THAI ECONOMIC PERFORMANCE AND FISCAL SCENARIOS AFTER THE CRISIS. By: Dr. Porametee Vimolsiri

Transcription

1 THAI ECONOMIC PERFORMANCE AND FISCAL SCENARIOS AFTER THE CRISIS By: Dr. Porametee Vimolsiri Deputy Secretary-General The National Economic and Social Development Board Facing the Aging Society in ASEAN Countries Symposium on the Emerging Middle Income Class and Social Safety Network Organized by The Japanese Embassy and Economic Research Institute for ASEAN and East Asia (ERIA) Dusit Thani Hotel, Bangkok, Thailand March 15, 2010

2 2 THAI ECONOMIC PERFORMANCE AND FISCAL SCENARIOS AFTER THE CRISIS Dr. Porametee Vimolsiri 1 Over the last 2 years, fiscal policies in most developing countries have faced with similar challenges. First, economic slowdown, brought about by global recession, has lowered government revenues. Second, stimulation efforts to revive the economy have imposed extra budget burdens. In this respect, public debts started to increase significantly in many revenue-constrained economies. Therefore, policy makers increasingly concern over long-term fiscal position and its sustainability, particularly in the face of (i) downside risks to global economic recovery; (ii) high and rising debt burdens; (iii) rising trend of world market interest rates; and (iv) escalating global financial market fluctuation. This paper discussed the plausible scenarios of fiscal positions in Thailand in the medium-term and derived policy implications towards fiscal sustainability. The paper is organized into 3 parts. The first part provided the overview of Thai economic performances in , outlook for 2010 and key stimulation measures. The second part traced key features of fiscal structure and depicted the likely medium-term fiscal scenarios. The third part summarized policy implications toward fiscal sustainability. 1. ECONOMIC PERFORMANCES IN , OUTLOOK Similar to other export-dependent countries, the Thai economy was severely affected by the global economic recession. Combined with oil price increase and unfavorable domestic political condition, GDP started to contract in the last quarter of 2008 and brought down the whole year GDP growth rate to only 2.5 percent as compared to an average GDP growth rate of 5.1 percent in Amidst the full-fledged global economic recession, the Thai economy contracted further by 7.1 percent in the first quarter of Nevertheless, in the second quarter, the pace of economic contraction started to reduce to 4.9 percent. In the latter half, the Thai economy continued the path of economic recovery with the slower pace of GDP contraction of 2.7 percent in the third quarter and a strong expansion of 5.8 percent in the fourth quarter. Facing the storm of global recession, Thai government announced two stimulation packages on January and March 2009 respectively. Combined with the textbook s effect of automatic stabilization that reduced government revenues, the fiscal position was negatively affected. Budget balance registered a deficit of 3.98 percent to GDP in FY 2009 and public debt increased to percent at the end of Together with the debt burden of second stimulation package which is estimated at 800 billion baht over FY and uncertainties in global economic recovery, concerns over fiscal position and debt sustainability has increased. The following subsections summarized Thailand economic performances in , outlook for 2010, and the overview of government stimulation packages. 1 Deputy Secretary-General, the National Economic & Social Development Board (NESDB). Opinions expressed are those of the author, and do not represent official position of NESDB. I would like to thank Dr. Wichayayuth Boonchit and Macroeconomic Analysis Unit of the Macroeconomic Policy Office, NESDB for the technical exercises. This paper was prepared as a background document for Facing the Aging Society in ASEAN Countries Symposium on the Emerging Middle Income Class and Social Safety Network, organized by the Japanese Embassy and Economic Research Institute for ASEAN and East Asia (ERIA), Dusit Thani Hotel, Bangkok, Thailand on March 15, 2010.

3 3 1.1 The Thai economy in 2008 The Thai economy was not directly affected by the sub-prime crisis when it first started. In the first quarter, the pace of economic expansion picked up to 6.4 percent, compared to the yearly growth rate of 4.9 percent in However, the increase in oil prices slowed down the pace of economic expansion to 5.2 percent in the second quarter. In the second half of the year, the US sub-prime crisis weakened external demand and domestic political demonstration slowed down the economic growth rate in the third quarter to 2.9 percent. In the last quarter, the sub-prime crisis developed into full-fledged global recession while domestic political condition developed to confrontations and the shutdown of Don Muang and Suvarnabhumi Airport during November to December These unfavorable external and domestic conditions leaded to economic contraction of 4.2 percent. Table 1: Growth Rate of Real GDP (%YoY) Country Year Q1 Q2 Q3 Q4 Year World Thailand Source: NESDB The sharp economic slowdown in the third quarter and its contraction in the fourth quarter dragged down the whole year GDP expansion in 2008 to only 2.5 percent, compared to the average growth rate of 5.1 percent in The strong impacts of worsening global economic and domestic political conditions were seen in the development of exports, manufacturing production, tourism sector, employment condition, and eventually household consumption. The development of these key sectors can be summarized as follows; Exports Table 2: Export Figure % YoY Year Q1 Q2 H1 Q3 Q4 H2 Year Export Value (USD) Export Volume Export Price Export Value (USD): Classified by Destination Major Markets US EU (15) Japan ASEAN (5) Emerging Markets China Other Markets Sources: BOT, Ministry of Commerce Export value in the US dollar terms grew appreciably by 23.7 percent in the first quarter and picked up the pace to 28.6 percent in the second quarter. The robust expansion of export value in the first

