• One day after the USA, Great Britain and Spain had given up on vote counting on the second UN Security Council Resolution on Iraq scheduled to take place on March 17, 2003, anxiety and uncertainty over the Iraq war possibility is over.   According to the ultimatum, unless the Iraqi leadership leaves the country, the attack by force would happen within two days or by March 20, 2003.   The probability of a "quick war" to start in late March or early April and end in Q2 2003, increases to 60 percent and that of "no war" or "war with little resistance" with the Iraqi leadership eventually removed remains at 30 percent while the "long war" scenario has a rather low probability of happening.
  
  
• The war premium put on the world crude oil prices has probability run its course in as much as the war anxiety and speculation warranted.   The average price of Brent Crude for the first quarter is around US$ 32.60 per barrel (based on actual data of 78 days and with about 12 days of estimate remaining in Q1 2003).   With the oil field operators' strike practically over in Venezuela and the cold winter in the Western Hemisphere receding day by day, the remaining factors that will keep crude oil prices abnormally high in Q2 are the stronger than usual demand for oil from East Asia (due to better economic performance in the region than anybody expected) and the even more heightened anxiety of the long and drawn out war possibility (which we do not believe to be the case as reflected in our low probability assessment of this scenario).   As can be seen by our analysis of the economic performance of 10 major East Asian countries including Japan, the relatively strong demand for oil from East Asia together with the Venezuela oil workers' strike, the cold weather and the war anxiety had together kept the crude oil price very high in Q1 2003.   With at least there factors (oil strike, cold weather, and extreme war anxiety) receding in the coming months of Q2 2003, even the stronger economic performance of East Asia than those of the USA and European Union will not be able to sustain the level of crude oil price much higher than the US$ 32.6 per barrel (of Brent Crude) experienced in Q1 2003.  Except for a short spike of crude oil price increase during the first few days or weeks after the outright attack on Iraq, the average price of Brent Crude is assumed to be US$ 32 per barrel for Q2, US$ 30 for Q3 and US$ 28 for Q4 under the most probable (in our opinion) "quick war" scenario.  Under the "no war" or "war with little resistance" and "long war" scenarios, the assumed oil prices will be lower or higher by US$ 1-2 per barrel compared to those of the "quick war" scenario for Q2, Q3 and Q4 of 2003.
  
  
• The upside surprise which we argue all along in our "Diamond-5 Macroeconomic Policy Paradigm Shift "analysis ^1/ is a much stronger economic performance, as demonstrated through very strong numbers on exports, imports, tourist arrivals, industrial productions, consumer spendings, private investments and government spendings in Q1 2003 for most countries of East Asia (Japan, China, South Korea, Malaysia, Thailand, Taiwan, Singapore, Hong Kong, the Philippines and Indonesia).   We continue to argue that despite weaker numbers coming out of monthly data released by the USA and the EU, East Asia (for the first time including Japan) continues to show remarkable resiliency and is experiencing much increases in imports, exports, tourism and domestic spendings (many have the year on year growth rates in the double digit percentage in 10's and 20's or even 30's category).   East Asia excluding Japan has collectively become a major economic force of the world because among many factors, enough number of large countries such as China, South Korea, Malaysia, and Thailand have adopted and continues to implement the "dual-track policy" with the use of domestic demand stimulation policies to compensate for weak exports and to cooperate and coordinate their domestic and international policies in various regional forums such as the ASEAN +3 ^2/ and the Asian Cooperation Dialogue (ACD).   Some policy initiatives such as the short-term regional currency swaps arrangements and the bilateral/ multilateral free trade agreements have been implemented, and more initiatives such as the long-term Asian Bond Action Plan will be declared in the near future.   The old policy paradigm based on the "locomotive-wagon" or the "flying geese" theory is being gradually outdated by the new Asian realities and the proactive, stronger and closer regional policy coordination under the emerging political leaderships of the region.
  
  ^1/ See " Thailand's Dual-Track Policy and a Paradigm Shift in Regional Cooperation and Coordination, "an article published in this Web Site (www.Thailandoutlook.com) dated January 20, 2003.
  

• Brent crude oil price: almost actual for Q1 (US$32.6/barrel) and declining slightly for Q2 (US$32/barrel), Q3 (US$30/barrel), Q4 (US$28/barrel) as previously stated.
  
