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p. 33 of 77 BACK | NEXT Foreword, Acknowledgments, Acronyms and Abbreviations, Definitions I. Developing Asia and the world II. Economic trends and prospects in developing Asia East Asia Southeast Asia Cambodia Indonesia Lao People's Democratic Republic Malaysia Myanmar Philippines Singapore Thailand Viet Nam South Asia Central Asia The Pacific III. Promoting competition for long-term development Statistical appendix

Asian Development Outlook 2005 : II. Economic trends and prospects in developing Asia : Southeast Asia

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Thailand

Economic growth slowed in 2004, partly as a result of drought, avian flu, and rising oil prices. Investment became a more significant contributor to the final outcome. Growth is expected to slip further this year, even though the authorities plan major infrastructure spending. Issues to watch include implementation of the infrastructure program, potential private debt imbalances, and whether the Government uses its strengthened parliamentary position to promote economic reforms.

Macroeconomic assessment of 2004

In contrast with most of East Asia and Southeast Asia, Thailand’s expansion slowed in 2004, to a still strong 6.1% from 6.9% in 2003. The deceleration was attributable to a prolonged drought, avian flu, increasing oil prices, and unrest in the southern provinces, which hurt consumer and investor confidence. But against this broader trend, investment continued to accelerate, rising by 16.1% and contributing 3.6 percentage points to total growth. The main factor was an 11.7% surge in public investment, after a 0.8% fall in such investment in 2003. Private investment grew by 15.3%, slowing a little from 17.5%.

Consumption grew by 5.4% and contributed 3.4 percentage points to GDP growth, similar to the input from investment. In consumption, too, government spending growth picked up, to 4.1% from 2.0%, while the rise in private consumption decelerated, to 5.6% from 6.4% (Figure 2.12). Expansion in imports outpaced that in exports, and net exports subtracted 1.1 percentage points from growth.

On the production side, agriculture was affected by the drought, avian flu, and reduced export demand for shrimps due to US antidumping measures. Consequently, agricultural production fell by 4.4% in 2004, switching from growth of 8.7% in 2003. The growth rate of manufacturing eased to 8.3% from 10.4%. Production of chemicals was strong, partly reflecting high demand from the PRC. Some light manufacturing industries, especially food and beverages, were also hit by avian flu and drought, although they recovered in the third quarter. The capital goods and technology industries continued to slow through 2004, partly due to declining demand for motor vehicles prompted by higher oil prices and revisions to excise taxes, which caused some consumers to delay purchases until after July when the revisions took effect.

Among services, growth in wholesale and retail trade eased a bit but hotels and restaurants grew by 12.4%, recovering strongly from 2003 when the regional SARS outbreak set back these subsectors. Hotel occupancy rates increased from about 57% in 2003 to 64% in 2004 and the number of foreign tourist arrivals rose by 17.3% to 11.7 million. Construction recorded high growth of 12.7% in 2004, up from 3.3%, reflecting an increase in private and public construction. Transport and communications also grew faster in 2004, by 7.7%, or more than double the pace of 2003, while growth in the financial sector was high at 14.2% in 2004, although this was 2 percentage points below its 2003 rate.

Unemployment has been on a downward trend since the Asian financial crisis, from 4.4% in 1998 to 3.3% in 2001 and 2.1% in 2004. Indeed, the labor market is tight in some industries.

Government revenues and expenditures both increased by about 17% in FY2004 (ended 30 September 2004). The budget registered a surplus of B19.4 billion and there was a nonbudgetary deficit of B2.2 billion, so that the overall government balance was a surplus of B17.2 billion, or 0.3% of GDP. In FY2003, the Government had recorded a surplus of 0.6% of GDP.

The general level of prices edged up in 2004, largely due to higher prices of farm and oil products, but started slowing toward year-end. Consumer price inflation averaged 2.7% in 2004, higher than 1.8% in 2003. Core inflation, excluding food and energy, was 0.4%, up from 0.2%, but within the target range set by the Bank of Thailand (BOT). The central bank raised its benchmark 14-day repurchase rate three times in the second half of 2004, by a total of 75 basis points to 2.0%, in order to lean against inflationary pressures. The overnight interbank rate rose from 1.02% in January to 1.79% in December, though the 1-year fixed deposit rate remained at 1.0% and the prime lending rate stayed in a range of 5.5-5.75%.

In the banking sector, commercial bank deposits increased by just 2.6% in 2004, compared with 4.4% growth in 2003. Commercial bank private credits expanded at a much higher rate of 6.8%, accelerating from 3.6% in 2004. The ratio of NPLs in Thai commercial banks was about 12% in December 2004, down from almost 14% in the previous year, although some estimates put NPLs for the whole economy at around 20%. The Stock Exchange of Thailand Index gave back some of the large gains it made in 2003, when this measure of share prices more than doubled. In 2004 the index declined by 16%. The baht firmed to an average rate of B40.27/$1 from B41.53/$1 in the previous year, while the real effective exchange rate fell slightly.

External performance remained strong in 2004. Merchandise exports climbed by 23.0% to $96.1 billion, accelerating from the rate of expansion in 2003, mainly a result of sharply higher shipment volumes to the EU, ASEAN economies, and Japan. Merchandise imports grew even faster, by 26.9%, to $94.4 billion. The surge in imports was attributable to oil price increases and imports of intermediate products and capital goods. The trade surplus fell by half to $1.7 billion, but the services account recorded an increased surplus, producing a current account surplus of $7.3 billion, or 4.5% of GDP, compared with 5.6% in 2003. Gross international reserves rose to a comfortable $49.8 billion in December 2004, from $42.1 billion at end-2003. External debt fell to $50.6 billion from $51.8 billion and the debt service ratio declined from 16.0% to 8.4%.

