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Countries and Regions Country Partnership Strategies Document
I. Development SituationA. Recent Political and Social Developments1. Following the January 2001 elections, the Thai Rak Thai party formed a three-party coalition led by Prime Minister Thaksin Shinawatra. The Thai Rak Thai has effective command of 324 seats of 500 Lower House seats, protecting the administration from any vote of no confidence. The new Government has yet to chart its long-term policy agenda. However, given immense pressure to stimulate the economy quickly, it has prioritized fiscal measures to boost rural incomes, including suspending farmers' debts and creating village revolving funds. The centerpiece of the new administration’s economic recovery program calls for the establishment of the Thailand Asset Management Corporation, vested with extra-legal authority to resolve $30 billion of nonperforming loans. The corporation is scheduled to begin operations in July 2001. 2. Thailand has largely met basic human needs. While improvements in the quality of life have been broad based, Thailand lags in some areas. In particular, compared to other middle income countries, educational attainments lag. As a result of the crisis, an additional 3 million Thais became poor. Households that were already poor saw a disproportionate worsening of their circumstances.1 The increase in poverty was distributed unevenly throughout the country, affecting mostly rural areas, especially the northeast, south, and central regions. Although data are partial, other social indicators have also registered setbacks. B. Economic Assessment and Outlook3. Building on modest growth in 1999, the Thai economy grew by 4.4 percent in 2000, restoring some of the income lost as a result of the crisis. While recovery is progressing, it is far from complete. By the end of 2000, per capita incomes (measured in local constant prices) were still about 9 percent lower than their 1996 peak level. 4. The fiscal deficit, based on the government-financed statistics format, narrowed from over 11 percent of gross domestic product (GDP) in fiscal year (FY) 1999 to 3.2 percent in FY2000. Capital transfers to the financial sector, to support the recapitalization of banks, were greatly reduced in FY2000 over FY1999. Hence, despite the reduced deficit, the overall fiscal stance remained broadly supportive of growth. As a result of successive deficit spending measures and support for banking sector recapitalization, the ratio of public debt to GDP has climbed from just 15 percent prior to the 1997 crisis to about 58 percent by the end of 2000. Although this sharp escalation in debt has amplified fiscal strains, Thailand’s public debt position is manageable. Protracted slow growth or a steep rise in real interest rates could, however, pose considerable fiscal difficulties. 5. In a low inflationary environment, the 14-day repurchase rate, which is the key Bank of Thailand policy rate, averaged about 1.5 percent in 2000. Despite low interest rates and ample liquidity, the stock of commercial bank credit to the private sector contracted further in 2000. The demand for loans remained subdued, and banks were reluctant to lend to all but their most creditworthy clients. Slow but steady progress was made in resolving nonperforming loans. By the end of 2000, the ratio of nonperforming to total loans in the domestic banking system had fallen to 17.8 percent from just under 40 percent at the end of 1999. However, the fall in the nonperforming loan ratio owed as much to the transfer of impaired assets to Asset Management Corporations as to voluntary resolution and restructuring. A large backlog of unresolved debts has accumulated in the bankruptcy courts. 6. Robust export growth in 2000 underpinned a trade and a current account surplus. But the overall balance of payments was in deficit. Low domestic interest rates encouraged the refinancing of foreign currency obligations in domestic debt markets. This, together with the scheduled repayment of private sector obligations, generated net capital outflows that more than offset the surplus on current account. By December 2000, Thailand’s foreign debt had fallen to about $80 billion from a peak of $109 billion in 1997. Although international reserves slipped marginally over the year, they still provided ample cover for imports and debt of short-run, residual maturity. 7. Measured year on year, GDP grew by 1.8 percent in the first quarter of 2001. The National Economic and Social Development Board expects growth for 2001 of 2.0 to 3.0 percent. The prospect of slower growth in 2001 will stem social recovery and possibly slow debt resolution. Monthly trade data through April 2001 show rapidly slowing export growth. In US dollar terms, export earnings could shrink in 2001. Private domestic demand remains anemic. In this context, the Government has targeted a deficit of 3.7 percent for FY2002. The effect of this fiscal stimulus will not be felt until the end of 2001 and 2002. 8. Provided the global economy regains momentum and the global electronics cycle picks up, economic growth is expected to accelerate by late 2001. But if a global recovery fails to materialize, Thailand’s fiscal and balance-of-payments positions might deteriorate and progress on debt restructuring and the rehabilitation of the banking system would become more difficult. Thailand's economic indicators are shown in Appendix 1. C. Implications for the Country Strategy and Program9. An interim country operational strategy (COS) for Thailand was prepared in May 1999. It incorporated major shifts in operational priorities in response to markedly changed conditions in Thailand related to the economic crisis. The interim COS had three objectives: (i) poverty reduction and quality of life improvement, (ii) structural adjustment, and (iii) strengthening competitiveness, to promote efficient, regionally balanced, and sustainable growth. The interim COS called for all projects (except those involving national systems) to be concentrated in the relatively less developed north, northeast, and southern regions, which account for most of the target groups below the poverty line. A notable feature of the strategy of the Asian Development Bank (ADB) was the effort to link its activities in these regions to those in neighboring countries through subregional economic cooperation initiatives. The interim COS further suggested that ADB assistance focus on support for the social (e.g., education, health, and social welfare); agriculture/rural development; and financial sectors. 10. A number of factors call for a reevaluation of ADB’s strategy and program in Thailand and preparation of a country strategy and program (CSP). First, the 1997 Constitution has mandated significant steps toward greater decentralization of the Thai economy and provides for mechanisms that will greatly empower civil society. Second, the 9th National Economic and Social Development Plan (2002-2006) will specify ambitious national goals for poverty reduction and growth. Third, the newly elected administration is championing several new policy initiatives with an emphasis on rural development and national self-reliance. Fourth, Thailand must address gaps in its competitiveness, a serious long-term challenge that has been overshadowed by the immediate demands of managing the crisis. 11. The CSP is being formulated at a time of considerable political and economic uncertainty. Still in the early days of its tenure, the administration is preoccupied with issues of short-run economic management, and has not yet had an opportunity to demonstrate its commitment to needed structural reforms. Growth prospects, crucial for completing the recovery process, are clouded by the uncertain prospects for external demand. Moves toward greater decentralization and improved accountability and transparency in public life may also entail significant learning and adjustment costs. The CSP must, therefore, be able to guide ADB assistance under a wide variety of possible circumstances. 12. As in the past, ADB’s capacity to deliver high quality services will depend on maintaining an effective partnership with the Government. Increasingly, however, it will also hinge on the support its operations enjoy among legitimate representatives of civil society. A key challenge will be to invest in community relations at the project and broader institutional levels. 13. In addressing these challenges, the draft CSP, which is in preparation, proposes a strategy to support inclusive social development, promote rural development, and deepen competitiveness. This strategy reflects the Government’s priorities, will advance poverty reduction and equitable growth, and will address directly key challenges facing Thailand. The geographical focus of the interim COS will be preserved. ____________________
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