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Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia : Southeast Asia

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Thailand

Economic growth moderated in 2001, primarily as a result of the impact of the global slowdown on the industry sector and on exports. The deceleration was exacerbated by sluggish investment and banks’ reluctance to lend, given the high level of nonperforming loans and slow progress in corporate and financial restructuring. Somewhat more rapid GDP growth is projected in 2002 as the world economy recovers. A strengthening of investor confidence is crucial to sustaining a faster rate of expansion in the medium term.

Macronomic Assessment

The global economic slowdown in 2001 had a significant impact on the Thai economy. GDP grew by 1.8%, considerably less than the 4.6% rate in 2000, while average unemployment increased to 3.9%, from 3.6% in 2000, based on the quarterly labor force survey by the National Statistics Office.

On the supply side, the pace of growth slowed in all sectors. Expansion of industrial output (which accounts for about 44% of GDP) decelerated to 1.3% in 2001 from 5.3% in 2000. The manufacturing production index, which covers about 63% of overall value added in manufacturing, rose by only 1.1%, a decline from 3.3% in 2000. The capacity utilization rate slipped to 53.3%, from 56% in 2000. The slowdown in activity was most evident among export-oriented industries, including electronics. However, domestic-oriented industries, such as vehicles and parts, beverages, and ornaments, fared somewhat better.

Growth in services (accounting for about 48% of GDP) moderated to 2.3% in 2001 from 4% in 2000, and was broadly in line with the general pace of economic activity. Virtually all subsectors experienced difficult conditions. Tourist arrivals dropped in the wake of the September 11th events in the US, and a moderation in consumption spending was felt in the retail segment and in other services activities. Growth in the agriculture sector (which accounts for about 8% of GDP) fell to only 1.5% in 2001, from 4.8% in 2000, partly due to the sluggish performance in production following a reduction in the area planted to rice and cassava.

On the demand side, real consumption growth slowed to 3.2% in 2001 from 4.6% in 2000. In a context of increased uncertainty, private consumption growth fell to 3.4% in 2001, from 4.9% in 2000. Investment, which has been the slowest component of demand to recover in the wake of the Asian financial crisis, remained sluggish in 2001. Excess capacity and obstacles to corporate restructuring held it in check.

In fiscal year 2001 (ending 30 September 2001), a consolidated central government deficit of B109.4 billion, or 2.1% of GDP, was registered, compared with B154 billion, or 3.2% of GDP, in fiscal year 2000. This reduction resulted largely from shortfalls in disbursements on capital projects. The rise in government revenues, mostly in the form of increased excise taxes, also contributed to the deficit reduction. The deficit was financed mainly through the issuance of domestic debt securities.

Money supply (M2) growth rose slightly to 4.2% in 2001 and short-term interest rates remained low throughout the year in a context of ample liquidity, but, despite these two factors, nominal net domestic credit continued to contract by 6.2% during the year. In particular, credit to the private sector (in nominal terms) dropped by 7.5%. This was the fourth year of the domestic credit decline, largely reflecting commercial banks’ unwillingness to lend in the face of high credit risks, weak balance sheets, and sluggish domestic demand. Consumer price inflation stayed virtually unchanged at 1.7%, mainly due to weak demand, a stable exchange rate, and a moderation of fuel prices.

In 2001, exports shrank by 7%, as a result of reduced external demand and the downturn in the electronics business cycle. Import demand also contracted but by less than exports, causing the trade and current account surpluses to contract. Reduced demand for intermediate goods for exports and lackluster growth in consumer demand were largely responsible for this import demand shrinkage. The trade surplus narrowed to about $2.5 billion in 2001 from $5.5 billion in 2000, as the current account surplus narrowed to 5.5% of GDP from 7.5% (Figure 2.12).

The overall balance of payments was in surplus in 2001. However, the capital account remained in deficit, mainly due to the continued payment of foreign loans by private commercial banks and nonbank financial institutions. Official international reserves continued to accumulate, reaching $33 billion as of December 2001, up from $32.7 billion in 2000. This is more than twice the level of short-term debt and equivalent to around 6 months of imports. Currently, free international reserves, as defined by the gross reserves net of swap obligations and IMF package liabilities, are estimated at about $18 billion–$20 billion.

On a variety of indicators, the economy’s external financial vulnerability is improving. By the end of 2001, total external debt had fallen to $69 billion, from $80 billion at the end of 2000. The reduction in debt was largely due to the liquidation of private sector foreign exchange liabilities. The external debt service ratio stood at about 17%. The baht depreciated from an average of 40 to the dollar in 2000 to an average of 44.5 to the dollar in 2001, which was broadly in line with the depreciation of other regional currencies against the dollar.

Policy Developments

In the face of the weakening external demand, domestic demand recovery is crucial to economic growth. In this context, the Government plans deficit-spending measures to support domestic demand. For fiscal year 2002, a budget deficit of B199.5 billion is targeted, or 3.8% of GDP, representing an increase of B90.2 billion, or 1.7% of GDP, over the budget for fiscal year 2001. The measures include higher spending on a public health program, a village and urban revolving fund, a tourism promotion program, a debt-suspension program for farmers, and housing credit support for government officials. The deficit will be financed mainly by the issuance of government bonds to the public.

