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Thailand Economic Monitor November 2005 Launch 3 November 2005 1 Monitor – Key Messages Tsunami, drought and oil price rise will reduce GDP growth in 2005 to 4.2%. GDP growth in 2006 will rise to 5%. Floating of retail oil price is judicious Limit burden on Oil Fund Promote more efficient use of oil and energy conservation – Reduce oil imports, which helps reduce current account deficits 2 Monitor – Key Messages Helping firms to reduce production and operation costs will help them in adjusting to high oil prices Improving the Investment Climate can help reduce costs and also improve firm’s productivity Key improvements to investment climate needed Reduce regulatory burden Upgrade skills Improve infrastructure (Results of Thailand Productivity and Investment Climate Study) 3 Real GDP Growth will be 4.2% in 2005 GDP growth is expected to speed up in the second half year as net foreign demand increases Real GDP Growth 2005 30 H1 2005 H2 2005 p 2005p 25 H1 2005 = 85.8% H2 2005p= -45.8% 15 2005p= 20.0% 10 5 Imports Exports Public I Private I Government C 0 Private C Annual % change Growth rates of Change in Inventories 20 Source: NESDB and World Bank 4 Sharp oil price rise impact growths of consumption, private investment, and production this year Increase in Retail Oil Price (%) 60 percentage change 50 40 30 20 10 0 2002-2005 2003-2005 2004-2005 Retail oil price this year is 54% higher than in 2002 Raises 2005 inflation to 4.5% – affects consumption Raises costs of production – affects production and private investment this year Source: EPPO 5 Rise in retail oil price are promoting conservation Growth in Gasoline and Diesel Consumption, 2002- 8M 2005 15 Gasoline High Speed Diesel percent, y-o-y 10 5 0 -5 -10 2002 2003 2004 8M2005 Source: EPPO 6 Exports growth to speed up in 2005H2, while imports slowed Export Volume Growth Import Volume Growth 30 35 30 25 percentage change, y-o-y percentage change, y-o-y 25 20 15 10 5 0 -5 20 15 10 5 0 -10 -15 -5 2004 H1 2005 Q3 2005 2004 H1 2005 Agricultural products Fishery products Consumer Goods Raw M aterials M anufactured products Total Fuel & Lubricant Total Source: BOT Q3 2005 Capital Goods Source: BOT 7 FDI are still increasing Gross FDI Inflows 8 7 Billions of US$ 6 5 4 3 2 1 0 Avg 1988/92 2003 2004 8M 2004 8M 2005 Source: BOT Gross FDI inflows rose in 2005 and much higher than 1988- 1992 levels 8 Real GDP growth will rise to 5% in 2006 as domestic demand picks up Real GDP Growth 2004, 2005p and 2006p 18 2004 2005p 2006p 16 Annual % change 14 12 10 8 6 4 Oil price will rise by 14% in 2006, compared to 30% this year Real interest remains low at 4-5% Bank loan continues to expand 2 Imports Exports Public I Private I Government C Private C 0 Growth rates of Change in Inventories 2004 = 39.9% 2005p = 20.0% 2006p = 0% Source: NESDB and World Bank 9 FDI will continue the rise as Thailand remains attractive UNCTAD Survey of world’s 325 largest transnational corporations BOI Approval of FDI 100% foreign equity 10%<foreign equity<100% 400 250 Ranking of FDI Prospects in Asia 2005-2008 Top 1 China 200 Top 2 India 150 Top 3 THAILAND 100 Top 4 Vietnam 50 Top 5 South Korea 350 Bt Billion 300 0 2002 2003 2004 Jan-Sep 2004 Jan-Sep 2005 Source: UNCTAD Global Investment Prospects Assessment, Sep 2005 Source: BOI 10 External environment will be more favorable next year External Environment, 2004-2006 2003 2004 2005p 2006p % Change from previous year, except interest rates GDP Growth World 2.5 3.8 3.1 3.1 World (PPP Weights) 3.9 5.0 4.4 4.3 1.8 3.0 2.4 2.5 United States 2.7 4.2 3.5 3.5 Japan 1.4 2.6 2.3 1.8 Euro Area 0.7 1.7 1.1 1.4 World Trade (Volume) 5.8 10.3 6.4 7.0 CPI Inflation - G7 a/ 1.5 1.7 2.2 2.0 28.9 37.7 53.6 56.0 15.9 30.6 42.1 4.5 10.2 17.5 11.9 -5.9 1.2 1.7 3.8 5.0 OECD Oil Price - $/bbl - % Change Non-oil Commodity Prices LIBOR (US$. 