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Thailand Economic Monitor November 2006 Launch November 14, 2006 1 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 2 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) 14 2005p 12.2 12 11.2 9.4 10 Percent 2006e 11.9 8.7 8 5.4 6 4.6 4.4 4 2 4.5 4.3 3.9 4.5 3.2 1.1 0 Priv C Gov C Priv I Pub I Export Import GDP 3 In 2006, domestic demand was depressed by higher energy prices, higher inflation and interest rates, political uncertainties & depressed confidence Nominal Interest Rates, CPI Inflation, and Real Interest Rates, Growth of Energy Prices, 25 8 7 20 6 Percent Percent, y-o-y 5 15 10 4 3 2 1 5 0 9M 2002 0 2003 2004 2005 9M 2003 9M 2004 Lending rat e Real int erest rat e 9M 2006 Consumer Confidence Index 9M 2005 9M 2006 Inflat ion CPI Business Sentiment Index 115 52 110 50 105 48 46 95 90 44 85 42 80 40 75 Jul Apr 2006Jan Oct Jul Apr 2005Jan Oct Jul Apr Oct-06 Jul-06 Apr-06 Jan-06 Oct-05 Jul-05 Apr-05 Jan-05 Oct-04 Jul-04 Jan-04 2004Jan 38 70 Apr-04 Index 100 These have slowed down Household Consumption, Private Investment, and Public Investment this year 4 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) Energy Cost Share (of Total Cost) Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Manufacturing Sub-sectors Cement and Concrete Products Basic Chemical Products Other Non-metallic Products Spinning, Weaving and Bleaching Non-ferrous Metal Iron and Steel Other Chemical Products Plastic Wares Other Foods Industrial Machinery Rubber Products Textile Products Saw Mills and Wood Products Paper and Paper Products Fabricated Metal Products Source: Thailand Input-Output Table 2000 Petroleum Products 10.7 4.4 4.5 1.3 4.8 2.4 4.0 0.6 1.4 2.1 1.3 0.5 0.5 0.9 1.0 Electricity & Gas 8.3 6.6 5.4 6.6 2.6 5.1 1.7 4.6 3.4 1.3 2.0 2.0 1.8 1.3 1.0 Total 9.6 5.5 4.9 3.8 3.8 3.7 2.9 2.5 2.3 1.7 1.6 1.2 1.1 1.0 1.0 5 Exports growth this year was driven by quantity growth to traditional markets • Export volume growth of manufactured products, esp. electronics recovered from slowdown last year Contribution to Export Growth by Various Markets Export Growth in price, volume, and value 25 35 30 20 15 percent Percent, y-o-y 25 20 15 10 10 5 5 0 2006 9M 0 2003 9M Export price 2004 9M 2005 9M Export volume 2006 9M Export value US, Japan and EU ASEAN Middle East Others China Australia 6 Export growth began slowing down in 2006H2 while import growth sped up Goods Export Volume and Import Volume Growth Import volume growth Export volume growth 15 10 8 8 6 6 4 US$ Billion Percent, y-o-y 4 10 5 2 2 0 -2 0 -2 -4 -4 -6 -8 0 -6 -10 -8 2003 Source: BOT Q3 2006 Q2 2006 Q1 2006 Q4 2005 Q3 2005 Q2 2005 Q1 2005 Q4 2004 Q3 2004 Q2 2004 Q1 2004 -5 % of GDP 20 Current Account and Trade Account 2004 2005 2006p Current Account T rade Account Current Account (% of GDP) T rade Account (% of GDP) Source: BOT and WB staff estimates Trade Account is smaller deficit this year and Current Account in surplus from rebound in services receipts 7 II. Real GDP Growth in 2007 Economic Environment 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 2004 2005e 2006f 2007f 10.4 7.5 9.7 7.3 1.8 2.7 2.2 3.4 2.5 3.4 2.1 2.5 17.5 37.7 30.6 6.9 13.4 53.4 41.5 0.8 20.6 65.0 21.7 2.4 -4.5 60.0 -7.7 3.8 1.6 2.1 3.6 2.2 5.4 3.0 5.7 3.6 4.1 5.2 3.3 3.2 2.0 2.7 4.2 6.4 3.5 4.7 2.7 2.6 1.4 2.6 3.2 5.7 3.9 5.1 3.1 3.0 2.3 2.9 3.3 5.5 3.3 4.5 2.5 2.4 1.9 2.4 2.4 4.6 Global Conditions World Trade Volume Consumer Prices G-7 Countries a,b United States Commodity Prices (USD terms) Non-oil commodities Oil Price (US$ per barrel) c Oil price (percent change) Manufactures unit export value d Interest Rates $, 6-month (percent) €, 6-month (percent) Real GDP growth e World Memo item: World (PPP weights) High income OECD Countries Euro Area Japan United States Non-OECD countries f Source: World Bank 8 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 Real GDP Growth (1988 Prices) 14 2005p 12.2 12 Lower farm income growth support HH consumption growth less than this year 2007p 11.2 9.4 10 8.7 7.9 Percent High oil price, higher real interest rates, real appreciation, policy uncertainties does not support private investment growth 2006e 11.9 8 6.0 6 4.4 4 4.6 4.1 5.0 6.0 5.4 4.5 4.3 3.9 2 6.0 4.5 4.6 3.2 1.1 0 Priv C Gov C Priv I Pub I Export Import GDP Slowing down of global demand, GSP expiration & real appreciation affects exports 9 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 Planned Estimated disbursement* 2005 42.7 35.0 2006 290.0 99.0 2007 506.1 140.0 2008 514.5 165.0 (Billion Bt) 2009 450.9 139.0 Total 1804.2 578.0 * 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 10 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 Growths of Private Investment, Manufacturing Production, and Capacity Utilization 20 25 18 20 15 10 5 0 2002 2003 2004 2005 H1 2006 electricity prices (Baht per kWh) Diesel HSD (Baht per litre) Fuel oil (Baht per litre) Weighted average(Baht per equivalent unit) Source: EPPO and MEA 76 74 16 14 72 