World Bank Thailand Economic Monitor November 2009 Press Launch November 4, 2009
overview The Thai economy is rebounding from a rocky first half of 2009, but the medium-term outlook is uncertain. The Thai economy is doing better than most people feared We maintain our forecast of a 2.7 percent contraction implying a quick rebound in the second half but that doesn t mean it is out of the woods yet. It will take at least another 2-3 years for Thailand to return to its potential growth So what does Thailand need to do to find its way back into sustainable growth? Increase returns to private investment by building human capital and maintaining political stability Rebalance the economy by removing constraints from domestic demand and promote greater equity 2
Percent Percent 1. near term economy is doing better than what most people feared earlier this year Manufacturing production has led the Thai economy in 2009 first down and now up. A contraction in manufacturing-for-exports drove the large headline GDP contractions Q4 2008: Orders cut in G3 export orders decline supply chains in manufacturing switch off but not quickly enough to avoid accumulating unsold goods and unused inputs in inventories Q1 2009: Fiscal/monetary stimulus in G3 and China begins to be felt export orders higher inventories depleted supply chains start to be switched back on Pick-up in production slower than contraction in line with the slow recovery in demand and some difficulties of firms in expanding production Contributions to GDP Growth 8.0 6.0 5.97 5.28 3.90 4.0 2.0 0.0-2.0-4.0-6.0-4.20-4.86-8.0-7.12-10.0-12.0 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 Net Exports (Net Foreign Demand) Change in Inventories Gross Fixed Capital Formation Consumption GDP Growth Source: NESDB and World Bank calculations Contribution of Manufacturing to GDP Growth 8 6 4 2 0-2 -4-6 -8 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 Manufacturing (40 percent of GDP) Non-Manufacturing (60 percent of GDP) GDP Growth Source: NESDB and World Bank calculations 3
Year-on-Year Growth Rate 1. near term economy is doing better than what most people feared earlier this year Supply chains played an important role in the crisis and rebound. Why are supply chains important to understand the crisis? E&E and auto sectors are two of the largest manufacturing sub-sectors in Thailand characterized by both regional and domestic supply chains in Thailand responsible for 83% of export decline in 2008Q4 able to switch on and off quickly: short lead times in production thanks to increased use of IT and local suppliers 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% Contribution of E&E and auto sectors to Export Contraction Contribution from other products Contribution from E&E and Autos Nominal Export Growth 77 percent of the contraction 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% Exports and Production of the E&E and auto industries in Thailand, q/q growth rates, SA Exports Production Q1/2008 Q2/2008 Q3/2008 Q4/2008 Q1/2009 p Q2/2009 p Source: Bank of Thailand and World Bank calculations Source: Bank of Thailand and World Bank calculations 4
Tourist Arrivals (thousands) Average Room Prices (THB) 1. near term economy is doing better than what most people feared earlier this year The number of tourists has picked up from its lows, but room prices had been declining until recently. Thailand Tourism Sector (seasonally adjusted) Tourist Arrivals, 3-month moving average (left axis) 1,400 1,350 1,300 1,250 1,200 1,150 1,100 1,050 1,000 950 900 Room Prices (right axis) 1,600 1,550 1,500 1,450 1,400 1,350 1,300 Source: Bank of Thailand and World Bank calculations 5
