thai economy at the cross roadstaiwan · 9/6/2012 · 1.performance of thai economy in 2012 :...

Thai Economy at the Cross Roads :

Opportunities and Challenges

1

Nipon PoapongsakornThailand Development Research Institute

International Conference on “ASEAN Integration under the Global Political and Economic Trends : Major Issues, Impacts and Responses. Organized by Chung-Hua Institution for Economic Research, Taiwan ASEAN Studies Center, Taipei,

September 6, 2012

Topics of discussion• Performance of Thai economy in

2012 : roller coaster

• Outlook in 2013 and risks

• Key challenges facing the Thai economy in the medium term

• Some policy implications2

1.Performance of Thai economy

in 2012 : roller coaster

• GDP in the second quarter of 2012 grew by

4.2% compared to 0.4% in Q1/2012, thanks to

a strong expansion of domestic consumption

(5.3%) and investment (10.2%), while

government consumption grew by 5.6%

3

QGDP Growth

Global financial Crisis

Global financial Crisis

Political Crisis

Political Crisis

FloodFlood

Tsunami in JapanTsunami in Japan

Source: NESDB.

• Non-agricultural growth was 4.5%, compared to 0.1% in previous quarter. This is because of the recovery of the manufacturing sector after facing the flood disaster

• But agricultural growth slowed down from 3.4% in Q1/2012 to 1.3% in Q2/2012 mainly because of the fall in rice export which was the consequence of the paddy pledging policy

5

Performance of Thai economy in 2012 : roller coaster

• After a brief recovery from the 2011 flood,

Thailand is now expected to experience a

sharp reduction in export growth, thanks to

the EU crisis

6


Source: Bank of Thailand and NESDB.


2. Outlook in H2/2012 and 2013 and risks

• Though IMF predicted a sharp economic rebound in April, the EU crisis will push down Thai GDP growth in H2/2012 and 2013 mainly through the slower growth of export (from 15% to about 4-5% in 2012)–Annual growth in 2012 may be 4.5-5.5%

–It will pick up to 7-7.5% in 2013, according to IMF, depending on the growth of EU and USA

9

Forecasted GDP growth in 2013

• Growth opportunity in 2013

–A major investment project is expected to bring

back investors confidence and generate high

economic growth in 2013-15, i.e., the 8.065

million USD flood prevention program

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• What are the concerns and downside risks ?

–External risk 1 : intensification of Euro zone crisis, fiscal cliff and double dip recession

–External risk 2 : higher oil prices as a result of international boycott of Iranian oil

–Internal risk 1 : increased government spending for the populist policy by borrowing without additional tax revenue

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Fiscal Measures and Estimated CostsPolicy Estimated Cost (% of GDP)

Lower corporate tax rate (from 30 percent to 23 percent) 1.2

Diesel fuel excise tax cut 1/ 1

Rice price guarantee scheme 1

Tax refund for first time car buyer (beginning FY13) 0.2

Note: 1/ If the tax cut is phased out in the coming months, the impact in FY12 would be 0.7 percent of GDPSource: IMF April 2012.

Public Sector Debt will increase after 2012 as a result of increased

borrowing (In percent of fiscal year GDP)

Thai public debt is still lower than

other ASEAN countries

Thailand has the lowest rate of VAT

• How large is the expected

impact of the risks ?

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• Short-tern challenge : how would the government use

fiscal and monetary policy to counteract the negative

impact of Euro zone crisis in m1-m5/2012

สถานการณ์ตลาดส่งออกของไทยในช่วง 5 เดอืนแรกของปี 2555(BCG Analysis for Thailand’s Export Markets)

-50

-40

-30

-20

-10

0

10

20

30

-5 0 5 10 15 20 25

Export Growth (%)

Export Share (%)

ASEAN 5

16,565 (+7%)America9,888

(+2.5%)

China11,125 (+8%)

Europe9,142 (-11%)

Japan9,410(-5%)

CLMV7,191 (+16%)

Hong Kong

4,697 (-35%)

Russia & CIS578 (-16%)

Australia3,950

(+3%)

Middle East4,838(+2%)

India2,244 (+5%)

South Korea1,615 (+5%)

Africa3,240 (+12%)

South America

หมายเหต ุ ขนาดของวงกลม คอื มูลค่าการส่งออกของไทยไปยังตลาดนัน

3,147 (+18%) หน่วย : ลา้นเหรียญ

สหรัฐฯ

16Size of the circles is the value of exports

Thailand – Risk Assessment Matrix

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Nature/Source of Main Threats Overall Level of Concern