  
• The scenario of "short war" that is assumed to take place in Q2 will have some, but not large, negative effects on the economy of East Asian countries.  As a result, exports, imports, tourism and economic growths of East Asian countries (China, South Korea, Malaysia, Taiwan, Hong Kong, Singapore, the Philippine, Indonesia) that trade rather heavily with Thailand will slow down somewhat compared to the very high numbers in Q4 2002 and Q1 2003.   It should be noted that the word "slow-down" means a small decline in the year on year growth rate (not seasonally adjusted quarter-on - quarter at annual rate as reported by the USA or Japan), e.g. China's merchandise export rate of increase (all in US$ terms) slow down from 32% yoy in Q1 to 28% yoy in Q2, and South Korea's export growth rate from 24% yoy in Q1 to 20% yoy in Q2, Thailand's export growth rate from 19% yoy in Q1 to 15 % yoy in Q2 and Japan's export growth rate from 19% yoy in Q1 to 16% yoy in Q2 2003.  Compared to the USA or the EU, which experience single-digit growth rates, such double-digit export growth rates for East Asia are still considered very strong by any standard.  As a result of this coincidence of "subdued growth" in the USA and the EU and "still buoyant growth" in East Asia, the "world economic growth rate" as weighted by the export shares of Thailand to these countries is reduced from the estimated 3.3% yoy in Q4 2002 to 2.8 % yoy in Q1 2003 and 2.4% yoy in Q2 2003.   With the assumed conclusion of the Iraq war by the end of June 2003, normality returns and the crude oil price drops by US$ 2/barrel in Q3 and another US$ 2/barrel in Q4 2003.   The world economy should rebound in all areas including the USA and the EU. An additional assumption is that the Bush Administration will be able to pass its tax cut legislation and together with related war spendings that help to boost the US economy out of its doldrums.   To what extent the EU countries would be able to use their domestic demand stimulation policies to boost the domestic economies in light of stronger value of the Euro relative to the US$ and the binding (no more than 3% of fiscal deficit to GDP) growth and stability (Marstricht) conditionality for Germany and France remains less clear.   Hence the recovery in Q3 and Q4 for the EU is projected to be rather modest.

The opposite is true for Japan as the other East Asian countries, particularly China, will be importing much more Japanese goods.   Through its exports to other countries in East Asia, Japan is likely to show a much stronger recovery in Q3 and Q4 of 2003 than it ever witnessed in the last 10 years.  East Asia, in a meaningful way, will be able to pull Japan out of its doldrums for the first time in recent history.  The downside risk is that Japan and its East Asian trading partners do not understand the new Asian realism and continue to pursue the old policy of "win-loss" mentality, not the "win-win" mentality of the new Diamond-5 Policy Paradigm of equally important and interacting 5 blocks of the would economy.  And in this case East Asia-9 can lead and help Japan out of its recession and vice versa.  China and the rest of East Asia should be encouraged to expand their outputs, incomes, international trades (export and imports) and tourism so that all countries will benefit in the win-win situation.  There are enough underutilized productive capacities in Asia since the financial crisis of 1997 that such win-win policies will not run into industrial capacity and financial stability constraints for at least 2-3 years (till 2005) at the earliest.

• Exchange rates among major currencies (US$, Yen and Euro) are expected to remain roughly at the mid March levels with the Euro already appreciated by about 10 percent and the yen by 4 percent against the US$ since December, 2002. As a result, the THB/US$ exchange rate is projected to remain about 42.70 baht per US$ in Q2, Q3 and Q4 of 2003.
  
  
• As Thailand's volume of exports, mostly to other East Asian countries, have been very buoyant since Q2 2002 and domestic private investments (even with subdued foreign direct investment into the country) have accelerated at a double digit pace since Q3 2002.  The Thai Government has intentionally slowed down its fiscal spendings to balance the budget and achieve fiscal sustainability as quickly as possible.  The Q1 2003 government expenditure turns out to be lower than what we estimated in late January; hence the expansionary effect of direct fiscal spendings by government agencies has been rather modest while the tax revenue collection has been very much above target since October 2002.  For the first five months of the fiscal year 2003 (October 2002-February 2003), tax revenue increased by 16 percent year-on-year compared to the target increase of 6 percent.  The fiscal cash deficit of the Thai Government was only 20 billion baht, or roughly 1 percent of GDP, for the first five months of the current fiscal year.  As the current trend is expected to continue as the year progresses, the Thai government's expenditures are expected to be lower at 231 billion in Q2, 240 billion in Q3 and 254 billion in Q4 of CY 2003, approximately 1 percent lower than the previous estimates done in late January 2003.  As will be shown later, the actual cash deficit of the Thai Government will be so small that approximate budget balance (no more than 1% of GDP) will be more or less achieved within 2004.