USD billions Percent 1. near term economy is doing better than what most people feared earlier this year Result of all the bouncing: steep decline in the first half, strong rebound in the second half overall GDP growth forecast remains at -2.7%. Negative growth in 2009 is driven by the adjustment in manufacturing output to a lower level of global demand This translates into a reduction in inventories, exports and imports Negative multiplier effect on household consumption and private investment Because private investment and inventories are reduced, imports decline by more than exports and external demand has a positive contribution to growth Public consumption and investment contribute about 1-percentage point to growth (1.4 percentage points in Q3&Q4) 1120 Quarterly Real GDP, SA Forecast 7.0 Contributions to GDP Growth 1100 1080 2009Q3 2009Q4 5.0 3.0 5.1 2.5 1060 1040 1020 1000 2008Q4 2009Q2 2009Q1 1.0-1.0-3.0-5.0-2.7 2007 2008 2009 Net Exports (Net Foreign Demand) Change in Inventories Gross Fixed Capital Formation Consumption Gross Domestic Product Source: NESDB and World Bank Source: NESDB and World Bank 6
Percent 1. near term economy is doing better than what most people feared earlier this year The baht has appreciated only modestly in 2009, and remains in line with East Asia s currencies. In 2009, Asian exchange rates have continued to weaken modestly (Malaysia, Philippines, Singapore), remained fixed against USD (China, Hong Kong) or recovered from large depreciations following the crisis (Korea, Indonesia). Contrast with Brazil, where the real exchange rate has already appreciated by 14 percentage points more than the post-crisis depreciation Brazil Thailand Singapore Philippines Malaysia Korea Indonesia Chinese Taipei Hong Kong SAR China Real Effective Exchange Rate Variation -0.4-32.1-10.1-34.4-22.8-9.9-1.9-20.5-0.4-5.3-12.8-1.9 0.8-6.2 0.3 19.4 15.6 26.5 26.1 46.1-50.0 0.0 50.0 Ann. Percentage Change, August 2008 - March 2009 Ann. Percentage Change, March 2009 - Sep. 2009 35 30 25 20 15 10 5 0-5 -10-15 Real Effective Exchange Rate Appreciation (annualized rate, 2009 year-to-date) Ann. Percentage Change, 2009-4.9-2.1-11.6 12.3 11.9-4.2-6.1-1.8 1.3 31.9 Source: Bank for International Settlements and World Bank calculations 7
USD million USD Million 1. near term economy is doing better than what most people feared earlier this year Pressures to appreciate are coming from high capital inflows in 2009, especially from the trade account. 6,000 Thailand Capital Flows 1,000 5,000 900 4,000 3,000 2,000 1,000 0-1,000 800 700 600 500 400 300 200-2,000 100-3,000 0 Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep 2008 2009 Financial Account Errors and omissions Net services, income & transfers Trade Account Overall balance FDI Net Inflows (right axis) Source: Bank of Thailand 8
1. near term economy is doing better than what most people feared earlier this year The financial sector has remained strong, supporting the rebound. The financial sector has mirrored the strong balance sheets of most of its corporate clients Large corporate clients came into the crisis with strong balance sheets At the onset of the crisis, banks substantially slowed credit growth to SMEs and other riskier credits, protecting their balance sheets Source: Bank of Thailand Source: Bank of Thailand 9
Year-on-year Growth Rates Year-on-year Growth Rates percent percent 1. near term economy is doing better than what most people feared earlier this year Wages and employment have started to recover along with GDP growth. Real wages recovered since 2009Q2 while unemployment & under-employment declined since May Real Wages by Sector 6 4 2 0-2 -4-6 Manufacturing (left axis) -8 Wholesale, retail & other services (real) Agriculture (right axis) -10 Overall (left axis) -12 Source: NSO, MoC (prices) and World Bank calculations 12 8 4 0-4 -8-12 -16-20 -24-28 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Unemployment, Under-employment and Employment Growth 8 6 4 2 0-2 -4-6 -8-10 -12-14 Jan Feb Mar AprMayJun Jul Aug Sep Oct Nov Dec Jan Feb Mar AprMayJun Jul Aug 2008 2009 Rate of Underemployment Rate of Unemployment Growth in Manufacturing Employment (right axis) Growth in Agricultural Employment (right axis) Source: NSO and Bank of Thailand 10
