1 thailand economic monitor november 2006 launch november 14, 2006
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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
Real GDP Growth (1988 Prices)
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
Priv C Gov C Priv I Pub I Export Import GDP
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
Private investment will unlikely grow much faster than in 2006
… 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
Private investment will unlikely grow much faster than in 2006
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
Real GDP Growth (1988 Prices)
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
Priv C Gov C Priv I Pub I Export Import GDP
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
III. Going Forward: Agenda for a balanced and quality growth
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)
III. Going Forward: Agenda for a balanced and quality growth
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
III. Going Forward: Agenda for a balanced and quality growth
25
Growth must be more evenly distributed• Income distribution must be more even
• Fight against poverty must continue with improved targeting of the poor
III. Going Forward: Agenda for a balanced and quality growth
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
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