Thailand Economic Monitor, April 2005

Date launch: April 2005 Number of pages: 64 Download Report:   English    Thai Version  Â

Thailand grew by 6.1 percent in 2004, slower than in 2003, but a further slowdown to 5.2 percent is expected in 2005 in view of the adverse shocks.  The rebound in tourism after the SARS scare in 2003 and a jump in public investment after many years of retrenchment, helped real GDP growth to exceed 6 percent last year despite slower increases in private consumption and a fall in net exports.  Higher oil prices last year and election-related uncertainties had taken their toll. The tsunami, the increasing unrest in the South, the recent drought and further increases in oil prices have affected household and business confidence adversely.  This is manifest in a slowing of quarterly growth rates as evident from the last quarter of 2004 and the first quarter of 2005. Slowing private consumption and net exports, the latter due to lower growth in world output and trade projected for 2005 despite rising imports, will reduce overall growth this year. 

Poverty has continued to fall. After falling below pre-crisis levels in 2002, the incidence of poverty continues to decline. Thailand has adopted a new poverty-line reflecting more accurately the current consumption patterns. By this measure, the number of poor has fallen by 2 million between 2002 and first half of 2004 for which data is now available. Using the new poverty line, poverty has fallen from 15.6 percent to 12.0 percent.

Inflation could be close to 4 percent this year, up from 2.7 percent in 2004 driven largely by increases in oil prices.    Upward adjustments of domestic prices of gasoline and diesel this year will have the largest negative impact on GDP growth, given the oil-intensity of the economy. Retail benzene prices have floated since October 2004. The continuing rise in world oil prices is likely to translate into a 17 percent rise in domestic retail benzene prices this year, the same as last year. Unlike last year, this year the Government raised the ceiling on the retail price of diesel in February and in March by a total of Bt 3.60 per liter, thereby lowering the subsidy to Bt  3 per liter ; this means that the retail price of diesel in Thailand will be almost 20 percent higher than last year.

External vulnerability fell further last year. In 2004, the external current account surplus fell relative to 2003 to US$7.3 billion or equivalent to 4.5 percent of GDP.  The trade balance fell by more than half that of 2003, but was offset by increases in receipts of services incomes from tourism by almost US$2 billion. International reserves reached almost US$50 billion by the end of 2004 or 4.4 times of short term external debt and 6.3 months of imports. External debt at the end of 2004 was US$51.1 billion, similar to that of 2003, with short-term debt increasing by 1 percent of total external debt to 22.4 percent.

Nevertheless, the external current account and the fiscal balance are under pressure. The trade balance is in deficit in the first quarter given rising oil prices, higher capital imports and weakening world demand. Imports are expected to continue to grow at a faster rate than exports, given the large public investment program.  Tourism receipts are also down which is likely to reduce the surplus on services account. On the fiscal front, revenue growth is likely to be slower with some slowdown in GDP growth, even as public debt servicing and other current expenditures remain strong. The Oil Fund already has a large deficit, and this is likely to rise further this year as oil prices remain buoyant. This is likely to constrain the size of the multi-year public investment program, as is probably reflected in recent announcements.

Private investment will have to grow to take up the slack in private consumption and net exports, if growth is to be higher over the medium-term.  Private consumption growth slowed in 2004 and will slow further in 2005.  Net exports will decline as imports pick up. Private investment is expected to grow at around 15 percent, the same rate as last year, given that the Board of Investment (BOI) approvals over the last two years and rising capacity utilization. But higher growth in private investment is needed, especially in more productive and efficient sectors, if growth is to be sustained at more than 6 percent.   Foreign direct investment is expected to slowly pick up, probably because of a wait-and-see approach to the Southern unrest and its recent escalation and the newly-announced trust-building initiatives.  This means that private domestic investment, which has been sluggish, needs to grow more. 

Probably more important for sustaining private investment are the constraints like regulatory burden, skill-shortage and infrastructure costs, identified by firms  as severe. Preliminary findings also show that the performance of firms– measured by labor productivity and total factor productivity – is adversely affected by these constraints.  Thus, unless these constraints are addressed adequately thereby raising the rates of return for investors, growth in private investment and flow of higher investment into highly productive sectors will slow down over the medium-term. It is in this sense that the Government’s efforts under the National Competitiveness Committee, which is already working on these areas, now needs to accelerate the implementation of measures to alleviate these constraints for private firms.