6 Mo.) Source: World Bank DEC Prospects Group update Oct. 25, 2005. a/ In local currency, aggregated using 1995 weights. The G-7 countries are: Canada, France, Germany, Italy, Japan, United Kingdom, and United States. 11 Going forward, higher private investment growth needed to avoid supply constraints Capacity Utilization Capacity utilization CU in 8M 2005 >90% Soy milk Tin metals* Compressor* Craft paper Intermediate petrochemical Hard disk drive* Printing & writing paper Rubber glove* Synthetic fibres Downstream petrochemical Upstream petrochemical 80%<CU in 8M 2005 <90% Concrete products Pulp Tyre Zinc metals Motorcycle Petroleum products Washing machines* Air-conditioners* Commercial car Paper board Weights 59.10 9.3 0.1 0.1 0.2 0.6 0.7 4.7 0.2 0.3 0.8 1.2 0.4 15.0 0.2 0.6 0.9 0.1 0.7 9.5 0.1 0.9 2.1 0.0 Ave 8M 95/96 76.41 8M 2004 67.86 8M 2005 70.41 54.6 31.0 67.4 n.a. 56.0 n.a. n.a. n.a. 86.8 126.9 42.0 115.1 59.5 92.5 81.2 98.6 71.5 89.7 93.3 103.2 95.5 93.8 131.5 103.6 101.6 101.0 100.1 100.0 95.4 95.0 92.6 92.2 91.0 n.a. 77.6 88.3 92.1 79.3 87.5 72.0 90.3 86.5 n.a. 71.1 92.3 87.8 95.5 78.9 84.1 93.9 82.0 72.2 77.5 89.6 88.9 88.8 87.3 86.7 86.3 84.7 81.8 81.8 80.4 • Over 1/3 of sectors have Cap U > 80% • More than half of high exporting sector have cap u > 80% or > pre-crisis levels Source: BOT 12 Improved investment climate helps to promote investment and firm productivity Helps reduce cost of doing business – more urgently needed as firms face high oil prices Firms’ Concerns about Business Climate – Results from Thailand Productivity and Investment Climate Study Regulatory Burden Skilled Labor Shortage Infrastructure and Support Services Source: Thailand PICS, 2005 0 10 20 30 40 50 60 Percent of Firms Identifying Issues as One of Three Top Obstacles 70 13 Reducing regulatory burden reduces firms’ costs in doing business Number of Days to Obtain Different Licenses/Permits/Approvals/ Certificates Percent of Firms Identifying Regulation as "Severe" or "Very Severe" Obstacle Labor Regulations Obstacle for Firms in Thailand Avg St. Dev Coeff Variation Ministry of Commerce 10 20 1.9 Department of Industrial Works 17 22 1.3 Immigration Department Land Office 10 13 14 22 1.4 1.7 25.0 Local Government 10 15 1.6 20.0 Source: Thailand PICS, 2005 45.0 40.0 35.0 30.0 15.0 10.0 5.0 0.0 Hiring procedures for local workers Hiring procedures for Layoff procedures/cost foreign workers of retrenchment Thailand Limits on temporary hiring Inflexible salary scale for skilled workers Malaysia Source: Thailand PICS, 2005 14 Reducing skills shortage can help reduce large wage premiums and firms’ loss of sales Thailand’s Wage Premiums (Total Returns Relative to Workers with Less than Secondary Education Complete) Sales Gain from Reduction in # Weeks Taken to Fill Vacancy for a Professional 45 40 percent 35 30 25 20 15 10 5 0 High school/ Por Wor Chor Source: Thailand PICS 2005 Por Wor Sor College Degree Number of Days Taken to Fill Latest Vacancy to fill vacancy # weeksfortaken a Professional 50 9 8 Clothing 8 Wood Products/Furnit. Auto-parts 7 Rubber/Plastics 7 Machinery/Equipmen Food Processing t Textiles 6 6 Electronics/Elec. Appliances 5 5 4 0 5 10 15 20 25 30 35 40 45 50 % Sales Gain from Reduction in Skill Shortages Source: Thailand PICS 2005 Skills shortage vary from sector to sector Sector with more binding constraints can increase sales by more if constraints are relaxed Average sales loss across sectors is 15% 15 Improving skills will help increase firms’ technological capacity • • Lack of skilled ICT workers is the major constraint to firms’ expansion of ICT use ICT use correlates with innovation