Catalog

During the first half of 2002, most of the expansion was driven by strong private consumption spending, facilitated by government measures to ease access to credit. Fiscal pump-priming in the first half of the year, in an overall environment of low inflation and interest rates, also aided growth. In addition, the Government provided a stimulus through various nonbudgetary measures, such as a "village fund" project.

While private consumption spending remained vigorous in the second half of 2002, a strong increase in exports and private investment spending produced a more broad-based growth outcome. Private investment rose by 13.3% in 2002, compared with only 4.7% growth in 2001. This sharp rebound is encouraging, given that investment has been the most sluggish demand component to recover since the crisis. However, a significant portion of this increase appears to be related to housing construction rather than productive capacity. Exports too rebounded well, led mainly by electronics.

From a sector point of view, the main contributor to stronger growth was manufacturing, which expanded by 7.7% in 2002. Manufacturing output also accelerated through the four quarters, from 4.2%, to 6.8%, to 9.1%, and to 10.6%, year on year, due to improvements in both domestic and external demand. While output of iron and steel products and cement was boosted by greater domestic construction activity, production of electronic goods and electrical appliances rose in line with the measured upturn in the global electronics cycle.

The agriculture sector did not contribute to the overall economic expansion, with zero growth in 2002 compared with 3.3% in 2001. A major underlying factor was a 4.8% drop in fisheries output resulting from a slump in frozen shrimp exports to European markets stemming from food safety concerns. Major crops continued to perform well, however, despite somewhat erratic weather conditions—droughts in the first half of the year and floods in the second. Output of major crops grew moderately by 0.8% in 2002, led by rubber. Prices of major crops also rose, by 6.5%, due mainly to higher demand for agricultural products and the Government's price intervention measures.

The services sector grew by 4.1% in 2002. This sector is dominated by tourism, which accounts for almost 5% of GDP. The tourism industry has recovered from the sharp drop-off in tourist arrivals felt in the immediate aftermath of the September 11 attacks, and performed well in 2002. Tourist arrivals improved by 7.3% in 2002, with a significant rise in the number of tourists from nearby countries, such as Korea and Malaysia. Despite the new regional security concerns that emerged in October 2002 with the bombings in Bali, indications so far are that the tourism industry has not been adversely affected. However, it is too early to assess the potential long-term effects on tourism of these security concerns.

Unemployment continued to trend downward, falling to a 5-year low of 1.4% in December 2002, compared with 1.7% a year earlier. In 2002, it averaged 2.4%, as against 3.3% in 2001. Employment increased by about 1.3%, with the majority of jobs created in the wholesale and retail trade, construction, and tourism. At these levels, unemployment is no longer a major policy issue for the Government, though poverty incidence is. Based on consumption of $2 per day, the World Bank estimates that poverty rose significantly from 28.2% in 1996 to 35.6% in 2000, but that its incidence declined slightly to 32.5% in 2002. The incidence is much lower when poverty is measured on consumption of $1 per day.

Thailand still has some way to go in bringing poverty down to the levels seen prior to the financial crisis. The Government has, indeed, been trying to address this issue, mainly through its fiscal spending program. For instance, a substantial package of farm, village, and small enterprise-oriented programs designed to expand productive opportunities for low-income groups has been introduced. In addition, a low-cost universal health scheme has been brought in to cover the uninsured. Furthermore, the rapid increase in farm income recorded in 2002, if it were to continue, would help in reducing the incidence of poverty in rural areas.

The budget deficit for FY2002 (ended 30 September 2002) was significantly lower than the target rate of 3.8% of GDP: it came in at B116.6 billion, or 2.2% of GDP. This was mainly the result of buoyant tax receipts, accruing from higher than expected economic growth. Government revenues for the fiscal year totaled B845.4 billion, up by 10.5% from the previous year, and B46 billion above target. Government spending continued to provide a stimulus to the economy, particularly in the first half of the year. Government expenditures for the fiscal year totaled B973.2 billion, 11.1% higher than the prior year's level.

