1 Thailand Economic Monitor November 2006 Launch November 14, 2006.

1

Thailand

Economic MonitorNovember 2006

LaunchNovember 14, 2006

2

Outline of Presentation Today

I. Real GDP Growth in 2006

II. Real GDP growth in 2007

III. Going forward: Agenda for a balanced and quality growth

3

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)

4.4

12.2

11.211.9

9.4

1.1

4.65.4

8.7

3.24.3

4.53.9

4.5

0

2

4

6

8

10

12

14

Priv C Gov C Priv I Pub I Export Import GDP

Perc

ent

2005p 2006e

4

In 2006, domestic demand was depressed by higher energy prices, higher inflation and interest rates, political uncertainties & depressed confidence

These have

slowed down

Household

Consumption,

Private

Investment, and

Public Investment

this year

0

5

10

15

20

25

2003 2004 2005 9M 2006

Per

cen

t, y

-o-y

Growth of Energy Prices,

0

1

2

3

4

5

6

7

8

9M2002

9M2003

9M2004

9M2005

9M2006

Per

cen

t

Lending rate Inflation CPIReal interest rate

Nominal Interest Rates, CPI Inflation, and Real Interest Rates,

Consumer Confidence Index Business Sentiment Index

38

40

42

44

46

48

50

52

2004

Jan

Apr Ju

l

Oct

2005

Jan

Apr Ju

l

Oct

2006

Jan

Apr Ju

l70

75

80

85

90

95

100

105

110

115

Jan

-04

Ap

r-0

4

Jul-

04

Oct

-04

Jan

-05

Ap

r-0

5

Jul-

05

Oct

-05

Jan

-06

Ap

r-0

6

Jul-

06

Oct

-06

Ind

ex

5

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

Energy Cost Share (of Total Cost) Rank Manufacturing Sub-sectors Petroleum

Products Electricity

& Gas Total

1 Cement and Concrete Products 10.7 8.3 9.6 2 Basic Chemical Products 4.4 6.6 5.5 3 Other Non-metallic Products 4.5 5.4 4.9 4 Spinning, Weaving and Bleaching 1.3 6.6 3.8 5 Non-ferrous Metal 4.8 2.6 3.8 6 Iron and Steel 2.4 5.1 3.7 7 Other Chemical Products 4.0 1.7 2.9 8 Plastic Wares 0.6 4.6 2.5 9 Other Foods 1.4 3.4 2.3

10 Industrial Machinery 2.1 1.3 1.7 11 Rubber Products 1.3 2.0 1.6 12 Textile Products 0.5 2.0 1.2 13 Saw Mills and Wood Products 0.5 1.8 1.1 14 Paper and Paper Products 0.9 1.3 1.0 15 Fabricated Metal Products 1.0 1.0 1.0

6

Exports growth this year was driven by quantity growth to traditional markets

0

5

10

15

20

25

2003 9M 2004 9M 2005 9M 2006 9M

Per

cen

t, y

-o-y

Export price Export volume Export value

0

5

10

15

20

25

30

35

2006 9M

perc

en

t

US, Japan and EU Others

ASEAN ChinaMiddle East Australia

Export Growth in price, volume, and value Contribution to Export Growth by

Various Markets

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

7

-5

0

5

10

15

20

Q1

200

4

Q2

200

4

Q3

200

4

Q4

200

4

Q1

200

5

Q2

200

5

Q3

200

5

Q4

200

5

Q1

200

6

Q2

200

6

Q3

200

6

Per

cen

t, y

-o-y

Import volume growth Export volume growth

Export growth began slowing down in 2006H2 while import growth sped up

Goods Export Volume and Import Volume Growth

Source: BOT

Current Account and Trade Account

Trade Account is smaller deficit this year and Current Account in surplus from rebound in services receipts

-10

-8

-6

-4

-2

0

2

4

6

8

10

2003 2004 2005 2006p

US$

Bill

ion

-8

-6

-4

-2

0

2

4

6

8

% o

f G

DP

Current AccountTrade AccountCurrent Account (% of GDP)Trade Account (% of GDP)

