1 Economic Conditions in 21 and Outlook for 22
2 Executive Summary The Thai economy slowed down since the beginning of 21, due mainly to the adverse impact of the global economic slump on the external sector. For the entire year, the value of exports contracted, with the electronics sector being hit the hardest, same as in other regional countries with high share of electronics exports. Part of the contraction in foreign demand was offset by domestic stimulus from the government sector, especially in the second half of the year. In FY 21, the government cash deficit stabilized at 2.1 percent of GDP, meanwhile, in the first quarter of FY 22, the government adopted a front-loaded fiscal policy, equivalent to about 1.3 percent of GDP to shore up domestic demand. In addition, several measures were implemented to boost private spending, for example the postponement of the VAT rate hike and granted tax and non-tax incentives to real estate activities. Together with other favorable factors: very low real estate prices in comparison to the levels witnessed during the asset price boom; low interest rate environment; and financial institutions inclination toward lending to borrowers with steady income like civil servants, therefore, private demand for housing picked up around the end of the year, leading to an acceleration in construction activities and a better investment outlook. However, a full recovery was restrained by unfavourable export conditions. With substantial production capacity remaining unutilised, demand for new investment in machinery and equipment was low, especially in export-oriented industries. In addition, financial institutions were also cautious in extending credits to sectors with lacklustre business prospects. Household consumption continued to expand, but at a slower rate than in 2. Consumer confidence was partly shaken by the terrorist attack in the US that later spread into a war against terrorism. Nevertheless, when the tension was eased sooner than expected, consumer confidence rebounded from the weakest level in September 21, and improved steadily for the rest of the year. The terrorist attack further dampened the US economy as well as world economy, and the slack in world demand led to a sharp fall in oil prices during the last quarter of 21. The combination of lower oil prices, stable baht, and domestic economic slowdown caused inflation to decline steadily. For the entire year, headline inflation equalled 1.6 percent, while core inflation of 1.3 percent was well within the monetary policy target corridor of to 3.5 percent. Improvement in labour employment was another indication of favourable domestic stability. Employment in the sector of hotels and restaurants expanded most strongly over the entire year, in line with good trend in tourism even though it was temporarily affected by the event in the US. The construction sector also began to absorb significantly more employment towards the end of the year, in parallel with the revival of housing activities. Such improvement in employment was likely to help raise consumer confidence and purchasing power going forward. Not only that domestic stability improved, but external stability especially foreign capital flows also strengthened strikingly over 21. During the first five months of the year, the private sector made net foreign debt repayment of USD 499
3 million per month on average. Such high level of private capital outflows was due in part to Thailand s unattractive interest rate differential. To mitigate this, the Bank of Thailand hiked the policy interest rate from 1.5 to 2.5 percent on 8 June 21, and during the last seven months of the year net foreign debt repayment by the private sector climbed down significantly to USD 292 million per month on average. Meanwhile, the stability of the baht improved, and international reserves stood at a comfortable level. The decline in both inflation and external vulnerabilities during the latter half of the year allowed more room for monetary policy to accommodate growth. As a result, the Bank of Thailand lowered the policy rate from 2.5 to 2.25 percent on 25 December 21, but the effectiveness of monetary policy remained limited under prevailing financial sector conditions. Commercial bank credits expanded by only.7 percent (excluding transfers between commercial banks and AMCs) while commercial bank deposits rose at a higher rate of 4. percent, reflecting high liquidity in the banking sector. The Thai economy was likely to expand by 1.5 percent, or slightly higher, in 21. While the growth rate was less than in the previous year, the economy was able to prevail under sluggish global environment. Most importantly, increased downward risks from the external sector did not diminish Thailand s economic stability as originally feared since the beginning of the year. A favourable mix between monetary policy and fiscal policy, plus the diversified structure of production and exports, allowed the economy to resist contraction. Future recovery of the Thai economy is likely to depend on the pickup in global demand, as well as the corporate sector s ability to reap benefit from the occasion. Both fiscal policy and monetary policy will meanwhile continue to support sustainable growth. The Bank of Thailand expects the economy to grow at around 2 to 3 percent, with no inflationary pressure, in 22.
