Macroeconomic Perspectives for Thailand

1 Macroeconomic Perspectives for Thailand Pattama Teanravisitsagool Macroeconomic Strategy and Planning, Director Office of the National Economic and Social Development Board 27 April 2009

WWW.NESDB.GO.TH 2 Outline of presentation Current economic situation: Thailand, in Q4/08, experienced first contraction in 10 years. Economic outlook in 2009-2010: Domestic demand-led recovery; a challenging task for Thailand? Policy framework/guidelines to revive the Thai economy: Policy combination of short-term stimulus package and longterm investment projects aimed at strengthening economic and social fundamentals in a bid for Thailand to cope with a changing global economic landscape after this crisis?

WWW.NESDB.GO.TH 3 Impacts of sub-prime and world economic crisis on Thailand 3 Direct impacts on financial institutions - Total foreign exposure (which includes loan in foreign currency and investment in foreign debt and equities) as a percentage share to total assets of financial institutions was only approximately 7.5% - Hence, direct impacts on financial institutions were limited. Related impacts on International capital movement - Capital outflows from portfolio investment - Thai stock market s volatility and decline in set index and hence decline in wealth - Depreciation of baht currency Impacts on Thai exports and tourism - Contraction in world demand - decline in trade finance - growing concern over protectionism

% WWW.NESDB.GO.TH 4 Currently, the Thai economy is in a contraction period Q4/08 saw the first economic contraction in 10 years 1987-91 1992-96 1997-98 1999-2001 2002-06 2007-08 GDP 10.9 8.1-5.9 3.9 5.6 3.8 Inflation 4.7 4.8 6.9 1.2 2.9 3.9 Current Account/GDP 1/ -7.7-8.1 12.8 7.4 1.2-0.1 External Debt/ GDP 1/ 44.4 65.9 69.9 56.1 32.8 26.8 Source: NESDB 1/ at the final year of each period GDP Growth 10 8 6 4 2 0-2 -4-6 Q1 01 Global economic recession Q3 Q1 02 Q3 Q1 03 Q3 Q1 04 GDP at 1988 prices Low interest rate, banks lending data and consumption expanded at an accelerating rate. Private investment expanded significantly. Noticeable recovery of the global economy bolstered the country s exports. Q3 Q1 05 Q3 The Tsunami disaster High crude oil prices/inflation Q1 06 Q3 Oil price World economic recession Political unrest Q1 07 Q3 Q1 08 Q3

Q1/04 Q1/05 Q1/06 Q1/07 Q1/08 WWW.NESDB.GO.TH 5 Q4/2008 saw the first contraction in 10 years GDP Growth (%) 8 7 6 5 4 3 2 1 0-1 -2-3 -4-5 % Quarterly economic growth GDP 2006 2007 2008 2550 Year Q1 Q2 Q3 Q4 GDP 5.2 4.9 2.6 6.0 5.3 3.9-4.3 GDP (QoQ annualized) Source: NESDB 5.2 4.9 2.6 0.9 0.6 0.4-6.1 Export-led Hampering factors: Military coup in September 2006 Rapid increase in oil prices in H2/2007 and H1/2008 World economic recession has prevailed since Q4/2008 In Thailand, followed again by political unrest in 2009

Thailand s Economic Outlook in 2009 Economic contraction will continue Risks & uncertainty associated with the outlook World econ. recession - Main economies (US, EU, Jap) contracted - Key Asian economies (Taiwan, S. Korea, HK, Thailand, Singapore) contracted - Emerging Asian Economies (China, India, Viet Nam) slow down Political uncertainty Consumer and business confidence key for policy effectiveness Bottoming out in H1/2009? - Decline in consumption & investment -Decline in World trade volume - Reduction in manufacturing production - Gloomy confidence Weaker economic momentum in emerging Asia; an important regional growth engine Dampen market sentiment and public confidence and delay the recovery of domestic demand Discourage domestic demand and limit effectiveness of accommodative policies WWW.NESDB.GO.TH World scenario Low CAPU & Excess capacity High unemployment 8

WWW.NESDB.GO.TH 12 contributed by severe contraction in exports, which had been key driver to the Thai economic growth in 2006-2007. While domestic demand remain weak and policy effectiveness is 10.0-2.0-4.0 constrained. 8.0 6.0 4.0 2.0 0.0 % Changes in inventory and statistical discrepancies Net exports Domestic demand GDP 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: NESDB Contribution to growth 12 In 2008, however, 1. Imports increased much faster than exports. Net exports, therefore, contributed less to growth than in 2006-2007 2. Stocks were built up as the consequence of the surge in imports, particularly of such items as steel and iron, auto parts, electronic parts, and gold. Change in stocks, therefore, contributed a big share of growth in 2008.

