Thailand Economic Monitor November 2006

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Thailand Economic MonitorNovember 2006

• Launch
• November 14, 2006

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Outline of Presentation Today

• I. Real GDP Growth in 2006
• II. Real GDP growth in 2007
• Going forward Agenda for a balanced and quality
  growth

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I. Real GDP Growth in 2006 will be around 4.5

• driven mainly by export growth as domestic
  demand slowed down sharply

Real GDP Growth (1988 Prices)
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In 2006, domestic demand was depressed by higher
energy prices, higher inflation and interest
rates, political uncertainties depressed
confidence
Nominal Interest Rates, CPI Inflation, and Real
Interest Rates,
Growth of Energy Prices,
These have slowed down Household Consumption,
Private Investment, and Public Investment this
year
Consumer Confidence Index
Business Sentiment Index
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High Oil Prices burden firms

• Oil prices falling but almost double that of 2002
• Manufactures affected PPI up by 16.1 Output
  growth down from 7.1 to 5.5 between 2002 2005
  
• Different sub-sectors affected differently
  depending on their energy transport intensity

Manufacturing sub-sectors and their energy cost
share (Fabricated Metal Products 1)
Source Thailand Input-Output Table 2000
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Exports growth this year was driven by quantity
growth to traditional markets

• Export volume growth of manufactured products,
• esp. electronics recovered from slowdown last
  year

Contribution to Export Growth by Various Markets
Export Growth in price, volume, and value
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Export growth began slowing down in 2006H2 while
import growth sped up
Goods Export Volume and Import Volume Growth
Current Account and Trade Account
Source BOT
Source BOT and WB staff estimates
Trade Account is smaller deficit this year and
Current Account in surplus from rebound in
services receipts
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II. Real GDP Growth in 2007
Economic Environment

• Oil price continue declining, but remains at a
  high level
• Inflation falling to 2.5 from almost 5 this
  year
• Lower nominal interest rate, but real interest
  rate rise as inflation declines
• Deceleration in global demand
• Intl crop prices not as robust as this year
• Real exchange rate in Thailand continues
  appreciation trend

Source World Bank
9
Real GDP Growth in 2007 will be at around 4.6

• Lower inflation and interest rates help increase
  household consumption growth
• Public investments disbursed as planned
• High oil price, higher real interest rates, real
  appreciation, policy uncertainties does not
  support private investment growth
• Lower farm income growth support HH consumption
  growth less than this year
• Slowing down of global demand, GSP expiration
  real appreciation affects exports

Real GDP Growth (1988 Prices)
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Public investment would accelerate but mega
project disbursement delayed

• Public investments would accelerate as
  disbursements will be made for whole year
• FY2007 Central Government investment budget
  increase by 11
• FY2007 SOE approved investment budget for
  increased by 4.5
• Mega project investment next year will be less
  than planned

Mega Project Investments
(Billion Bt)
Source Public Expenditure Review (OPDC), March
2006 Note Mega project spending in 2005 is about
7 of total public investment and estimated to be
about 16 of total public investment in 2005-2007
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Private investment next year unlikely grow much
faster than in 2006

• . as manufacturing output decelerated from slow
  down in exports, while firms continue to adjust
  to high oil price

Energy prices used by firm
Growths of Private Investment, Manufacturing
Production, and Capacity Utilization
Source EPPO and MEA
Source BOT and NESDB
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Private investment will unlikely grow much faster
than in 2006

• as real interest rates rise
• and real exchange rate appreciate

Real Interest Rates (PPI adjusted)
Real Effective Exchange Rate
Source BOT
Source BOT
13
Private investment will unlikely grow much faster
than in 2006

• as constraints to investments have not been
  addressed

Top 3 constraints to doing business and expansion
in 2004 as reported by 1,385 firms in Thailand
Source Thailand PICS 2005
14
Private investment will unlikely grow much faster
than in 2006

• as investors sentiments have not recovered much

Business Sentiment Index Survey of 568 Large and
Medium-size firms
Business Sentiment Index
Index 50 indicates that business sentiment
remains stable Index gt 50 indicates that business
sentiment has improved. Index lt 50 indicates that
business sentiment has worsened.
Source BOT
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Private investment next year will unlikely grow
much faster than in 2006

• as investors esp. FDI wait-and-see amidst
  uncertainties in policies and external demand