4 I. Economic Conditions in 21 Output and Demand Overall manufacturing production expanded at a slower rate in 21, dragged mainly by the export-oriented sector whose production contracted by as much as 11.4 percent compared with expanding briskly at 2.7 percent in 2. The sector that was most affected by the slump in global demand was electronics. However, the impact on Thailand was still less severe compared to other regional countries with higher share of electronics exports. In addition, domestically oriented industries continued to expand quite favourably in response to domestic demand, which picked up strongly for some industries like construction materials. Ratio in 21 Total Exports.75.5.25. % /\yoy 4 3 2 1-1 -2-3 -4.26 Electronics Exports Growth (Custom basis).61* Thailand Singapore Malaysia S.Korea Philippines Taiwan 1999 2 21 Source: Official Sources, CEIC.59 * Ratio in Total Non-oil Domestic Exports.35.53.36 Thailand Singapore Malaysia S.Korea Philippines Taiwan Table 1 Manufacturing, Agriculture and Services %y-o-y 2 21 H1 H2 Q3 Q4 Manufacturing Production Index 3.3 1.3 1.3 1.3.9 1.7 export > 6 % 2.7-11.4-1.6-12.3-15.8-9.2 export <3% -1.1 13.2 11.1 15.3 17.4 13.4 Capacity Utilization 55.9 54. 53.9 54.1 52.4 55.8 Farm Price Index -3.5 2.6 2.9 2.2 3.2 1.1 Crop Price Index -5.5 3.2 2.3 4. 4.9 3.1 Livestock Price Index -1.3 1.1 7.4 12.7 13.5 11.8 Agricultural Production (Major Crops) 2.2 5.3 7.9 3.4. 5.2 Farm Income (Major Crops) -3.4 8.7 1.4 7.5 4.9 8.5 Number of Tourists 1.8 5.7 7.9 3.6 6. 1.4 Occupancy Rate 58.9 59.2 61.6 56.8 55.6 58.1 In 21, the agricultural sector performed well, and farm income rose due to both good crop harvest and favourable prices for crops and livestock. The increase in the prices of tapioca and broiler was due in particular to strong foreign demand. Higher farm income, coupled with the 3-year debt moratorium scheme for farmers, helped to raise the purchasing power of farmers. In the service sector, tourism carried on fast growth before the terrorist attack in the US. From that event, however, the number of tourists especially Americans and Japanese with relatively high per diem spending dropped significantly. Fortunately, towards the end of the year there was an increase in the number of tourists from neighbouring countries. While these tourists did not have high per diem spending, they still generated significant tourism income to compensate for part of the loss from long-distance tourists. Hotel occupancy rate averaged at 59.2 percent, up slightly from
5 58.9 percent in 2. On the whole, tourism remained in satisfactory condition and helped to generate employment in related industries such as hotels and restaurants as well as wholesale and retail trade. On the demand side, private consumption continued to be a contributing factor for economic growth. The Private Consumption Index grew at a decelerated rate of 2.6 percent compared with 3.4 percent in 2, due to impaired consumer confidence from the absence of clear recovery signs and the terrorist attack in the US. However, a number of factors helped to shore up households purchasing power: (1) increased income for farmers and employed persons on average; (2) higher employment, especially in the latter half of the year, due in part to the Village Fund Project which aimed at creating employment opportunities in rural areas; and (3) continuation of low interest rate environment. The last factor provided in particular incentives for durable consumption, and the sales of motorcycles and passenger cars expanded briskly at 16.4 and 25.8 percent, respectively. While consumption of imported consumer goods declined, it was not unwelcome in light of the export slump and narrowing current account surplus. The overall level of private investment in 21 was comparable to that of the previous year, suggesting a lack of recovery. As capacity utilization remained low, especially in factories producing mainly for export, the demand for new machines and equipment was limited. At the same time, commercial banks were cautious in extending credits to lacklustre businesses. Therefore, capital