All down with the buck

Global leaders must find a way to unravel lop-sided trade and investment flows or risk a slump in the U.S. dollar that would create havoc for the world economy.

An international agreement along the lines of the 1985 Plaza Accord "on a bigger scale" is needed to unwind the imbalances that have resulted in the U.S. current account deficit swelling to a record $805 billion and surpluses in China, the rest of Asia and Europe.

A disorderly unwinding would play havoc not only with the U.S. but with the world economy. What the world needs right now is something like the Plaza Accord but on a bigger scale.

A slump in the dollar could prompt U.S. policy makers to raise U.S. interest rates, causing a decline in house prices to accelerate and curbing consumption among the heavily-indebted consumers who represent 70% of the world's biggest economy. A subsequent slide in corporate investment would have a "chilling" effect on the global economy.

The 1985 Plaza Accord precipitated an appreciation in the yen that eventually led to an asset bubble in Japan that burst in the early 1990s, leading to a 15-year period of lackluster growth during which the world's 2nd-largest economy had 3 recessions.

Japan took most of the brunt of the Plaza Accord, obviously any such agreement needs to be a lot more sophisticated than that.

Countries including China, Brazil, Mexico, India, Saudi Arabia, some of the wolrd biggest economies, should join the group of countries to come to an agreement, which currently has the countries members of the G-8 as participants.

US loses top competitiveness spot

The U.S. has lost its status as the world's most competitive economy, according to the World Economic Forum. The U.S. now ranks only sixth in the body's league table of global competitiveness, behind Switzerland, Finland, Sweden, Denmark and Singapore.

Risks attached to the large U.S. trade and fiscal deficits prompted its fall. The UK has retained its place among the world's 10 most competitive economies but China, Russia and Brazil have all fallen down the rankings.

Imbalances

Countries were judged on how conducive their business climates are to sustaining economic growth.
Publishing its Global Competitiveness Index, the World Economic Forum (WEF) said the best performing countries were distinguished by their competent economic stewardship, investment in higher education and a emphasis on technological development and innovation.
Although the U.S. remained the global engine of technology, WEF said its business environment was being endangered by the fragile state of its public finances.
The U.S. has seen its budget and trade deficits spiral in the past few years as a result of heavy government spending and rising trade imbalances with countries such as China and Japan.
The U.S. trade deficit is expected to top last year's record level of $717 bn ( £378 bn; 565 bn euros) in 2006, while the budget shortfall, although expected to be significantly lower than last year, is still forecast to be close to $300 bn.

U.S. competitiveness is threatened by large macroeconomic imbalances, particularly rising levels of public indebtedness associated with repeated fiscal deficits. Its relative ranking remains vulnerable to a possible disorderly adjustment of such imbalances.

World Economic Forum, Global Competitiveness Index´s report

Swiss peak

Switzerland is now regarded as the world's most competitive economy, with Nordic countries holding three of the five top rankings.
The WEF praised the UK for its flexible labour markets and low unemployment rate compared to the rest of continental Europe. But it said the UK, in common with Germany and Italy, was afflicted by public sector deficits and rising levels of public indebtedness.
China, Russia and Brazil, among the world's fastest growing economies, all suffered a decline in their relative competitiveness.
China fell from 48 to 54 in the ranking, its rapid economic growth and low inflation offset by an over-regulated banking sector and low penetration of mobile and internet technology outside urban areas.
Russia slipped from 53 to 62, with concerns over the independence of the country's legal system and safeguarding of property rights singled out as key concerns, the WEF.

"The private sector in Russia has serious misgivings about the independence of the judiciary and the administration of justice," it said.

No time for generals

Neither the months-long political impasse that preceded it nor Tuesday's so-far bloodless coup have done much to dent Thailand's status as a star economic performer in Southeast Asia. But lasting harm could come if the current situation descends into a political struggle between the country's new military leadership and the former prime minister, billionaire Thaksin Shinawatra.

If democratic rule is not quickly restored, the resulting political instability could crimp domestic consumption, delay needed spending on infrastructure and scare off foreign investors.
On Wednesday, Gen. Sondhi Boonyaratklin, the leader of the Thai army, assured the nation in a televised address: "We don't have any intention to rule the country and will return power to the Thai people as soon as possible." Sondhi said the country would be returned to civilian rule within two weeks.

Tim Condon, Singapore-based head of Asia research with ING, said he expected a sharp decline on the Thai stock market, particularly shares held by the Thaksin family. He also sees weakness in the baht until the political situation stabilizes.

The Thai stock market was ordered closed by the military on Wednesday, though trading is expected to resume on Thursday. After news of the coup spread in New York on Tuesday, two closed-end funds specializing in Thailand fell about 4%, presaging weakness when Bangkok trading resumes.

The baht fell 2% against the dollar, a large decline for what had been a strong currency this year, but not a fall that indicated a total collapse in investor confidence. Given the country has foreign reserves of $59.6 billion, fast-growing exports and improved public finance, there does not seem to be much chance that the economy will suffer the way it did in 1997, when foreign investors suddenly pulled out of Thailand, setting off an economic crisis across Asia.

After rising to 37.95 baht in New York late Tuesday, the dollar stabilized against the Thai currency in London, slipping to 37.70.

Moody's Investors Service, the bond-rating agency, told clients it considered the coup as "primarily a domestic political development, rather than as a financial development." It suggested the political situation could rapidly normalize if the coup clears the way for elections. A vote had been scheduled for November before the military action, but it was unclear if it could be arranged that quickly.
Moody's noted that Thaksin's administration was generally friendly to foreign investors, which might not be the case among the major opposition parties.

A rival rating agency, Standard & Poor's, was less optimistic. Ping Chew, a credit analyst, said the political impasse already has taken a toll on domestic consumption and investment interest in the country, and that a continuing of current impasse would affect the country's investment climate. Standard & Poor's put Thailand's triple-B-plus debt on its Credit Watch list of issues whose ratings might change, with negative implications.

The political paralysis in the past few months has claimed casualties in a projected $7 billion spending on public infrastructure projects, which is critical to Thailand's economic growth in the next few years. Already, the political uncertainty has halted the extension of Bangkok metro line and new highway plans.

More immediately, the automobile industry, which has drawn significant foreign investment, is suffering from plant closures on Wednesday at Nissan Motor and Mazda Motor in what has been declared as a day of "public holiday."

Another casualty will likely be Thailand's plans to become a regional transportation hub. The government had planned to use the Sept. 28 opening of Suvarnabhumi, or Golden Land, airport in Bangkok as a showcase. The airport has been touted as the most modern in Asia, but the plans to draw international traffic will probably have to wait for a while.