33,913 15,08 7
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 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.
This is differ from Co-investment with Priv ate Sectors because there is another amo unt of funds from an investment of private sectors.
It is normally in short-term financing and b
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 Stock
r = Required Rate of Return g = Dividend Growth
t
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.
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
QUESTION 1 :
What the projects’ sized should be inorder to maintain economic stability?
Being more flexible about size of the projects, 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
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 tostabilize 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 guarantee
o Promote corporate governance
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
Possible Extension :
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;
Possible Extension :
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