Macroeconomic policy developments

The Government strengthened its position in Parliament in elections in February 2005, ensuring continuity of its dual-track policy of building up domestic economic fundamentals while enhancing Thailand’s links to world markets through international trade, investment, and financial cooperation. The Government is expected to continue its programs, such as the Village Fund that provides loans to communities, as well as assistance for SMEs.

High crop prices in 2003-2004 led to significant increases in farm income, by 28.5% in 2003 and 15.4% in 2004. These increases, plus government programs that injected funds into rural districts, contributed to reducing poverty. However, income inequality among different regions and groups remains a problem. Thailand is likely to attain most of the Millennium Development Goals, and is now going beyond them in some areas.

Investment plans that call for spending of up to B2.7 trillion ($69 billion) between FY2005 and FY2008, mainly on infrastructure projects in transport and energy, have been drawn up by the Government and SOEs. Large-scale projects, each costing more than B3 billion, account for 56% of the total. Planned funding sources are the government budget (36%), domestic loans (25%), international loans (24%), and SOE income (15%). The investment will raise GDP growth on average by about 0.2 percentage point a year over the investment period, according to the Ministry of Finance. However, it may also result in a smaller current account surplus. Although spending on infrastructure will boost the competitiveness of the economy, in implementing such a large investment program the Government should give paramount consideration to debt sustainability and macroeconomic stability.

The Government provided tax breaks that it hopes will spur private investment. From the start of 2005, the corporate income tax rate on the first B1 million of profit was lowered for businesses with registered capital not exceeding B5 million. From April 2005, the level of business income at which VAT applies is to be raised from B1.2 million a year to B1.8 million.

After raising its benchmark repurchase rate three times in the second half of 2004, BOT increased the rate by another 25 basis points to 2.25% in March 2005, and further tightening appears possible because of inflationary pressures, rising global rates, and a less pressing need for low rates in Thailand. The central bank will be cautious, though, because adjusting rates too rapidly could hurt private investment, economic growth, and the banks if their borrowers are strained by higher rates.

In response to the rehabilitation needs after the tsunami disaster, the Government said that expected expenditures for emergency and rehabilitation assistance could be about B10 billion. Of that amount, B5 billion was allocated to immediate programs, including direct assistance to families, support for industries, and low-interest loans for businesses. BOT will provide funding for commercial banks to lend at low rates to businesses in tsunami-affected areas.

Outlook for 2005-2007 and medium-term trends

Growth is likely to ease further--to 5.6%--in 2005 because of the global growth slowdown, high oil prices, and impact of the tsunami. The negative impact of the tsunami is estimated at 0.3-0.5 percentage point of GDP, which will be partly offset by government and private sector rebuilding. Consumption growth is forecast to slow to around 4% in 2005. This reflects in part two increases in diesel fuel prices in the first quarter of 2005 and the higher inflation and interest rates in 2005 that will slow spending.

Consumer confidence was in a downward trend early in 2005. Investment growth, though, will pick up to around 16% in 2005, because of post-tsunami reconstruction, high capacity utilization rates in certain manufacturing industries, and stronger corporate profitability in 2004. Also, some of the big public infrastructure projects are expected to be under way by the end of 2005, and the Government plans a supplementary budget that will fund public investments. These factors will more than offset the negative impact on investment of the slowing economic growth and rising interest rates.

On the production side, agriculture is expected to slowly recover after the 2004 contraction, provided that the drought eases and avian flu sees no nationwide recurrence. However, the drought remained a serious concern through the first quarter of 2005 and, if it continues, could slow the economy further. Growth of industry is put in the 7-8% range over the forecast period, slightly below 2004’s pace.

Services growth will slacken to about 4.0% in 2005, reflecting the impact of the tsunami on tourism. BOT commented in March 2005 that economic growth had moderated in December and January as a result of the tsunami, drought, and a softer trend in exports. (The coastal provinces affected by the tsunami usually host about 15% of Thailand’s foreign and domestic tourists.) After this year, GDP growth is expected to edge up to 5.8% in 2006 and 6.0% in 2007.

Net exports will be a slight drag on growth for at least the next 2 years as imports are expected to grow faster than exports, largely because of high oil imports and demand for imported capital and intermediate goods. The faster growth of imports will tip the trade balance into deficit from 2005 and the current account surplus will shrink. However, it is expected that external debt will fall further and that international reserves will be maintained at a comfortable level. Inflation is set to move up by nearly 1 percentage point to 3.5% on average in 2005, before subsiding in 2006-2007.

Investors will be watching to see if the Government uses the opportunity presented by its strengthened parliamentary position to make a renewed push on corporate and banking sector restructuring, on legal reforms in corporate governance and bankruptcy, and on privatization. Another issue under scrutiny will be the Government’s attitude toward off-budget spending now that it is more secure. Off-budget spending has raised concerns about the size of the Government’s contingent liabilities.

External risks to the outlook include lower than expected economic growth in Thailand’s major markets and higher than expected oil prices. The country’s active participation in regional cooperation programs and bilateral economic cooperation frameworks may help it minimize the impact of some types of externally generated problems.

Domestic risk factors include the drought, threat of a nationwide outbreak of avian flu, and sociopolitical tension in the south. In addition, close attention needs to be paid to private debt levels because property investment and household debt levels have been rising. Excessive credit expansion could increase the vulnerability of the economy as a whole, and the financial sector in particular, to rises in interest rates.

Over the longer-term, a long-standing challenge is higher education, in terms of quality and accessibility. A larger pool of trained employees, especially in technical fields, is needed to help the economy remain competitive.

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