imports contracted significantly during the year. Nevertheless, toward the end of the year there were signs of recovery in private construction investment. Cement sales rose considerably in tandem with housing demand that was propped up by various government measures to revive the real estate market. PRIVATE CONSUMPTION INDICATORS Sales of Motorcycles Sales of Passenger cars 1, Unit Jan Jan 1 Jan 2 Jan Jan 1 Jan 2 Import of Consumer Goods (real term) Retail Sales (real term) Billion Baht %(Y-O-Y) Million US$ 2 21 Dec-1 Jan-2 2 21 Nov-1 %(Y-O-Y) 7,95.3 6,644.3 494.1 548.7 867.3 867.7 82.1 9 2-8 1 2 18.3% -6.4% -1.3% -3.3% 21.4% 1.7% 7. 2% 75 16 8 16 6 12 12 8 6 8 45 4 4 4 3 15-4 2-4 -8 Jan Jan 1 Jan 2 Source : BOT Survey and Customs Department Jan Jan 1 Fiscal policy maintained an expansionary stance over the past three years to help boost the economy. In FY 21, the public sector ran a cash deficit of 3.5 percent of GDP, and the deficit is expected to increase to 5.5 percent of GDP in FY 22, in line with expected progress in major government agendas such as the Village Fund Project, temporary debt moratorium for farmers, the People s Bank Project, and the Universal Health Care Scheme. In the first quarter of FY 22, the government s budget 12 1 8 6 4 2 1, tons 3, 2,5 2, 1,5 1, 5 2 21 Dec-1 Jan-2 796.3 926.9 84. 71.9 34.1% 16.4% 17.1% 13.% %(Y-O-Y) 1, Unit %(Y-O-Y) 2 2 2 21 Dec-1 Jan-2 2 83.1 14.6 14. 7.7 16 15 15 24.3% 25.8% 36.6% 33.8% 12 1 8 1 4 5 5-4 -8-5 Private Investment Indicators Domestic cement sales %y-o-y 6 Jan- Jan-1 Jan 2 Imports of capital goods at constant price 2 21 Dec-1 Jan-2 p Billion Baht %y-o-y 258.4 229.6 17.2 19.9 3 6 21.3% -11.2% -19.6% -1.1% 25 2 15 1 Jan- Jan-1 Jan 2 Source: BOT survey 8 7 6 5 4 3 2 2 21 Dec-1 Jan-2 p 18,2 19,48 1,958 1,917-3.6% 5.7% 41.6% 25.8% 3 1-3 5-6 3-3 -6 35 3 25 2 15 1, units Domestic commercial car sales %y-o-y 2 21 Dec-1 Jan-2 179.1 192.6 22.9 17.1 1 18.2% 7.5% -1.% 51.% Jan- Jan-1 Jan 2 Index 8 Capacity Utilization 55.1 56.6 55.6 6 4 2 Private Investment Index 2 21 Dec-1 Jan-2 p 41.4 41.3 44. 44.5 22.7% -.3% -8.5% 12.% Jan- Jan-1 Jan 2 Q3 2 Q4 Q1 21 Q2 Q3 Q4 Source : Constructed from BOT survey 52.1 52.4 55.8 5-5 -1 %y-o-y 1 75 5 25-25 -5
6 disbursement rate was accelerated to 22. percent from 21.1 percent during the same period last fiscal year. As a result, the government ran a cash deficit of Baht 69 billion in that quarter alone, equivalent to as much as 63.9 percent of the cash deficit accumulated over the entire FY 21. The deficit was financed mostly by domestic borrowing. Increased efficiency in tax collection and improved employment conditions for both public and private sector employees led to the enlargement of the income tax base. Therefore, personal income tax revenue rose by 9.9 percent in FY 21, while excise tax revenue also rose, by 7. percent, as a result of higher tax rates for liquor and tobacco. However, corporate income tax and import duties slowed down significantly from the previous fiscal year due to sluggish performance of the corporate sector. Table 2 Labour Data 2 21 Employment (thousand person) 31,292.6 32,172.8 government employee 2,517.9 2,81.5 private employee 1,341.4 11,326.2 Person in Social Security Fund (million person) 5,81.1 5,865.2 Number of Terminated Establishment 6,747 5,243 (% y-o-y) (2.9%) (-22.3%) Number of Terminated Employee 174,174 128,169 (% y-o-y) (65.1%) (-26.4%) Source : National Statistical Office, Social Security Office, Department of Labour Protection and Welfare Public sector expenditure amounted to 17.3 percent of GDP in FY 21. Current expenditure, with the dominant share of 78.1 percent, totalled Baht 684.1 billion or up by 5.9 percent from the previous fiscal year. All items in this category rose subsidy and transfer, purchase of goods and services, and salary and employee compensation with the last item alone absorbing close to half of all current expenditure. Meanwhile, capital expenditure amounted to only Baht 191.9 billion, down by 6.3 percent from the previous fiscal year due to the decline in durable asset accumulation.