12 10 70 8 Percent 30 Annaul Percentage Change Baht per unit Energy prices used by firm 68 6 4 66 2 0 64 H1 2003 H1 2004 H1 2005 H1 2006 Private Investment Growth (LHS) M anufacturing Production Growth (LHS) Capacity Utilization (RHS) Source: BOT and NESDB 11 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 10 100 8 95 Index (1994=100) Percent 6 4 2 0 -2 90 85 80 75 -4 Source: BOT Source: BOT 9M 2006 2005 2004 2003 2002 2001 2000 70 1999 2003 2004 2005 9M 2006 Lending rate Inflation PPI Real interest rate 1998 2002 12 Private investment will unlikely grow much faster than in 2006 … as constraints to investments have not been addressed Top 3 constraints to doing business and expansion in 2004 as reported by 1,385 firms in Thailand Regulatory Burden Skilled Labor Shortage Infrastructure and Support Services 0 10 20 30 40 50 60 70 Percent of Firms Identifying Issues as One of Three Top Obstacles Source: Thailand PICS 2005 13 Private investment will unlikely grow much faster than in 2006 … as investors sentiments have not recovered much Business Sentiment Index Survey of 568 Large and Medium-size firms Business Sentiment Index 52 50 48 46 44 42 40 Jul Apr 2006Jan Oct Jul Apr 2005Jan Oct Jul Apr 2004Jan 38 Index = 50 indicates that business sentiment remains stable Index > 50 indicates that business sentiment has improved. Index < 50 indicates that business sentiment has worsened. Source: BOT 14 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 JETRO’s Business Sentiment Survey of Japanese companies in Thailand (Billion Bt) 40 Total Net Applications Agriculture 2003 304.7 34.2 2004 637.2 53.1 2005 685.6 39.7 2005 (JanOct) 630.9 31.7 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 30 20 10 0 -10 -20 2006 (JanOct) 424.8 37.4 Source: JETRO Oct(Outlook) Jul Sep May Mar Nov 2006Jan Sep Jul May Mar Nov 2005Jan Sep Jul Mar May 2004Jan -30 Investors have been more cautious since last year 15 As exports slow and imports increase, current account will fall Trade and Current Account Balance 8 8 6 6 4 2 2 0 -2 0 -2 -4 -4 -6 -8 -6 -10 -8 2003 Trade account is in greater deficit, and Current account decline to almost zero % of GDP Imports rise with pick up in investment and rebuilding of stocks 10 4 US$ Billion Export falls with slow down in global demand, GSP expiration and real appreciation 2004 2005 2006p 2007p Current Account T rade Account Current Account (% of GDP) T rade Account (% of GDP) 16 GDP Growth in 2007 will be 4.6% … as domestic demand accelerates, but foreign demand decelerates Real GDP Growth (1988 Prices) 14 2005p 12.2 2006e 2007p 11.9 12 11.2 9.4 10 8.7 Percent 7.9 8 6.0 6 4.4 4 4.6 4.1 5.0 6.0 5.4 4.5 4.3 3.9 2 6.0 4.5 4.6 3.2 1.1 0 Priv C Gov C Priv I Pub I Export Import GDP 17 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 Capacity Utilization (%) 80 78 76 74 72 70 1995-1996 Average Excess Capacity 9M 2006 2005 2004 2003 2002 2001 2000 1999 68 66 64 62 60 58 Source: NESDB Source: BOT NOTE: 1980s share in GDP was 22% Greater investments needed to relax the constraints 18 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 19 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 20 III. Going Forward: Agenda for a balanced and quality growth (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 21 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 Total Factor Productively (TFP) and Price Dispersion in Thailand, 2004 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 Source: Ariyapruchya et al (2006) Note: Each point represents a firm 22 III. Going Forward: Agenda for a balanced and quality growth Knowledge Economy Index (0-10) E as t As ia H ong Kong S in g a p o r e T a iw a n K o re a M a la y s ia T h a ila n d P h ilip p in e s C h in a I n d o n e s ia V ie t n a m 1995 2004/05 4.33 7 .2 0 7 .4 2 6 .3 7 5 .8 7 4 .7 9 4 .2 6 2 .9 9 2 .6 7 2 .3 4 1 .4 9 6.04 7 .6 8 8 .2 4 8 .1 0 7 .4 8 5 .5 7 4 .7 6 4 .2 5 4 .1 2 2 .9 6 2 .9 2 Source: World Bank Knowledge Economy Index covers 4 pillars of a knowledge economy: 1. Economic incentive regime 2. Innovation 3. Education 4. ICT (2) Actions needed to move Thailand towards a knowledge economy – Increasing S&T graduates – Promoting R&D in firms – Creating universitybusiness linkages – Strengthening role of public research institutes (e.g. NSTDA) 23 III. Going Forward: Agenda for a balanced and quality growth (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 24 III. Going Forward: Agenda for a balanced and quality growth Growth must be more evenly distributed • Income distribution must be more even • Fight against poverty must continue with improved targeting of the poor Poverty Map of the Northeast Region, 2004 Average Per Capita Real Consumption (Baht/Month) 1st Poorest Quintile 2nd Quintile 3rd Quintile 4th Quintile 5th Richest Quintile 2000 955 1,578 2,294 3,449 7,845 2002 1,063 1,724 2,467 3,638 8,205 2004 1,155 1,891 2,726 4,040 9,558 Source: WB Computation from SES data Source: NSO 25 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 26