Economy Report - Thailand (Extracted from 2001 Economic Outlook) ECONOMIC OUTLOOK IN 2001 The Thai economy is expected to grow at 2–3 percent in 2001, more slowly than it did in 2000. There are several threats to the Thai economy, including the slowdown in the world economy, which has grown at a rate of 2.2–3.2 percent in 2001, down from a 4.7 percent growth rate in 2000. The slowdown in the world economy is due to the downturn of the US business cycle and to the fragility of the Japanese economy. Other factors contributing to the slowdown are higher oil prices in the first half of 2001 and the lingering bear stock market. The deteriorating external environment has been an obstacle to Thai exports since the beginning of the year. However, on the bright side, the Thai economy is experiencing a relatively low level of inflation. It will be possible to maintain the inflation rate in target range of 0–3.5 percent, as set by the Bank of Thailand. The low interest rate may also persist through next year because the liquidity in the money market is still high, and there is no pressure from the relatively low inflation rate. The existing low interest rate is at a comfortable level, since the Federal Reserve Bank may reduce the Fed funds rate further to prevent the US economy from experiencing a hard landing. Other positive factors for Thailand are the implementation of stimulus packages by the new government, and the progress that has been made in the area of debt restructuring, which has reduced the amount of non-performing loans since 2000. The transfer of debts from banks to asset-management companies will allow financial institutions to expand credits better next year. Given the improved trend for agricultural products, the agricultural cycle will start to be on the upswing in 2001. REAL GROSS DOMESTIC PRODUCT In the first quarter of 2001, the Thai economy grew at the rate of 1.8 percent. This slow growth was attributed largely to a slowdown of the world economy which caused their real exports to decrease 2 percent. In addition, domestic demand was relative weak. Total consumption increased 2.7 percent only, whereas total investment decreased 5 percent. As the external environment deteriorates, the real gross domestic product (GDP) is expected to grow at the rate of 2-3 percent in 2001, lower than the growth rate in 2000. External demand will be limited by a slowdown in the world economy. The pressure of surging oil prices on production costs will become more pronounced. Private consumption will increase 3.5–3.7 percent in 2001 because of the lack of a strong supporting factor. The government will need to implement an expansionary fiscal policy to boost the economy in the future. Government consumption and government investment at constant prices are expected to grow at the rate of 4.8 percent and 2.6 percent respectively.

However, the economy is expected to pick up as the fiscal stimulus packages become effective in the remaining of this year. Private investment is expected to expand at the rate of 5.1–9.4 percent. INFLATION In the first quarter of 2001, headline inflation recorded 1.4 percent, amid increases in retail oil prices, cooking gas prices, and electricity charges. Core inflation, excluding raw food and energy items, was 1.0 percent, which remained within the inflation target range of 0.-3.5 percent. Headline inflation in 2001 is expected to be 2.2 percent, slightly higher than it was in 2000 as a result of increasing agricultural prices, electricity costs, capacity utilisation, and the average exchange rate. However, owing to the decreasing pressure of volatile oil prices combined with the economic slowdown, it is now less likely that core inflation will move out of the target range of 0–3.5 percent in 2001-02. Core inflation for 2001 is estimated to be 1.5-2 percent with 79 percent probability, increasing from 50 percent in the October forecast. In 2002, core inflation is projected to be 1.5–3 percent with 86 percent probability. EMPLOYMENT In the first quarter of 2001, the labour force expanded 1.1 percent whereas the number of persons employed increased by 0.9 percent, reflecting the inability of the labour market to absorb new labour entries. Thus, the unemployment rate rose to 4.8 percent. However, the unemployment rate is expected to fall as the government policies at the grass-roots level become effective in the second half of the year. EXTERNAL TRADE ACCOUNT Thailand’s exports continued to grow in 2001, but more slowly than in 2000. A slowdown in the world economy will result in increased worldwide competition in 2001, while the implementation of non-tariff barriers (for example, health standards and environment standards) will be more pronounced. Because it appears that imports will grow faster than exports, Thailand’s trade surplus in 2001 is expected to be reduced to US$2.1 billion. The current account in 2001 will have a surplus of US$4.2 billion, or 3.7 percent of GDP, down from 6.7 percent in 2000. GROSS EXTERNAL DEBT Total external debt continued to decline as a result of an increase in private external debt repayment. External debt at the end of the first quarter of 2001 declined to US$75.6 billion, Private external debt declined to US$43.8 billion, whereas public external debt declined to US$31.8 billion.

EXCHANGE RATE The average currency exchange rates of the baht were 37.96 and 40.30 baht per US dollar in 1999 and 2000 respectively. The exchange rate continued to depreciate in the first half of this year. In 2001 the baht is expected to further depreciate for the following reasons: •

The Thai economy in 2001 has shown signs of recession; the growth rate of the GDP is expected to be at 3.5–4 percent, slower than the 4.7 percent growth in 2000. This is because expansion in domestic consumption has been sluggish.

