Inflation Report April 2004 The Inflation Report is prepared quarterly by staff of the Bank of Thailand with the approval of the Monetary Policy Committee (MPC). It serves two purposes: (1) to provide a clear forward-looking framework for economic and inflation forecasting to assist the MPC in making monetary policy decisions and (2) to give the MPC an opportunity to present the explanation for their decisions on various policy issues to the public. Although individual MPC members may have differing opinions regarding the assumptions on which the forecasts are based, as a group they are in agreement with the forecasts on the outlook for inflation and output as well as the risk factors involved as illustrated in the fan charts. The Monetary Policy Committee: M.R. Pridiyathorn Devakula Chairman Mr. Bandid Nijathaworn Vice Chairman Mrs. Tarisa Watanagase Member Mr. Aran Thammano Member Mr. Chaiyawat Wibulswasdi Member Mr. Krirk-krai Jirapaet Member Mr. Chakramon Phasukavanich Member Inflation Report April 2004
Thailand Monetary Policy Strategy Monetary Policy Formulation The Monetary Policy Committee (MPC) sets monetary policy in order to attain price stability conducive to sustainable economic growth. The MPC also monitors factors contributing to external stability. The Monetary Policy Instrument The MPC utilizes the 14-day repurchase rate as the key policy rate to signal the monetary policy stance. The Target The MPC uses core inflation (excluding raw food and energy) as its policy target with the range of 0-3.5 per cent (quarterly average). In the event that the target is missed, the MPC is required to explain the reasons thereof to the public. Forecasting Tools To assist the MPC in making monetary policy decisions, the Bank of Thailand has developed a macroeconomic model to forecast economic conditions and inflation outlook. The model is also employed to evaluate the impact of various factors on the economy and to offer guidelines for appropriate monetary policy responses. Inflation Report April 2004
Contents 1. Overview 1 Box: Price Pressure and Inflation Trend 2 2. Recent Developments in Inflation and Economic Conditions 9 Inflation trends 9 Aggregate demand 13 Production and supply 21 3. Monetary Conditions in the Last 3 Months 27 Interest rates 27 Adjustment of the banking system 32 Exchange rates and capital flows 38 Box: Liquidity in Thailand s Financial Market and Implications for Monetary Policy 36 4. Inflation Outlook 41 Forecast assumptions 42 Output and inflation projections 56 Assessment of risks 61 Forecasts by research houses 69 Report: ç Economic/Business Information Exchange Programme between the Bank of Thailand and the Business Sectoré 71 Box: Confidence and Economic Activities 63 5. Conclusion 73 Appendix: Macroeconomic model 75 Inflation Report April 2004
1. Overview In 2004, although certain business sectors were affected by the avian flu problem and the events in southern Thailand, the overall Thai economy managed to continue its growth momentum. Private consumption, private investment, as well as public expenditure all helped contribute to the robust growth. Yet despite the satisfactory domestic economic stability, the MPC deemed that the international inflation trend, crude oil prices, and commodity prices merit a close monitor as they could affect the domestic price level going forward. Over the last 3 months, the MPC viewed that: 1. High fuel prices throughout the period caused the rise in prices of cooking gas, electricity, and transportation. Compared to world crude oil prices, however, the rise in prices of cooking gas, electricity, and transportation were rather modest, owing to price administration by the government. Furthermore, the re-introduction of the retail oil price measure starting from 10 uary 2004 onwards helped keep domestic retail oil prices low relative to crude oil prices. Raw food prices such as those of Hom Mali rice, pork, and chicken rose, owing to higher demand and supply shortage. Headline inflation in 2004 stood at 1.9 per cent, accelerating from 1.6 per cent in the previous quarter. Core inflation edged up only slightly at 0.1 per cent in 2004. Yet the MPC assessed that core inflation would not turn negative in 2004 and, going forward, would accelerate (see Box for details). In 2004, core inflation excluding housing rent averaged 0.6 per cent similar to the previous quarter. Headline inflation accelerated in 2004, while core inflation edged up slightly to 0.1 per cent. Nonetheless, the MPC projected core inflation to be non-negative throughout the year 2004 and was likely to accelerate going forward. Inflation Report April 2004 1
