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The World Bank Thailand’s Economic Outlook.. Weathering the Global Storm Dr. Kirida Bhaopichitr & Dr. Vatcharin Sirimaneetham The World Bank 3 November 2008 Presentation Today 1. What are the consequences of the global financial crisis? 2. What are the impacts on Thailand’s economic outlook? 3. Can we turn this crisis into opportunity? 2 1. What are the consequences of the global financial crisis? 3 Before the global financial crisis… US Debt Outstanding 4 Before the global financial crisis… Financial Leverage, end-2006 Source: Phatra Securities 5 And the financial crisis begins… 6 And the financial crisis begins… Source: Phatra Securities 7 Consequences of the global financial crisis… Real GDP growth will fall across the world World Major advanced economies US EU Japan Australia Emerging & developing economies Developing Asia China ASEAN-5 Middle East 2006 5.1 2.7 2.8 3.3 2.4 2.7 7.9 9.9 11.6 5.7 5.7 2007 2008f 2009f 5.0 3.9 3.0 2.2 1.2 0.1 2.0 1.6 0.1 3.1 1.7 0.6 2.1 0.7 0.5 4.2 2.5 2.2 8.0 6.9 6.1 10.0 8.7 7.7 11.9 9.7 9.3 6.3 5.5 4.9 5.9 6.7 5.9 Note: ASEAN-5 includes Thailand, Indonesia, Philippines, Malaysia, and Vietnam Source: IMF 8 Consequences of the global financial crisis… Commodity and agricultural prices will fall Crude oil ($/brl) Gold ($/toz) 5% rice ($/ton) Shrimp (c/kg) Rubber (c/kg) Palm oil ($/ton) 2006 64 604 305 1,024 211 478 2007 71 697 326 1,010 229 780 2008f 105 896 665 1,060 295 1,000 2009f 79 845 446 1,025 220 700 Source: World Bank 9 Consequences of the global financial crisis… Global liquidity will be tight, and banks will be much more careful in lending Monetary policy will ease around the world, but bank interest rates may not decline as much Lower global inflation Currency movements will not be as volatile, as many hedge funds have closed down Equity markets will be down 10 2. What are the impacts on Thailand’s economic outlook? 11 Immediate impact high, but less than regional peers 550 500 450 400 350 300 250 200 150 100 50 0 20 0 -40 -60 -80 Basis points -20 -100 -120 Thailand CDS (left) Oct Sep Aug Jul 08 Jun May Apr Mar Feb -140 Jan 08 Basis points Thailand 5-year Credit Default Swap Thailand minus Regional Peers (right) Regional peers are China, Hong Kong, Indonesia, S. Korea, Malaysia, and Philippines Source: World Bank 12 Immediate impact high, but less than regional peers Recent Equity Market Performance 5% 1,500 SET Index 0% YTD Change -5% 500 -10% -15% 0 -20% -25% -30% -500 Basket of Regional Indices Foreign Net Equity Flows (bars, right axis) -1,000 -0 8 Oc t 8 -0 Se p 8 -0 Au g -0 8 Ju l 8 -0 Ju n 8 ay -0 M -0 8 Ap r 8 ar -0 M 08 -1,500 Fe b- -0 8 -35% Ja n Net Equity Flows ($ million) 1,000 Source: SET, Bank of Thialand, and World Bank 13 Immediate impact high, but less than regional peers Exchange Rate to US$ 1.20 Thai Baht Index Jan2008=1 1.15 Average of currencies 1.10 1.05 1.00 Oc Se Au Jul Jun Ma Apr Ma Fe Jan 0.95 Average of currencies are those of China, Hong Kong, Indonesia, S. Korea, Malaysia, Philippines, and Taiwan Source: BOT and World Bank 14 In the short-run, Thailand’s external vulnerability is small Thailand has de-leveraged since the 1998 economic crisis International reserves have built up to over US$100 billion Remaining foreign investment in stock market ~US$3.3 billion 16 14 50 0 2004 2005 2006 Int' reserves (left) Source: Bank of Thailand 2007p 8M 2008 BoP (right) 0 External ST Debt (left) Jun 08 0 10 2007p 4 2 2006 20 20 2005 40 2004 8 6 30 2003 60 40 2002 12 10 times Short-term external debt 2001 80 $ bn 60 2000 100 18 1999 $ bn 1998 International reserves 1997 $ bn 1996 120 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Int'l reserves / ST debt (right) Source: Bank of Thailand 15 In the short-run, Thailand’s external vulnerability is small Thai banking system remains sound, but needs to be closely monitored Investment in foreign debt instruments = 13% of total debtinstrument holdings Foreign investments < 2% of assets Foreign banks account for only 5% of the Thai market. NPLs = 3.3% of total loans in 2008Q3, compared to 4.4% in 2007Q3 Loan-to-deposit ratio is around 90%, so liquidity crunch unlikely 16 But impact will be larger next year as global economy slows down Exports of both goods and services (tourism) will be severely affected Thailand’s key export products in key markets Tourist arrival by nationality 100% EU (27) Market share (Jan 07-Aug 08) 13.6 Computers and parts X Electronic circuits X Rubber X Jewellery X Seafood X Meat X Air conditioning machines X Motor vehicles and parts X US Japan China ASEAN 12 11.6 9.7 22.2 X X X X X X X X X X X X X X X 80% 60% 40% 20% 0% X X 2005 Europe China 2006 ASEAN US Others Australia 2007 Japan Middle East 17 But impact will be larger next year as global economy slows down Bank loan growth will be lower as banks will be more risk averse (more concerned on credit quality) Deposit and Credit Growth Source: Bank of Thailand 18 But impact will be larger next year as global economy slows down Investment growth will be down Private Investment Index, 2008 24 % PUBLIC investment growth % 24 8 20 20 6 16 16 5 12 12 8 8 4 4 0 0 Percent 7 4 3 2 1 0 Jan -4 Feb Mar Apr May Jun Jul Aug Sep 2005 Construction 2006 2007p Equipment H1 2008 -4 Public investment Source: NESDB 19 But impact will be larger next year as global economy slows down FDI will also be slightly sluggish Origin of FDI inflows 100% 40 35 30 25 20 15 10 5 0 80% 60% 40% Source: Bank of Thailand 8M2008 8M2007 2007 2006 2005 2004 20% 2003 Billion US$ Gross FDI Inflows 0% 2005 Japan 2006 US EU (15) Singapore 2007 Others Source: Bank of Thailand 20 But impact will be larger next year as global economy slows down Capital account and current account will be lower next year Baht will likely continue to slowly depreciate Balance of Payments, 2008 10 8 Billion US$ 6 4 2 0 -2 -4 -6 Jan Feb Current Acct Mar Apr May Capital Acct Jun Jul Aug Sep Balance of payments Source: BOT 21 But impact will be larger next year as global economy slows down Oil prices and inflation expected to fall next year Average crude oil price ($/barrel) 120 Thailand CPI Inflation 10% Headline 100 8% 80 6% 60 4% Source: World Bank Ja n-0 7 Ma r-0 7 Ma y07 Ju l-0 7 Se p07 No v -0 7 Ja n-0 8 Ma r-0 8 Ma y08 Ju l-0 8 Se p08 No v -0 8 2012 2011 2010 2009 2008 2007 2006 2005 2004 0 2003 0% 2002 20 2001 2% 2000 40 Core Source: MOC and BOT 22 But impact will be larger next year as global economy slows down Household consumption will also continue to be dampened Consumer confidence declines Real wage increase small Farm income growth down with lower agricultural prices 100 Consumer confidence index 60 % Farm Income Growth 95 50 90 40 85 30 80 20 75 10 70 0 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Source: UTCC 2006 Farm price growth 2007 7M 2008 Farm income growth Source: BOT 23 Real GDP growth will be lower next year Sources of Growth 6.1 5.2 Q 220 08 4.7 Q 120 08 4.1 Q 120 07 Q 420 06 Q 320 06 Q 220 06 4.4 4.4 5.7 Q 420 07 4.9 Net Exports Domestic Demand Q 320 07 5.6 Q 220 07 6.4 Q 120 06 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 Real GDP growth 4.8% this year and around 4% next year 24 3. Can we turn this crisis into opportunity? 