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Thailand's Growth To Slow After Sustained Economic Recovery

MANILA, PHILPPINES (19 April 2001) - In the wake of sluggish demand and less favorable external conditions, Thailand's growth will slow in 2001 to 3.5 percent in 2001, according to the Asian Development Outlook 2001 (ADO), released today by the Asian Development Bank.

The slowdown follows two years of sustained economic recovery in 1999 and 2000, says ADO, an annual publication analyzing and forecasting economic trends. Real gross domestic product grew by 4.2 percent in 1999 and 2000, despite slower industrial expansion.

There was a rapid acceleration in growth in the first half of 2000, propelled mainly by strong export performance, the lagged effects of earlier fiscal stimulus packages, and accommodative monetary policies. But a sharp slowdown came in the second half, which carried into 2001, as the slowing US economy and uncertainty surrounding the Thai general election (held in January 2001) took their toll.

Exports rose by 19.6 percent in 2000 over their 1999 level. But ADO reports there was a slowdown in industrial growth, especially in domestic-oriented manufacturing industries, which contracted by 7.1 percent.

To tackle sluggish domestic demand, the Bank of Thailand maintained reduced interest rates and a low fiscal deficit in 2000, while inflation reached a historic low rate. However, the report points out that "with banks unwilling to lend, neither government spending nor low interest rates had a strong expansionary effect on domestic demand."

Fiscal expenditure expanded by 3.5 percent, while revenue rose by 5.4 percent and the fiscal deficit improved to 2.2 percent of GDP from 2.8 percent in 1999. But after reaching 0.3 percent in 1999, inflation edged up to 1.6 percent in 2000, driven by the rise in world crude oil prices and the continued depreciation of the baht.

As the economic recovery continued in 2000, the relatively high unemployment rate of 4.1 percent of the total workforce in 1999 dropped to 3.3 percent in 2000. Employment in agriculture rose by 37,000 persons while nonagricultural employment increased by 618,000, or 3.6 percent year on year.

"Economic momentum should strengthen in 2002, provided that external conditions improve and that the fiscal stimulus is maintained," ADO says.

But it warns: "Economic expansion remains vulnerable to domestic political instability, the possibility of weaker than expected economic performance in the US and Japan, and the risk of world oil prices remaining high."

As export demand weakens, the report says, stronger domestic demand will become more important to sustaining the recovery. However, credit expansion is constrained because the financial sector is still plagued by a large amount of nonperforming loans (NPLs), which could hamper economic growth. "The resolution of the NPL problem is incomplete and remains a significant challenge to the Government," ADO warns.

If NPLs transferred to and held by asset management companies for disposal, are taken into account, the NPL ratio would still be about 30 percent. Meanwhile, as economic growth slows, some restructured loans are becoming NPLs again.

The Government also faces serious issues connected with corporate sector restructuring, if economic improvement is to be maintained. This means restoring the health of financial institutions and corporations.

The pace of corporate debt restructuring quickened in 2000, but complete resolution is likely to be a lengthy process. ADO sees weak corporate governance as inhibiting the banking sector's ability to generate new loans and stimulate domestic demand.

The Government is amending laws to strengthen regulations to enhance shareholder rights, adopt international accounting and auditing procedures, and ensure enforcement of regulations on corporate finance and management.

"The Government must now focus on implementing these new procedures to enhance the ability of Thai corporations to compete in the global environment and contribute to sustained economic growth," ADO concludes.

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