Thailand Economic Monitor, November 2005

Date launch: November 2005 Number of pages: 64 Download Report:   ภาพรวม (pdf 127Kb)   Download full report | ภาษาไทย    Presentation (ppt 156Kb)

An Overview

Economic growth is estimated to be 4.2 percent in 2005, but significantly lower than the 6.1 percent achieved last year, but should speed up to 5 percent next year.   The tsunami, drought, unrest in the South, slowdown in world trade and, of course, a large rise in oil prices have all taken a toll on consumer and investor confidence this year.   Growth in domestic demand is thus depressed and net export growth is down.  While the effects of tsunami and drought will wear off, and export demand is expected to pick up next year, the effects of large increases in oil prices will continue to constrain the pace of recovery in GDP growth in 2006, as the economy adjusts to higher oil prices.  GDP is thus expected to grow at around 5 percent next year. 

 

Poverty reduction remains high on the national agenda. Under the recently revised poverty line, incidence of poverty in terms of headcount has fallen from 21.3 percent in 2000 (14.2 percent in 2000 based on the old poverty line) to 11.3 percent in 2004. This decline was mainly contributed by the reduction in the number of poor in the Northeast. The Northeast, which is the most populous region and houses more than half of Thailand’s poor, has seen a reduction in headcount from 35 percent of population in 2000 to 17.2 percent in 2004.

 

Thailandis one of the countries in the region that has been very effective in judiciously passing-through the higher world oil price to its users.  As a result, average retail prices for oil products in 2005 are more than 40 percent higher than the retail price in 2003 and more than 50 percent higher than that in 2002.  The largest increase this year has been for diesel as the subsidy was removed[1].  This measure is strengthening further the macro-economic situation in the face of higher world oil prices in several ways.  First, the Oil Fund is no longer adding to the deficit of nearly Bt 90 billion that it accumulated in the earlier period, thereby reducing the consolidated fiscal deficit.  Second, growth in domestic oil consumption has slowed noticeably, reducing the pressure on the import bill and the current account balance.  In fact, growth in gasoline consumption, falling since last year, has turned negative this year, while growth in diesel consumption, though still brisk, has fallen.  Third, this pass-through of higher prices is promoting conservation and increased efficiency in the use of oil and energy; also the government’s support for conservation will help accelerate this trend.  Fourth, the Government has taken supplementary measures to alleviate the impact on workers by raising the minimum wages as well as promoting additional fiscal spending. 

 

Nevertheless, higher oil prices will constrain the rebound in GDP growth next year, as households and firms adjust to become more efficient user of oil and energy.    Given the high oil intensity in Thailand, growth in consumption and investment will pick up slowly next year, as households and firms adjust.  The higher cost of production for service providers like those in transport and power, has also led to increases in transport and power costs.  This is turn affects manufacturers and other service providers in Thailand that use oil, power and transport as production inputs to varying degrees.  This is already evident in the growth of manufacturing production which has slowed in the first 8 months of 2005 relative to the same period in 2004.  Household consumption growth is also down this year and is likely to recover gradually given the reduction in real disposable income.

 

With rising domestic retail oil prices as well as power and transport prices, headline inflation in 2005 could reach 4.5 percent, significantly higher than recent years.  In the first three quarters of this year, headline inflation is 4.3 percent. But on a year-on-year basis, October inflation is 6.2 percent and this rising trend is expected to continue until the end of the year.   This is mainly due to the rise in oil and transport prices, as well as increased food prices arising from drought in the beginning of this year.  Nominal interest rates are also being adjusted upwards as the central bank tries to stem inflationary expectations, and it is likely that next year real interest-rates will rise as inflation falls.

Private investment slowed this year, following the shocks to investor confidence and the resulting uncertainty.    Private investment recovery since the crisis, especially domestic, has been sluggish relative to past recoveries as well as in terms of levels; it has remained below 20 percent of GDP, lower than the average of the 1980s, even before the pre-crisis investment boom.   With capacity utilization now close to the pre-crisis level and exceeding 80 percent in over half of the exporting sectors, private investment needs to pick up to avert a serious supply constraint.  Foreign direct investment inflow, which grew strongly during last few years of recovery, continued to be high this year. So clearly a pick-up in domestic private investment is necessary for rapid GDP growth in the next few years.  And this has to happen in the context of a profit squeeze that is underway with higher prices of oil, power and transport, with opportunities for passing-through higher costs to buyers limited by the depressed growth in domestic demand. 

 

The imperative for firms in Thailandto become more efficient and increase rates of return to private investment is now more urgent.  Unless firms become more efficient users of oil and energy which will take time, and improve their overall efficiency and productivity in the near term, the rates of return will not be high enough to encourage increased private investment in the face of increased uncertainty. 