Uncertainty about the economic situation and the market was also an issue for firms. This may have a lot to do with the recent experience of the East Asian crisis, China’s WTO accession and impact of terrorism. Locally, the experience with SARS, the Avian flu and now Southern unrest have created greater uncertainty. This means that for investors to invest, rates of return will have to rise to compensate for the increased uncertainty and risk.  Addressing the constraints identified above will be critical for encouraging private firms to invest more and in more productive sectors.

Some types of private firms are found to deal better with these constraints, than others. Medium and large firms are found to be performing much better than small firms.  Similarly foreign-owned and exporting firms are found to be more productive than domestically-owned ones. In short, small firms, domestically-owned firms and domestic-market-focused firms – the very firms that the Government has been keen to promote – have their performance affected disproportionately more than others by these same constraints.

Firms in regions outside Bangkok and vicinity are found to have lower total factor productivity. This is particularly true in the Northeast, the North and the Central regions. Also, the severity of constraints varied across regions. While skilled-labor shortage was equally severe for firms in all parts of Thailand, poor infrastructure and lack of support services was much more of a constraint in the Northeast. At the same time, surprisingly, Northeast region faced less of a burden from regulations. 

The shortage of skilled labor could potentially undermine sustained high private investment and growth.  Nearly a quarter of firms report that they are not operating at full capacity due to a skill shortage. The survey also finds a significant wage-premium that has to be paid by firms for tertiary graduates. On the other side, Thailand is producing a lower number of secondary education graduates relative to countries at similar levels of income and development.  Also the quality of the secondary school graduates produced is lower than those of its middle-income neighbors, as measured by test scores.  On another dimension, 45 percent of the firms surveyed rated IT skills of their production workers as ‘very poor’. Given the urgency for Thailand to move up the value-chain and create a knowledge-economy, these skill deficiencies identified by private firms are worrisome from the perspective of medium-to-long term private investment and growth.

Notwithstanding the above, Thailand continues to be a very attractive place for foreign investors.  A. T. Kearney FDI Confidence Index, based on a 2004 survey of top multinationals, show that Thailand ranks as the third most attractive investment destination among Asian investors, after China and India. However, for all foreign investors, Thailand’s rank has fallen from 16th to 20th rank, largely because other countries have made significant improvements in their investment climate. 

Public investment is expected to grow more rapidly than last year.  In 2004 it grew by 12 percent, having fallen in each of the previous five years, bringing total public investment to 6 percent of GDP.  As the mega-infrastructure projects begin to be implemented, assuming a much slower rate of actual spending than is planned, public investment would grow in 2005 at almost twice the rate of last year.

Three challenges remain for public investment in infrastructure. First, it is not clear whether fiscal consolidation and the proposed large public infrastructure investment implementation are both doable. Is there adequate fiscal space for the program? This is something the Government is focusing on at present and will be important during the 2005-2007 period.  Second, it is not clear if the policy changes needed to make infrastructure investments deliver the quality infrastructure services that businesses need are in the pipeline together with the investments.  Third, the distribution of public infrastructure investment does not take into account adequately the needs of poorer regions.

The Northeast region is the poorest, but receives the lowest per capita public spending, including for transport .  The gap in per capita spending is largest in transport and agriculture.  Firms in the region also confirm that transport and other infrastructure services constitute one of their severe constraints to productivity and investment growth.  There is thus an urgent need to revisit the allocation of public spending on infrastructure, if regional equity is to be improved.
 
Exports receipts last year grew by 23 percent year-on-year largely due to price increases.  Prices of Thai merchandise exports grew by almost 16 percent last year while volume expanded by 6.2 percent.  Exports of goods and services together in real terms grew by 7.8 percent in 2004, largely due to the rebound in tourist arrivals. 