Constraints to Introducing or Expanding IT Use Considered “Important” or “Very Important” Constraints Small Medium Large Lack of knowledge and trained IT personnel 42% 35% 33% Lack of experienced consultants to provide or design IT-based solution systems 39% 37% 32% High cost of IT equipment and maintenance 20% 18% 18% Low returns to investments in IT 15% 12% 11% Source: Thailand PICS 2005 16 Infrastructure Inadequacy needs to be addressed Electricity, transport, telecommunications, and water services need to be improved Cross Country comparison of Mass Rail Transit Length Numbe r of Time s of Powe r O utage Thailand City Bangkok KL Manila Hong Kong Singapore London Beijing Malaysia China Russia Turke y 0 5 10 15 20 Population (Million persons) 9 1.4 10 7 4.2 7.4 13 Length of Mass Rail Transit Lines (Km.) 44 65 46 219 89 463 113 Pe rce ntage of Wate r Coming from Own Source s Fre que ncy of Phone Inte rruptions Last Ye ar Indone sia Thailand Thailand Malaysia Philipine s Brazil Brazil Philipine s Malaysia Indone sia 0 0 1 2 3 4 5 6 7 10 20 Source: Thailand PICS 2005 30 40 50 60 70 17 The Thai Government is consistently pursing these issues Regulatory burden: – Public sector reforms – A committee has been established to take these issues forward Skills shortage: – Education reform – secondary education and vocation education Inadequate infrastructure – Public infrastructure investment plan (Megaproject) 18 Public investment in infrastructure is needed and timely • Proposed public investment program is needed, given reduced investments since the crisis • Estimated impact on fiscal & current account balance & debt, appears consistent with medium-term macrostability, given current state of private investment recovery • Infrastructure program should be prioritized to reduce cost & raise quality of infrastructure services so that private investors’ competitiveness can be increased 19 Mega-project investment plan appears consistent with medium-term macro-stability Public Investment as % GDP 2005-09 10 9 Mega-project Import Content, 2005-09 Non-mega project M ega-project Import content (LHS) % of GDP (RHS) 200 2.5 8 6 5 4 1.5 100 1.0 % GDP 2.0 150 Billion Bt % GDP 7 3 50 2 0.5 1 0 0 2005 2006 2007 2008 2009 Source: Cabinet meeting Nov 1, 2005 and WB GDP estimations 0.0 2005 2006 2007 2008 2009 Source: FPO, Sept 26, 2005 and Cabinet meeting Nov 1, 2005 Given current state of private investment recovery, estimated impact on fiscal, current account, & debt, appears consistent with macroeconomic stability 20 Current account deficits are not excessive Current and Trade Accounts 10 8 8 6 6 US$ Billion 2 2 0 -2 0 -2 -4 % of GDP 4 4 -4 -6 -8 -6 -10 -8 2003 2004 2005p 2006p Current Account T rade Account Current Account (% GDP) T rade Account (%GDP) Source: BOT for 2003-04 and WB estimates for 2005-06 21 Prioritizing infrastructure investments will reduce cost & raise quality of infrastructure services Getting to the details Mega project investments by sector 450 Verifying the strategic importance of each investments Establishing sector investment priorities Making financial sense Establishing a mechanism to ensure quality throughout project preparation and implementation 400 350 Billion Bt 300 250 200 150 100 50 Others Public Health Education Water Resources Housing Transportation Mass Transit 0 Source: Cabinet Meeting Nov 1, 2005 22 THANK YOU Full report can be downloaded from www.worldbank.or.th 23 Medium term growth will help Thailand sustain poverty reduction Poverty Headcount Ratios in 2000, 2002, and 2004 Region Bangkok and vicinity Central North Northeast South Whole Kingdom 2000 1.6 10.5 23.5 35.0 17.1 21.3 2002 2.2 8.0 18.7 23.7 13.8 15.5 2004 1.6 5.1 16.2 17.2 7.8 11.3 Source: NESDB Note: Based on revised poverty line 24