Inflation remained subdued in 2002. Consumer price inflation averaged only 0.7%, while "core" inflation (excluding food and energy items) averaged 0.4%. The effects of rising world oil prices have begun to show however, with consumer price inflation increasing by 1.6% in December. Nevertheless, underlying inflationary pressures remain very weak, with excess capacity in many sectors. The main threat to the current low inflation environment lies in the possibility of a sharp rise in oil prices as a result of the conflict in Iraq.

The baht firmed in 2002, with the baht reference rate averaging 43.0 to the dollar in 2002, slightly stronger than the 44.5 recorded in 2001. With the rebound in exports and return to strong economic expansion, the baht could strengthen in 2003.

The Bank of Thailand (BOT) has an official policy of inflation targeting, and monetary policy is aimed at keeping core inflation within the 0-3.5% range. In 2002, BOT continued its accommodative monetary policy stance. Faced with low inflation and uncertainty over the pace of domestic economic recovery, in November it cut its benchmark 14-day repurchase rate by 25 basis points, to 1.75%. Money market interest rates declined even before this announcement, as the market had widely anticipated the move and priced it in. At these levels, interest rates are already at 30-year lows. These moves were also facilitated by the downward trend set by the US Federal Reserve, which cut its repurchase rate by 50 basis points in October to 1.25%.

The Stock Exchange of Thailand (SET) index reached a high of 426 in mid-June, up by nearly 50% in dollar terms since the end of 2001. Expectations of improved economic growth and better corporate profitability underscored the recovery. The sharp declines in US markets, which reverberated throughout Europe and Asia, were also felt in Thailand; by end-September 2002, the SET had slumped to about 332. Since then, it has recovered somewhat, and passed the 370 mark by mid-January 2003.

After dropping by 1.5% in the first half of 2002, exports rebounded strongly in the third and fourth quarters, rising by 11.4% and 15.2%, respectively. This resulted in an overall rise of 5.8% in 2002. Recent growth has been driven by improved demand conditions for electronics and related products, although improved world agricultural prices have also helped boost export income. Imports also turned up, growing by 2.1% in the second quarter after declining in the four previous quarters. The pickup in domestic demand was reflected in a surge in imports in the second half of 2002 as well. Import growth in the third and fourth quarters came in at 12.9% and 14.8%, respectively. This produced an overall increase in imports of 4.6% in 2002, and a merchandise trade surplus of $3.5 billion.

With surpluses in income and services, the current account surplus totaled $7.6 billion in 2002. The balance-of-payments surplus widened to $4.2 billion by the end of the year, increasing international reserves to $38.9 billion. This is more than twice the level of short-term debt, and equivalent to more than 7 months of imports.

External debt totaled $59.3 billion at end-2002, down from $67.5 billion at end-2001. The debt stock has been trending downward since 1997. The ratio of public sector debt to private sector debt has also been falling, from 41.7% at end-2001 to 38.5% at end-2002. This drop is in line with government efforts to repay loans from multilateral agencies such as IMF, World Bank, and ADB. The Finance Ministry recently announced that it plans to lower the country's public debt target to 54.6% of GDP in 2003. In setting this, the Ministry cited better than expected growth outcomes, as well as the repayment of more than B37.4 billion in government debt—of which more than B32 billion was foreign denominated. Some of these repayments have been financed by the issuance of short-term paper (e.g., euro commercial paper), and this raised the ratio of short- to long-term debt from 19.8% at end-2001 to 23.2% at end-2002. The Government plans to continue with prepayment of loans from multilateral agencies in 2003 through the issuance of sovereign bonds. With a comfortable current account surplus, growing international reserves, and declining foreign debt levels, particularly private sector short-term debt, external vulnerability has fallen considerably since the financial crisis.

