Countries and Regions

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p. 7 of 17 BACK | NEXT Executive Summary Map I. Recent Economic Developments A. Growth, Employment, Saving, and Investment B. Fiscal Developments C. Monetary Development and Prices D. External Trade and Balance of Payments II. Short and Medium-Term Economic Prospects and Policy Issues III. Selected Policy Issues

Country Economic Review: Thailand : I. Recent Economic Developments

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D. External Trade and Balance of Payments

1. Trade and Current Account

30. Robust export growth helped Thailand to start its recovery in 1999. In 2000, export demand continued to be a major factor contributing to economic growth. The value of exports, in dollar terms, rose by 19.6 percent over 1999. However, export growth began to taper off toward the end of 2000, following a slowdown of the US economy in the second half of the year and a downturn in the global electronics cycle. About 22 percent of Thailand’s total exports go to the US and about 19 percent of total exports are electronics. In 2000, the value of imports grew rapidly at 31.3 percent from a low base in 1999, with a sharp increase not only in net oil imports (from 2.7 percent of GDP in 1999 to 3.7 percent in 2000), but also in raw materials and capital goods (Figure 5). The increase of capital goods was in line with the increase in gross capital formation (or investments), which grew by 18.9 percent in 2000. Despite quick import growth, the trade account posted a surplus of $5.5 billion at the end of 2000. Nevertheless, the rapid growth of imports in 2000 led to a narrowing of the current account surplus, which declined from $12.5 billion (10 percent of GDP) in 1999 to $9.21 billion in 2000 (7.5 percent of GDP). Services income performed strongly in 2000, as net income from tourism surged, helping to offset import growth.

2. Capital Flow and Foreign Direct Investment

31. In 2000, the overall balance of payments was in deficit. The capital account deficit increased to $9.8 billion in 2000 from $7.9 billion in 1999 (Figure 6 and Table 11). The outflows were mainly due to the continued payment of foreign loans by private commercial banks ($4.8 billion) as well as nonbanks ($3.9 billion), accounting for about 89 percent of total net financial outflows. Corporates and banks were encouraged by low domestic interest rates to refinance their foreign currency obligations in domestic debt markets. The Government also made repayments to bilateral creditors and multilateral development institutions (including a $500 million loan prepayment to ADB and a $200 million repayment to IMF in 2000). Aside from the bank and nonbank loan repayments, movements of offshore funds (at $562 million) out of Thailand, likely due to low domestic interest rates and political uncertainty before the national election, also contributed to net capital outflows. Gross international reserves declined marginally to $32.7 billion by the end of 2000, from $34.8 billion in 1999. This is more than twice the level of short-term debt and equivalent to around six months of imports.

32. Foreign Direct Investment (FDI) inflows slowed in 2000 to $2.9 billion from $5.9 billion in 1999. The decline reflected continuing low levels of investor confidence. A moderation of the strong interest in the banking and finance sector drove FDI in 1998 and 1999. In addition, some investors’ perception is that the cost of doing business in Thailand is high because of the inadequacy of the skilled labor force.¹⁸ Another factor accounting for the slowdown in FDI inflows is the current excess capacity in many industries. Portfolio investment remained at much lower levels than the precrisis levels. International investors have still not regained confidence in the stock market.

33. The net financial outflows from Thailand that occurred in 2000 did not pose the same threats as those occurring in 1997. First, the quantum of the outflow was considerably smaller. Second, the composition of recent financial outflows has changed. During the crisis in 1997- 1998, outflows largely reflected the nonrenewal of short-term bank credits. In contrast, in 2000, the outflows largely reflected scheduled debt repayment, which directly improved the country’s external debt position. Third, Thailand’s external debt structure has improved substantially, with the share of short-term debt in total external debt declining from a peak of 52 percent in 1995 to around 18 percent in December 2000. Fourth, Thailand’s external payment position is now considerably stronger than before. Current account surpluses prevail, and foreign exchange reserves provide ample cover against short-term maturing liabilities. Although total international reserves slightly fell to $32.7 billion at the end of 2000 from $34.8 billion at the end of 1999, they continue to be higher than $27 billion at the end of 1997.

3. External Debt and Exchange Rate

34. In June 2000, external debt figures from 1995 onward were revised upward by BoT following a comprehensive survey that included the nonbanking subsector. Based on the revised figures, total external debt was estimated to have declined to $79.7 billion at the end of 2000 from $95.2 billion at the end of 1999 (Table 12). Thailand’s external debt had a better position than in 1996 before the crisis. First, total external debt declined to $79.7 billion from $108.7 billion at the end of 1996. Second, the maturity profile of debt has shifted toward long-term debt, with short-term debt’s share in total declining to 18.4 percent in 2000 from 43.9 percent in 1996, mainly as a result of external debt repayment by the private sector. Third, of that total, public debt made up 42.5 percent in 2000, from 15.5 percent in 1996, while the private sector owed the remaining. Fourth, the gross international reserves as a ratio of short-term debt have increased from 81.1 percent in 1996 to 222 percent in 2000. In addition, Thailand’s debt service ratio (percent of exports of goods and services) dropped from 19.4 percent at the end of 1999 to 15.2 percent at the end of 2000, reflecting an improved ability to service foreign debt.

35. The baht depreciated from an average of 38 to the dollar in 1999 to an average of 40 to the dollar in 2000. Domestically, the weakening of the baht could be attributed to the low interest rates, deterioration of balance of payments, and preelection uncertainty. Externally, an increase in world oil prices adversely affected Thailand’s terms of trade. The baht’s depreciation was in step with a boarder depreciation of regional currencies against the dollar.

36. By the end of 2000, Thailand’s nominal effective exchange rate depreciated by 16 percent points since the crisis in 1997. Likewise, the real effective exchange rate or (nominal effective exchange rate adjusted for inflation of major trading partners) has depreciated by 13 percent points during the same period. The depreciation of the real effective exchange rate has helped to support export growth.

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