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Asian Development Outlook 2004 : II. Economic Trends and Prospects in Developing Asia : Southeast Asia
Thailand Rapid economic growth, budget and current account surpluses, and debt repayments continued to reduce the economy’s external vulnerability in 2003. While private consumption has been a driver of growth, investment looks set to pick up in 2004, although it will remain well below precrisis levels. Risks to watch include a rise in household debt, a surge in asset prices, and violence in the south. The avian flu problem appears manageable. Economic Assessment The solid growth of 5.4% achieved in 2002 carrie As in 2002, private consumption was the major component that propelled growth in domestic demand, strengthening to 6.3% growth in 2003 from 4.9% in 2002, and contributing 3.5 percentage points to the GDP expansion. Private investment rose by 17.9% in 2003, albeit from a low base. Public investment declined in the first half of the year before recovering in the second, resulting in overall growth in total investment of 11.7%, approaching double the 6.5% recorded in 2002. From a sector point of view, industry-sustained by strength in manufacturing-contributed 4.2 percentage points to GDP growth. The manufacturing production index gained 12.3% in 2003, up from 8.5% a year earlier. The upturn in the global electronics cycle boosted production of electronics and electrical appliances, while robust domestic and external demand increased production of motor vehicles. Stronger economic growth meant that the unemployment rate continued to trend down. After averaging 2.4% in 2002, it averaged 2.2% in 2003, the lowest rate since the crisis. However, the incidence of poverty remains a concern. The Government has been tackling it mainly through its fiscal spending program, and on 1 January 2004, introduced an unemployment security fund to provide a safety net for those laid off. It has launched a “war on poverty” in an attempt to eradicate poverty within 6 years. Faster economic expansion also strengthened the fiscal position, mainly through mounting tax revenues. In FY2002 (ended 30 September 2002), the budget had been in deficit by the equivalent of 2.2% of GDP. FY2003 experienced a major turnaround: the budget recorded a surplus amounting to 0.6% of GDP. Consumer price inflation rose to 1.8% in 2003 from 0.7% in 2002, but remains manageable. Much of the rise was a consequence of higher petroleum and food prices, with food up by 3.6% over the year. The core inflation rate, which excludes food and energy, edged up by just 0.2%. The baht firmed up in 2003, with its reference rate averaging B41.5/$1, strengthening from B43.0 in 2002. Rising FDI and a recovering stock market contributed to this. In January 2004, the baht gained more ground, to around B39/$1. The Stock Exchange of Thailand index soared by 117%. Most regional markets benefited from a surge of foreign funds in the second half of the year, and Thailand’s equities also were helped by the strong economic growth and improved corporate profits. Monetary policy of the Bank of Thailand (BOT) is aimed at maintaining core inflation within a 0-3.5% range. In June 2003, it cut the 14-day repurchase rate by 50 basis points to 1.25% and kept the key rate at this level, even though economic growth later in the year was stronger than expected and consumer prices rose a little. Surplus liquidity in the financial system helped keep rates down. However, domestic bond yields are rising in 2004 as a result of the pickup in inflation.
Especially in the fourth quarter, merchandise exports and imports both grew strongly, registering growth of 18.6% and 17.1%, respectively, for the year, and widening the merchandise trade surplus to $4.2 billion. Tourism recovered toward the end of 2003, after the SARS scare in the first half and, combined with the trade surplus, helped push the current account surplus to almost $8 billion in 2003 from about $7 billion a year earlier. As a share of GDP, the current account surplus was 5.6% in 2003, similar to the 2002 level. The overall balance of payments was in surplus only by about $143 million as a result of prepaying the IMF-led loan package. Foreign currency reserves rose to $42.1 billion, more than twice the level of short-term debt and equivalent to almost 7 months of imports. Declining since 1997, the external debt stock continued its downward trend in 2003, to $52.3 billion at year-end from $59.5 billion 12 months earlier. The ratio of public sector external debt to total external debt also fell, from around 39% in 2002 to about 32% in 2003. This is in line with government efforts to repay loans from multilateral agencies such as IMF, World Bank, and ADB. Thailand paid off the last of the IMF-arranged loan package in July 2003, 2 years ahead of schedule. Soon after this, the Government announced that it would no longer borrow from multilateral sources. Net inflows of FDI rose to $954 million in 2003 from $841 million the previous year, with investment in manufacturing and trade-related activities accounting for the bulk of these inflows. Overall, Thailand further reduced its external vulnerability in 2003 by building international reserves, running budget and current account surpluses, and reducing its external debt. Policy Developments The economy grew faster than most others in the region in 2003, an unlikely forecast scenario even a couple of years ago. The fact that it has been able to achieve this performance while running both a budget and current account surplus, prepaying some loans, and containing inflation, is laudable. With its first fiscal surplus since the crisis, the economy is in a position to generate a cushion to address a future slowdown using injections of government spending. Factors that contributed to the surplus included strong economic growth, improvements in tax administration and collection, falling debt service costs, and the expiration of a 5-year period when companies were allowed to carry over losses incurred during the crisis. However, Thailand also has some significant off-budget items. For example, various government initiatives, such as the provision of credit to small and medium enterprises and housing projects for the poor, are paid for by state-owned banks. The cumulative cost of off-budget items since 2001 is estimated at 6% of GDP. Analysis of the strength of the overall fiscal position is marred by such items, and raises concerns about the size of the Government’s contingent fiscal liabilities. A move to include the costs of such items in the budget would reduce uncertainties about the fiscal position. The war on poverty launched by the Government involves a registration process, which started pilot testing in late 2003, whereby poor people are required to explain their problems so that tailor-made solutions can then be applied. It is too early to gauge the ability of this program to reduce poverty over the long term. While total investment