Regions and Countries

	Table of Contents
p. 2 of 23 BACK | NEXT I. Country Performance Assessment A. Economic Performance Assessment B. Poverty Assessment C. Assessment of Socio-Environmental Performance D. Governance: Sound Development Management E. Implementation Assessment II. Country Operational Strategy III. Sector Strategies IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Thailand : I. Country Performance Assessment

---

I. Country Performance Assessment

A. Economic Performance Assessment

1. Thailand is recovering from the severe economic crisis that engulfed it almost three years ago. After an unprecedented real gross domestic product (GDP) contraction of 10.2 percent in 1998, real GDP grew by 4.2 percent in 1999, and consensus forecasts call for GDP growth of 4 percent in 1999 and 4-5 percent in 2000, supported by increased domestic consumption, higher capacity utilization in the manufacturing sector, and encouraged by two stimulus packages. Inflation was contained at an historically low level of 0.3 percent in 1999, compared to 8.1 percent in 1998. The external sector showed a strong recovery with significant increases in both exports and imports while maintaining a current account surplus of 9.1 percent of GDP. International reserves increased, external debt declined, and the baht proved stable. In sum, the economy has achieved a successful comeback from the crisis and consequent recession. Labor Force Survey data indicate that the unemployment rate (excluding seasonally inactive labor force) for the month of August declined slightly from 3.6 percent in 1998 to 3.4 percent in 1999, and that for November fell from 4.5 percent in 1998 to 3.3 percent in 1999.

2. During FY 1999, the Government maintained the expansionary fiscal stance and continued to relax public sector deficit targets. The consolidated deficit, including the cost of financial restructuring, is estimated at 7.2 percent of GDP for FY 1999, compared to 5.5 percent in 1998. The Government launched economic stimulus packages in March and August 1999 totaling B153 billion ($4 billion) in expenditures, along with tax and tariff reductions. While the March package totaling B53 billion was aimed at increasing employment and stimulating private consumption, the August package totaling B100 billion focused on stimulating private investment (including tax and tariff measures) and financing arrangements for small- and medium-enterprises (SMEs). On the monetary front, despite an easing of monetary policy, the increase in M2A was only 1.3 percent at the end of 1999, compared to 6.1 percent at the end of 1998. Interest rates have declined from historic highs of only two years ago to historic lows. However, the credit crunch continued in 1999 because of bank concerns with the high level of nonperforming loans (NPLs) and the need to comply with tightened prudential norms. NPLs in the total loans outstanding of the financial sector continues to be high at 38.07 percent as of February 2000, albeit a much lower level compared to 46.7 percent in February 1999. Although a steady progress in corporate debt restructuring has been reported, a lot of "completed cases" were merely rescheduled, not fully restructured.

3. External sector performance improved significantly in 1999, with export growth of 7.4 percent and import growth of 17.7 percent. The current account balance remained in surplus at $11.3 billion, 9.1 percent of GDP. Official international reserves reached $34.8 billion or about nine months of imports coverage in December 1999, and the exchange rate was fairly stable at around B38/$1 in 1999. Meanwhile, despite increased foreign direct investment inflows, the net capital movements registered a deficit of $6.1 billion, reflecting large private capital outflows as commercial banks continue to repay their external debts. Consequently, external debt stood at $75.6 billion in December 1999, down from $86.2 billion at end-1998; the share of short-term debt also declined from 27.3 to 18.1 percent of total external debt during the same period. However, public sector debt (including the Monetary Authority) as a proportion of total external debt has more than doubled since the crisis began in July 1997 and accounted for 48.4 percent of total debt at end-1999.

4. In December 1999,the International Monetary Fund (IMF) Executive Board approved the completion of the eighth review under Thailand's Stand-By arrangement. In principle, this would have allowed the authorities to draw a further $500 million from the official financing package. However, in view of the gathering recovery and stronger external position, the authorities indicated that they would not avail of these additional resources. IMF officials publicly supported the Government's intention to refrain from additional withdrawals and agreed to treat the arrangement as precautionary. Thailand did not withdraw any funds under the arrangement after June 1999. In February 2000, the Government confirmed that the $17.2 billion IMF-led economic adjustment program would expire as scheduled on 19 June 2000. On 23 May, IMF's Executive Board completed the ninth, and final review under Thailand's Stand-By Arrangement. In total, Thailand availed of $14.3 billion from bilateral and multilateral contributors to its $17.2 billion financing package.

5. There remains considerable uncertainty however as to Thailand's medium- and long-term growth prospects. It is particularly worrisome that commercial bank credits have continued to decline for the past two years, registering a year-on-year decrease of 5.2 percent in March 2000. As industry capacity utilization has improved, standing at 62.2 percent in March 2000, the banking sector may prove unable to accommodate financial needs of the manufacturing sector once investment start picking up. Although the economy is expected to maintain 4-5 percent GDP growth over the medium term, the weak financial sector may hamper a steady recovery of the economy. In this situation, the Government will continue its supportive role until a more pronounced increase in private sector activity materializes. This will increase the Government's fiscal burden and the level of public external debt.

6. Continuation of growth in the near term will depend on accelerating progress in corporate and bank restructuring and resolution of NPLs, as well as regional and domestic demand factors. Steady and balanced growth will only be sustained by maintaining a prudent macroeconomic framework, development of additional financial supervision capacity, and continued progress in areas of poverty, competitiveness, governance, and the environment.

7. Viewed from another perspective, Thailand is entering a more complex phase in its development involving the transition from an economy that has depended on cheap labor and abundant natural resources to a more complex structure requiring higher levels of technology and associated skills. Future development in Thailand thus raises a classic challenge - Thailand cannot make the leap to newly industrializing status on the basis of a purely low-end manufacturing role and an expanding service sector, much of which remains nontradable. If Thai industry is to lead the country to modernization, it must deepen and broaden its technological base, upgrade its human resources, and foster a strategic approach to the environment that will ensure sustainable resource use. At the same time, it will be important to address the continuing problems of improving the education levels and skills base of the poor (to ensure that they might participate more fully in the mainstream of socioeconomic development and benefit as much as possible from this transformation), as well as the widening income disparities among both income groups and regions.

Back I. Country Performance Assessment	Next B. Poverty Assessment