Download Thailand Economic Monitor November 2004 Issue

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