Thailand’s Economy Bouncing Back from the Crisis, World Bank Says

Contact
Buntarika Sangarun
(+66-2) 686-8326
bsangarun@worldbank.org

BANGKOK, Nov. 4, 2009 – The World Bank said Wednesday that the Thai economy has begun to bounce back from the recent crisis. However, it also cautioned that the country may not return to high growth in the near term because it is still dependent on the economies of Europe, Japan, and the U.S. which are healing slowly.

To ensure that future growth would be more balanced and sustainable, the government should invest in both "hardware" (infrastructure) and "software" (education reform, services sector competitiveness) to stimulate private investment, and create sustainable social safety nets.  These could cushion the impact of future crises and remove constraints to domestic consumption, the World Bank recommended in its latest review of the Thai economy.

The Bank said its forecast for Thailand’s 2009 gross domestic product would remain at the -2.7 percent level that it had predicted in April. Still, this year’s contraction would be Thailand’s first since 1998.

“People were pessimistic early on and had expected the Thai economy to contract by much more than 2.7 percent in 2009,” said Frederico Gil Sander, an economist at the World Bank in Bangkok. “But we’re now optimistic about the second half of 2009.”

However, it would be premature to celebrate. In the November 2009 issue of Thailand Economic Monitor, the Bank said there remained a number of medium-term issues weighing on Thailand’s growth prospects, even though it predicted that the country’s GDP would grow 3.5 percent in 2010.

For more detail on the Bank's forecast, click here (pdf 869 KB).

Signs of Rebound in Manufacturing

The contraction in Thailand’s GDP this year is due primarily to shrinking demand for Thai exports during the global economic downturn. Manufacturing, which represents 40 percent of real GDP, accounted for nearly two-third of the contraction during the crisis.

However, the rebound in the Chinese economy and recent improvements in demand from some of the more advanced economies are helping to bolster exports from East Asia.  In Thailand, manufacturing activity has picked up during the second half of the year as exports recover and inventories are rebuilt, helping to offset the sharp decline during the first half. Having earlier predicted that exports would contract 15.9 percent in 2009, the World Bank now forecasts that the decline will be 13.6 percent.

Real wages and employment have also started to recover along with the resurgence in manufacturing.  Both unemployment and underemployment have started to decline since May this year.  These had some positive impact on household consumption.

The Thai government’s first fiscal stimulus program – or SP1 – probably had some positive effects on consumer spending as well. The SP1 included distribution of one-time cash assistance to middle-income workers and a small monthly cash supplement to senior citizens. 

“Without SP1, we think that household consumption would have declined more sharply,” Gil Sander said. The World Bank predicted that private consumption would decline only marginally, by 1.1 percent in 2009, from a 2.2 percent growth year-on-year in 2008.

Recovery Underway, But Uncertainty Remains

Although data suggest that Thailand may have seen the worst of the crisis, its growth prospects in the immediate future remain uncertain.  For instance, the economies of Thailand’s major trading partners – Europe, Japan and the United States – are expected to remain sluggish over the next 2-3 years. As a result, the World Bank does not expect Thailand to return to its potential growth rate until 2013, citing the country’s dependence on export revenues.

The government has also been accumulating debt to fund programs aimed at stimulating the economy. “It will be important for the government to carefully manage rising public debt so that it won’t impede economic stability and long-term growth,” said Kirida Bhaopichitr, the World Bank’s Senior Economist in Bangkok.   

The crisis has highlighted the need for moving away from the export-driven growth strategy that had earlier steered the Thai economy through successive decades of high growth. Rebalancing of growth in Thailand and its East Asian neighbors towards higher levels of consumption would lead to domestic and regional demand emerging as a source of economic growth. Such a coordinated structural transition, however, is likely to take time.

The World Bank recommended that the government play a catalytic role in encouraging private investment and domestic consumption through measures such as education reform, regional trade integration and by increasing public investment in infrastructure. This would help stimulate private investment, create more jobs, and therefore increase consumer spending in the long run.

In particular, a more reliable social safety net could over time lead to greater social security, which would allow people to reduce savings for contingencies and spend more on regular consumption. Providing incentives for the service sector to produce more value-added could also boost economic productivity in an area of relative strength, the World Bank said.