Price Pressure and Inflation Trend Given the clear sign of world economic recovery, the continuous rise in commodity and oil prices resulted in a higher inflationary trend in many countries. Notably, China, which has been exporting lower-priced goods, is now experiencing rising cost pressure as well as accelerating inflation. In 2004, price pressure in Thailand is most likely to be upward owing to increases in prices abroad and a growing domestic demand, with which producers could pass their rising costs on to consumers. Nevertheless, core inflation, which is the monetary policy target, has remained low and close to zero for more than one and a half years, although headline inflation rose to average around 2 per cent per annum in 2003, reflecting the stickiness in the upward price adjustments of goods in the core CPI basket. Chart 1 Headline inflation composition Annual percentage change 4 Rawfood (10.7) Energy (15.0) 3 Core (74.3) Headline 2 1 0-1 2000 2001 2002 2003 Source: Trade and Economic Index Bureau, Ministry of Commerce Index 150 140 130 120 110 100 90 80 70 60 Chart 2 Administered price indices Fuel prices Transportation and communication Cooking gas Source: Trade and Economic Index Bureau, Ministry of Commerce Chart 3 Food price indices 2004 Apr Jul Oct Apr Jul Oct Apr Jul Oct Apr Jul Oct 2000 2001 2002 2003 2004 Index 110 105 100 95 90 85 Electricity Other food Raw food Apr Jul Oct Apr Jul Oct Apr Jul Oct 2000 2001 2002 2003 Apr Jul Oct 2004 Source: Trade and Economic Index Bureau, Ministry of Commerce Short-term core inflation trend Owing to declining housing rent, core inflation turned negative in uary 2004, the first time ever since the consumption price index has been compiled. Examining the components of headline inflation from 2002 Q4, the rise in headline inflation was due to alternative rises in raw food and energy prices. Meanwhile, core inflation hardly moved and has remained near zero, although rising raw food and energy prices should have led to rising prices of other items in the core CPI basket. With regard to energy prices, although world crude oil prices have been rising, prices of energy-related goods and services, such as cooking gas, electricity and transportation have remained almost unchanged over the past year. One reason explaining the stickiness in the upward adjustment of energy prices is the government s measure to stabilize domestic retail oil prices. Crude oil prices thus need to adjust upwards continuously for some period before affecting prices of goods and services administered by the government. Notably, cooking gas, electricity and transportation charges have gradually adjusted upwards towards the end of 2003 and early 2004. Going forward, if oil prices remain at this high level, administered prices are expected to rise further, especially electricity and water utility charges during mid-2004. As for food prices, it is worth noting that despite rising raw food prices, the prices of ready-to-eat and semi ready-to-eat food have risen only marginally. Other food prices have also changed only slightly since 2000. The relatively slow pass-through of increases in raw food and energy prices meant the increases were not enough to counter-balance the impact of 2 Bank of Thailand Bank of Thailand
declining housing rent, which accounted for 24 per cent of the core CPI basket, causing core inflation to remain low. Nevertheless, prices of goods and services related to raw food and energy have started to adjust upwards, while the decline in housing rent has moderated. Core inflation should thus rise and should be non-negative throughout 2004. The long-term core inflation trend Going forward, 3 main factors indicating price pressure include: Billion baht 1,050 1,000 950 900 850 800 750 700 650 600 550 Chart 4 GDP trend Source: Bank of Thailand estimates Index 100 90 80 70 Capacity utilization GDP Trend GDP at 1988 constant prices (seasonally adjusted) 1993 1995 1997 1999 2001 2003 Chart 5 World non-fuel commodity price trend 60 1999 2000 2001 2002 2003 Metals 2005 Non-fuel commodities Per cent 85 75 65 55 45 35 Agricultural raw materials 2004 2005 (1) Demand-side pressure (or domestic demand) reflected by the narrowing output gap, in line with rising capacity utilization, which will put upward pressure on prices going forward. (2) Cost pressure from raw material inputs such as world crude oil, farm, and world commodity prices. According to IMF s estimation, prices of the aforementioned raw material inputs will remain high for the next 2 years due to the acceleration in world demand, particularly