4 4 half of 2008 was attributed by the strong increase in both export volume and price. In term of export by market destination, in the first half, the expansion was broad base. Export value to major markets, emerging market and other markets grew appreciably by 19.2 percent, 36.8 percent and 27.8 percent respectively. In the second half of 2008, the global economy was worsen by the sub-prime crisis and eventually developed into a full-fledged recession in the last quarter. Combining with the impacts from air port shutdowns, export value turned from its expansion of 26.1 percent in the third quarter to a contraction of 10.4 percent in the fourth quarter and resulted in a sluggish pace of expansion of 7.0 percent in the latter half. Export to the US and EU turned from its expansion of 13.8 and 12.4 percent in the third quarter to a contraction of 12.0 and 11.2 percent in fourth quarter. Similarly export to emerging market and other market turned from their expansion of 35.3 percent and 24.1 percent in the third quarter to a contraction of 9.1 percent and 4.6 percent in the fourth quarter Manufacturing production Table 3: Manufacturing Production Index % YoY Year Q1 Q2 H1 Q3 Q4 H2 Year GDP Manufacturing MPI Food Beverages Chemical Vehicles Electronic Electric appliances Capacity Utilization Sources: BOT, NESDB In line with the performance of export sector and domestic demand condition, the expansion of manufacturing production remained robust in the first half of Nevertheless, the growth of manufacturing GDP slowed down from 10.3 percent in the first quarter to 7.7 percent in the second quarter, reflecting the impacts of oil price increase that increasingly jeopardized disposable incomes and raised production costs. In the second half of 2009, manufacturing GDP turned to a contraction of 0.9 percent, compared to the expansion of 9.0 percent in the first half. Starting in Q3, the growth pace of manufacturing GDP decelerated further from 10.3 and 7.7 percent in the first and second quarter to 5.4 percent. This deceleration could be noticed in both the production for domestic market and the exportoriented production. The cause of such decrease in the growth of the industrial sector was attributable to (i) the development of US sub-prime crisis to global recession after the collapse of Lehman Brothers in September 2008; and (ii) domestic political conflicts that developed into severe confrontations. These developments weakened both export and domestic demand which, in turn, slowed down production of electronic products and electrical appliances even further from the second quarter. Moreover, in this quarter, the production of wood furniture and leather declined severely.

5 5 In the fourth quarter, credit crunch and wealth destruction in major advanced economies accelerated the contraction of global demand contraction. Meanwhile, the domestic conflict had caused a shutdown of two airports and blocked international transportation. As a resulted, manufacturing production contracted for the first time in 10 years by 6.8 percent. The production of export-oriented industries was severely hit as indicated by a contraction of export-oriented MPI by 11.5 percent. Production sectors with strong output contraction were computer and appliances, integrated circuits, televisions, wood furniture, and leather. Likewise, domestic-oriented production contracted by 1.2 percent which was attributable to the slowdown of consumption and investment spending in the environments of; (i) political uncertainties that jeopardized economic sentiments; and (ii) unfavorable employment condition that lowered household incomes Tourism sector Table 4: Thailand Service Sector Year Q1 Q2 H1 Q3 Q4 H2 Year GDP Hotels and restaurants No. of tourists: 1,000 persons (%YoY) 14,464 (4.6) 4,327 (12.9) 3,550 (13.6) 7,876 (13.3) 3,380 (-2.0) 3,328 (-18.0) 6,708 (-10.7) Occupancy rate (%) Sources: CEIC, NESDB 14,584 (0.8) In the first half of 2009, the overall picture of tourism sector was favorable. The number of tourists increased at a strong pace by 13.3 percent and hotel occupancy rate stood at 61.1 percent. Classified by country of origin, the number of tourists from Europe, America and China grew impressively with the support of favorable global economic condition and government campaigns to promote the market. The favorable tourism and domestic demand condition helped support the expansion of hotels and restaurants sector that expanded appreciably by 8.1 percent in the first half of In the latter half, however, tourism condition changed dramatically due to the worsening global economic and domestic political conditions. The number of tourists that picked up from 12.9 percent expansion in the first quarter to 13.6 percent in the second quarter suddenly turned to a contraction of 2.0 percent in the third quarter, the first reduction in 3 years. In the last quarter, tourism condition was worsened further by the deep global recession and the shutdown of two airports that blocked transportation. Therefore, the number of tourists contracted further at a sharper pace by 18.0 percent and resulted in a contraction of 10.7 percent in the second half. The worsening tourism condition and the weakening domestic demand contributed to a contraction of hotels and restaurants sector of 4.1 in the latter half.

