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Asian Development Outlook 2006 :
II. Economic trends and prospects in developing Asia :
Southeast Asia
Thailand
Drought, higher world oil prices, and the December
2004 tsunami were a drag on growth in 2005. Inflation rose while
the trade and current accounts switched into deficit. The economy
is projected to perform somewhat better in 2006, mainly on account
of sustained growth in exports and some stimulus from disbursements
for large infrastructure investments. These investments will increasingly
become a driver of growth in 2007 and beyond.
Economic performance
Economic growth slowed to 4.5% in 2005, the lowest rate since 2001.
(Growth had averaged 6.2% over 2002–2004.) Still, the performance
is notable because several adverse factors affected the economy
in the first half of the year (Figure 2.28.1). The tsunami
of 26 December 2004 battered the tourism industry in the
southwest of the country; a severe drought affected output from
agriculture (still an important export sector); sporadic political
unrest continued in the southern provinces; and perhaps more important
than all of these factors, high oil prices hurt the economy, which
is particularly sensitive to them.
As the year advanced, growth picked up with a strong recovery in
agriculture and tourism and a healthy expansion of exports, as manufactured
goods, including electronics, and agricultural products benefited
from high external demand. Second-half gross domestic product (GDP)
growth at 5.0% was about 1 percentage point higher than in
the first half. On the demand side, higher energy prices and rising
interest rates damped private consumption and investment. Consumption
remained the major contributor to GDP growth, adding 3.4 percentage
points; investment contributed 2.9 percentage points; but a
contraction in net exports subtracted 2.1 percentage points
(Figure 2.28.2).
With rapidly rising retail oil prices pushing up power and transport
prices and with increases in wages, consumer inflation in 2005 rose
to 4.5% from 2.8% in 2004, the highest rate in 7 years. Year-on-year
inflation peaked at 6.2% in October, subsequently declining to 5.8%
in December. Fuel subsidies, which had been introduced in January
2004, were gradually removed over the first half of 2005 and completely
abolished in July, in one of the major government policy initiatives
of the year. 
In total, however, the subsidies still cost the Government
the equivalent of $2.3 billion in 2004–2005. When the
subsidy on diesel prices was eliminated in July, its price immediately
jumped by 16%. Over the year, retail prices of diesel and gasoline
rose by 57% and 33%, respectively.
Oil-price increases percolated to other prices. Core inflation
(excluding food and energy) accelerated but remained comparatively
subdued at 1.6% in 2005. Concerns about rising inflationary pressures
and an interest rate differential with the United States prompted
the Bank of Thailand to lift its 14-day repurchase interest rate
in stages to 4.0% by December, and then to 4.5% by March 2006 (Figure 2.28.3).
The fiscal position remained strong in FY2005 (ended 30 September
2005). Revenue collection expanded by 13.3% from 2004, as collection
of corporate income tax and value-added tax continued to rise. In
spite of a midyear supplementary budget of baht (B) 50 billion,
government spending was kept within the original budget target.
Overall, the budget showed a small surplus of 0.1% of GDP, similar
to that in 2004 (Figure 2.28.4). The Government initiated a
huge $42 billion megaprojects investment program to improve
physical and social infrastructure, covering the period 2005–2009,
an amount equivalent to about 5% of GDP each year. The program targets
substantial investments in transport projects (including urban mass-transit
systems), water resources development, energy, low-cost housing,
and health and education (Figure 2.28.5). While some expenditures
on the program were made under the 2005 budget, they did not significantly
affect government outlays. The program’s impact will be felt
mainly from 2007. The authorities continued to repay some of the
more expensive external debt in 2005, and by year-end total public
debt stood at a comfortable 44% of GDP, below the Government’s
self-imposed ceiling of 50%.
A major positive factor in 2005 was the export performance. Agricultural
exports improved as higher farm prices and favorable weather conditions
in the last 3 quarters of the year lifted crop production.
Meat and fisheries were also beneficiaries of increased export demand.
Manufacturing exports of high-technology products (mainly electronics),
automobiles, chemicals, plastics, and rubber all expanded robustly.