that of China. Although China is one of the top 5 world producers of steel, producing 220.12 million metric tons or a 21.2 per cent increase in 2003, China s import value of steel in February 2004 accelerated to 1,884.3 million US dollars, or a 50 per cent rise year-on-year. (3) Global competition and profitmaintenance capability of domestic businesses. BOT s business sentiment survey suggested that fierce competition in the domestic market was the most important business obstacle since early-2003 and was Source: IMF also the reason forcing businesses to compete by lowering sale prices and accepting lower profit margin. However, surveys during late 2003 and early 2004 found that production costs have become the second most important obstacle compared to its prior minimal significance. This indicates that business operators may be in a situation where they will have to raise prices albeit the present fierce competition. In conclusion, increasing raw food and energy prices caused headline inflation and production cost to rise over the previous period, and to be on the upward trend going forward. Core inflation, however, was insignificantly affected by these price changes. One reason explaining the stickiness of core inflation is that prices of fundamental necessity services, such as utility and public transportation, have been administered by the government. Another reason is that the highly competitive market caused firms to accept lower profit margin. Nevertheless, as production costs and aggregate demand continue to rise, the authority may allow prices of administered goods and services to adjust upwards. Meanwhile, entrepreneurs can, to some extent, pass on the rising cost to consumers. Prices of goods in the core inflation basket will thus eventually pick up on a rising trend. In analyzing price pressures to conduct monetary policy, the MPC deemed important to also monitor other price movements together with core inflation. Inflation Report April 2004 Inflation Report April 2004 3
Annual percentage change 5 4 3 2 1 0-1 Chart 1.1 Consumer price index Headline inflation Core inflation excluding housing rent Core inflation 1/ Apr Jul Oct Apr Jul Oct Apr Jul Oct 2001 2002 2003 2004 1/ Consumer price index excluding raw food and energy items Source: Trade and Economic Index Bureau, Ministry of Commerce Core inflation target range 3.5 Mar 2.3 0.7 0.2 0 Private spending remained a major driving force in 2003 Q4. 2. The latest data from the National Economic and Social Development Board (NESDB) indicated that the Thai economy grew 7.8 per cent year-on-year in 2003 Q4. On the seasonally adjusted basis, the Thai economy expanded 2.7 per cent in 2003 Q4 over the previous quarter, with private expenditure as the main driving-force. The overall economic growth rate for 2003 was 6.7 per cent, accelerating from the 5.4 per cent gained in 2002. Table 1.1 GDP at 1988 prices Unit: % yoy 2002 2002 2003 Q3 Q4 Q2 Q3 Q4 Private consumption 4.9 5.5 5.8 6.8 5.7 5.4 7.4 Private investment 13.2 19.3 16.3 19.8 16.8 16.5 18.5 Public expenditure -1.0-3.3-5.6-14.0-1.7 2.6 14.8 Exports of goods and services 12.1 15.8 13.7 12.1 4.3 3.7 6.2 Imports of goods and services 13.6 19.1 16.3 12.4 2.0 3.7 11.9 Gross domestic product 5.4 5.8 6.0 6.7 5.8 6.6 7.8 % yoy = percentage change from the previous year Source: National Economic and Social Development Board 4 Bank of Thailand
In 2004, BOT s Private Consumption Index indicated continued expansion in private consumption, albeit at a dampening pace. Although the avian flu problem, the events in southern Thailand, and demonstrations against privatization of state-owned enterprises did not affect the economy directly, consumer confidence weakened. The Consumer Confidence Index compiled by the University of Thai Chamber of Commerce dropped from the previous quarter to 107.5. Remaining above 100, however, the Consumer Confidence Index indicated sound consumer confidence, with supporting factors including high farm income growth, improved employment conditions, the low interest rate environment, as well as easier access to consumer credits. Consumer and investor confidence remained sound but dampened slightly in the past 2-3 months. Private investment also rose. BOT s Private Investment Index in uary and February gained, on average, 19 per cent over the same period last year, accelerating from the 17.5 per cent gained in 2003 Q4. The rise was consistent with the Business Sentiment Index, which although declined in 2004, remained above 50, suggesting high business confidence. 3. Government spending in 2004 (the second quarter of fiscal year 2004) expanded continuously, both in public consumption and investment, reflecting the Government s intention to boost its role in promoting economic expansion. Government expenditure in uary and February 2004 expanded by 16.1 per cent over the same period last year, with a 13.9 per cent disbursement rate. In uary and February last year, government expenditure contracted 14.1 per cent, with a 12.5 per cent disbursement rate. Inflation Report April 2004 5
