Thailand Economic Monitor, April 2004

Date launch: April 2004 Number of pages: 63 Download Report:   English (547kb pdf)   Thai Version (173kb pdf)   Press Release (150kb pdf)

An Overview

Thailand’s recovery has gone from strength to strength and has become increasingly more broad-based.  Private consumption remains the dominant driver of this growth, but its contribution has been falling as private investment and net exports have increased their contribution. This year, the economy is projected to grow even faster with public investment as a new driver of growth, as such investment grows after six years of continuing decline. The challenge of converting this strong recovery into sustained high growth, however, remains the challenge of expanding capacity and raising productivity.  With capacity-utilization approaching pre-crisis levels, emerging pressures on interest rates to rise and for real exchange rate depreciation to moderate, the economy’s dependence on sustained structural reforms for ensuring high growth will increase.     

Growth in 2003 reached 6.7 percent, significantly higher than the 5.2 percent achieved in 2002. The SARS did shave overall growth by about 0.3 percent in 2003, but this was more than offset by continued growth in private consumption.  Private investment also grew by 18 percent and export earnings increased by 17 percent .  

This year, growth is projected to exceed 7 percent, in part because of a substantial increase in public investment. After retrenching for six years since the crisis, public investment is expected to grow by 10 percent, and there are reports that a significantly expanded five-year public investment program is being drawn up. Most of this is planned for infrastructure and thus this will not only stimulate growth directly, but to the extent such investments improve the quality and reduce the cost of infrastructure services will they also increase productivity of private investment; for  the latter, adoption of policies that encourage more effective service delivery will also be important.

Poverty, which fell to around 10 percent in 2002, has clearly fallen further in 2004.  Until the next survey is concluded this year, actual numbers on poverty incidence are not available. In any case, the national poverty incidence hides differences across regions in Thailand, and across provinces within those regions. The Northeast region continues to be the poorest, with the incidence of poverty at around 18 percent and five of the eight poorest provinces (based on provincial poverty incidence) are located in that region.  Two of the poorest provinces are outside the Northeast with one in the South and another two in the Northwest.   The poverty map shows that richer and poorer provinces are adjacent to each other. The Government is clustering those provinces to develop growth and poverty-reduction strategies for such clusters and to harness within-cluster provincial heterogeneity and the consequent synergy for their development.

Macroeconomic adjustment has continued to reduce external vulnerability. The current account surplus in 2003 raised foreign exchange reserves to $42 billion, five times the values of imports plus short-term debt. The Government has adopted a policy of using these surpluses to repay external debt, including prepayments. As a result external debt has fallen to US$37 billion at the end of 2003. In 2004 the current account surplus is projected to fall, largely due to the expected decline in Thailand’s trade surplus.

Export performance continues to be robust.  In 2003 total export earnings grew by 17 percent and export volume by 10 percent, significantly higher than in 2002. China and ASEAN markets contributed nearly half of this growth in export earnings, while Europe and Japan contributed around a quarter.  Agriculture and resource-based manufactures still comprise close to a fifth of total exports – confirming the importance of agriculture in exports with all other manufactures comprising around 77 percent.  Three of the manufactures – electrical machinery & parts, non-electrical machinery and parts, as well as vehicle & parts have been the rapidly growing exports over the last few years. But in the last two years, rubber exports grew very rapidly too, largely due to high Chinese demand. 

Thai exports to China grew by 62 percent, faster than all other ASEAN countries’ exports to China.  This growth has raised China’s share in Thailand’s exports to 8 percent.  Rubber, plastic, electrical machinery & parts, and non-electrical machinery & parts were the four fastest growing export categories in this market. The implementation of the ‘early harvest’ program in vegetables and fruits has also led to a sharp rise in the exports of vegetables and fruits, though in respect of fruits, imports exceed exports. 

