Catalog

	Table of Contents
p. 26 of 54 BACK | NEXT I. Developing Asia and the World - Economic Developments and Prospects II. Economic Trends and Prospects in Developing Asia Newly Industrialized Economies Central Asian Republics, Azerbaijan, and Mongolia People’s Republic of China Southeast Asia Cambodia Indonesia Lao People’s Democratic Republic Malaysia Myanmar Philippines Thailand Viet Nam South Asia The Pacific III. Asia's Globalization Challenge

Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia : Southeast Asia

---

Thailand

The economic recovery maintained its momentum in 2000 with real GDP growth of 4.2 percent, despite slower industrial expansion. Exports were the main engine of growth as domestic demand remained weak. Monetary policy stayed accommodative with low interest rates while the fiscal deficit improved. Reducing the level of nonperforming loans and restructuring the corporate sector are critical to continued economic improvement.

Recent Trends and Prospects

Real GDP grew by 5.7 percent in the first half of 2000 but slowed markedly in the second half, to give a figure for the year of 4.2 percent, the same as in 1999. Rapid acceleration in the first half of the year was propelled mainly by strong export performance, by the lagged effects of earlier fiscal stimulus packages, and by accommodative monetary policy. The slower pace in the second half was mainly attributable to the steep rise in world oil prices, the slowdown in the US economy, and the uncertainty surrounding the national election scheduled for January 2001.

During 2000, real value-added growth decelerated in both the agriculture and industry sectors while in services, three years of contraction were reversed. Overall, the industry sector still led the economy with 5.2 percent growth followed by services at 3.8 percent and agriculture at 1.2 percent. In the agriculture sector (accounting for about 10 percent of GDP), excessive flooding reduced crop production.

The slowdown in industrial growth was seen primarily in manufacturing. The manufacturing production index, which covers 62 percent of total value added in manufacturing, rose by only 3 percent in 2000, compared with an 11.5 percent increase in 1999. The deceleration in manufacturing growth was mainly concentrated in domestic-oriented industries (whose share of exports is less than 30 percent of output), which contracted by 7.1 percent. Export-oriented industries (whose share of exports exceeds 60 percent of output) registered a manufacturing production index increase of 20.8 percent. The industrial capacity utilization rate for 2000 averaged just under 56 percent—a decrease from the 60 percent rate in 1999 and still below the average of about 70 percent that prevailed before the Asian financial crisis.

In services (accounting for about 46 percent of GDP), the generally robust expansion in real value added that characterized much of the sector in 1999 continued in 2000. The turnaround in services came as the rate of contraction in financial intermediation services slowed to 7.8 percent in 2000 from 38.8 percent in 1999. The subsector shrank to less than 3 percent of GDP in 2000 from over 7 percent in 1996.

Reflecting the excess industrial capacity, the resource gap (investment less savings) switched from a deficit of 8.1 percent of GDP in 1996 to a surplus of 8.0 percent in 2000, as the rate of investment after the financial crisis dropped off much more steeply than the rate of savings.

The fiscal stance was less accommodative in fiscal year 2000, which ended on 30 September 2000. Despite its critical role in stimulating the economy throughout 1999, fiscal spending began to taper off in the first quarter of 2000, reflecting the Government’s policy of gradually reducing the fiscal deficit. For fiscal year 2000, the Government’s cash deficit was B115.9 billion, a reduction from B134.4 billion in the previous year. Fiscal expenditure expanded by 3.5 percent, while revenue rose by 5.4 percent. The fiscal deficit fell to 2.2 percent of GDP from 2.8 percent in 1999. Total public debt outstanding was B2.8 trillion at the end of 2000, equivalent to around 58 percent of GDP. This is more than three times its precrisis level of 16.8 percent of GDP in 1996 and is the consequence of four years (1997–2000) of budget deficits.

In 2000, to spur domestic demand, the Bank of Thailand maintained its low interest rate policy, keeping the key policy rate (14-day repurchase rate) at 1.5 percent a year. Yet the average annual growth rate of the money supply (M2) in 2000 was only slightly higher than the 2.1 percent in 1999. Commercial banks remained cautious in new lending, as reflected in the level of bank credit outstanding falling by 10.2 percent at the end of 2000 from the level of the previous year. The poor condition of the credit market reduced the effectiveness of the accommodative fiscal and monetary policies. With banks unwilling to lend, neither government spending nor low interest rates had a strong expansionary effect on domestic demand.

Following a historically low rate of 0.3 percent in 1999, inflation increased to 1.6 percent in 2000. Upward pressures came mainly from supply factors such as the rise in world crude oil prices and the continued depreciation of the baht from an average of 38 to the dollar in 1999 to 40 to the dollar at the end of December 2000. Nevertheless, given excess productive capacity within the economy, slack labor market conditions and weak domestic demand kept inflation subdued. Core inflation (calculated from the consumer price index, excluding raw food and energy items) remained at 0.7 percent in 2000, well within the target range of 0–3.5 percent announced by the Monetary Policy Board in May 2000.