Although net exports declined continuously, exports remained a major driving-force of economic expansion. The avian flu problem and the events in southern Thailand affected tourism as well as the agricultural sector. Yet industrial production expanded favorably in line with domestic and export demand. External stability remained sound. Monetary conditions remained accomudatitive to growth. Interest rates and the real baht value indicated an easy monetary condition. 4. Exports continued to grow steadily and remained a major driving force of economic expansion. Export value in the uary-february period averaged 7,058 million US dollars, or a 19.6 per cent expansion over the same period the previous year, compared to a 23.0 per cent expansion in 2003 Q4, owing to both price and volume growth. Exports were expected to continue to grow strongly following improved economic conditions in trading partner countries. The acceleration of imports which averaged 6,786 million US dollars in the uary- February period, or a year-on-year expansion rate of 22.3 per cent, prompted a decline in net exports continuing from 2003 Q4. 5. Events such as the avian flu outbreak and unrest in southern Thailand affected tourism and caused a slight contraction in non-farm sector employment. Draught as well as shortage supply of water in the agricultural sector resulted in a slowdown in farm production compared to 2003 Q4. Overall crop prices, however, continued to rise, inducing farm income from major crops to grow at a satisfactory level, and remained a factor supporting the expansion in household consumption. Industrial production continued to expand in line with domestic and export demand. Capacity utilization in certain industries such as those in vehicles and electronics already rose beyond the pre-crisis level and was reflected by improved employment conditions in the non-farm sector. Unemployment rate remained steady at a low level, with no clear sign of wage pressures. 6. External stabilities remained sound. International reserves were ample, with current account in surplus, and foreign debt steady at a low level. Monetary conditions remained accommodative to growth. Interest rates as well as the real value of the baht indicated an easy monetary 6 Bank of Thailand
condition. Liquidity in the financial system remained ample following deposit expansion. Improved commercial banks operating profits together with the declining trend of non-performing loans should help credit expansion. Even though the intermediary role of commercial banks in the money creation process improved, this did not undermine equity and debt instrument issuances. Vibrant stock market conditions were conducive to public offerings by the corporate sector. Inflation outlook and monetary policy The MPC viewed that the Thai economy would grow continuously, supported by world economic recovery together with accommodative domestic monetary conditions. Negative factors that could affect economic expansion included uncertainties with regard to directions of the US dollar and interest rates in the upward international economic cycle, as well as domestic price pressures that could lead to higher inflation. Continued economic expansion together with easy monetary conditions could induce financial imbalances in various economic sectors. Headline inflation accelerated following rising costs as well as demand-side pressures. The current accommodative monetary policy could induce financial imbalances in various sectors of the economy. Headline inflation was projected to accelerate slightly, in line with rising crude oil and farm prices. Headline inflation should average around 1.5-2.5 per cent in 2004 and 1-2 per cent in 2005. Core inflation was expected to adjust upwards. Factors driving up core inflation could be the demand-side pressure arising from continued economic expansion, and the narrowing output gap, in line with higher capacity utilization. Supply side pressures from higher farm, commodity and oil prices were also expected. The MPC projected core inflation to be between 0-1 per cent in 2004 before accelerating to 1-2 per cent in 2005. Inflation Report April 2004 7