Private investment showed greater robustness than before.  Its composition has shifted more in favor of machinery & equipment, and this is reflected in a significant increase in the imports of capital goods last year.  The private investment index reached its second peak this February, reinforcing the rising trend for this year.  Nevertheless, private investment as a share of GDP is only around 15 percent; this is only two-thirds of the Thai average in the 1980s and less than half of that in the pre-crisis period of the mid-1990s.       

Foreign direct investment gross inflows have fallen in 2003 relatively to the previous year, but the Board of Investment’s (BOI) foreign investment approvals of US$5 billion are twice those in 2003.  This level of approvals argues well for potential gross flows this year and the next. Also the fact that these approvals are in the export sectors means that exports will be less constrained by inadequate capacity. 

With greater capacity utilization and modestly growing bank credit, it is expected that private investment will continue its momentum. Seventeen of the 32 manufacturing sub-sectors surveyed had capacity utilization rates exceeding pre-crisis levels , including five of the mainly exporting sectors . Similarly, total loan growth has picked up. Consumer and mortgage lending is still growing rapidly. While loans to the corporate sector are growing slowly, its growth rate is higher than before, even if it is still not keeping pace with GDP growth.

The economy will be more dependent on structural reforms for sustaining high growth over the medium-term.  Many of the favorable factors that supported growth up to 2004 will weaken. Excess capacity is reducing as capacity utilization reaches pre-crisis levels.  With falling trade and current account surpluses, pressures will be in train for interest rates to rise. In addition, real exchange rate depreciation, which has been an important booster for exports, is likely to slow down in subsequent years; also the baht-dollar exchange rate is likely to appreciate and affect exports to the US.  Thus growth will have to come more from increased private investment and capacity expansion as well as from productivity growth; for that to materialize, Thailand will have to sustain its structural reforms to ensure that firms are encouraged to improve efficiency.

In addition, fiscal risks could rise if the fiscal and quasi-fiscal stimulus is increased substantially.   To date the stimulus measures have not been large relative to the available fiscal space (see Economic Monitor, October 2003) and thus risks have been manageable. The proposed increase in public investment in 2004 is significant given continuous decline for the last six year, but total size remains within bounds. But recent media reports about proposed huge increases in infrastructure investments over a five-year period, if they materialize, could pose much greater fiscal risks to the economy than has been the case up to now. 

Implementation of Structural Reforms continues to make progress, even as a fuller reform strategy is being prepared. Over the last six months, the period covered by this Monitor, most of this progress has been in reductions in import protection, consolidation of the financial sector and in the reform of the public sector.  There have also been several initiatives conducted under the National Competitiveness Committee (NCC) taken.  Progress in respect of reforms in corporate sector, in the legal framework for the financial sector and in the climate for investment have been more limited.   

Thailand has been continuing import tariff reductions, and as of December 2003, over half the tariff lines have been moved to the lower three-rate system. Thailand reduced tariffs in October and December 2003. Thus 55 percent of tariff lines are now under this system. The Government has also decided to adjust another 43 percent of tariff lines into that system by 2005; reduction of the remaining 2 percent of tariff lines, which include plastic and its products, are expected to be submitted for Cabinet approval this year.  As a result, simple average tariffs for agriculture and industrial products have come down as well as the effective protection for the manufacturing sectors.

Financial sector restructuring and reform also made good progress.  Non performing loans of commercial banks have fallen, the provisioning guidelines for banks have been tightened and the banks capital situation has strengthened. A plan to promote consolidation of the financial sector has also been announced and several banks have already announced mergers for that purpose.  There has however, been very little movement in respect of the legal framework reform for financial contracts and for corproate restructuring. 

Reforms in public sector has also been sustained. The Strategic Plan for Thai Public Sector Development, approved in May 2003, has been implemented for over a year.  In the area of financial accounting, the Agency Financial Management Information System (AFMIS) has been fully implemented within the Comptroller General’s Department (CGD) and its regional offices and the CGD is abolishing the manual accounting system. There has been not much progress in respect of decentralization.