6 Employment Table 5: Employment 2008 Employment (%YoY) Total Employment - Agriculture - Non-Agriculture Manufacturing Construction Wholesale and Retail Trade Hotels and Restaurants 2008 Units: Thousand People Q1 Q2 Q3 Q4 Year 35, , , , , (1.6) (3.1) (1.9) (1.8) (2.1) 12, , , , , (0.4) (3.6) (3.7) (2.9) (2.8) 23, , , , , (2.3) (2.8) (0.6) (1.1) (1.7) 5, , , , , (0.4) (-2.2) (-6.5) (-3.8) (-3.0) 2, , , , , (0.5) (2.0) (3.8) (6.9) (3.0) 5, , , , , (2.4) (3.5) (2.0) (5.1) (3.2) 2, , , , , (1.2) (2.5) (2.2) (1.2) (1.8) Unemployment Rate Source: NSO In the first half of 2008, the labor market remained favorable with million people and million people employed in the first and second quarter respectively and the unemployment rate stood at 1.65 percent and 1.39 percent over the same period. This favorable employment condition was supported particularly by the sharp increase of agricultural prices in world market that induced agricultural production expansion, and the favorable production condition in construction sector, wholesale and retail trade as well as hotel and restaurant. Led by the continued reduction of employment in manufacturing sector over the last three quarter, however, the employment expansion decelerated noticeably, from 3.1 percent in the second quarter to 1.9 percent and 1.8 percent in the third and fourth quarter respectively. The manufacturing-led unfavorable employment condition was in line with the development of manufacturing production in previous subsection Household consumption Table 6: Private Consumption % YoY Year Q1 Q2 H1 Q3 Q4 H2 Year Private consumption expenditures Durable goods Semi-durable goods Non-durable goods Services Private consumption index Retail sales index Source: BOT, NESDB

7 7 Household consumption continued to expand throughout the year in line with the economic theory which suggested that consumption fluctuates less than incomes. The supporting factors for consumption expansion in 2008 included (i) the increase of farmers incomes due to strong agricultural price increase; (ii) a raise in minimum wage and government officials salary; and (iii) tax measures to enhance income under tax policy stimulation. Nevertheless, the pace of private consumption expansion slowed down noticeably from 3.3 percent in the first quarter to 2.6, 2.7 and 2.1 percent in the second, third and fourth quarter respectively which reflected the negative effects from (i) the increase of oil and commodity prices that reduced purchasing power of household incomes; (ii) deteriorating hiring and income condition brought by negative development in production sector; and (iii) deteriorating consumer s confidences due to political and income uncertainties. All in all, for the whole year of 2008, household consumption expanded by 2.7 percent, compared to 1.7 percent in The Thai economy in 2009 The prolonged global recession hit the Thai economy severely in The deepest global recession in the first quarter together with the political unrest in April caused the Thai economy to contract sharply by 6.0 percent in the first half of On the demand side, the strong impacts were seen in export sector while private consumption started to fell for the first time in the first quarter and continued to decline in the second and third quarter. Private investment contracted by 16.9 and 8.4 percent in the first and second half in response to rising excess production capacity and uncertainty in economic prospects. On the supply side, manufacturing production declined sharply by 11.6 percent in the first half of 2009 while number of tourists fell by 16.1 percent and dragged down the performance of tourism-related sectors. Table 7: Growth Rate of Real GDP (%YoY) Country Source: NESDB Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year World Thailand Thailand (%QoQ sa.) After the deepest recession in the first quarter, the Thai economy contracted at a slower pace of 4.9 percent and 2.7 percent in the second and third quarter respectively, before strongly rebounded by 5.8 percent in the last quarter. The significant improvement of economic condition in the second half was supported by the Asian-led global economic recovery after collaborative global stimulations. Government stimuli under the first and second stimulus packages also played the role to revive the economy. The quarter-on-quarter GDP growth pace of 2.1 percent, 1.7, and 3.6 in the second, third and fourth quarter reflected the path of Thai economic recovery after its sharpest contraction in the fourth quarter of The development of key sectors can be summarized as follows;