BOI Net Applications by Sectors
JETROs Business Sentiment Survey of Japanese
companies in Thailand
(Billion Bt)
Investors have been more cautious since last year
Source JETRO
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As exports slow and imports increase, current
account will fall
Trade and Current Account Balance
Export falls with slow down in global demand, GSP
expiration and real appreciation Imports rise
with pick up in investment and rebuilding of
stocks Trade account is in greater deficit, and
Current account decline to almost zero
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GDP Growth in 2007 will be 4.6

• as domestic demand accelerates, but
• foreign demand decelerates

Real GDP Growth (1988 Prices)
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• Going forward
• Agenda for a balanced and quality growth

• Supply side constraints must be relaxed for
  growth to be sustained as capacity utilization
  close to pre-crisis levels

Private Investment Growth and Share in GDP
Capacity Utilization ()
1995-1996 Average
Excess Capacity
Source NESDB
Source BOT
NOTE 1980s share in GDP was 22
Greater investments needed to relax the
constraints
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III. Going forwardAgenda for a balanced and
quality growth

• But firms are finding it difficult to expand in
  an environment of
• High oil prices a new factor that has raised
  production costs reduce firms margin
• Intensified export competition in both labor
  technology intensive goods from China other
  middle-income countries, which have rapidly
  improved human capital and firm/university RD

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III. Going Forward Agenda for a balanced and
quality growth

• What will help promote both investments
• and productivity of firms?
• Relax regulations, skills and infrastructure
  constraints which firms identified as major
  constraints to their investments productivity
• Innovation/knowledge critical for raising
  productivity will be key
• More efficient services sector financial,
  telecom, ICT, logistics, and business services

These would help lower operations costs for
firms and increase demand for Thai products
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III. Going Forward Agenda for a balanced and
quality growth

• (1) Reforms badly needed to improve the
  investment climate
• Improvements in skills of workforce (secondary
  vocational education, IT and English skills)
• Regulatory burden (reducing processes,
  streamlining procedures, ensure predictability of
  time taken for service delivery, ensuring
  competition)
• Relaxation of price controls

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Price Controls How severe are they?

• 2 lists of product and services that Min of
  Commerce enforces varying degrees of price
  control
• Controlled list (35 products and services)
• Monitored list (200 products and services)
  accounts for roughly 50 of manufacturing sector
  value added
• Accounts for lt 20 of CPI basket

Total Factor Productively (TFP) and Price
Dispersion in Thailand, 2004

• Impact of price control on firms
• Reduces margins of firms
• In latest Business sentiment index survey (BoT),
  firms report inability to adjust prices as one of
  top 3 constraint to doing business
• Firms productivity declines

Source Ariyapruchya et al (2006) Note Each
point represents a firm
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III. Going Forward Agenda for a balanced and
quality growth

• (2) Actions needed to move Thailand towards a
  knowledge economy
• Increasing ST graduates
• Promoting RD in firms
• Creating university-business linkages
• Strengthening role of public research institutes
  (e.g. NSTDA)

Knowledge Economy Index (0-10)
Source World Bank

• Knowledge Economy Index covers 4 pillars of a
  knowledge economy
• Economic incentive regime 2. Innovation
• 3. Education 4. ICT

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III. Going Forward Agenda for a balanced and
quality growth

• (3) Actions needed to increase efficiency in
  services sector
• (45 of GDP, key supporter of industrial
  sector, large employment and large share of SMEs)
• Enact laws that will help promote services
  businesses e.g. Secured Transactions Act
• Ensuring fair competition

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Growth must be more evenly distributed
III. Going Forward Agenda for a balanced and
quality growth

• Income distribution must be more even
• Fight against poverty must continue with improved
  targeting of the poor

Poverty Map of the Northeast Region, 2004
Average Per Capita Real Consumption
(Baht/Month)
Source WB Computation from SES data
Source NSO
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Summary of Key Messages

• Real GDP growth this year will around 4.5
  supported by exports
• Real GDP Growth next year will speed up slightly
  to 4.6 as exports slow down and private
  investment recovery will be slow
• Supply constraints needs to be relaxed if
  Thailands growth is to be sustained
• Future investments must come with higher
  productivity (quality) for Thailand to be
  competitive
• Distribution of growth especially to the poorest
  must be ensured