25 Answer YES, we can… but only with every one’s hard work and united efforts 26 Turning a crisis into opportunity... World economy are projected to start to recover from financial crisis in 2011 Thailand is in a competitive position as the impact on us is relatively less We should take this opportunity to strengthen our competitiveness and poise for a jump in growth as world economy rebounds 27 It is time to improve our productivity and start investing Private Investment growth, and Capacity Utilization Real private investment growth (Right) 75 18 Capacity utlization rate (Left) 16 74 14 10 8 72 Percent Percent 12 73 6 4 71 2 70 0 2004 2005 2006 2007 Source: BOT and NESDB 28 It is time to improve our productivity and start investing Positive factors that are to our advantage Low input prices Lower inflation Lower interest rate Depreciated baht 29 Actions we need to take to improve our productivity Top Constraints to Business and Investments (Percent of 1,043 firms in 9 manufacturing industries surveyed) Macroeconomic uncertainty and access to finance 40.6 35.8 Skilled labor shortage 21.7 Regulatory burden Inadequate & unreliable infrastrcuture services 12.5 0 5 10 15 20 25 30 35 40 45 Percent Source: Thailand Productivity and Investment Climate Study 2007 (PICS 2007), World Bank, NESDB and Foundation of Thailand Productivity Institute 30 (a) Macroeconomic and policy uncertainties have adversely affected firms’ investment decisions Uncertainty of Macroeconomic and Policy Factors Policies on foreign capital Policies on investment Inflation rate Interest rate Exchange rate Raw material prices Oil prices 80% 70% 60% 50% 40% 30% 20% 10% 0% Commodity prices Percentage of firms that considered these to have adversely affected their investment decisions substantially or very substantially in 2006-2007 Source: PICS 2007 31 Firms need to protect themselves against macroeconomic volatility… Percentage of Firms Used These Methods to Deal with Macroeconomic Uncertainties 60% 50% 40% 30% 20% 10% All Small Medium No measure taken Investing abroad Pricing in different currency Financial hedging instrument Long term contract Finding new suppliers Productivity improvement 0% Large Source: PICS 2007 32 … through acquiring more knowledge on hedging/coping mechanisms Firms Reporting Not Undertaking any Measure vs. the Lack of Knowledge on Coping Measures (Percent of firms) 50% 45% Electrical Appliance Lack of knowledge 40% 35% Furniture & Wood Product 30% 25% Garment Small Food Processing Medium 20% Textile Domestic Electronic Component 15% Large 10% Auto parts Rubber & Plastics Machinery & Equipment Foreign 5% 0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% No measure taken Source: PICS 2007 33 (b) Skills & knowledge need to be improved to move Thailand towards a knowledge economy …But Thailand has not made much progress on this World Bank’s Knowledge Economy Index* Rank in 2008 Change in rank from 1995 Country 1 0 Denmark 17 7 Taiwan (China) 19 -2 21 0 26 -3 Hong Kong (China) 31 -3 Korea 46 1 55 11 63 -10 77 18 93 3 96 12 100 4 Japan Singapore Malaysia Brazil Thailand China Indonesia Vietnam India * KEI is a simple average of 4 sub-indexes which represents the 4 pillars of the knowledge economy: (1) economic incentive and institutional regime, (2) education and training, (3) innovation and technological adoption, and (4) information and communications technologies (ICT) infrastructure. Source: World Bank 34 Skills shortage and mismatch have persisted in recent years Number of weeks taken to fill job vacancies for various types of workers Whole Sample (Thailand) 8 2007 7 2004 Firms in the North 8 7 6 2007 2004 6 5 5 4 4 3 3 2 2 1 1 0 0 Professional worker Skilled production Unskilled worker production worker Professional worker Skilled production Unskilled worker production worker Source: PICS 2007 35 Innovative efforts in the North are more limited than other regions Percent of firms that undertook these