8 Export Table 8: Export Figures % YoY Year Q1 Q2 H1 Q3 Q4 H2 Year Export Value (USD) Export Volume Export Price Export Value (USD): Classified by Destination Major Markets US EU (15) Japan ASEAN (5) Emerging Markets China Other Markets Sources: BOT, Ministry of Commerce Thai exports declined sharply in the first quarter due to the deeper global economic recession. In the US dollar terms, export value dropped by 20.0 percent which was contributed by volume reduction of 19.6 percent and price reduction of 0.5 percent. In the second quarter, export values in US dollar term contracted at a faster pace by 26.1 percent with the reduction of volume and price of 23.8 and 3.1 percent respectively. Export price of agricultural commodities fell sharply, due to rising bargaining power of importers during the period of demand contraction. Major agricultural exports which recorded a volume reduction included, for instance rice, cassava and rubber. Meanwhile exports of electronics and electrical appliances contracted at an alarming pace. Export value of computer parts and accessories dropped sharply due to the reduction of orders from the major importers such as Australia, Indonesia, Malaysia, Philippines, and Japan. However, in the second quarter, export value of technology-intensive products fell at a slower pace compared to that of in the first quarter, attributed mostly to the improvement in the exports of electronics and electrical appliances. In the third quarter, export continued to contacted but at a slower pace than in the first two quarter. Export value in US dollar term fell by 17.5 percent while the total export volume and price declined by 15.6 and 2.2 percent respectively. Agricultural products export volume and price, in particular rice and rubber, fell considerably, leading to a drop of agricultural export value of 33.2 percent. Meanwhile, manufacturing declined at a significantly slower pace which was attributable to economic recovery in major trading countries such as the US, Australia, ASEAN nations, and China. Led by global economic recovery and low base effect, in the last quarter of 2009, export value in US dollars increased for the first time in 12 months by 12.2 percent, comparing to an average reduction of 21.1 percent during the first nine months of Export volume and price rebounded by 4.4 and 7.5 percent. These attributed to the rise of export volume and price of agricultural products, mainly rice and cassava. Furthermore, export of major manufacturing commodities started to expand after a long contraction since the fourth quarter of 2008 such as rubber products, paper and products, skincare products, pharmaceutical goods and medical instruments, vehicles, computer and electrical appliances.

9 Manufacturing production Manufacturing production in the first half of 2009 fell at alarming pace by 11.6 percent, compare to the expansion of 9.0 percent in the first half of In the first quarter manufacturing production declined by 14.4 percent while the production capacity utilization declined to only 58.1 percent, reflecting a sharp increase of excess capacity in manufacturing production. Major industries that utilized their capacity under 50 percent were electronic equipments, electrical appliances, vehicles and equipments, iron and steel products. However, the contraction of manufacturing production bottomed out in the first quarter, as seen in a slower pace contraction of 8.7 percent in the second quarter. The most remarkable development was seen in export-oriented production which declined by only 1.8 percent, compared to a 22.3 percent in the first quarter. A sign of global economic recovery triggered importing countries to increase demand for imported industrial products. Similarly, production for domestic consumption slightly increased. Table 9: Manufacturing Production Index % YoY Year Q1 Q2 H1 Q3 Q4 H2 Year GDP Manufacturing MPI Food Beverages Chemical Vehicles Electronic Electric appliances Capacity Utilization Sources: BOT, NESDB In the second half of 2009, the condition of manufacturing production improved gradually, with a slower pace of contraction of 5.9 percent in the third quarter and a strong rebound of 9.9 percent in the fourth quarter. This improvement was mainly supported by the recovery of export-oriented production that expanded by 0.2 percent in the third quarter and grew impressively by 22.9 percent in the fourth quarter. The well-performed industries included the vehicles and equipments, electronic appliances, particularly integrated circuits and hard disk drives, and canned seafood industry. Production for domestic market contracted by 9.3 percent in the third quarter but recovered by 7.5 percent in the last quarter, owing to the government s stimulus measures, better hiring and income condition which brought back consumer s confidence, and the increase in price of agricultural commodities. In line with production recovery, the rate of capacity utilization picked up from 59.2 percent in the second quarter to 62.5 percent and 67.3 percent in the third and fourth quarter respectively.

10 Tourism sector Table 10: Thailand Service Sector Year Q1 Q2 H1 Q3 Q4 H2 Year GDP Hotels and restaurants No. of tourists (1,000 persons) (%YoY) 14,584 (0.8) 3,643 (-15.7) 2,964 (-16.5) 6,607 (-16.1) 3,284 (-2.9) 4,198 (27.7) 7,482 (11.5) Occupancy rate (%) Sources: CEIC, NESDB 14,088 (-3.4) In the first half of 2009, the tourism sector was badly affected by (i) the deepest global recession; (ii) political unrests in April that caused other countries to issue travel warning about traveling to Thailand; and (iii) the spread of influenza A (H1N1) and the Chikun-Gunya outbreak in Southern Thailand. These unfavorable environments discouraged foreign tourists to visit Thailand, causing a fall of number of tourist to 3.6 and 3.0 million people in the first and second quarter respectively which was a 15.7 percent and 16.5 percent decline from the same period of The occupancy rate dropped to 53.5 percent and 42.1 percent in the first and second quarter, compared to that of 68.0 and 54.3 in the same period of These developments attributed to the contraction of hotels and restaurants sector by 7.0 percent and 5.7 percent in the first and second quarter respectively. In the second half, the concerns over the outbreak of swine flu 2009 epidemic and domestic political unrest were relieved. Together with a contribution from global economic recovery, tourism sector recovered materially. In the third quarter, number of tourists declined at a significantly slower pace of 2.9 and turned to a strong expansion of 27.7 percent in the fourth quarter. In December, the number of tourists picked up to 1.68 million persons, the highest record. Meanwhile, the hotel occupancy rate rose to 54.2 percent in the last quarter compared to that of 49.3 percent in the same quarter of The recovery of tourism sector was driven by a strong expansion of tourist number from East Asia, particularly China, Republic of Korea and Taiwan. Theses development contributed to a slower contraction of hotel and restaurant sector of 2.5 percent in the third quarter and its strong expansion of 13.5 percent in the last quarter.