•

Financial intermediaries are in a paradox of high liquidity, although there are still restrictions on loanable funds since their non-performing loans are still worrisome.

•

The reduction in Thai exports resulting from the downturn in the US economy affected the volume of trade surplus. In addition, trade barriers in the European Union and fierce competition are other factors. Meanwhile, the value of imports has been increasing.

However, because of the economic slowdown in the United States the Federal Reserve will tend to implement a more relaxed monetary policy. Consequently, US investors might transfer capital to invest in the Thai securities market, and this would somewhat defend the depreciation of the baht. FISCAL POLICY The government has used the stimulus fiscal policy continuously from 1999, and since then it has been become the main tool running the economy. In 2001, fiscal policy is expected to take on an even more important role. The government has announced that it will implement an intensive stimulus fiscal policy on the following projects: •

Reallocating government budgets of fiscal year 2001 to projects that generate more income in the economy.

•

Increasing the budget expenditure of fiscal year 2002 to help boost the economy.

•

Maintaining the VAT rate of 7 percent until September 2003 to keep people’s purchasing power.

•

Establishing the Village and Urban Revolving Fund, for people to borrow for local investment and supplementary vocations.

•

Establishing a 3-year farmers’ debt suspension scheme to relieve farmers’ debt burden.

•

Promoting exports by searching for new markets and facilitating trade negotiation via newly appointed Thai Trade representatives.

•

Launching measures to promote tourism

•

Increasing the excise tax on luxury goods such as alcoholic beverages and tobacco

products. MONETARY POLICY The Thai government has successfully brought inflation down and has sought to move the currency exchange rate in a direction that coincides with the concurrent economic fundamentals basis. The government has also helped commercial banks reduce their operating costs, enabling them to reduce the interest rate. Subdued inflation allow the Bank of Thailand to use an accommodative monetary policy to support economic recovery. Recently, the Bank of Thailand raised the 14-day repurchase rate from 1.5 percent to 2.5 percent to correct for the distortion in the interest rate structure. Moreover, in order to reduce the excess liquidity in the banking system, the government has implemented measures to promote banks’ lending as follows: •

Accelerating NPLs restructuring and debt restructuring through the centralized Thai Asset Management Corporation (TAMC).

•

Establishing the Peoples Bank Scheme to improve access to banking facilities for low-income citizens.

•

Establishing the Bank for SMEs to promote banking facilities for SMEs.

•

Accelerating public financial institutions to expand credits to SMEs.

•

Improving the operation of the Credit Insurance Corporation for Small Enterprises to support banks’ lending.

MEDIUM-TERM ECONOMIC OUTLOOK The government continues its prudent macroeconomic policy to revive the economy and lays down a firm foundation for sustainable growth and economic stability. The objective is to achieve a moderate growth rate of 5.0–6.0 percent per annum. The inflation rate is expected to be around 2.6 percent, well within the target set by the Bank of Thailand. The current account surplus is estimated at 1–2 percent of GDP.

GDP Growth (percent) GDP (billion baht) at current price Inflation (percent) Current account (percent of GDP) Export (Target) (percent) Export (Trend) (percent)

2002

2003

2004

2005

2006

4.0

5.3

5.6

6.0

6.0

5,454

5,879

6,361

6.908

7,502

2.6

2.6

2.6

2.6

2.6

1.9

1.6

1.3

0.8

0.4

6.5

7.2

8.0

8.7

8.7

3.9

4.7

4.7

4.7

4.7

The government will command a smaller share of the economy as a result of smaller increases in its general expenditures and investment expenditures. These smaller increases represent the government’s need to curb its expenditures in order to maintain fiscal discipline amidst rising public debt. The target case projection also showed a continuous increase in public debt through the Ninth Economic and Social Development Plan. Two factors are responsible for this rise: first, the government has to bear the FIDF losses, which will ultimately show up the government debt; and second, government consumption expenditure and investment expenditure are increasing at a rate of 7 percent annually, which is only slightly lower than the average increase in GDP at constant prices (less than 8 percent). If government revenue and GDP increase by the same percentage (elasticity of revenue close or equal to 1), the government will have limited ability to pay interest, especially when outstanding debt rises with the fiscalisation of the FIDF loss. Therefore, in order to achieve the government expenditure levels projected, other sources of revenue must be sought, and debt must be cautiously managed. BUSINESS AND FINANCIAL STRUCTURE REFORM Progress and Corporate Debt Restructuring Considerable progress has been seen in corporate debt restructuring which resulted in a reduction of non-performing loans (NPLs) from the peak of 47 percent of total outstanding loans in May 1998 to 17.8 percent in May 2001. Yet, as cases in which multiple creditors were involved made negotiations difficult, a standstill of NPLs and low credit expansion by banks was seen in the first half of 2001. To facilitate and accelerate the corporate debt restructuring, NPLs with multiple creditors and worth more than 50 million baht will be transferred to the TAMC. The resolution of NPLs by the TAMC are as follows: •

TAMC must purchase default loans from the commercial banks at Net Book Value with no discount.