Source: BOT and WB staff estimates

8

II. Real GDP Growth in 2007

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

Int’l crop prices not as robust

as this year

Real exchange rate in Thailand

continues appreciation trend

Economic Environment

2004 2005e 2006f 2007f

Global ConditionsWorld Trade Volume 10.4 7.5 9.7 7.3

Consumer Prices

G-7 Countries a,b 1.8 2.2 2.5 2.1

United States 2.7 3.4 3.4 2.5

Commodity Prices (USD terms)

Non-oil commodities 17.5 13.4 20.6 -4.5

Oil Price (US$ per barrel) c 37.7 53.4 65.0 60.0

Oil price (percent change) 30.6 41.5 21.7 -7.7

Manufactures unit export value d 6.9 0.8 2.4 3.8

Interest Rates

$, 6-month (percent) 1.6 3.6 5.4 5.7

€, 6-month (percent) 2.1 2.2 3.0 3.6

Real GDP growth e

World 4.1 3.5 3.9 3.3

Memo item: World (PPP weights) f 5.2 4.7 5.1 4.5

High income 3.3 2.7 3.1 2.5

OECD Countries 3.2 2.6 3.0 2.4

Euro Area 2.0 1.4 2.3 1.9

Japan 2.7 2.6 2.9 2.4

United States 4.2 3.2 3.3 2.4

Non-OECD countries 6.4 5.7 5.5 4.6

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


4.4

12.2

11.211.9

9.4

1.1

4.65.4

8.7

3.2

6.0

5.0

6.0

7.9

4.34.5

3.94.54.1

6.0

4.6

0

2

4

6

8

10

12

14


Perc

ent

2005p 2006e 2007p

10

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

2005 2006 2007 2008 2009 TotalPlanned 42.7 290.0 506.1 514.5 450.9 1804.2Estimated disbursement* 35.0 99.0 140.0 165.0 139.0 578.0

11

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

0

5

10

15

20

25

30

2002 2003 2004 2005 H1 2006

Baht per

unit

electricity prices (Baht per kWh)

Diesel HSD (Baht per litre)

Fuel oil (Baht per litre)

Weighted average(Baht per equivalent unit)

Energy prices used by firm

Source: EPPO and MEA

0

2

4

6

8

10

12

14

16

18

20

H1 2003 H1 2004 H1 2005 H1 2006

An

nau

l P

erce

nta

ge

Ch

ange

64

66

68

70

72

74

76

Per

cent

Private Investment Growth (LHS)Manufacturing Production Growth (LHS)Capacity Utilization (RHS)

Growths of Private Investment, Manufacturing Production, and Capacity Utilization

Source: BOT and NESDB

12

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

70

75

80

85

90

95

100

1998

1999

2000

2001

2002

2003

2004

2005

9M 2

006

Inde

x (1

994=

100)

-4

-2

0

2

4

6

8

10

2002 2003 2004 2005 9M 2006

Per

cent

Lending rate Inflation PPI

Real interest rate

13


… as constraints to investments have not been addressed

0 10 20 30 40 50 60 70

Infrastructure andSupport Services

Skilled Labor Shortage

Regulatory Burden

Percent of Firms Identifying Issues as One of Three Top Obstacles

Top 3 constraints to doing business and expansion in 2004 as reported by 1,385 firms in Thailand

Source: Thailand PICS 2005

14


38

40

42

44

46

48

50

52

2004

Jan

Apr Ju

l

Oct

2005

Jan

Apr Ju

l

Oct

2006

Jan

Apr Ju

l

Business Sentiment Index

… as investors sentiments have not recovered much

Index = 50 indicates that business sentiment remains stableIndex > 50 indicates that business sentiment has improved.Index < 50 indicates that business sentiment has worsened.