Robust export expansion played a major role in economic performance in 2000. The value of exports rose by 19.6 percent over the 1999 level, although toward the end of the year export growth decelerated. The economic slowdown in the US in the second half of the year particularly affected exports. The value of imports grew much more rapidly than in 1999 at 31.3 percent, with a sharp increase in net oil imports (from 2.7 percent of GDP to 3.7 percent in 2000), raw materials, and capital goods. As a result, the surplus on the current account declined from $12.4 billion in 1999 to $9.9 billion in 2000. International reserves continued to accumulate in 2000, but at a slower rate than in 1999, reaching $34.2 billion by the end of the year, or more than twice the level of short-term debt and equivalent to around seven months of imports.

External debt outstanding continued its downward trend, with the maturity profile shifting toward long-term debt. In June 2000, all external debt figures from 1995 onward were revised upward by the Bank of Thailand following a comprehensive survey that included the nonbanking financial sector. Based on the revised figures, total external debt decreased from $95.6 billion at the end of 1999 to $80.2 billion in December 2000. This was mainly attributable to repayments by the private sector. The share of short-term debt fell from a peak of 52 percent in 1995 to around 18 percent of total external debt in December 2000.

As the economic recovery continued in 2000, the relatively high unemployment rates of late 1998 and 1999 fell. According to labor force surveys conducted in May and August 2000, unemployment, excluding seasonally inactive labor, fell to 3.3 percent of the total labor force from 4.1 percent of the total labor force in 1999. Employment in agriculture rose by 37,000 persons or 0.3 percent year on year while nonagricultural employment increased by 618,000 persons or 3.6 percent year on year.

GDP growth is projected to be around 3.5 percent in 2001 due to sluggish domestic demand and less favorable external conditions. However, economic momentum should strengthen in 2002, provided that external conditions improve and that the fiscal stimulus is maintained. 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. Continued progress in financial sector reform and corporate debt restructuring is essential to increasing the level of investment.

Issues in Economic Management

As export demand weakens, 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 overhang of nonperforming loans (NPLs), defined as loans for which payment is at least three months overdue. This could hamper economic growth. Some progress has been made in reducing the proportion of NPLs, which declined from a peak of about 48 percent of total loans in May 1999 to 18 percent in December 2000. However, for two reasons, the resolution of the NPL problem is incomplete and remains a significant challenge to the Government.

First, the sharp decline in NPLs was largely due to the transfer of some NPLs to asset management companies (AMCs), created to remove bad loans from the banks’ balance sheets. If these NPLs had been included in the calculation of the NPL ratio, together with new NPLs and reentry NPLs, the NPL ratio would have been around 30 percent (see Figure 2.11). Moreover, as of December 2000, state-owned commercial banks and finance companies had significantly higher NPLs than private commercial banks, averaging around 22 percent and 25 percent, respectively.

Second, as economic growth slows, some restructured loans are resurfacing as reentry NPLs. Many commercial banks were reluctant to accept the losses associated with writing off bad loans and tended simply to reschedule payments. In 2000, reentry NPLs amounted to about B200 billion, reflecting the inability of companies to meet the new repayment schedules on loans restructured in 1999 and early 2000. Meanwhile, despite the overall improvement of the economy, new NPLs continued to emerge, particularly in those industries that were still struggling such as real estate and construction.

The transfer of bad assets to AMCs should allow the banking sector to refocus attention on carrying out day-to-day operations and on developing new lending while the AMCs concentrate on the difficult process of restructuring corporate debt. With some NPLs off their books, banks were able (i) to nearly complete the task of loan-loss provisioning in 2000 (although state banks are lagging behind and some banks may still have significant unrealized losses on their balance sheets due to weak standards of NPL classification) and (ii) to post operating profits. With fresh capital of about B900 billion, the banks have made significant progress in meeting capital adequacy standards, though additional capital may be required as the economy slows and as new NPLs appear.

Policy and Development Issues

Although conditions are beginning to stabilize in the banking sector, much work needs to be done to restore the health of financial institutions and corporations so as to ensure sustained economic growth. The Corporate Debt Restructuring Advisory Committee, formed in 1998, has been monitoring and facilitating the process of debt restructuring for over 2,000 large corporations. In about half these situations, creditors and debtors reached voluntary restructuring agreements while the remainder were sent to the civil courts for reorganization or liquidation, creating a backlog of cases that might last as long as eight years at current court capacity. Several legal and institutional obstacles inhibit the expeditious and efficient resolution of these cases, including a shortage of experienced bankruptcy judges, weak insolvency criteria, and legal difficulties in removing weak corporate management and in implementing liquidation and foreclosure procedures. To speed up the process of debt restructuring and restore financial sector health, these obstacles must be removed or lessened.

Although the pace of corporate debt restructuring quickened in 2000, complete resolution is likely to be a lengthy process. This problem, which is inhibiting the ability of the banking sector to generate new loans and stimulate domestic demand, is related to generally weak corporate governance. Oversight by both the Government and by corporations’ boards of directors was ineffective (it also did little to protect minority shareholder interests). Poor accounting, auditing, and financial reporting practices compounded the problem. To improve the transparency of corporate management, the Government is amending laws and strengthening regulations to enhance shareholder rights, adopt international accounting and auditing procedures, and ensure adequate government 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.

Back Philippines	Next Viet Nam