7 Table 3 Fiscal Sector Billions of baht Fiscal Year 1999 2 21 22 Q1 Revenue 79.9 747.6 765.4 173.4 (% y-o-y) (-2.4) (5.3) (2.4) (6.4) Expenditures 821.6 85.6 876. 257.1 (% y-o-y) (-1.7) (3.5) (3.) (14.5) Cash Balance -134.4-116.6-17.9-69. (% ของ GDP) (-2.9) (-2.4) (-2.1) (-1.3) Disbursement Rate 85.5 88. 88.4 22. Comprehensive Public Sector Balance -274.3-215.6-177.3-76.6 (% of GDP) (-6.) (-4.5) (-3.5) (-1.5) Public Debt 2,469.2 2,84.3 2,931.7 n.a. (% of GDP) (53.5) (57.3) (57.6) (n.a.) At the end of FY 21, public debt stood at Baht 2,931.7 billion or 57.6 percent of GDP, up slightly from 57.3 percent in FY 2. This amount could be separated into three categories: borrowing of the government (24.8 percent of GDP), borrowing of state enterprises (19.1 percent of GDP), and liabilities of the Financial Institutions Development Fund (FIDF) (13.7 percent of GDP). External Sector In 21, exports contracted by 6.9 percent, while imports also contracted but at a lesser rate of 2.8 percent. As a result, the trade surplus narrowed to less than half of the level in 2. The service and transfer account was meanwhile kept in surplus at a comparable level, thus contributing to the current account surplus of USD 6.2 billion compared with USD 9.3 billion in 2. The overall export performance was dragged mainly by the significant drop in manufacturing exports of 6.9 percent, most notably hi-tech goods like integrated circuits and parts, due to the slump in demand from trading partners. Exports to the US and Japan major markets that together absorbed no less than 35 percent of Thailand s exports dropped by 1.7 and 2.7 percent, respectively. Despite so, automobile exports fared well because Thailand had been chosen as the regional production base by many car manufacturers.
8 Table 4 Exports % y-o-y 21 Q1 Q2 Q3 Q4 Total Agricultural Products -4. -.6-2.3-5.3-3.1 Fishery Products 4.7-11.1-15.5-21.5-11.9 Manufacture Products -.6 -.2-12. -13.5-6.9 - Labor intensive products.4-1.3-2.8-3.4-1.8 - High-tech products.1-1.5-17.1-18.3-9.8 - Resource based products -4. 9.5-2.9-4.3 -.7 Exports f.o.b. (BOP basis) -1.2 -.7-11. -13.4-6.9 Imports expanded by 7.2 percent in the first half of 21, before contracting sharply by 11.5 percent in the following half of the year. For the entire year, imports contracted by 2.8 percent. Raw material imports declined in line with subdued export performance, while capital good imports dropped due to limited demand for production capacity expansion. Fuel imports, however, decreased substantially in the last quarter of 21 because of the price effect. Terms of trade deteriorated, due in part to higher prices of imported capital goods during the first half of 21, in line with technological advancement of software products that were in high demand locally. Table 5 Imports % y-o-y 21 Q1 Q2 Q3 Q4 Total Consumer Goods 8.4-4.6-12. -12. -5.8 Intermediate products and raw materials 2.7-6.6-8.1-1.7-5.8 Capital Goods 1.9 1.7-12.4-16.5-2.9 Fuel and lubricant 27.1 16.7 9.2-26.3 4.3 Imports c.i.f. (BOP basis) 11.5 2.9-9.1-13.9-2.8 The service and transfer account recorded a slightly smaller surplus than last year, in part because workers remittance dropped in tandem with the slowdown in Thailand s major export market for labour Taiwan. Though affected by the psychological effect of the terrorist attack in the US, revenue from tourism remained satisfactory. As for capital movements, net capital outflows were substantial in the first half of 21, due mainly to debt repayments by the private sector. At the same time, the slipping baht encouraged people with foreign liabilities to hedge, causing in turn the accumulation of foreign assets by commercial banks. When the Bank of Thailand raised the policy interest rate in June in the middle of the declining trend in fed funds rate, however, the interest rate differential switched sign in favour of the Thai market. As a result, net capital outflows slowed down significantly thereafter, leading to a visible improvement in currency stability as well as the reduction in commercial banks foreign assets, in line with subsiding demand for hedging.