Thailand Economic Outlook in Q1/09 : Contraction in Consumption, Investment, and Supply side Sharp contraction in export Rising unemployment Decline in Consumer Confidence 2007 2008 2008 2009 %YOY Year Year Q1 Q2 Q3 Q4 ธ.ค. ม.ค. ก.พ. ม.ค. Private Consumption Index 1.5 3.6 2.7 2.5 2.7 2.2 0.8-4.0-7.1 Value added Tax (VAT) 3.3 9.0 9.9 9.4 16.3 0.8-1.5-13.2-25.2 Private Investment Index -0.5 3.5 5.9 4.6 3.7-0.1-3.6-9.7-12.9 Export value 17.3 16.8 23.8 28.9 28.4-9.4-15.7-25.3-11.1-23.1 - excluding gold 16.6 15.7 22.9 27.4 27.9-11.1-21.1-28.9-24.5-24.5 Import value 9.1 26.4 35.0 28.7 39.1 5.3-8.8-36.4-43.5-35.1 - Capital goods 3.6 19.5 39.4 17.0 21.1 4.5-4.7-28.5-15.1-24.7 MPI 8.2 5.3 12.6 10.1 7.7-8.1-18.5-21.3-19.8 Capacity Utilization 72.6 67.7 73.6 69.3 67.9 60.2 57.3 57.1 55.4 Number of foreign Tourists 20.0 0.5 13.3 15.0-1.8-19.4-26.7-10.5-23.2 Unemployment rate 1.4 1.4 1.6 1.4 1.2 1.3 1.4 2.4 - Number of unemployment claim of insured workers (in thousand) 280.4 387.6 82.0 94.9 90.9 119.8 49.3 66.8 101.9 76.3 Consumer Confidence Index 77.1 77.8 79.4 78.9 77.8 74.9 74.8 75.2 74.0 72.8 Business Confidence Index 43.4 41.9 45.9 42.6 41.1 36.5 36.9 36.3 37.4 1 13 Industrial Confidence Index 80.9 77.2 84.1 74.6 80.3 70.1 62.9 64.1 63.0 69.4 NESDB 2009 source: BOT

WWW.NESDB.GO.TH 14 Expenditure side: contraction in first 2 months of 2009 Private Expenditure 12 8 (%) Private expenditure expected to contract in Q1/08 Private consumption index: -5.5% Private investment index: -11.3% International Trade Q1/09 Export value in USD term -19.8% Q1/09 Import value in USD term -38.3% 4 0-4 2006 2007 2008 2009-8 -12-16 60 50 (%YOY, 40 3mma) 30 20 10 0-10 -20-30 -40-50 -60 Source: BOT P rivate investment Index Private consumption Index Both export and import value sharply contracted in Q1/088 Impo rt Expo rt. Feb. -4.0% -7.1% -9.7% -12.9% 2009. Feb. Mar. Export -25.3% -11.1% -23.1% Import -36.4% -43.5% -35.1%

(% YOY,3mma) Imports by economic classification: broad-based contraction 80 60 40 20 0-20 -40-60 -80 Consumer goods Capital goods Crude oil & lubricant Line 7 2008 2009_p (% YOY) Year Q1 Q2 Q3 Q4 Q1 %Share Consumer goods 25.1 37.3 32.6 33.1 2.6-17.6 10.3 Raw mat. & intermediate 21.9 25.8 27.2 37.4-1.9-44.9 36.3 Capital goods 19.5 39.4 17.0 21.1 4.5-22.7 33.2 Auto and parts 24.4 40.6 28.4 27.0 6.5-34.2 3.4 Crude oil & lubricant 44.2 68.5 51.2 60.0 6.1-37.6 15.6 Total 27.6 37.9 29.3 39.9 6.1-37.7 100.0 Raw mat. & intermediate Auto and parts Total 2549 2550 2551 2552 Source: BOT p: preliminary 1 17