1. near term economy is doing better than what most people feared earlier this year Stimulus Package 1 may have supported consumption and cushioned some vulnerable households. First stimulus package mainly focuses on transfers to individuals in Q2 and Q3 of 2009 to mitigate immediate impact of crisis From April-September, total SP1 disbursement rate was 81%; disbursement rate of transfer programs (excluding Sufficiency Economy program) was 92% although SP1 not very well targeted, some measures likely to reach the poor (e.g. pension for elderly) 11
2. medium-term outlook not out of the woods 2010 12
2. medium-term outlook not out of the woods 2010 GDP growth is projected at 3.5%, driven by domestic demand. In the context of weaker global demand in 2010, Exports grow modestly, but the restocking cycle and slow rebound in investment also imply a pick-up in imports, which results in muted net external demand Public and private investment add 0.8 percentage point to the growth rate, while normal stocking patterns provide a boost to growth of 1.5 percentage points 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Contributions to Growth 2010 2010 Source: World Bank Projections Net Exports (Net Foreign Demand) Change in Inventories Gross Fixed Capital Formation Consumption Household consumption picks up modestly, adding 0.8 percentage point to the growth rate, whereas public consumption decelerates from 2009 levels but still adds 0.4 percentage point 13
Growth Rate (percent) Percent of Total Trade 2. medium-term outlook not out of the woods Thailand will take at least another 2-3 years to return to its potential growth. Lower G3 growth expected in the next 2-3 years Thailand s trade still dependent on G3 directly and indirectly, as most exports to East Asia end up in the G3 Rebalancing towards domestic consumption both in Thailand and in the region will take time Exchange rate adjustments unlikely in the near term, will slow down rebalancing Global Economic Outlook (2009-2011) 10 World 8 High-Income 6 Developing 4 45% 40% 35% 30% 25% 41% 39% Composition of Trade 42% 33% 26% 2 0-2 20% 15% 10% 5% 20% 9% 10% -4-6 2007 2008 2009 2010 2011 Others East Asia G3 China Source: World Bank Global Economic Prospects Source: Bank of Thailand 14
Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 percent THB billion 2. medium-term outlook not out of the woods Public debt issued in the past six months has been relatively short term. Based on our current projections, public debt is sustainable But shift in composition towards shorter-term instruments that must be refinanced 3-5 years from is a concern Since investment projects are long-term, debt will need to be refinanced 3-5 years from now, interest rates will likely be higher with economic rebound, interest bill is likely to rise, putting pressure on the budget and creating the risk of dampening recovery 70 Thailand Government Securities Outstanding and Share of Short-term Securities 3,500 60 50 3,000 2,500 Government securities outstanding 40 30 20 10 0 2,000 1,500 1,000 500 0 Share of securities with maturity < 5 years Source: World Bank Source: Asian Development Bank (Asian Bonds Online) 15
2. medium-term outlook not out of the woods The fiscal deficit will reach 4.6 percent of GDP in 2010, before starting to decline in 2011. Thailand s Fiscal Balance (calendar years) Source: MOF and WB projections 16
3. finding the way back into growth Long-term growth depends on a return to private investment. How to raise returns given weak global demand? Ensuring political stability and improving skills, human capital, and infrastructure services can help offset the decline in returns to private investment arising from lower world growth rates Software (regulations, management, quality of services) as important as the hardware (infrastructure, subsidies) SP2 (Thai Kem Kaeng) is relatively quick-disbursing and focuses on the hardware (~70% is for construction and equipment) compensates fall in on-budget investment next year but may not be sufficient to address constraints to long-term growth (which requires reforms to the software) Rebalancing the economy towards domestic demand 17