11 Employment Table 11: Thailand Employment Total Employment - Agriculture - Non-Agriculture Employment (%YoY) Manufacturing Construction Wholesale and Retail Trade Hotels and Restaurants 2009 Units: Thousand People Q1 Q2 Q3 Q4 Year 36, , , , , (1.9) (2.3) (1.4) (1.9) (1.9) 12, , , , , (0.8) (2.5) (-0.8) (-2.3) (-0.1) 23, , , , , (2.5) (2.1) (3.1) (4.9) (3.1) 5, , , , , (-3.7) (-3.2) (1.3) (0.2) (-1.5) 2, , , , , (3.4) (5.6) (1.6) (5.3) (4.0) 6, , , , , (5.5) (5.3) (4.2) (5.4) (5.1) 2, , , , , (7.7) (7.3) (8.7) (11.4) (8.8) Unemployment Rate Source: NSO The average employment in the first and second quarter was at 36.5 and 37.7 million people respectively, increased by 1.9 percent and 2.3 percent from the same period last year. Numbers of employment in agricultural increased by 0.8 percent and 2.5 percent over the same period. In contrast, employment in manufacturing sector decreased by 3.7 percent in the first quarter and 3.2 percent in the second quarter due to unfavorable production condition. Unemployment rate picked up to 2.08 percent and 1.75 percent in the first and second quarter respectively compare to that of 1.65 percent and 1.39 percent in the same period of The improving production and exports condition in the latter half of 2009 contributed to the employment condition. However, employment in agricultural sector declined by 2.3 percent due to the high demand for labor in non-agricultural sector, the outbreak of pinkish cassava mealy bug and brown plan hoppers, and the worsening climate conditions. The employment in manufacturing sector expanded 0.2 percent. Unemployment rate declined to 1.17 percent and 0.98 percent in the third and fourth quarter respectively. The improvement in labor market, hotel and restaurant sector in particular, was a clear evidence of economic recovery. In addition, the recovery in electronic and automobile industries fueled the increase of employment in manufacturing sector.

12 Household consumption Table 12: Private Consumption % YoY Year Q1 Q2 H1 Q3 Q4 H2 Year Private consumption expenditures Durable goods Semi-durable goods Non-durable goods Services Private consumption index Retail sales index Sources: BOT, NESDB Household consumption expenditure declined by 2.5 percent in the first quarter, the first reduction in ten years. This was contributed by the decrease in labor incomes led by the rise in layoffs, especially in manufacturing sector, the decline in working hours and annual bonus in business firms, the rapid slowdown in farm incomes, the low confidence in economic situation and growing concerns over income and employment prospects. Though the 6 months 5 measures stimulus package, which helps to reduce living expenses, was extended for another 6 months and consumer prices has continuously fell, the overall purchasing power did not improve favorably. Nevertheless, the real purchasing power of salarybased workers picked up as the result of declining cost of living led by the drop in oil and consumer prices. In the second quarter, consumption expenditure declined at a slower pace by 2.2 percent with the contribution of the first government stimulus package (SP1) and the fall of consumption prices. However, there were negative factors on spending in this quarter such as the subdue consumer confidence due to the concern over economic prospects, employment condition, the political unrest, and the drop of farm incomes. In the second half of the year, household consumption noticeably improved which is in line with the improvement of employment and income condition. In the third quarter, household consumption spending decreased at a significantly slower pace by 1.3 percent. In the last quarter, private consumption recovered by 1.4 percent, improved from the 2.0 percent contraction in the first three quarters. The supportive factors are the increase of employment in trade and hotel sectors, the increase of farm incomes as a result of rising in agricultural products prices and the decrease of global supply due to unfavorable weather, the improvement in consumer confidence, government s stimulus package (SP1), and the increase of minimum wage rate on December 25, 2009.

13 Economic Outlook for 2010 Table 13: Economic Projection of 2010 Actual Data Projection GDP (at current prices: Bill. Bht) 8, , , ,726.2 GDP per capita (Bht per year) 129, , , ,092 GDP (at current prices: Bill USD) GDP per capita (USD per year) 3, , , ,433.6 GDP Growth (at constant prices, %) Investment (at constant prices, %) Private (at constant prices, %) Public (at constant prices, %) Consumption (at constant prices, %) Private (at constant prices, %) Public (at constant prices, %) Export volume of goods & services (%) Import volume of goods & services (%) Trade Balance (Bill. USD) Current Account Balance (Bill. USD) Current Account to GDP (%) Inflation (%) Source: NESDB, 22 February 2010 In the year 2010, Thai economy is forecasted to grow by percent with 3-4 percent headline inflation and a current account surplus of 4.1 percent to GDP. Supporting factors for economic recovery are; (i) the improving global economic condition that will support the recovery of manufacturing production, exports and the tourism activities which will eventually strengthen household income and consumption; (ii) the momentum from economic recovery in the latter half of 2009 will provide impetus for economic recovery well into 2010 particularly the improvement of incomes and employment condition, the revival of consumer and business confidences, and the increase of capacity utilization; and (iii) the implementation of investment projects under the second government stimulus package (SP2) will help offset the reduction of regular government budget and facilitate economic recovery.