On the production side: Agriculture output and prices are likely to slow down Source: BOT 1 19

Production Production side: continued decline in first 2 months MPI -20.5% (. -21.3% Feb. -19.8%) CAPU = 56.2% (Year 2008 = 67.6% Year 1997 = 69.9%) Services Number of foreign tourists: - 16.9%. Foreign tourists (Mil. persons) (%YOY) - 1-19 April = -8.2% Feb. 1.29 1.14 10.5-23.2 MPI growth fell in Q1/08 (%) 22 Index 18 14 10 6 2-2 -62006 2007 2008 2009-10 -14 Capacity Utilization (RHS) -18-22 MPI (LHS) Thousand 1,600 1,400 1,200 1,000 800 600 400 Number of Tourists declined No.Tourists %YoY (%) 200 2005 2006 2007 2008 1 20 80 75 70 65 60 55 50 45 40 50 40 30 20 10 0-10 -20-30 -40-50

MPI by export orientation Manufacturing Index (MPI, % growth) 2007 2008 2009 year year Q1 Q2 Q3 Q4. Feb. 2m MPI growth 8.2 5.6 12.6 10.1 7.6-8.1-21.2-19.8-20.5 - Export < 30% 2.1 6.4 12.7 9.9 4.6-1.2-15.6-21.1-18.4-30%<Export<60% 1.0-1.3 3.5 1.3-0.8-9.9-11.7-14.5-13.1 - Export > 60 18.0 8.2 18.8 15.8 14.4-11.5-30.9-22.3-26.6 Capacity Utilization (CAPU, % rate) 2007 2008 2009 year year Q1 Q2 Q3 Q4. Feb. 2m CAPU 72.5 67.6 73.5 69.2 67.9 60.1 57.1 55.4 56.2 - Export < 30% 76.0 75.4 79.2 78.1 75.3 69.5 67.2 64.2 65.7-30%<Export<60% 69.3 64.8 80.2 63.3 61.7 54.1 64.4 60.6 62.5 - Export > 60 70.1 59.8 63.6 61.9 62.3 52.4 41.7 42.6 42.1 ท มา : ธนาคารแห งประเทศไทย 1 21

Rise in unemployment unemployment Unemployment rate in /09 = 2.4% (year 2008 = 1.4%) Number of unemployed person in /09 was 900 thousand persons, up from 500 thousand in Dec/09 Number of claims for unemployment compensation (for insured workers) totaled 245 thousand persons in Q1, increased by 198.8% 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 120 100 80 60 40 (Mil. people) 49 50 51 52 (พ นคน) unemployment unemloyment rate (RHS) (%) Number of unemployed (LHS) Number of insured workers who claim for unemployment benefits 2008 = 387.6 thousand people Q1/2009 = 245.0 thousand people /09 = 66.8 thousand people Feb. Mar = 101.9 thousand people = 76.3 thousand people 3 2.5 2 1.5 1 0.5 0 20 0 มค 50 1 22 มค 51 มค 52

Prices: Consumer and producer prices Decreasing prices: deflation threat? Headline inflation = -0.3% in Q1/09 Core inflation = 1.6% in Q1 Producer price index declined by 3.5% in Q1 % 10 8 6 4 2 0-2 Inflation and Chnages in PPI 50 51 52 40 20 0 % Headline inflation (LHS) Prices of food and energy PPI (RHS) 50 51 52 % 25 20 15 10 5 0-5 -10. Feb. Mar. H. Inflation -0.4-0.1-0.2 1.6 1.8 1.5 Core inflation PPI -2.5-4.0-4.0-20 Fresh food Energy -40 1 23

24 Thailand s Stimulus Packages and Macroeconomic management 24

Policy mix/policy coordination to stabilize and stimulate the economy 25 Monetary Policy Fiscal Policy Low Interest Rate policy From 2.5% to 1.25% Closely monitoring of financial liquidity Support for consumer spending through Public investment Projects Stimulus Package I Stimulus Package II Macro prudential policy to prevent financial imbalances and to ensure stability of financial institutions Personal tax cuts & Transfer payment e.g. more generous unemployment insurance benefit, subsidy to senior citizen, cash handout for low income-earners, free education, etc. 3-Years Public Investment Projects e.g. Infrastructure projects, education development-related projects, water system development projects, health care upgradingrelated projects etc. 25