innovative activities Upgraded machinery and equipment Thailand Bangkok and vicinity Central East North Northeast South PICS 2007 86.4 85.7 89.4 91.1 62.0 78.5 88.3 Chg from PICS 04 + 18.0 + 13.2 + 20.7 + 14.0 - 2.4 + 25.8 + 47.1 Upgraded an existing product line PICS 2007 80.3 80.1 83.1 85.9 56.6 70.6 75.5 Chg from PICS 04 + 9.6 + 4.9 + 14.7 + 8.8 - 14.7 + 15.1 + 25.9 Developed a major new product line PICS 2007 49.3 50.6 50.3 51.0 41.8 37.5 37.5 Chg from PICS 04 - 1.1 - 0.6 - 1.3 - 5.3 - 7.5 - 12.5 + 3.9 Introduced new technology that substantially changed the way the main product is produced PICS Chg from 2007 PICS 04 46.7 - 4.8 46.7 - 7.2 46.3 - 7.7 56.1 - 3.3 28.4 - 23.7 43.4 + 5.9 37.9 + 12.7 Source: PICS 2007 36 High costs of innovation and lack of knowledgeable personnel largely explain low innovative efforts Reasons why firms did not conduct innovative activities (% of firms) 50 Thailand 40 North 30 20 10 0 Low returns to innovative activity Insufficient knowledge about possible activities High cost of Lack of financing knowledgeable and innovative activities trained personnel Source: PICS 2007 37 To boost innovation, firms view that government’s indirect incentives (e.g. tax deductions) and technical assistance are important Percent of firms viewing these government initiatives as very important to promote innovation Indirect incentives Technical assistance Reforms in other areas Direct financial incentives Public investment in equipment facilities Stronger intellectual property rights Industrial estates and infrastructure 0 20 40 Percent 60 80 38 But existing government incentive programs for innovation are not widely used Share of Firms Benefiting from Government Initiatives to Promote Innovation (Percent) Benefitted from these Share (%) No. of firms Never heard of these Share (%) No. of firms R&D investment promotion (BOI) 3.7 37 34.3 341 Industrial technology assistance programme (NSTDA) 3.6 36 51.1 508 Skill, technology and innovation promotion (BOI) 3.1 31 41.0 408 Science Park project (NSTDA) 2.3 22 41.2 410 Low interest loan for technological development in private sector (NSTDA) 1.5 15 45.0 447 Open Lab (NSTDA) 1.2 12 66.5 662 200% Tax reduction for R&D expenditure (Revenue Department and NSTDA) 1.1 11 61.5 612 Source: Thailand PICS 2004 and PICS 2007 39 (c) Improved regulations and regulatory environment -- needed to lower costs for firms and promote greater competition and productivity Revise regulations to promote investments & productivity esp. in services sector E.g. revise Foreign Business Act, pass Secured Transactions Act Liberalize some industries esp. in services sector Streamline bureaucratic procedures, improve governance, and reduce corruption Reduce amount and uncertainty of time on customs clearance, tax refunds, and inspections Integrate processes into 1-stop center & minimize face-to-face interactions 40 Multiple regulatory procedures and uncertainty in time taken were voiced by firms as burdensome to business and investment Very Severe or Severe Regulatory Obstacles to Business and Investment Average Days to Obtain Permits to Start Production and Deviations* (% of firms) 40 All firms Small Medium Large 35 Electrical Appliance (147) 30 Textiles (115) Auto parts 25 Percent (22) All Industries 20 (82) M achinery & Equipment (25) Food processing (23) 15 Furniture & Wood Products (19) 10 Rubber & plastics (21) Garments (22) 5 (23) Electronic components 0 Tax Customs and administration trade regulations Source: PICS 2007 Labor regulations Business licensing and registration 0 10 20 30 40 50 60 70 Days *Figures in ( ) are standard deviations from the mean 41 (d) Public infrastructure investments are needed to reduce logistics and production costs Share