14 14 Against this background, total consumption spending in 2010 is projected to increase by 2.8 percent, compared to a contraction of 0.1 percent in Private consumption is likely to grow by 3.0 percent with the support of improving employment and income condition. Meanwhile, government consumption is projected to increase by 1.6 percent. Total investment is forecasted to grow by 4.6 percent, compared to a 9.0 percent contraction in Public investment is expected to increase moderately by 3.5 with the support of the implementation of investment projects under the second stimulus package that will help offset the reduction of regular capital budget in FY2010. Supported by economic recovery in trading partners, export of goods and services in US dollar terms is expected to increase by 15.5 percent against its sharp reduction of 13.9 percent in Meanwhile, import value of goods and services in US dollar term is forecasted to increase by 24.0 percent in contrast with a sharp contraction of 24.9 percent in Trade balance is forecasted to register a surplus of 11.3 billion US dollar. Combined with a surplus in service account, current account is projected to register a surplus of 12.2 billion US dollar which is equivalent to 4.1 percent of GDP, compare to 4.0 percent of GDP in previous projection. 1.4 Government Stimulation measures Taking into consideration the sharp economic contraction in the last quarter of 2008, which was deepened further in the first quarter of 2009 by the severe global recession, the government announced the first Stimulus Package (SP1I) worth 116,700 million Baht (3.33 billion US dollar) on January 13, In addition, to ensure economic recovery in 2010 and to enhance long-run growth potential, the Thai government announced the second Stimulus Package (SP2) worth 1.56 trillion Baht (44.57 billion US dollar) on March 25, : The First Stimulus Package (SP1) The SP1 was designed to revive and stimulate short-run economy on timely basis. Therefore, it is mainly comprised of income transfer measures and tax deduction that aimed to (i) stimulate private consumption expenditure by raising household income and reduce living cost; and (ii) inject liquidity into economic system by raising working capital of the SFIs in order to promote credit extension to SMEs. The SP1 was financed by the supplementary budget of FY2009. The key measures and its associated budget can be summarized as follows: (i) Increase purchasing power and reduce living expenses, especially low-income earners and disables (total 59, Mil-Baht) One-off 2,000 baht cash handout for low income earner (18, Mil-Baht) Create senior citizen assurance (9,000 Mil-Baht) Free water, electricity for the poor and transport subsidy (11, Mil-Baht) Ministry of Commerce s measures to reduce living cost (1,000 Mil-Baht) Free education for 15 years (19, Mil-Baht) (ii) Create employment, income, and improvement of life quality (total 27,560 Mil-Baht) Build and improve water resources for agriculture (2,000 Mil-Baht) Rural roads construction (1,500 Mil-Baht) Small reservoirs construction (760 Mil-Baht)

15 public housing estate for low ranked police force (1, Mil-Baht) Improve standard health service stations (1, Mil-Baht) (iii) Sufficiency Economy Fund for improvement in quality of life in rural community (15,200 Mil-Baht) (iv) 1-month training and 3-month wage subsidy (6,900 Mil-Baht) (v) Community health volunteer recruitment (3,000 Mil-Baht) (vi) Stabilize agriculture prices (13, Mil-Baht) include last budget 110,000 Mil-Baht (vii) Business measure (total 13,222 Mil-Baht) Tourism stimulus (1,000 Mil-Baht) Encourage and support food industry and SMEs (500 Mil-Baht) Stimulate domestic tourism (1,597 Mil-Baht) (viii) Rebuilding confidence in an image of Thailand (325 Mil-Baht) (ix) Tax measures (total 9,800 Mil-Baht) Extension of tax-deduction to reduce living expense and support entrepreneurs Extension of tax-deduction to real estate sector (6,500 Mil-Baht) Extension of tax-deduction to encourage tourism (1,800 Mil-Baht) Extension of tax-deduction to debt and organization restructuring (x) Contingency fund for emergency use or as necessary (4,090.4 Mil-Baht) 1.4.2: The Second Stimulus Package (SP2) The SP1 was announced in the midst of severe global recession when the prospects for the remaining of the year 2009 and 2010 were clouded by uncertainties. In addition, the SP1 aimed primarily at short-run economic stimulation on timely basis and was not designed to address the long-run economic issues. However, the fundamental factors for growth potential have been eroded recently and are likely to deteriorate further without government intervention. The main concern over economic fundamental factors includes (i) aging population that will reduce labor efficiency and raise dependency ratio; (ii) sluggish investment expansion in 2006 and its contraction in 2009 that are likely to impede the process of capital accumulation; (iii) global warming that is likely to reduce productivity of agricultural production; (iv) deteriorating energy efficiency; and (v) lacking of basic infrastructure to support the development of knowledge base economy. Therefore, in order to ensure the economic recovery in and to enhance long-run potential growth, the government announced the Second Stimulus Package on March The SP2 comprised of investment project in 7 key areas which will be implemented in FY The purposes of investment and their associated budget in each area are summarized as follows: (i) (ii) To enhance food and energy security, including increase productivity of agricultural and industrial sectors (230,645 Mil-Baht) Water Management Technology & Standard Improvement for Agricultural Sector To upgrade public infrastructure for both economic and social services to improve economic competitiveness and quality of life (1,140,016 Mil-Baht) Transport & Logistics