 

Firms in Thailandtell us in the Productivity and Investment Climate Study (PICS) that regulatory burden, infrastructure weaknesses and skill shortages are major constraints to increasing competitiveness.    The above study (based on a survey of 1,385 firms in 2003 to 2004) conducted jointly by the National Economic & Social Development Board (NESDB) and the World Bank, shows that these constraints cannot be overcome by firms alone or by the Government alone; they need actions from both parties. 

 

Reducing the regulatory burden will be the least costly and most effective measure for the Government to take quickly.  Firms tell us that regulations for starting a business, for importing goods and services, for hiring and firing labor, and for taxes are all taking a large toll on firms.  Also interestingly, it is the more productive firms (e.g. large, or export-oriented or high-tech or foreign-owned firms) in Thailandthat are most adversely affected by regulations, and so relaxing that burden will raise productivity and investment the most too.  The Government can do this quickly and such actions will not only have the most ‘bang-for-the-buck’ but also the fastest impact because the most productive firms will make use of it to raise investment and productivity. 

 

Overcoming skill-shortages will also make a significant contribution, as it can add anywhere between 15 percent and 40 percent of sales revenue, depending on the sector in which firms are located.  Also such shortages limit firms’ efforts at innovation and reduces potential for within-sector productivity-growth through innovation; without these skills, moving up the value-chain to remain competitive in the face of rising wages, becomes difficult.  Nevertheless, the impact of measures to reduce skill shortage takes time.  Improving the quality of secondary education graduates  —   as well as English language and ICT skills taught in secondary schools —takes time to implement, but more importantly take nearly a decade after implementation to improve the skill-composition of the labor force.  Improving effectiveness of vocational education and of incentives for firms for skill development of its labor will work faster, but still take a few years.  For this very reason, Thailandneeds to expedite its education reform program. 

 

The Government is already fine-tuning its competitiveness strategy to ensure effective economic restructuring over the next 4 years, but it needs to move faster.  A Committee is examining laws and regulations in order to streamline them, and reduce firms’ transaction cost.  On strengthening secondary education, the reform program is being strengthened; however, this will affect the skill-composition of the labor force significantly only after a decade or so.  Meanwhile there are efforts to reform the vocational education system as well as to provide appropriate skill-development incentives, but these need to be expedited and implemented.  The Government is preparing the 10^th Five Year National Development Plan (FY2007-2011), now called the National Development Strategy, which will cover 5 pillars: Coping with the changing development context, Economic restructuring, Adding value through innovation and knowledge creation, Pursuing social development, and Enhancing global and regional linkages.  The Office of National Economic and Social Development Board (NESDB) is responsible for drafting the Strategy with first draft planned for February 2006 and the final draft for September with issuance of the document in October 2006.  

 

Also, infrastructure weaknesses are raising cost and reducing returns; it takes a long time to obtain telephone, water and power connections, longer than many of its competitors.  Traffic congestion not only in Bangkok but on key trunk routes are also costing firms, including those in the Central and Eastern seaboard provinces where most manufacturing and high-tech firms are now located.  The railway-system is not very effective in transporting goods. Power outages and fixed line interruptions have also risen. 

 

The Government is addressing infrastructure weaknesses more frontally.  It has initiated a major infrastructure public investment program, with a proposed program of mega-projects of Baht 1.8 trillion to be implemented during 2005-2009 period.  Together with other public investments, this will raise total public investment from 7 percent of GDP this year, to 9 percent of GDP by 2009, if fully implemented along the planned timeline.  The proposed expansion in public investment in infrastructure is much needed, following more than five years of retrenchment since the crisis.  Of course, the strategic targeting of these investments as well as their prioritization must be well worked out to ensure that these public infrastructure projects do increase private sector competitiveness and private investment returns. This process of choosing the projects and sequencing them appropriately is critical, and still underway. 

 

Nearly a fifth of the mega-projects program is planned to be financed by external borrowing, but given the current macroeconomic situation, this is feasible.   Current information suggests that half of the Bt1.8 billion public infrastructure mega-projects will be financed by the Government’s budget and state-owned enterprises’ (SOEs) revenues.   The remaining 27 percent will be financed by domestic borrowing and 18 percent by external borrowing.   The import content of the mega projects have been estimated at around 35 percent, implying an addition to the current account deficit from its implementation, but the final size of the current account deficit will also be a function of changes in private investment.  However, given existing external debt and the overall fiscal situation, a current account deficit in excess of 2 percent in some years will be manageable. 

 

It is expected that this investment program will be accompanied by appropriate policy and institutional changes to improve infrastructure efficiency and encourage private participation.  This policy and institutional area related to infrastructure is being examined by various agencies, drawing on successful experiences of other countries, and a large agenda of analytical work is underway in respect of policies relevant to improving urban infrastructure services, greater inter-modal efficiency as well as promotion of private-public partnership in infrastructure investments  Without these complementary changes in policies and institutions, the economy in general and firms in particular, will not derive as much benefit from these infrastructure projects as they would otherwise do.