9 Capital outflows led to the reduction in the outstanding stock of external debt from USD 79.7 billion at end-2 to USD 67.1 billion at end-21. The reduction was seen in both the public and private sectors. For private external debt, the outstanding stock declined by USD 7. billion, mostly from long-term borrowings. Public external debt dropped by USD 5.6 billion, almost all of which was from long-term borrowings, including the USD 3.1 billion repayment of IMF loans by the BOT. Table 6 Balance of Payments (Millions of US Dollars) 2 21 21 H1 H2 Q1 Q2 Q3 Q4 Exports, f.o.b. 67,889 63,19 31,654 31,536 16,19 15,635 16,1 15,526 (% change) (19.5) (-6.9) (-1.) (-12.2) (-1.2) (-.7) (-11.) (-13.4) Imports, c.i.f. 62,423 6,665 31,182 29,483 15,949 15,233 15,4 14,479 (% change) (31.3) (-2.8) (7.2) (-11.5) (11.5) (2.9) (-9.1) (-13.9) Trade Balance 5,466 2,525 472 2,53 7 42 1,6 1,47 Services & Transfers 3,862 3,686 1,932 1,754 1,311 621 682 1,72 Current Account Balance 9,328 6,211 2,44 3,87 1,381 1,23 1,688 2,119 Capital Movements (net) -1,27-5,533-3,311-2,222-2,49-821 -84-1,382 Private Sector -9,771-4,54-2,29-2,25-2,19-1 -113-2,137 - Bank -6,66-2,113-2,227 114-1,657-57 98 16 (Commercial Bank) -2,596-817 -1,826 1,9-1,379-447 725 284 (BIBF) -4,1-1,296-41 -895-278 -123-627 -268 - Non-Bank -3,165-2,427-63 -2,364-533 47-211 -2,153 Public Sector -349-64 -94-51 -13 36-41 -1 BOT -15-389 -927 538-17 -757-317 855 Errors and Omissions -675 639 675-36 1,358-683 -693 657 Overall Balance -1,617 1,317-232 1,549 249-481 155 1,394 Despite the significant amount of BOT debt repayment, the balance of payments still recorded a surplus of USD 1.3 billion in contrast to the deficit of USD 1.6 billion in 2. International reserves at year-end equalled USD 33. billion, up slightly from the previous year, and the ratio of reserves to short-term debt continued to rise. BOT s forward position at year-end was USD 2.1 billion, same as in 2. On the whole, external stability improved considerably over the second half of the year. Table 7 External Stability Indicators (percent) 2 21 Gross Reserve / Short-term Debt (original) 222.3 251.7 Current Account / GDP 7.6 5.4 Debt Service Ratio 15.4 2.5 External Debt / GDP 67.1 56.1
1 Monetary Sector The slowdown in overall economic activities caused liquidity to remain high in the banking sector. Deposits at commercial banks grew by 4. percent, but commercial bank credits rose by only.7 percent (excluding accounting transfers with AMCs) as the absence of clear recovery signs restrained the expansion of demand for commercial credits. At the same time, on the supply side of credits commercial banks remained quite cautious under dull business prospects. Despite the progressive decline in the outstanding stock of non-performing loans (NPLs), concerns prevailed especially when NPL re-entry surged over certain periods. During the entire year, inflation stayed well within the target corridor of monetary policy. Nevertheless, the BOT raised the policy interest rate from 1.5 to 2.5 percent around mid-year to alleviate pressure on the capital account as well as to stabilize the baht and correct distortions in the structure of domestic money market rates. However, when external stability subsequently improved to a comfortable level and inflation declined following the significant drop in oil prices during the last quarter of the year, the BOT deemed the environment sufficiently favourable for the easing of monetary policy stance. The policy interest rate was thus reduced from 2.5 to 2.25 percent in late December to lend greater support for growth. Both deposit and lending rates of large commercial banks stayed unchanged during 21, except for the slight rate reductions seen toward the end of the year. Profitability of commercial banks improved, with Thai commercial banks