Economic recovery measures Stimulus Package 1 1 26

Stimulus Package 1 - Strong boost to domestic demand is key and imperative for the road to recovery in 2009 while Thai exports will contract throughout 2009. The measures under SP I are aimed to mitigate impacts of economic slowdown. -In uary 2009, Abhisit's government announced a Bt116.7 billion (US$3.35 billion) stimulus package aimed at boosting domestic demand shore up an economy which has been battered by the global downturn and political turmoil and last year's airport blockade. Excluding an amount paid back to treasury balance, this is a one-year 2,700 mil. USD (or 93,000 million baht) program. - The stimulus package was 2009 based on 4 principles as guidelines for implementation, namely timely, transparent, temporary, and targeted. -The plan comprised a mix of cash handouts for low earners, tax cuts, tax deductible for mortgage payment up to 300,000 baht, expanded free education, monthly payments to the elderly and volunteer health-care workers, and subsidies for transport and utilities. - If implemented by Q2/2009, potential boost of GDP is expected to be around 0.5-0.7 percent of GDP. 1 27

Economic recovery measures Stimulus Package 2 1 28

Three-year 1.56 trillion baht or 45 billion USD of public - Public investment programs will be in effect for 2010-2012 -Stimulate economic activities and create jobs in the SR and also build strong economic and social foundations in the LR to enhance competitiveness in the context of stronger tide of globalization and regional integration - Also include community involvement investment plan was announced in March 2009. Projects to develop and improve water grid system Programs to develop and improve infrastructure, logistic system, and other public services/facilities Programs to promote tourism income Projects to increase potential of Thailand s creative economy Plans to upgrade quality of Thai education Projects on health care/public health system reform Investment projects to upgrade incomeearning of Thai people especially those in the rural areas 1 29

Key concerns: Political uncertainty and low public confidence could be constraints for policy effectiveness If fully disbursed and timely implemented could increase public investment by 0.2% of GDP in 2010, 0.5% of GDP in 2011, and 1% of GDP of 2012. If fully implemented, will stimulate growth and improve Thailand s competitiveness. The government is working in preparing project details to reduce risk of implementation delay so that to achieve full impacts. Political uncertainty and protracted low public confidence remain key risks for policy effectiveness. Government s deficit is appropriately counter-cyclical and the deficit must be managed to decline after a few years. 130 120 110 100 90 80 70 60 2004 60 50 40 Jul Consumer confidence remains low 2005 Jul 2006 1 30 30 2003 Jul 2004 Jul BSI 2005 Jul Jul Economic Future Income 2006 2007 Jul Jul 2007 2008 Jul Job Opportunity CCI Expected BSI (next 3 months) Jul 2008 Jul 2009 Business sentiments remains low 2009

Economic outlook for 2009 Source 2009 (%) Forecast date World Bank (-2.7) 7 Apr 09 IMF (-3.5) 7 Apr 09 ADB (-2.0) 1 Apr 09 BOT (-3.5) (-1.5) 22 Apr 09 FPO (-3.0) (-2.0) 25 Mar 09 NESDB (-3.5) (-2.5) 25 May 09 The economy is likely to contract by 5%-6%, in H1/2009, before it recovers to zero growth, yoy, in H2/09 provided the world economic and political factors improve in H2. Positive yoy growth in H2 is possible on the back of effective implementation of SP I and SP can kick in right away in Q4/09. Depletion of stocks in H1 is reflected in the reduction of imports and production to a greater extent than the decline in sales. It is, thus, expected that more product line will resume in H2. That means laying off of labour should bottom in H1. Private investment will contract by 5%-8% in 2009. There is still possibility that private consumption expenditure increase slightly by 1%-2%, supported by government programs.

WWW.NESDB.GO.TH 32 Growth Outlook. However, in terms of growth component in 2009, the GDP data in 2009 could be significantly contributed by net exports, given that imports will contract more severely. Big contribution from domestic demand is expected to realize in 2010 when the SP II is implemented. Contraction in imports and bigger reduction in production than is sale will be on the expenses of de-stocking of inventory. That is stock accumulation will likely be negative contribution for growth in 2009 as compared to relatively large positive contribution in 2008. Trade surplus is predicted based on the prospect of faster decline in imports than in exports. The pressure on baht currency will subside, as a result.