16 16 Alternative Energy Telecommunication Tourism Education Public Health Social Security Science & Technology Natural Resources (iii) To improve income-generating capacity of tourism sector (6,637 Mil-Baht) Image Revival Tourism Marketing Creative Tourism Products Tourism Site Recovery Standard Improvement (iv) To create new income-generating sectors in the Creative Economy (20,134 Mil-Baht) Cultural Heritage Conservation and Restoration Arts and Cultural Town Thai Handcraft Promotion Creative Product Promotion Thai software Industry Promotion Design Industry and R&D Promotion (v) To upgrade quality of education and holistically modernized learning system (60,145 Mil-Baht) Learning Community Building Quality and Standard Improvement on Education and Learning System Intellectual Infrastructures Improvement Plan and Center of Education in Subregion and Region Quality Improvement on Teachers and Education Reform (vi) To raise quality of public health care system for all Thais (9,290 Mil-Baht) Production and Strengthening Capacity of Medical and Health Care Staff Research and Development of Medical Technology (vii) To create job and increase incomes for people at community levels in order to improve their quality of life (100,00 Mil-Baht) Development Programs for 5 Provinces in Southern Thailand Investment Programs for Job Creation and Income Generation in Communities The total value of investment of SP2 classified by areas and expected years of implementation are summarized in table 14. Its sources of fund are summarized in Table 15. Overall, the implementation of SP2 will inject liquidity by billion baht each year and required debt financing of around 800 billion baht. Investment in public infrastructure accounted for the largest portion of 72.8 percent of total budget, followed by investment in water-grid system which accounted for 14.7 percent. The investment fund will

17 17 be financed by; (i) government budget allocation (39.2 percent); (ii) debt financing (44.1 percent); and (iii) revenues of state enterprises and others (16.6 percent). Table14: Investment Funds for the SP II Project Unit: million Baht Program Total Proportion (%) 1. Water Management and etc. 70,068 77,192 83, , Upgrade public infrastructure and etc. 355, , ,188 1,140, Improve income-generating capacity of tourism sector 4,368 1, , Creative economy 5,798 7,751 6,585 20, Upgrade quality of education and etc. 19,056 19,832 21,257 60, Public health care system 1,130 3,930 4,230 9, Create job and increase incomes and etc. 30,000 35,000 35, , Total investment fund 486, , ,168 1,566, Source: NESDB Table 15: Sources of Investment Funds Unit: million Baht Sources of Investment Funds Total Proportion (%) Government budget 180, , , , Domestic loan 64,183 89, , , Foreign loan 139, , , , Income and etc. 102,162 74,826 83, , Total investment funds 486, , ,168 1,566, Source: Ministry of Finance

18 18 2. KEY FEATURES OF FISCAL SYSTEM AND THE FISCAL SCENARIOS To derive implications for fiscal policy management, this section analyzes key features of fiscal system in Thailand, key issues that are likely to affect medium-term fiscal scenarios and then depicted the likely scenarios of medium-term fiscal position. The first subsection provides the overview of government revenues, expenditures and public debts. The second subsection summarizes key issues that influence fiscal scenarios. The third subsection analyzes fiscal sustainability by depicting fiscal scenarios based on certain assumptions. 2.1 Key Features of Fiscal System: Compared to international standard, the ratio of government expenditures to GDP is found to be lower than the average pattern of developing countries and increased at a slower pace. Nevertheless, while the overall spending ratio is relatively low in Thailand, budget allocation is considered to be supportive for the process of capital accumulation and long-run growth. The share of capital expenditure during was at around 4.7 percent of GDP, comparable to other Asian developing countries 2. Meanwhile, the share of expenditure on social services was at 6.1 percent, compared to the average 6.0 percent of Asian developing countries 3. Nevertheless, the ratio of budget allocation for debt repayment was significantly lower than the average of developing Asian economies. Table 16: Thailand s Government Expenditure Compared to Others Countries Government Expenditure Industrial Countries Developing Asia Thailand (average ) GDP Total Exp GDP Total Exp GDP Total Exp By Economic Type Current Exp Wage Goods & Service Employer Contribution n.a. n.a. Interest Subsidies & Transfer Capital Exp Lending Repayment By Function General Public Services Defense Education Health Social Security & Welfare Housing Economic Services Other Gov. Service Sources: Government Financial Statistic, BOT 2 Fan & Rao (2003) found that the average ratio of social spending in Asian developing countries in 1998 was at around 4 percent of GDP. 3 This included education, health, social security & welfare. In addition, Sturm (2001) found that share of expenditure on social services in Thailand was higher than the average of other 37 countries.