Merchandise exports rose by 15.0%. However, as a result of the rising
cost of oil imports and buoyant demand for capital goods—as
capacity utilization rose after a long period of low business investment
in manufacturing—total imports increased by 26.0%. After 7 years
of surpluses, the trade balance swung into deficit in 2005 and,
for the first time since the 1997–98 Asian crisis, the current
account balance was in deficit, by $3.7 billion, or 2.1% of
GDP. Strong capital inflows ensured a comfortable overall balance-of-payments
outcome. Together with a narrowing of the interest rate differential
with US dollar rates, these inflows caused the baht to strengthen
toward the end of the year. International reserves rose to a high
$52.1 billion, nearly twice their level of 1997.
The Government had hoped that new listings of major companies would
give a boost to the stock market in 2005. However, an initial public
offering of the shares in EGAT, the state electricity generation
authority, was suspended in November by the supreme administrative
court on the grounds that the issue may violate the constitution.
The Government wanted to raise about $800 million by selling
25% of the shares in EGAT. 
Moreover, Thai Beverage, a major privately
owned liquor company, postponed a listing in Thailand because of
opposition from antialcohol groups, proposing instead to list in
Singapore. It had planned an initial public offering in Thailand,
valued at up to $1 billion. 
Even with these setbacks, strengthening
the capital markets remains a priority for the Government. A capital
market development master plan, finalized in January 2006, includes
measures to increase the supply of high-quality stocks, encourage
participation of institutional investors in the stock market, and
strengthen domestic securities companies.
Economic outlook
Prospects for 2006 and 2007
Continued high oil prices will hold back growth of consumption
expenditure in 2006 and, to some extent, in 2007. Concerns about
the impact of rising costs on core inflation—in part resulting
from the pass-through of higher oil prices—are likely to lead
the Bank of Thailand to continue raising interest rates in 2006.
This will slow spending on, among other things, automobiles, household
goods, and housing. The forecasts also assume that an increase in
spending on the megaprojects program will become a key driver of
growth. Consequently, both private and public investment will induce
stronger growth in the economy.
While there is a consensus in Thailand that the proposed megaprojects
program is required to sustain long-term growth, perhaps with some
modifications, there was considerable uncertainty in the first quarter
of 2006 as to the speed and magnitude of its implementation. Political
uncertainties and a call by the Government for a more open and wider
international bidding process for constituent projects will delay
the start of some activities scheduled for this year. But a progressive
acceleration of expenditures is assumed in the baseline from 2007.
Megaprojects investment could contribute 0.5–0.7 of a percentage
point to GDP growth each year from 2007, taking into account direct
and multiplier effects. In addition to direct spending on the projects,
the investment will encourage capacity expansion in cement, steel,
and construction materials and subsequent creation of new jobs.
This year, perhaps half of the original allocation of about $7 billion
for the megaprojects will be invested, mainly by state enterprises
such as EGAT, PTT (the state petroleum company), State Railway of
Thailand, National Housing Authority, and Thai Airways International.
This slow start is not expected to affect the economy much in 2006,
but if delays and uncertainties continue into 2007 and beyond, the
baseline outlook for growth, investment, and capital market development
would be significantly eroded.
GDP is forecast to grow by about 4.7% in 2006, slightly above last
year (Figure 2.28.6). The leading drivers will be a moderate
pickup in public investment, somewhat better performance in agriculture,
robust exports, and a continuing revival of the tourism industry
from the setback of the tsunami. 
Agriculture’s contribution
depends on whether it will be affected by drought again—in
early 2006, there were signs of drought in some parts of the country.
Yet the sector may now be better prepared to cope because the Ministry
of Agriculture started improving the irrigation system last year.
Although the contribution of consumption expenditure to growth
is likely to moderate in both 2006 and 2007, private investment
should remain relatively robust as capacity utilization continues
to increase. In 2007, spending on the megaprojects program should
support some further acceleration in growth to the 5.0–6.0%
range.
Export growth is forecast at 15.3% for this year, about the same
as in 2005. Electronics, computer peripherals and parts, automobiles,
and agricultural products are projected to show significant export
gains in 2006, with some leveling-off possible in 2007. Exports
of services, essentially tourism, will continue to strengthen over
the next 2 years. Import growth is projected to slow to 15.0%,
since in 2005 imports of oil, capital equipment, and gold for the
jewelry industry all surged, and this rate of increase will likely
moderate in 2006. Elimination of fuel subsidies in 2005 and some
energy-saving measures will curb growth in oil imports. The trade
deficit is expected to widen (Figure 2.28.7). The current account
deficit is likely to be $4.6 billion–4.9 billion
(or 2.5% of GDP) in both years (Figure 2.28.8).
