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Thailand Economic Monitor April 2006 Press Briefing 7 April 2006 1 Thailand Economic Monitor Key Messages Thailand had strong recovery, growth at 6% during 2002-04 with GDP per capita & poverty better than pre-crisis levels; But slower growth in 2005-2006 due to external shocks & decline in household consumption growth Export growth has been robust driver throughout recovery Priv. inv. slow throughout – how to raise priv. inv. & productivity? YET, medium term prospects look good – given sound macrosituation, rising openness & infrastructure investment plans ONLY IF -- actions to reduce regulations, enhance skills, invest infrastr. TAKEN to raise investment & innovation, in the face of high oil-prices, rising interest rates and modest real appreciation. 2 Outline of today’s presentation 1. Thai economy in 2005 2. Thai economy in 2006 3. Thailand from a medium term perspective 3 1. Thai economy in 2005 4 1. GDP growth slowed to 4.5% in 2005 Real GDP Growth In 2005, GDP growth slowed to 4.5% Higher energy prices dampen growth of private investment & consumption Softer world demand, drought, tsunami slowed export growth to 15% 2004 2005 2006p 5.3 5.4 4.4 Private C 5.9 4.4 4.0 Gov C 4.7 12.2 7.0 13.8 11.3 8.7 Private Investment 16.3 11.2 9.5 Public Investment 6.8 11.7 6.5 Total Domestic Demand 7.8 7.3 5.5 Exports 9.6 4.4 6.8 8.4 4.3 6.0 15.5 4.6 10.0 13.5 9.3 6.6 Goods 12.3 8.9 6.0 Services 20.4 11.6 10.0 -4.1 -16.5 7.4 6.2 4.5 5.0 Total Consumption Gross fixed capital formation Goods Services Imports => Manufacturing production growth fell (from 11%, to 8% and to 5.5% in 2003, 04, 05) Net Foreign Demand GDP Source: NESDB and World Bank 5 2. Thai economy in 2006 6 Growth will recover to 5% in 2006 due to higher export growth & lower imports Real GDP 1988 Prices In 2006 GDP growth projected to be 5.0% with downside risks Growth come mainly from net exports (exports accelerate while imports decelerate) Domestic demand dampened by high oil price, rising real interest rates, depressed confidence, and political uncertainty 2004 2005 2006p 5.3 5.4 4.4 Private C 5.9 4.4 4.0 Gov C 4.7 12.2 7.0 13.8 11.3 8.7 Private Investment 16.3 11.2 9.5 Public Investment 6.8 11.7 6.5 Total Domestic Demand 7.8 7.3 5.5 Exports 9.6 4.4 6.8 8.4 4.3 6.0 15.5 4.6 10.0 13.5 9.3 6.6 Goods 12.3 8.9 6.0 Services 20.4 11.6 10.0 -4.1 -16.5 7.4 6.2 4.5 5.0 Total Consumption Gross fixed capital formation Goods Services Imports Net Foreign Demand GDP Source: NESDB and World Bank 7 Domestic demand growth will fall further in 2006 In 2006 Household consumption growth FALL due to high oil prices, rising real interest, rate, low durables demand Real GDP 1988 Prices 2004 2005 2006p 5.3 5.4 4.4 Private C 5.9 4.4 4.0 Gov C 4.7 12.2 7.0 13.8 11.3 8.7 Private Investment 16.3 11.2 9.5 Public Investment 6.8 11.7 6.5 Total Domestic Demand 7.8 7.3 5.5 Exports 9.6 4.4 6.8 8.4 4.3 6.0 15.5 4.6 10.0 13.5 9.3 6.6 Goods 12.3 8.9 6.0 Services 20.4 11.6 10.0 -4.1 -16.5 7.4 6.2 4.5 5.0 Total Consumption Gross fixed capital formation Manufacturing growth fall or remain as depressed as last year, due to oil prices Private investment growth slows down to 9.5 from 11% Goods Services Imports Public invest. growth slows to 6.5% instead of rising Net Foreign Demand GDP 8 Higher energy prices reduced manufacturing growth in 2004 & 05 Real GDP growth and Growth of manufacturing sector 14 32.8% 12 10 7.6% 8 5% 6 4 Annual percentage change Baht per crude oil equivalent unit 16 12 12 10 10 8 8 6 6 4 4 2 2 0 0 Annual percentage change Weighted average of Electricity and Petroleum Prices used by manufacturers* 2 0 2002 2003 2004 2005 Source: EPPO Remarks: Petroleum products include Diesel HSD and Fuel oil. Prices are weighted by their consumption. 2002 2003 Real GDP Growth (LHS) 2004 2005 2006p Growth of manufacturing sector (RHS) Source: NESDB Average retail oil prices are to increase by another 25% this year and firms will need to adjust => Continues to impact production this year 9 Manufacturing growth for domestic market slowed MOST in 2005 … As a result of (a) oil-price adjustment by firms and (b) slow down in Household consumption due to rising oil prices, rising HH debt, terms of trade decline, and low consumer confidence HH consumption growth and Consumer Confidence Index 7 105 6 100 5 95 4 90 3 Index Annual Percentage Change Manufacturing Production Index (MPI) growth classified by export group* MPI growth Export < 30% of total production 30% < Export < 60% of total production Export > 60% of total production Weight 100.0 2003 13.9 2004 11.5 34.0 15.6 9.8 0.3 30.9 8.6 7.6 4.9 35.1 17.3 17.0 22.6 2005 9.2 85 2 1 80 0 75 2002 CCI (RHS) 2003 2004 2005 HH Consumption Growth (LHS) Source: NESDB and UTCC Source: BOT Remark: * Classified by the ratio of export production to total production of each industry This year, HH consumption will continue