3 Chart 1.2 Core inflation forecast Annual percentage change 3 2 2 1 1 0 0-1 -1 2002 2003 2004 2005 2006 Examining conditions in the stock market, the real estate sector, and the household debt situation, the MPC observed no clear sign of financial imbalances. Nevertheless, since the real estate sector continued to expand considerably at a high rate, and there had been many entries of new developers, credit extension to developers and developing trends should be monitored closely. Although price pressures rose, core inflation should remain within the target range of 0-3.5 per cent per annum throughout the forecast period. Although price pressures rose following higher production costs and higher demand, core inflation should remain within the target range of 0-3.5 per cent per year throughout the forecast period. The MPC deemed the current monetary policy stance and interest rates appropriate to the current economic condition. The MPC thus decided to keep the 14-day repurchase rate at 1.25 per cent per annum in the meetings on 17 March and 21 April 2004. 8 Bank of Thailand
2. Recent Developments in Inflation and Economic Conditions Inflation trends In 2004, headline inflation averaged 1.9 per cent year-on-year, accelerating from 1.6 per cent in the previous quarter. The food and beverage price index accelerated by 4.8 per cent owing to an increase in the rice price, as rice output in major production sources, particularly in China, were deteriorated by natural disasters. Therefore, world rice output and stock remained low. Moreover, the rise in pork price was higher than the decline in chicken price during the avian flu outbreak. Meanwhile, the non-food and beverage price index grew slightly by 0.2 per cent, similar to the previous quarter. In 2004 headline inflation stood at 1.9 per cent, accelerating due to the increase in price of food and beverage. Table 2.1 Consumer price index components Annual percentage change 2003 2003 2004 Q2 Q3 Q4 Total 1.8 1.9 1.7 1.9 1.6 1.9 Food and beverages 3.6 2.0 4.2 4.4 4.2 4.8 Non-food and beverages 0.7 1.9 0.4 0.4 0.2 0.2 - Clothing 0.1 0.2 0.1 0.1-0.1 0.0 - Housing and household furnishing -0.5-0.2-0.4-0.6-0.9-0.2 - Health and personal care 0.9 0.7 0.8 0.5 1.6 1.6 - Transportation and communication 3.1 6.8 1.6 2.6 1.8 0.8 - Recreation and education -0.1 0.9 0.1-0.4-0.7-0.6 - Tobacco and alcoholic beverages -0.6-0.6-0.5-0.5-1.0-0.7 Source: Trade and Economic Index Bureau, Ministry of Commerce The Dubai crude oil price rose from an average of 27.68 US dollars per barrel in 2003 Q4 to 29.54 US dollars per barrel in 2004. This contributed to partial upward adjustments in cooking gas price, electricity charges, and bus fares. The pass-through to the overall price level was, however, limited. Most prices of crude oil-related products Inflation Report April 2004 9
were administered or closely monitored by the authorities, particularly the retail oil prices, so as to avoid adverse impacts on people s standard of living. Annual percentage change 20 15 10 5 0-5 -10 2001 Chart 2.1 Headline consumer price index Energy Apr Jul Oct 2002 Headline CPI Apr Jul Oct 2003 Source: Trade and Economic Index Bureau, Ministry of Commerce Apr Raw food Jul Oct 2004 Mar 13.0 2.3 2.1 Annual percentage change 5 4 3 2 1 0-1 2001 Chart 2.2 Core and headline inflation Headline inflation Apr Jul Oct 2002 Apr Jul Oct 2003 Core inflation 1/ Apr Jul Oct 1/ Consumer price index excluding raw food and energy items Source: Trade and Economic Index Bureau, Ministry of Commerce 2004 Core inflation target range 3.5 Mar 2.3 0.2 0 Core inflation remained low, averaging 0.1 per cent in 2004, close to the previous quarter, partly due to the continuous decline in housing rent. As a result of the lag in the transmission mechanism, core inflation remained low at 0.1 per cent in 2004, close to the previous quarter. Importantly, housing rent which accounted for approximately 24 per cent of the core CPI basket continued to decline, although at a diminishing rate. This was mainly due to the low interest 10 Bank of Thailand