As a result of successive deficit-spending measures to stimulate the economy and support finance sector restructuring, public debt has risen substantially. Total public debt outstanding amounted to about B2.9 trillion at the end of 2001, equivalent to around 57% of GDP. In 1996, prior to the financial crisis, the ratio of public debt to GDP was 15%. If debt continues to escalate, it could pose risks over the medium term, as an increasing debt service burden will constrain public expenditure options. Rising debt levels may also eventually force up domestic interest rates and have an adverse effect on perceptions of sovereign creditworthiness. In an attempt to alleviate these concerns, the Government has imposed a ceiling of 60% on the ratio of public debt to GDP.

In June 2001, the Bank of Thailand raised its 14-day repurchase rate by 100 basis points to 2.5%. In a low inflation setting, this move was intended to support the income of deposit holders and to deter capital outflows through the refinancing of foreign currency debt in baht. Late in 2001 and early in 2002, the Bank of Thailand partially reversed its earlier stance by lowering the repurchase rate by 50 basis points, in two 25 basis point steps. Accumulating international reserves and an appreciating baht over the last 6 months of 2001 suggest that monetary policy may have been too restrictive.

The proportion of nonperforming loans (NPLs)—defined as loans for which payment is at least 3 months overdue—decreased to about 10% of the total, or B478 billion in December 2001, from about 18%, or B858 billion in December 2000. Although this sharp reduction was partly the result of debt restructuring, the main reason was the transfer of NPLs to asset management companies (AMCs), since assets with these AMCs are not counted in the NPL ratio.

To overcome a variety of obstacles to debt restructuring and to promote efficient management of NPLs, the Government established the Thai Asset Management Company (TAMC) in June 2001. The TAMC plans to acquire and manage about B1.3 trillion (about $30 billion) in book value of distressed assets. Over 80% of these assets consist of NPLs held by state-owned entities. The bill empowering the TAMC was approved in September 2001. In bypassing the existing slow judicial and administrative procedures, it is hoped that the TAMC, with its special legal powers, will speed up the debt-restructuring process. By January 2002, the TAMC had taken over more than B700 billion (approximately $16 billion) in NPLs, mostly from state-owned banks. By the end of 2002, the TAMC is expected to have restructured about 70% of this debt. Under the approved bill, the TAMC is empowered to restructure debt through debt and debt service reductions, debt for equity swaps, transfer of collateral through the reorganization of businesses, and the foreclosure and disposal of collateral. Resolving the corporate debt problem definitively is a crucial issue for the economy, in view of difficulties with earlier restructuring arrangements.

Thailand has made substantial progress in reducing poverty over the last 2 decades. However, the financial crisis in 1997 interrupted this momentum and had a severe impact on the poor. Poverty incidence increased to about 15.9% in 1999 from 11.4% in 1996 and may have risen further by the end of 2001. In the Ninth National Economic and Social Development Plan (2002–2006), the Government has committed to intensifying the fight against poverty and has set a target of reducing the poverty incidence to less than 10% by 2006. Achieving this target is likely to require much faster economic growth than currently anticipated and/or the concerted application of pro-poor redistribution measures. In particular, the prospects for sustained poverty reduction will hinge on reversing current trends toward growing income inequality. Rural regions have not benefited from growth to the same extent as Bangkok. In addition, national educational attainments compare unfavorably with those of other middle-income developing economies. Measures to bridge education gaps deserve priority attention from the Government, as do initiatives to promote greater geographic balance in the creation of economic opportunities.

Outlook for 2002–2003

Growth prospects will be influenced significantly by the evolution of global economic trends over the next 2 years. The economy is relatively open, with aggregate trade (defined as the ratio of exports plus imports to nominal GDP) of 111% of GDP. Thailand’s ICT exports constitute about 60% of total exports. The major export markets are the US and Japan, which account for about 21% and 15% of total exports, respectively. In addition, with the economy a large net importer of fuel, oil price movements can have a pronounced effect on domestic income.

With the external outlook uncertain and domestic private demand still constrained by a large debt overhang, GDP growth in 2002 of 2.5% is projected. Economic momentum is expected to strengthen in late 2002 with the expected acceleration in recovery of global demand. In the absence of unanticipated adverse shocks, growth in 2003 should be in the range of 3–3.5%. Over the medium term, the prospects for growth will remain crucially dependent on continued progress in finance sector reform and corporate debt restructuring. Without significant advances in these two areas, it is unlikely that the recovery of investment needed to propel activity will materialize.

Inflation is projected to rise to around 2% in 2002 and to edge up to about 2.2% in 2003 as a result of the widening fiscal deficit supporting domestic demand. The scheduled increase in VAT from 7% to 10% in October 2002 will also act as a one-off boost to inflation, though it should provide a much-needed fillip to fiscal revenues.

The current account surplus is projected to narrow further to 4.1% of GDP in 2002 and then to about 3% in 2003. As economic growth begins to accelerate, import growth is expected to slightly outpace that of exports. Overall external debt is projected to decline in 2002–2003.

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