beginning to make net profits for the first time in a few years. Contributing factors to the increase in % yoy 2 15 1 5-5 -1-15 Deposits Credits (adding back Debt write-off and Transferred loan) Credits Jan-98 Jul-98 Jan-99 Jul-99 Jan- Jul- Jan-1 Jul-1 Jan-2 Change (Bil.Baht) deposits credits * 1999-2.9-174.5 GROWTH RATE OF BANKS DEPOSITS AND PRIVATE CREDITS 2 241. -3.9 Q1:21 88.7.6 Q2:21 24.4-24.1 Q3:21 Dec-1 * credits (adding back debt write-off and transferred loan) Last Update : 25 Feb. 22 Source : BOT reports and surv ey s Monetary Policy Analy sis Div ision Tel. -2283-5621 % of total loans of commercial banks and finance companies 6 4 2-2 5 4 3 2 1 Dec-98 % Core inflation 22.8 3.3 Oct-1 42.6 35.2 Headline inflation Nov-1 32.6 12.6-19.9-2.4 Jan -99 Apr -99 Jul -99 Oct -99 Jan - Apr - Jul - Oct - Jan -1 Apr -1 Jun -1 Oct -1 Jan -2 45 3 15-15 -3-45 Mar-99 Source: Ministry of Commerce BHT billion 47.7% (May-99) Jun-99 INFLATION PROFITABILITY OF THAI FINANCIAL INSTITUTIONS 1998 NON-PERFORMING LOANS NON-PERFORMING LOANS Sep-99 Dec-99 Unit : Billion BHT Monthly average 2 Q1-1 Q2-1 Q3-1 Q4-1 New NPL 23.4 13.2 15.2 14.9 13.5 NPL Re-entry 17.5 17.9 21.4 22.2 17. NPL Exit 144. 34.6 116.6 34.1 77.8 End-period outstanding 857.3 847.2 67. 615.8 474. FIs Banks Finance companies 1999 Mar- Jun- Sep- 2 Dec- Mar-1 Jun-1 (Q1-Q3 only) 21 Sep-1 Jan-2 p/ 85. -7. 4.6.7 5-5.9 Jan-2p/ 3.5 Target corridor for core inflation Dec-1 Dec. 1.5% p/ (Dec-1 P )
11 profit were as follows. (1) Commercial banks had made sufficient loan loss and doubtful debt provisions since late 2; this helped to reduce provisioning burden in 21. (2) Interest income improved after the BOT raised the policy interest rate in June to help correct money market distortions. (3) The transfer of NPLs to the Thai Asset Management Corporation (TAMC) in exchange for TAMC promissory notes also helped to raise interest income for commercial banks. The establishment of TAMC aimed primarily at accelerating the restructuring process of Thailand s banking sector. In the process of doing so, NPLs with the total value of Baht 1.3 trillion were to be transferred from commercial banks to TAMC. At present, TAMC has already begun to manage the transferred NPLs with the objective of completing the restructuring process within 2 years and using another 3 years to follow up. The authorities are confident that TAMC will make the restructuring process more efficient and hence help boost investor confidence. II. Economic Outlook for 22 The economy is expected to expand by 2 to 3 percent in 22. In the first half of the year, stimulus from the public sector is likely to continue, while the recovery in private spending, notably construction investment and consumption, will also help drive economic growth. Construction investment has already picked up since 21, and private consumption has potential to expand on the back of good farm income, favourable labour market conditions, and the recovery of both business and consumer confidence. However, growth in the medium term will depend on the pickup in global demand, which is currently expected to begin in the second half of the year. Industrial production is likely to accelerate, especially in the construction materials sector which is already doing well, as a result of various government measures to revive the real estate market, and is expected to benefit in addition from large-scale public construction projects like the Second Bangkok International Airport Project. Production in export-oriented industries is anticipated to rebound in the latter half of 22, when signs of the global economic pickup become clearer and exports conditions improve. Nevertheless, some downward risks remain as Thailand now faces tougher export competition, especially in labour intensive goods. In particular, China has