Likelihood of Severe Realization of Threat in the Next 1-3 Years (high, medium, or low)

Expected Impact if Threat is Realized (high, medium, or low)

1. Intensification of the euro zone crisis and global double-dip • A global double-dip recession • The direct impact on Thai banks

would be relatively limited

2. Underperformance of public spending

Medium/High•The government has devised an ambitious investment and recovery expenditures plan

Medium/High•Adversely affect growth not only in the short run but also in the medium term

3. Domestic political tensionsLow/Medium

•The country remains politically divided and unrest could resume

High•Political unrest would worsen the investment climate already hurt by the 2011 floods

4. Slower growth in China by 2 percentage points

Low•A tighter macroeconomic policy stance in China would affect regional growth

Medium•Slower growth in China would have a significant knock-on effect on Thailand

5. Substantial and prolonged increase in oil prices

Medium •The international boycott of Iranian oil could put upward pressure on oil prices•But global outlook is weak

Medium•A substantial and prolonged increase in oil prices would have a significant fiscal cost

6. Resumption of capital inflowsMedium

•Yield differentials could attract capital away from depressed advanced economies

Low•Higher capital inflows put appreciation pressure on the currency

• Exchange rate appreciation could eventually hurt the export sector

• Large inflows imply costly sterilization

Source : IMF, April 2012

3. Thailand is now at the cross-roads

• Two big opportunities

–AEC 2015 and new investment cycle in ASEAN

– Government mega-infrastructure investment

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• New investment cycle in ASEAN

21

0

5

10

15

20

25

30

35

40

45

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

Percent of GDP

NIEs

ASEAN - 5

Developing Asia


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Many Thai corporate are now investing oversea: TDI is now greater than

FDI

• AEC in 2015 and new phase of business for Thai and

ASEAN corporations


23ทีมา: คดัลอกจากเอกสารการบรรยายคุณสุรศกัดิ ธรรมโน

ASEAN corporations

• AEC implementation problems : some

ASEAN members particularly Thailand, are

still reluctant to liberalize its service and

financial sector

–Thai companies will lose the business

opportunities in ASEAN, unless Thai

government liberalizes the service sector

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• The Thai government will invest 71,000 million USD in mega infrastructure projects in the next 4-5 years

• Two investment questions

–The government has to identify and prioritize the infrastructure projects that yield the highest return

–Examples are logistics projects that connect Thailand with countries in Mekong Sub-region

25


26

Connectivity infrastructure projects for Thailand

–It also needs to revise the public private

participation law and establish the new

infrastructure project management

institution so that the investment yields

highest possible return with adequate

risk management and good governance

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4. Thailand at the cross-roads :

major challenges 4.1 Populist policies to gain votes with increasing risks of unsustainable fiscal balance

– The government has been implemented extreme populist policies which will have less stimuli effect but tend to benefit the middle class and the rich more than the poor

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As a consequence, Thai Public debt has increased

faster than other countries

• The populist policy is very popular partly

because of the unequal income distribution,

and most people do not pay tax

30

4. Thailand at the cross-roads : major challenges

Thailand has the worst income

inequality in Asia

31

Income share of the richest and poorest

• Policy recommendations : Thailand needs to replace populist policy with a welfare system

• The government has to establish the basic universal social welfare at the level that Thais can afford and increase tax base as well as introduce new property tax–This will ensure that the welfare program is fiscally

sustainable

–The most important factor in designing the welfare program is the aging problem

32


4.2 Middle income trap

33

0

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1950

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Korea

ThailandMexico

Venezuela

• Thailand is already in the middle income trap


11-years Moving Average GDP Growth

ทีมา: คาํนวณจากข้อมลูรายได้ประชาชาติ สาํนักงานคณะกรรมการพฒันาการเศรษฐกิจและสงัคมแห่งชาติ

Slower economic growth rate is an evidence

of middle income trap

How do we escape from the trap?

• Structural adjustment toward high value

added industries/services

• Increasing R&D

• Improving quality of education and labor

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Increasing share of service sector with

high value : reform the service sector

36GDP Share of Thai Economy, 1952-2009 (%, by National Plans)

Reducing Barriers to Entry in the service sector

37

Ease of Investment by Sector

Identifying new industries with inclusive

growth strategy

38Share of Manufacturing Value Added (%), 2007-2008

4.3 Other challenges

– Aging and pension problems

– Fiscal decentralization

– The monarchy transition

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Thank You

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thai economy at the cross roadstaiwan · 9/6/2012 · 1.performance of thai economy in 2012 :...

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