 

Growth in export earnings and in export volume is also lower than last year.  Export volume growth, after an abysmal performance in the first half, has recovered in the third quarter.  Export earnings growth has been helped by export price increases of around 12 percent or so – and more importantly by sustaining growth in the Chinese market, though China’s imports slowed sharply in 2005.  Export value to China grew by 30 percent, more than last year – and there are indications that Thailand is make special effort to cultivate that market and to encourage Chinese foreign investment in Thailand for exports back to China.    More than 85 percent of exports are manufactures, and recent growth in exports has been most rapid in respect of electronics, automobiles and parts as well as machinery and parts; wearing apparel, textile and food processing has been contracting or grown slightly in recent years. Tourism receipts continued to be depressed following the tsunami in December 2004, and the southern unrest has not helped this situation either.

 

Thailand’s current account deficit is estimated to be around US$2.7 billion or 1.5 percent of GDP in 2005, following many years of surpluses.  The first half of this year saw a large rise in the import bill driven largely by a jump in oil and steel imports.   Import growth is slowing in the second half; but the current account deficit will still be significant, given slow growth in export earnings and gradual recovery in tourism receipts.  The current account is expected to remain in deficit next year with continued growth in the private investment and public investment, but that is consistent with Thailand’s position as a low middle-income country.

 

Nevertheless, Thailand’s external and fiscal situation remains strong.  It has reserves of more than US$48 billion (3 times of short term external debt) by August, and its total external debt has fallen to around 27 percent of GDP as of June 2005.  The government is committed to continue running a balanced budget, though the consolidated budget will go into deficit as the mega-projects program is implemented.  Public debt as a share of GDP is now below 50 percent and is projected to decline over the next 5 years.

 

The financial sector has been doing better too.  For the first time, the ratio of non-performing loans (NPLs) in total loans has fallen below 10 percent.  The NPLs of commercial banks are down by 3 percent but those of financial institutions have fallen by much more, as 20 percent of their NPLs, restructured earlier, are removed from NPL status following successful repayment experience.  The TAMC has made progress too, resolving most of the distressed assets transferred to it.  Increased profitability of Thai banks has improved their balance sheet in general; medium-sized banks had lower profitability and capital adequacy ratios, but also lower NPLs than large and small banks. 

 

The performance and health of Thailand’ corporate sector has improved significantly.  An average debt-equity ratio of less than one and interest coverage ratio of nearly ten for all listed companies implies a significant turnaround, not only relative to 1998 but also to 2002.  Also, all SET groups have debt to equity ratio of around one, even if interest coverage ratios go from a low of 8 for services and agriculture and food groups, to a high of 18 for the electrical group.  This is comparable to the region’s better performers.  The strong recovery in domestic and export demand has made this possible, by raising average net profit margins to 13 percent and return on assets to 12 percent;  The manufacturing group had the highest returns while agriculture and food group, the lowest.  There was little change in ownership, and more investigation is needed to ascertain whether there was significant operational restructuring in this process.  

 

Reforms continued in the areas of trade, financial and corporate sector and public sector governance.  The Bank of Thailand (BOT) is continuing its financial sector consolidation and rationalization as well as gearing up preparation for the implementation of Basel II which will be fully effective in 2008.  Non-performing loans in June 2005 still remained at doubled digits of 10.3 percent of total loans, a minimal decline of 0.58-percentage point from December 2004.  Corporatization of additional state-owned enterprises (SOEs) has taken place in 2005, namely, the Telephone Organization of Thailand (TOT), CAT Telecom, and Electricity Generating Authority of Thailand (EGAT).   This year regulations on consumer lending has been implemented to curb excessive consumer indebtedness.  The recently completed Thailand Report on Standards and Codes (ROSC) on corporate governance showed that listed companies largely observed two-thirds of the Organization for Economic Co-operation and Development (OECD) Principles on Corporate Governance, while the remaining one-third of the principles are partially observed.  The Free Trade Agreements (FTAs) are continuing, helping to increase competition and encourage firms to raise their productivity and competitiveness.  The Thailand-Australia FTA, the ASEAN-China, and the Thailand-New Zealand FTAs are effective this year leading to preferential tariff reductions.  The Government has also adopted the Government Fiscal Management Information System (GFMIS) since March 2005 to be able to better monitor budget execution on a monthly basis. The Cabinet has also approved the E-Government Action Plan (2005-2007) which focuses on providing services on-line, improving/amending laws to facilitate such services, building infrastructure to accommodate the services, and establishing the E-Government Agency (EGA) as an oversight agency.