joined the World Trade Organisation since late 21, and Vietnam has secured a bilateral trade agreement with the US that will lead to a substantial reduction in duties on Vietnamese goods to the US market. The outlook for agricultural production is favourable. Although there is some possibility of the El Niño phenomenon affecting crop supply, the adverse effect should be small relative to other countries due to the geographical characteristics of Thailand. Moreover, if the phenomenon takes place and world farm prices rise in response, Thai farmers are likely to reap benefit from higher income, which will in turn help raise private sector purchasing power. On the demand side, private consumption is likely to accelerate from 21 due to the following factors. (1) Consumer confidence has already improved steadily from the weakest level in September 21, when the terrorist attack took place in the US. (2) Private purchasing power is expected to increase not only from higher farm income
12 but also from the continued improvement in labour employment, strengthened grass-roots economy, and low inflation. (3) Low interest rate environment should continue to provide incentive for durable consumption. Private investment is also expected to improve in 22. However, a full recovery, especially of investment in machinery and equipment, is not expected soon because there is still excess production capacity in many sectors. Construction investment, which has already begun to pick up, should continue to expand favourably. During the first half of 22 when private spending and external demand are not likely to recover fully, fiscal spending will remain an important drive for growth. Nevertheless, the role of the fiscal sector will be limited in the medium term, as the government must maintain fiscal policy discipline and keep public sector debt at a sustainable level. Therefore, monetary policy is expected to take a more accommodating role, especially when inflation is likely to remain low and concerns over external vulnerabilities have greatly mitigated since late 21. Table 8 Projected growth rates of foreign countries 21 22 USA 1..7 Japan -.4-1. EU 1.7 1.3 China 7.3 6.8 Asian-4 * 2.3 2.9 * Indonesia, Malaysia, Philippines and Thai Source : International Monetary Fund In the latter half of the year, trading partners economic recovery is anticipated, and this should bring about better export conditions. In the event that the recovery is led primarily by the electronics sector, however, the upturn in exports will not be as strong in Thailand as in some neighbouring countries with higher share of electronics exports. Imports should also recover in 22, in tandem with consumption, investment, and exports. Liquidity in the banking sector is likely to remain high during the first half of the year but will decline as economic growth picks up. Factors supporting the expansion of commercial bank credits are as follows: (1) higher demand for business credits as the export sector recovers; (2) favourable trend in commercial banks profitability that will help raise commercial banks readiness to extend credits; and (3) strengthened corporate balance sheets through continued progress in debt restructuring made by both the Corporate Debt Restructuring Advisory Committee (CDRAC) and TAMC. In summary, public spending and the recovery of external demand will lend support for the pickup of growth in 22. As the private sector s readiness to reap benefit from the global demand recovery is crucial to how well Thailand will fare, reforms at the micro levels must be carried on to supplement the accommodative policy mix at the macro level. In this respect, corporate sector
13 restructuring, industrial reforms, and improvement in exports competitiveness need to be pushed forward seriously and aggressively.