to be dampened by high oil price, increased real interest rate, and dampened consumer confidence 10 Private investment FALLS further in 2006 Lower rise in capacity utilization in 2005 Capacity Utilization, 2002-2005 Total Capacity Utilization* Export less than 30% of total production Export between 30% to 60% of total production Export more than 60% of total production Ave 95/96 2002 2003 2004 2005 76.7 63.6 68.9 70.7 72.6 79.1 65.8 70.2 76.3 76.6 71.8 63.2 68.7 72.5 70.3 76.1 61.3 67.4 63.4 69.0 Source: BOT Remark: *Accounting for 59.1% of the 2000 manufacturing sector value added. Less favorable environment this year 2006 • High oil price/ slow manufacturing growth • Rising interest rate • Lower public investment growth Private investment will not rise quickly this year 11 Public investment growth will slow to 6.5% this year Because… Delays in the implementation of mega-projects that have been approved Delays in submission and approvals of projects for the remaining of the year due to political uncertainties Delays in approval of budget by the Parliament for next fiscal year These will negatively affect private investment growth this year 12 Trade deficits lower, services surplus higher -Current account deficit lower than last year Trade and Current Account 10 8 8 6 6 4 Import (goods) value growth will be significantly lower than last year’s (Import growth: 2005=26%, 2006=14%) Services account surplus higher as tourism recovers after tsunami US$ Billion 4 2 2 0 -2 0 -2 -4 % of GDP Export (goods) value growth same last year, but volume higher (Export growth=15%) -4 -6 -8 -6 -10 -8 2003 2004 2005 2006p Current Account T rade Account Current Account (% GDP) T rade Account (%GDP) Source: BOT and WB estmates 13 3. Thailand from a medium term perspective 14 Macroeconomic situation has been strong With low inflation, low real interest rates, & strong current account 10 8 6 4 2 0 -2 -4 -6 -8 -10 -12 Indicators of External Situation 80 Percent 60 40 20 0 2005 2004 2003 2002 2001 2000 1999 1998 1997 2005 2004 2003 2002 2001 2000 1999 1998 1997 -20 1996 Headline Inflation Real interest rates Fiscal Balance to GDP 1996 Percent Real GDP Growth, Inflation, and Real Interest Rates Current Account to GDP Real Exports of Goods and Services to GDP External Debt to GDP Debt service to Exports 15 Thailand is committed to increased openness … as indicated by increased external trade and FDI, tariff reforms, FTAs Indicators of Openness Gross FDI 160 7 140 6 10 9 8 120 5 80 3 60 2 External Trade to GDP Ratio (LHS) Import Tariff Revenues to Total Imports Ratio (RHS) 40 20 1 2005 2004 2003 2002 2001 2000 1999 0 1998 6 5 4 3 2 1 0 1997 Percent 4 1996 Percent 100 Billions of US$ 7 0 Avg 1988/92 2002 2003 2004 2005 16 Impending public investments will help alleviate infrastructure bottle necks Firms’ Response on Infrastructure (Firms Evaluating constraint as “major” or “severe”) (Percent) Thailand North Central Bangkok & Vicinity Telecommunications 11.4 6.8 8.8 8.3 18.2 18.3 24.3 Electricity 25.6 21.9 21.6 21.2 37.0 32.4 41.1 Transportation 13.8 13.7 9.5 14.0 15.6 12.7 15.9 East Northeast South Source: Thailand Investment Climate, Firm Competitiveness and Growth Study (2006) 17 In the medium term, Thailand must implement reforms to increase private investment Private investment rate and/or rate of innovation needs to be raised for Thailand to sustain high growth rates Real GDP growth and Growth of manufacturing sector Share of PI in Real GDP (LHS) Growth Rate of PI (RHS) 25 Given 20 20 16 As % of GDP 14 15 12 10 10 8 6 5 4 2 0 0 1980s 2002 2003 2004 2005 2006P Annual Percentage Change 18 • High oil price • Rising real interest rates • Slow down in household consumption Reforms to improve the Investment climate ever more important for growth and poverty reduction 18 Services sector potential tapped by removal of existing restrictions • WTO agreement can reduce services restrictions; • Telecom, banking, insurance, business services, ports can all benefit for such liberalization; • Share of services sector high • Productivity growth low- & thus scope to grow • Supportive policies needed 19 Needed Reform Agenda • • • • • Reduce regulatory burden on firms to reduce their transactions costs, esp. in Center & East – PLUS remove services restrictions Strengthen vocational education (incl. ICT), generally, & in NE region to fill skill gaps, and secondary education across the board Expedite infrastructure improvements, especially in East & Center, as also for mass transit in Bangkok More public expenditure in NE, given that it receives less public resources per capita though NE has most poor people Promote faster growth in NE by improving trade facilitation & transport links to integrate with Mekong region, & support crossborder private investments from Thailand to CLMV 20 THANK YOU Thailand Economic Monitor can be downloaded from www.worldbank.or.th 21