on average accounted for more than 40% of GDP in the years before the crisis, the postcrisis period has seen investment fall to about half that rate. Private investment, which was sluggish for several years after 1997, started growing in 2002 and this carried through to 2003. Public investment, on the other hand, continued to fall in 2003, although it picked up toward the end of the year and is likely to strengthen further in the coming years. The budget surplus has encouraged the Government to pursue public infrastructure investment in 2004 and beyond. Although it will likely be some time before total investment levels approximate to those of the precrisis era, the figures for 2003 suggest that both private and public investment is trending up. Completion of banking and corporate sector restructuring remains vital for the recovery of business investment. As of June 2003, the Thai Asset Management Corporation had acquired about $19 billion of NPLs, mainly from state-owned financial institutions, and had resolved about $14 billion of these, mainly by restructuring the loans. Improvements in the corporate bankruptcy law are required to complete the workout of NPLs, and if implemented effectively, will enhance the protection of creditors and the investment climate more generally. Outlook for 2004-2005 The momentum associated with the high growth rate in the fourth quarter of 2003 is likely to continue through at least the first half of 2004. Growth for all of 2004 is estimated at 7.2%, moderating in 2005 to just above 6%. The 2004 projection takes into account the estimated impact of the avian flu outbreak. Several factors underpin these growth projections. Exports are likely to accelerate in 2004, provided that global economic conditions keep improving and the baht appreciation is kept in check. The planned increase in government investment in 2004 will further contribute to growth. Moreover, in response to recent violence in the south, the Government has pledged to increase spending to accelerate development and improve livelihoods in that region. Election-related spending is also likely ahead of polls that must be held by early 2005. Private investment looks set to continue its revival. Most private sector forecasters expect that gross investment in 2004 will exceed 10%. Growth in private consumption spending, which has been a major factor in spurring the economy over the past 2 years, is likely to continue at around 6% in 2004, before easing in 2005. A rise in interest rates to cap inflationary pressures and other measures to curb rising household debt may dampen growth toward the end of the year and into 2005. Even with strong growth, consumer price inflation is likely to remain relatively subdued at around 2.4% in 2004 and 2.6% in 2005. This would be higher than in recent years, but would still be manageable. Certainly, 2004 got off to a brisk start. The index of private consumption rose by 4.4% in February from a year earlier, according to preliminary data from BOT, and the index of private investment jumped by 23.1%. Farm incomes rose because of increases in prices of major crops. External demand-especially for electronics, vehicles, and plastics products-was robust, with the value of exports up by 21.0%. The value of imports in February shot up by 25.5%, boosted by increased purchases of imported intermediate goods and raw materials as well as capital goods for industrial use. Manufacturing production rose by a higher than expected 16.3% in February, accelerating from 10.9% in January. Prices also rose; the CPI increased by 2.2%, mainly due to higher food prices. Continued strong economic growth suggests that the Government may be able to make significant inroads into the poverty that resulted from the crisis. The country’s experience with poverty reduction from the mid-1980s to the onset of the crisis shows that rapid growth can reduce the incidence of poverty. GDP growth, coupled with government programs targeting the poor (particularly in the northeast and southern regions), should result in poverty being reduced appreciably over the next few years. As a significant producer and exporter of poultry, Thailand faces a greater potential problem than most other subregional countries from the outbreak of avian flu, but the disease is not likely to have the impact that SARS had on business and tourist travel in 2003. Clearly, it will hurt the poultry industry and, to a lesser degree, tourism, and may well lower private consumption spending. The National Economic and Social Development Board recently estimated that avian flu would reduce GDP in 2004 by about 0.4 percentage point, which is built into the forecast. The violence in the south is a risk factor, too. Martial law was declared in the three provinces bordering Malaysia, but a new attack in late March raised further concerns about security in the area. Continuing violence may harm the country’s image as a safe destination for tourists. Another potential problem is an increase in household debt resulting from low interest rates, easy access to credit, and rise in consumer confidence. According to the Thailand Development Research Institute, average debt levels are now equivalent to around 6 months salary. For those on a relatively low income of about B900 a month, the average debt is equivalent to 8.5 months salary, and for people earning B450 it is 15 months salary. Unless consumer credit is curbed, rising household debt could eventually lead to a significant level of defaults, particularly when interest rates start to move up. In turn, that would reduce consumer spending, erode economic growth, raise NPLs in the financial sector, and increase poverty. During the first quarter of 2004, BOT indicated its concern about household debt by, among other steps, setting new limits on the length of time that credit card issuers can roll over delinquent debts. Related concerns are signs of a boom in asset markets. Since early 2002, property market transactions have been growing by about 40% a year. The stock market index more than doubled in 2003, although it retreated by 16% in the first quarter of 2004. The concern is that these sharp increases are fueled in large measure by short-term speculative flows that may be reversed at some stage, which would spark a plunge in business and consumer confidence. In summary though, it is unlikely that these risks will threaten growth to any significant degree.
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d through into 2003 and picked up pace in the second half of the year, notably with a 7.8% burst in the fourth quarter. This final-quarter surge resulted in overall growth of 6.7% for the year, exceeding official projections (Figure 2.12). Thailand is now growing at rates not seen since before the Asian financial crisis, and has been able to recoup almost all of the crisis-induced losses in per capita income (measured in constant local currency prices).
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