Billion Bt 3. finding the way back into growth SP2(Bt350bn) have added marginally to public investment this year and will be used to compensate the fall in CG on-budget investments in 2010. 800 Growth rate: 13.9% 1.0% 700 600 500 Public Investment, CY2008-2010 SOEs Local Gov Organization 400 300 200 SP1 SP2.2 (Bt150bn) SP2.1 (Bt200bn) 100 CG w/o SP1&SP2 0 CY2008 2009 2010 Source: FPO, PDMO, BOB WB calculations 18
3. finding the way back into growth The efficient and transparent implementation of SP2 will set an example for future CG investments. Enhancing Public Financial Management System (PFMS) By utilizing existing GFMIS data with an enhanced reporting system, government and the public can monitor implementation progress and success indicators. Hence, stakeholders can give feedback to projects and related agencies. M&E of projects to ensure the outcome and impact of SP2 projects are achieved according to the objectives With sufficient progress data, responsible central agencies can do M&E to guide agencies to implement on the right track (i.e. following the policy) in the long-run. 19
3. finding the way back into growth Rebalancing the economy towards domestic demand will involve increasing valueadded in services, better social safety nets, and regional integration. Increasing competition in services can drive productivity growth and higher value added in the services sector Service sector accounts for more than 45% of GDP, has almost twice the employment of industry, and most are SMEs Supports manufacturing Current regulations limits growth and productivity of the services sector Improved social safety nets allow greater risk-taking and higher equilibrium levels of private consumption With robust social safety nets, workers are more inclined to work in more productive but higher volatility jobs in manufacturing production rather than lower productivity, low risk jobs in agriculture or the informal service sector (which currently function as safety net for subcontracted or temporary workers) higher incomes and lower savings needed more consumption Regional integration Consumption in East Asian countries, if raised, could help promote trade and growth in the region as growth of demand from developed countries slows down 20
4. growth projections Real GDP Growth Rates - Percent, Year-on-Year Share in 2007 2008 2009 Previous 2010 2008 GDP Year Year Q1 Q2 Q3 Q4 Year(p) Forecast Year (p) Consumption 61.0 2.7 2.2-1.6-1.2 0.5 1.8-0.1 0.7 1.9 Private 52.1 1.6 2.5-2.5-2.3-0.9 1.1-1.1-0.5 1.5 Public 8.9 9.2 0.5 3.6 5.9 7.5 6.0 5.9 7.6 4.0 Gross Fixed Capital Formation 22.1 1.3 1.1-15.8-10.1-2.4 3.1-6.4-4.9 3.6 Public 5.3 3.4-4.8-9.1 9.6 12.0 17.0 7.5 3.3 2.5 Private 16.8 0.6 3.2-17.7-16.1-8.5-0.5-10.8-7.5 4.0 Change in Inventories 1.4-62.4 1114.7-488.5-27.3 10.0-40.0-167.4-150.0 memo: nom. chg in inventories 5,035 61,161-67,856-9,765 12,341 24,088-41,193 20,596 Total Domestic Demand 84.5 2.0 3.5-14.7-3.9-0.1 0.3-4.5-3.9 4.1 Exports 72.5 7.1 5.4-16.7-21.8-18.0 7.9-12.7-13.4 7.8 Goods 58.9 6.7 6.0-17.9-22.8-19.5 8.6-13.6-15.0 8.5 Services 13.5 8.9 2.9-12.4-17.0-10.5 5.0-8.7-6.4 5.0 Imports 57.0 3.4 7.5-31.6-25.3-18.6 2.9-18.1-18.0 10.5 Goods 45.8 2.2 6.9-36.1-28.9-21.0 4.0-20.7-21.3 12.0 Services 11.2 8.6 10.0-13.0-9.4-8.0-1.0-7.7-4.1 5.0 Net Foreign Demand 15.5 21.7-1.4 29.5-10.3-15.8 33.0 7.4 3.5 0.4 By Sectors: Agriculture 8.9 1.8 5.0 3.4-2.7-2.0 3.0 0.8 2.0 Industry 43.2 5.7 3.4-12.8-7.2-3.8 5.5-4.8 5.1 Services 47.9 4.7 1.2-2.9-2.6-1.5 2.6-1.1 2.2 GDP 100.0 4.9 2.6-7.1-4.9-2.7 4.0-2.7-2.7 3.5 Source: NESDB, World Bank projections. 21
Thank You Full report of the Thailand Economic Monitor will be available at www.worldbank.or.th