19 19 Table 17: Structure of Thailand s Government Expenditure Million Baht Fiscal Year (average) GDP (Current Price) 3,783,546 4,665,378 6,423,330 8,893,996 Total Government Budget Expenditure 640, ,000 1,115,636 1,805,850 (% of GDP) Current Expenditure 389, , ,797 1,312,686 (% of total Expenditure) Interest 94, ,022 (% of Total Expenditure) Capital Expenditure 219, , , ,223 (% of Total Expenditure) Debt repayment 32,245 20,361 33,649 54,602 (% of Total Expenditure) Source: Ministry of Finance Nevertheless, the share of capital expenditure to total budget has declined noticeably from the average of 34.2 percent during , to 23.0 percent during in contrast with the rising importance of current expenditure from 60.7 percent to 72.7 percent over the same period. The declining share of capital expenditure was also attributable to the burden of interest rate payment after economic crisis in 1997 as, on average, 7.9 percent of total budget was devoted for debt services Revenues Similarly, by international comparison, the ratio of government revenue to GDP is found to be below the average pattern of both developed and developing countries. Jansen and Khannabha (2006) used diagram in figure 1 and concluded that, with Thailand per capita income in 2002, the expected ratio of government revenues to GDP in 72 countries is closed to 24 percent, compared to that of 15 percent in Thailand. This relatively low ratio of revenues to GDP implied unused fiscal space that could be tapped to finance government expenditures. In addition, compared to other countries, the share of tax on income and profits in total revenues is considerably lower than that of developed countries but higher than the average of Asian developing nations.

20 20 Figure 1 : Revenue Ratio and Economic Development Source: Jansen and Khannabha (2006) The structure of government revenues has been relatively stable over the last 20 years. Tax revenue accounted for 89 percent of total government revenues (and 14.7 percent of GDP) while other revenues stood at around 10.3 percent of total revenues (and 1.7 percent of GDP) 4. The share of direct tax increased gradually from around 29 percent before and during 1997 financial crisis to 40.3 percent in due to the rising importance of corporate income tax from 18.4 percent in to 24.2 percent in Personal income tax contributed around percent to total revenues, over Treatments of personal income tax vary across different income bases with complicated allowances, deductions and exemptions. The effective rate tends to be higher in government-employed households 5, reflecting asymmetric collection efficiency across different sources of tax revenues. Indirect tax has its largest portion in government revenues 6 but its contribution declined from an average of 58.7 percent in to 49.3 percent in , but the share of VAT increased from an average of 18.6 percent in to percent over The current VAT rate of 7 percent is, however, rather low compared to other 30 countries 7. The structure of tax revenues has been changed systematically. The rising importance of corporate income tax and VAT vis-à-vis declining share of custom duties implied revenue compensation 4 Higher than that are found in the study by Warr and Bhanupong (1996), and World bank (2000) 5 Results from analyzing structure of Social Accounting Matrix 6 Also, World Bank (2002) found that shares of indirect taxes are significantly higher than that of other countries in Southeast Asia. 7 For details, see Tanzi and Zee (2000)

21 21 measure that has been used to neutralize the revenue impacts of trade liberalization. In addition, revenue from custom duties tends to decline further due to tariff rate reduction under free trade arrangement 8. Therefore, unless the Thai government wishes to reduce the tax burden of the economy, economic management requires some compensation measures to neutralize the fiscal effect of trade liberalization. Table 18 : Structure of Thailand s Government Revenue compare to other countries Government Revenue Industrial Countries Developing Asia Thailand % of GDP % of Rev. % of GDP % of Rev. % of GDP % of Rev. Total Revenue Tax Revenue Tax on Income & Profits o/w Social Security Contribution Tax on Consumption o/w Tax on Domestic G&S Tax on Inter. Trade Non-Tax Revenue Income Tax/ Consumption Tax Source: Government Financial Statistics 8 Although tariff revenues are likely to increase in the early stage of trade liberalization, Baunsgaard and Keen (2005) argue that there must be some points at which further trade liberalization leads to tariff revenue reductions a move towards a more liberalized economy is a move towards no trade tax. In addition, IMF (2005) concluded that it would be unwise to count on second round revenue effects of trade liberalization.

22 22 Table 19 : Structure of Thailand s Government Revenue Revenue 1. Tax 1.1 Direct Tax - Personal Income Tax - Corporate Income Tax - Petroleum Tax 1.2 Indirect Tax Sale Tax -Business Tax -Value Added Tax -Specific Business Tax -Stamp Duty Excise Tax 2. Non Tax Total Revenue Source: Ministry of Finance Mil. Baht % of Rev. % of GDP Mil. Baht % of Rev. % of GDP 625, , ,088, ,578, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,216, ,760, Mil. Baht % of Rev. % of GDP Mil. Baht % of Rev. % of GDP