Inflationary pressure is expected to ebb. The moderate tightening
of monetary policy should slow consumer spending, which could also
be affected by political uncertainty. In addition, the Ministry
of Commerce enforced stringent price controls on a range of consumer
goods in early 2006. Oil prices are projected to rise more moderately.
In view of these factors, the inflation rate for 2006 is forecast
at 4.0%, decelerating further to about 3.0% in 2007 (Figure 2.28.9).
The fiscal position is expected to remain comfortable, with the
Government targeting a balanced budget in FY2006 and FY2007. During
the first quarter of FY2006, revenue collection exceeded target
by 10.3%. There is room for an additional budget during the year
if economic growth fails to meet expectations. As public infrastructure
investment increases in 2007, additional funding will be needed
from domestic and international sources. The extent of resources
required from the public sector will depend in large part on the
Government’s success in attracting private sector participation
to the megaprojects.
Medium-term outlook
The outlook is for continued relatively robust economic growth
in the 5–6% range. This medium-term performance will depend
in part on raising the economy’s productivity and competitiveness
by pushing through with the megaprojects—which should, for
example, reduce transport bottlenecks—and by making advances
in structural reforms. These include privatization of state enterprises
and development of the capital markets.
Given the very large amounts of money involved over an extended
period, the financing of the megaprojects program needs to be structured
so as to avoid jeopardizing fiscal and external stability. The Government
has said it will ensure that public debt does not exceed 50% of
GDP, debt servicing stays below 16% of public spending, and the
budget is in balance. The current account is likely to remain in
deficit by 2–3% of GDP over the medium term, which would not
be a concern provided that the megaprojects help lift the economy
to a higher growth path. Private equity will be required to reduce
the pressure on public finances. Foreign participation could be
encouraged through public-private partnerships. The investment in
physical infrastructure is receiving the most attention, which may
underplay the need to improve human resources. A study by the World
Bank on the investment climate found that human resource constraints
are significant in Thailand. Skills shortages cost firms, on average,
the equivalent of 15% of sales.
In addition to increased public investment, the Government has
embarked on an effort to lift private investment by offering tax
incentives for reinvestment for a period of 3 years from this
year, and incentives for companies to add value to output, such
as by processing agricultural produce. The Government’s dual-track
development policy emphasizes both domestic demand and exports.
Domestic demand is to be boosted by continued substantial spending
on rural programs with a high multiplier effect, such as village
development programs. In FY2005, over 30,000 villages received a
total of B9.4 billion, and the budgeted amount for FY2006 has
been raised to B19 billion.
Putting the privatization program back on track will be important
for several reasons, including developing the capital markets, assisting
the funding of infrastructure investment, and enhancing investor
confidence. 
After the 1997–98 crisis, Thailand embarked on
the privatization program as one of its structural reforms. Privatization
of state enterprises was promoted both to improve their efficiency
and their access to funding, and as a way to reduce the financial
obligations of the Government. A privatization master plan was drafted
and several committees formed to oversee, implement, and audit the
sale process. Major enterprises privatized and listed include PTT
and AOT (the airport authority). However, the program became bogged
down by protests from employees and consumer groups as well as concerns
over regulatory deficiencies and the transparency of the share offerings.
The court decision on the EGAT share offering raised another obstacle.
In the near term, risks to the outlook arise from the uncertainties
over the timing of the megaproject investments. As discussed, significant
delays to the program would affect economic prospects. The financing
of the large investments is also unclear at this time. Although
the country’s economic fundamentals are strong—with
a healthy fiscal situation, robust export growth, and a comfortable
level of external reserves (Figure 2.28.10)—prolonged
political uncertainty would erode investor and consumer confidence.
The possibility of renewed sociopolitical tensions in the southern
provinces represent a further risk. Continued high petroleum prices
could pose a particular problem because the economy is one of the
most sensitive in Southeast Asia to them. The elimination of fuel
subsidies in 2005 was one step to reduce consumption of imported
oil. The Government has taken another step by promoting alternative
energy sources, such as bio-diesel and natural gas for vehicles.
It has reduced excise taxes on these alternatives, and is converting
official cars and taxis so they can use them. This program has had
some success.
Publications 
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