In 2005, export value growth is expected to decelerate to around 15 percent. Merchandise export volume growth is expected to slow down as growth in world output and world imports decelerate. Growth in output of the countries that are markets of Thailand is slowing not only relative to 2004, but also relative to 2003.  Export price is also projected to rise, but at a slower rate than last year. Thus, exports receipts will likely expand not much more than 15 percent in 2005.  In addition, growth of tourism receipts will be limited by the impact of the tsunami related disaster earlier this year.

Thailand’s exports to China grew at around 25 percent in 2004 compared to 60 percent in 2003. Electrical machinery and parts, non-electrical machinery and parts, plastic products and rubber products were the four items contributed more than 60 percent to this growth.
There is an emerging agenda of reform to be addressed, on top of those being addressed, if competitiveness is to be enhanced further and high growth is to be sustained.   The Government remains focused on its strategy to improve Thailand’s competitiveness, which is appropriate and is confirmed by the preliminary findings of the Productivity and Investment Climate Study (PICS). The Cabinet has recently approved the National Socio-economic Restructuring Plan proposed by the NESDB, which aims to promote higher annual economic growth over the next 4 years and highlights the urgency of improving Thailand’s overall and sectoral competitiveness. The niche sectors identified by the National Competitiveness Committee, that is, automotive, food, and fashion, including promotion of industry clusters remain part of that strategy. Logistics issues are also part of that program.  However, there are three general constraints that appear to affect a large number of firms operating in many sectors, including the niche sectors that are reducing their investment and productivity. 

First is the need to reduce the regulatory burden that the firms face. This is the least costly to implement, in terms of budgetary resources, and yet they are likely to have a large favorable impact on firms. The specific actions in this area need to be identified and prioritized.  Recent actions on trade reform and the FTA initiatives are all good steps in that direction, but more is needed in other areas.

Second is the issue of skilled-labor shortage and can be addressed at more than one level.  Strengthening the education system, especially at the secondary level, in respect to both access and quality which will help in the long run and this is already on the Government’s agenda. There is need for some urgency in terms of implementation.  The other is enhancement and expansion of appropriate skill-development and training institutes which can have a more immediate impact. For example, IT training can be very useful in this regard. The incentive systems for training and skill development need to be re-evaluated to see if more needs to be done.

Third is the need to enhance availability and quality of infrastructure services, especially in the regions. If regional development is important, firms need to have better quality of infrastructure services than they have currently. This will require a reallocation of public spending in favor of the regions on the grounds that private supply of infrastructure is more of a possibility in more developed parts of the country like Bangkok and vicinity. But that may need changes in policies that will increase the rate of return to private investors in infrastructure.

In addition, the Government should continue its reform of the financial and corporate sector.  For example, the Bank of Thailand has tightened the loan classification rules, including qualitative assessment of loans, raising non-performing loans (NPLs) of banks.  The implementation of this rule has raised NPLs in state-owned banks.  Though the impact on private banks has been less obvious and may have been less in reality, NPLs of private banks to total loans still remain important. Also the implementation of the Financial Sector Master Plan and financial institution consolidation should be continued.  

There is also some urgency to convert several draft laws into laws especially those relating to the financial and corporate sector. For example the collateral law, the secured transaction act, the bankruptcy code etc are all important steps for ensuring that firms have access to finance and there is discipline for the corporate sector. Recent Government initiative to review all laws is a good step in that direction.

Improvements in corporate governance area should also be sustained. The SET and the SEC have strengthened disclosure standards through monitoring financial and non-financial disclosure and providing incentives for such disclosure, including monitoring of audited financial statements and annual registration statements of listed companies.  Use of administrative sanctions has increased and liaison arrangements with the Department of Special Investigation (DSI) have helped in this area. The establishment of a mandatory Director Registration program by SEC, in which all listed company directors and senior executives are required to register and questionable actions can be evaluated by an independent Director Disciplinary Committee, is a good step for greater accountability.

If the Government is to attain its 4-year growth targets of more than 6 percent a year on average, movement on the above agenda is important. That will help to sustain high rates of private investment, as well as encourage those investments to go into more productive and more efficient sectors. That will help to improve total factor productivity growth, something that will be key to achieving high growth.    much