Policy Developments

In a context where external demand had been expected to be anemic, the authorities pursued accommodating fiscal and monetary policies in 2002. Deficit-spending measures included a public health program, a village and urban revolving fund, a debt suspension program for farmers, and housing credit support for government officials. Overall, expenditures rose by 11.1%. Tax breaks were also provided for business startups, home purchases, and stock exchange listings. But, in a context of stronger than expected economic growth, buoyant tax and nontax revenues helped contain the actual deficit. The central Government's deficit for FY2002 was 2.2%, as against a targeted deficit of 3.8% of GDP.

In a move toward greater fiscal transparency, arrangements were worked out in 2002 for the amortization and servicing of Financial Institutions Development Fund debts. The Fund's debts will be amortized using BOT profits. It may take 20-30 years to accomplish the write-off, however. In the meantime, interest payments will be met by the Ministry of Finance and will be directly "fiscalized". Other significant developments during the year included the postponement (for a second time) of the increase in VAT from 7% to 10%, until 30 September 2003.

The budget for FY2003 signals a shift toward fiscal consolidation. The ratio of public sector debt to GDP has risen from 16% in 1996 to around 54% at end-November 2002. Also, the need for fiscal priming is now less pressing as the external environment is expected to be more supportive in 2003. The Government is planning to pare the total public sector deficit, which includes local government, extrabudgetary, and off-budget activities, and public enterprise financing needs, by about 1.4% of GDP relative to 2002's outcome. Expenditures on special programs will decline, and the financial position of state enterprises is expected to improve. The expected reduction in the public debt ratio to 55% reflects not only a commitment toward fiscal consolidation but also a more optimistic assessment of growth prospects. If such prospects fail to meet expectations, the ratio of public debt to GDP could resume its upward trajectory, and narrow the Government's latitude for fiscal discretion.

In a benign inflationary environment, BOT lowered its repurchase rate twice in 2002, broadly maintaining the differential between domestic and (falling) international rates. As core inflation is expected to remain at the bottom end of the target range, and the output gap remains large, there is unlikely to be any departure from the current low interest rate environment. In the conduct of monetary policy, BOT is anxious to ensure that any changes in the value of the domestic currency are orderly, but it no longer targets a value for the exchange rate.

In 2002, several measures were taken to stimulate credit expansion, including some relaxation of loan provisioning and classification requirements for banks. In particular, consumer credit and the home mortgage market showed signs of revival. Indeed, strong growth in credit card use led to the reinstatement of minimum income regulations on credit card issuance that had been earlier relaxed, and BOT has now introduced a cap on credit card cash advances. These measures are intended to take some of the heat out of consumer credit expansion and to limit the rise in personal debt. However, provided that interest rates remain low and inflation favorable, these measures are unlikely to seriously constrain private consumption growth.

The completion of banking and corporate sector restructuring remains vital for the recovery of business investment and the medium-term prospects for the economy. The Thailand Asset Management Corporation has now acquired $17 billion of NPLs, largely from public sector banks. By December 2002, just over $11 billion of these NPLs had been resolved. The Corporation, which acquired assets at an average cost of 33.3% of their book value, expects to recover 45% from repayments by debtors. During the course of 2003, the Corporation will turn its attention to the acquisition of debts of less than B20 million from state-owned financial institutions and will acquire the debts of the Industrial Finance Corporation of Thailand.

Since details about individual cases are not readily available, it is difficult to make judgments about the quality and possible sustainability of the resolution process. One risk of emphasizing an approach that gives distressed businesses another chance is that some unviable debtors will remain in business, and that could pose a renewed threat to bank balance sheets. Also, many of the bad loans of the private banking sector still need to be resolved and it is possible that further losses and a concomitant need for fresh capital injections will occur in the future. Steps are also needed to strengthen the leverage of creditors in bankruptcy and foreclosure processes. Under current arrangements, debtors can often obstruct and delay resolution.