of transport and logistics cost in total Objective Measures of Thailand's Infrastructure Services 4% 3% 2% South Northeast North East Central Thailand 0% Bangkok and vicinity 1% Average hours of each telephone interruption 5% 2004 Yearly number of phone interruptions 6% 2007 Average hours of each water interruption 2004 Yearly number of water interruptions 2007 7% Production loss due to power outages (%) 20 18 16 14 12 10 8 6 4 2 0 8% Yearly number of power outages cost of delivering finished goods to customers Source: PICS 2007 42 Thailand’s investment climate is middling compared to other countries Objective Measures of Bureaucratic Process 18 Objective Measures of Infrastructure Services 30 16 25 14 12 20 10 15 8 10 6 4 5 2 0 0 Days to obtain operating license Thailand(2007) S. Korea(2005) India(2006) Days to clear exports Days to clear import customs customs China(2003) M alaysia(2002) Indonesia(2003) Vietnam(2005) Value lost due Days to obtain Days to obtain Daysto obtain to electrical electrical water fixed-line phone outages (% of connection connection sales) Thailand(2007) China(2003) Indonesia(2003) M alaysia(2002) Vietnam(2005) India(2006) S. Korea(2005) Source: Thailand PICS 2007 and Global PICS 43 Perceptions become reality Perceptions of worsened investment climate negatively affect investment decisions… Perception of Investment Climate Indicators as Major or Severe Obstacles to Doing Business Business Sentiment Index (Percent of Firms) 70% 50 2007 2004 60% 48 50% 46 40% 44 30% 20% 42 10% Source: PICS 2007 Source: Bank of Thailand Oct Jul Apr 2007Jan Oct Jul Apr 2006Jan Oct Jul 36 Apr 38 2005Jan Business permits Telecommunications Labor regulations Transportation Electricity Customs and trade regulations Access to domestic credit Tax administration Cost of Financing Macroeconomic instability Economic policy uncertainty Skills and education of available workers Anti-competitive practices 40 0% 44 Summary: Actions that can improve investment climate Improve business sentiments Certainty and clarity in policies Certainty in public infrastructure investment plans Announcements of productivity improvements assistance to most needed industries More PR on actions taken and on Thailand’s investment climate Facilitate the use of hedging instruments and knowledge to firms Streamlining bureaucratic procedures and time Introducing ICT to reduce bureaucratic process and time 45 Summary: Actions that can improve investment climate Productivity improvements assistance to most needed industries Gradual liberalization of services industries Pass laws and regulations that promote investment e.g. Secured Transactions Act, Revise Foreign Business Act Public infrastructure investments in most needed areas Putting Thailand on the path to a knowledge economy Improve quality of higher education Foster university - public research institute - industry linkages for innovation Raise standards and enrolment of vocational training 46 Summary We can turn this crisis into an opportunity for Thailand Thailand has a high growth potential with new investments and productivity growth We all need to work together to unleash Thailand’s potential by improving Thailand’s investment climate 47 Thank You For more information on World Bank work and reports: Global: www.worldbank.org Thailand: www.worldbank.or.th 48 **BACK-UP SLIDES** 49 PICS 2007 surveyed 40 producers in the North, mostly food processing and garments firms Regional distribution of firms in PICS 2007 (%) South, 8.0 Northeast, 5.9 Industrial composition of firms in the North (%) T extiles, 5.0 North, 3.8 East, 10.1 Electronics components, 10.0 Bangkok, 45.3 Garments, 32.5 Food processing, 32.5 Central, 27.0 Furniture, 20.0 Unit: Percent 50