Source: BOT

Business Sentiment Index Survey of 568 Large and Medium-size firms

15

2003 2004 2005

2005 (Jan-Oct)

2006 (Jan-Oct)

Total Net Applications 304.7 637.2 685.6 630.9 424.8

Agriculture 34.2 53.1 39.7 31.7 37.4

Mining, ceramics and base metal 19.9 157.7 130 129.0 28.1

Light industry 17.8 12.2 14.7 12.3 14.4

Metal products, machinery and transport equipment 60.5 57.4 145.1 135.1 47.1

Electronics and electrical appliance 62.8 82.6 86.4 77.1 60.6

Chemical, paper and plastic 56 116 110.1 100.3 141.4

Services and infrastructure 53.6 158.1 159.6 145.5 95.8

Net applications by foreign firms and joint ventures 243.6 340.4 531.1 496.2 260.4

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

(Billion Bt)

Investors have been more cautious since last year

-30

-20

-10

0

10

20

30

40

2004

Jan

Mar

May Ju

l

Sep

Nov

2005

Jan

Mar

May Ju

l

Sep

Nov

2006

Jan

Mar

May Ju

l

Sep

Oct

(Out

look

)

JETRO’s Business Sentiment Survey of Japanese companies in Thailand

Source: JETRO

16

As exports slow and imports increase, current account will fall

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

Trade and Current Account Balance

-10

-8

-6

-4

-2

0

2

4

6

8

10

2003 2004 2005 2006p 2007p

US

$ B

illi

on

-8

-6

-4

-2

0

2

4

6

8

% o

f G

DP

Current AccountTrade AccountCurrent Account (% of GDP)Trade Account (% of GDP)

17

GDP Growth in 2007 will be 4.6%… as domestic demand accelerates, but

foreign demand decelerates


4.4

12.2

11.211.9

9.4

1.1

4.65.4

8.7

3.2

6.0

5.0

6.0

7.9

4.34.5

3.94.54.1

6.0

4.6

0

2

4

6

8

10

12

14


Perc

ent

2005p 2006e 2007p

18

III. 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

Source: NESDB

NOTE: 1980s share in GDP was 22%

Greater investments needed to relax the constraints

58

60

62

64

66

68

70

72

74

76

78

80

1999

2000

2001

2002

2003

2004

2005

9M 2

006

Capacity Utilization (%)

1995-1996 Average

Source: BOT

Excess Capacity

19

III. Going forward:Agenda 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 firm’s 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 R&D

20

III. Going Forward: Agenda for a balanced and quality growth

What will help promote both investments and productivity of firms?

1) Relax regulations, skills and infrastructure constraints which firms identified as major constraints to their investments & productivity

2) Innovation/knowledge critical for raising productivity will be key

3) 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

21

(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


22

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 < 20% of CPI basket

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

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

Source: Ariyapruchya et al (2006) Note: Each point represents a firm

23

(2) Actions needed to move Thailand towards a knowledge economy

– Increasing S&T graduates

– Promoting R&D in firms

– Creating university-business linkages

– Strengthening role of public research institutes (e.g. NSTDA)


1995 2004/05

East Asia 4.33 6.04Hong Kong 7.20 7.68Singapore 7.42 8.24Taiwan 6.37 8.10Korea 5.87 7.48Malaysia 4.79 5.57Thailand 4.26 4.76Philippines 2.99 4.25China 2.67 4.12Indonesia 2.34 2.96Vietnam 1.49 2.92

Knowledge Economy Index (0-10)

Knowledge Economy Index covers 4 pillars of a knowledge economy:1. Economic incentive regime 2. Innovation3. Education 4. ICT

Source: World Bank

24

(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


25

Growth must be more evenly distributed• Income distribution must be more even

• Fight against poverty must continue with improved targeting of the poor


2000 2002 2004 1st Poorest Quintile 955 1,063 1,155 2nd Quintile 1,578 1,724 1,891 3rd Quintile 2,294 2,467 2,726 4th Quintile 3,449 3,638 4,040 5th Richest Quintile 7,845 8,205 9,558 Source: WB Computation from SES data

(Baht/Month)

Average Per Capita Real Consumption

Poverty Map of the Northeast Region, 2004

Source: NSO

26

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 Thailand’s 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

1 Thailand Economic Monitor November 2006 Launch November 14, 2006.

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Transcript of 1 Thailand Economic Monitor November 2006 Launch November 14, 2006.