•

The entire bank’s debt of state-owned commercial banks will be transferred to TAMC, whereas a private bank’s debt that would be transferred to TAMC includes the amount of overdue debts in the balance sheet and also the default debts that are under the ongoing process of a court conviction.

•

Default loans will be classified according to their loss incurred.

•

The payment for those default debts will be in the form of the issuance of bonds or notes with a 10-year maturity but will allow the issuer to call back. Each call back will not be over 10 percent of actual value, and it can be done after the three-year deferment period. The securities will be backed and secuired by FIDF.

Privatization of state-owned enterprises Privatization is one of the priority policies announced by the present Government. The objectives are to improve operational efficiency of state-owned enterprises, to ease burden

on the government budget and to create a conducive environment for private sector participation through public selling of shares in the stock market. In early 2001, the government approved a draft bill establishing the National Enterprise Corporation to act as the state holding company. The National Enterprise Corporation is empowered to finalize privatization plans, especially on the timing and listing of privatized companies’ shares in the stock market. The first four state enterprises whose shares are to be offered in the Thai stock market are Internet Thailand Company, Thai Airways International, the Petroleum Authority of Thailand, and the Krung Thai Bank Public Company Limited.

Annex I THAILAND: OVERALL ECONOMIC PERFORMANCE 1995

1996

1997

1998

1999

2000

GDP and Major Components (percent change, year over year, except as noted) Nominal GDP billion)

(level in

US$ 164.8

183.26

150.23

112.22

121.92

124.44

8.6

5.9

-1.4

-10.8

4.2

4.4

Private Consumption

7.9

6.8

-1.1

-12.3

2.4

4.5

Government Consumption

15.41

11.04

7.89

-0.18

12.82

8.44

Private Investment

10.3

3.4

-31.7

-52.4

-6.5

14.2

Government Investment

19.18

28.93

16.12

26.52

-16.37

-7

Exports of Goods and Services

23.6

-0.2

29.8

21.9

-1.4

27.1

Imports of Goods and Services

30.5

2.3

4.3

-10.5

7.3

39.6

Real GDP Consumption

Investment

Fiscal and External Balances (percent of GDP) Budget Balance

2.7

2.3

-0.7

-2.5

-2.9

-2.4

Merchandise Trade Balance

-4.9

-9.1

-1.8

10.9

7.6

4.4

Current Account Balance

-8.1

-14.4

-3.1

14.3

12.5

7.5

Capital Account Balance

12.97

19.5

-4.3

-9.8

-7.9

-9.5

Economic Indicators (percent change, year over year, except as noted) GDP deflator

6.3

4.8

5.5

9.4

-4.3

2.6(Jan-Sep)

CPI

5.8

5.9

5.6

8.1

0.3

1.6

12.7

16.3

9.5

2.1

3.6

22.36

13.59

1.48

1.28

109.2

102.4

90

93.5

86.9

M2 Short-Term Interest (Repurchase rate)

Rate

Real Effective Exchange Rate (level, 1997=100) Unemployment Rate (percent)

1.7

1.5

1.2

4.4

4.2

3.6

Population (millions)

59.1

60.1

60.8

61.5

61.7

61.9

Sources: 1. Bank of Thailand. 2. The Ministry of Labour and Social Welfare.

Annex II THAILAND: FORECAST SUMMARY (percent change from previous year) 2001

2002

Official

IMF

Real GDP

2.0-3.0

2.0

Exports

-2 - -0.5

N.A.

Imports

3.2-5.5

N.A.

CPI

2.2

2.5

Notes : N.A. Not available. Sources:

ADB 3.5 7.0 13.0 2.0

Official

IMF

4.0

4.0

N.A.

N.A.

N.A.

N.A.

2.6

2.7

ADB 4.5 11.0 14.0 2.6

IMF forecasts, The World Economic Outlook Database (September 2001). LINK forecasts, Project LINK World Economic Outlook (April 2001). ADB forecasts, Asian Development Outlook 2001.

Annex III THAILAND: MEDIUM-TERM TREND FORECAST (percent) 2002 Real GDP

4.0

CPI

1.9

Source: http://www.apecsec.org.sg/ 2002