rate environment which prompted a number of consumers to buy their own accommodation instead of renting. Nonetheless, the continued increase in oil and food prices as well as the rise in production costs, reflected by an increase in the Producer Price Index (PPI) of 2.5 per cent year-on-year in 2004, could pose pressure on businesses to raise their prices in the future. Higher domestic expenditure associated with the continuously strong output expansion and the increase in civil servants salaries could also put pressure on the price level. Going forward, inflation was expected to be on the upward trend, driven by both cost-push and demand-pull factors. Table 2.2 Quarterly inflation 2003 2003 2004 Q2 Q3 Q4 Core CPI (% yoy) 0.2 0.3 0.2 0.0 0.1 0.1 (% qoq) - 0.1 0.0-0.1 0.1 0.1 Headline CPI (% yoy) 1.8 1.9 1.7 1.9 1.6 1.9 (% qoq) - 0.7 0.5 0.2 0.3 0.9 - Food and beverages (% yoy) 3.6 2.0 4.2 4.4 4.2 4.8 (% qoq) - 0.8 2.3 0.6 0.5 1.3 - Non-food and beverages (% yoy) 0.7 1.9 0.4 0.4 0.2 0.2 (% qoq) - 0.6-0.6-0.2 0.3 0.6 Producer price index (% yoy) 4.0 5.3 4.0 4.0 2.9 2.5 (% qoq) - 2.0 0.5 0.0 0.3 1.7 % qoq = percentage change from the previous quarter % yoy = percentage change from the previous year Source: Trade and Economic Index Bureau, Ministry of Commerce 20 15 10 5 0-5 -10 2001 Manufacturing products Chart 2.3 Producer price index Annual percentage change Agricultural products PPI Petroleum products (RHS) Apr Jul Oct Apr Jul Oct 2002 2003 Source: Trade and Economic Index Bureau, Ministry of Commerce Apr Jul Oct 2004 Mar 15.8 80 60 40 2.6 20 0.8 0-1.1-20 -40 Inflation Report April 2004 11
Headline inflation in most regional economies remained low despite upward adjustments following the increase in oil prices. Headline inflation in most regional economies remained low, despite slight upward adjustments following an increase in oil prices. The exception was Indonesia which previously experienced high inflation that subsequently dropped as the rupiah stabilized. China s inflation which accelerated previously, declined slightly owing to the fall in food prices, yet remained high. For major industrial countries, the US inflation rate in 2004 remained low due to under-utilization of resources and higher productivity, resulting in a reduction in production costs. Inflation in the euro area adjusted downwards, declining back into the target range, as a result of the high base of energy-related prices over the same period last year. Japan continued to experience deflation but signs of improvement were observed due to temporary factors, namely an increase in health services charges and tobacco excise tax. However, there remained risk of deflation. Annual percentage change 3 Thailand 2 1 0 16 14 12 10 8 6 4 2001 Malaysia Indonesia Philippines Source: Various official sources Chart 2.4 World inflation Trading partners (22) 2002 2003 2004-2 02 1.6 Singapore 0.9 2001 2002 2003 2004 6 Mar Feb 2.3 3.3 4 Korea 2 China 2.1 Feb 0.6 1.3 0 Taiwan -2 Feb 4.6 4.1 4 3 2 1 0-1 -2 2001 2002 2003 2004 EU-12 US Japan Feb 1.7 1.6 0.0 2001 2002 2003 2004 12 Bank of Thailand
Aggregate demand In 2003, the Thai economy expanded by 6.7 per cent year-on-year following the considerable expansion in most quarters except in Q2 when the economy moderated due to the impact of the Severe Acute Respiratory Syndrome (SARS) outbreak. The economy, however, regained its growth momentum rapidly in the latter half of 2003, with private expenditure being the main driving-force. As for 2003 Q4, the economy grew 7.8 per cent year-on-year, accelerating from 6.6 per cent in the previous quarter. On the seasonally adjusted basis, the economy grew 2.7 per cent over the previous quarter, accelerating from 2.3 per cent in 2003 Q3. In 2003, the Thai economy expanded by 6.7 per cent year-on-year, driven mainly by private expenditure. The economic expansion in 2003 Q4 was mainly due to the increase in private consumption and investment, while public expenditure also increased its role in driving output growth. Net exports of goods and services contracted for the first time in 2 and a half years, following a strong acceleration in imports, despite a favourable increase in exports over the same period. Regarding components of GDP, private consumption expanded by 7.4 per cent year-on-year, in line with the continuous Per cent 10 1999 = 4.4 8 6 4 2 0-2 1999 Chart 2.5 Real GDP growth at 1988 prices Growth rate (%yoy) 2000 2000 = 4.8 2001 = 2.1 2001 Source: National Economic and Social Development Board 2002 = 5.4 2003 = 6.7 5.5 5.8 6.0 6.7 7.8 5.8 6.6 4.4 2.3 2.7 Growth rate (%qoq) 2002 2003 Inflation Report April 2004 13
expansion in consumption of durable goods and services. The MPC, however, deemed that an increase in private consumption was not much higher than its long-term trend, and thus should not be a concern. Private investment grew by 18.5 per cent year-onyear, following considerable investment expansion both in machinery and equipments as well as construction. Public consumption and investment also accelerated from the previous quarter, increasing the role of the public sector in generating economic growth. The disbursement rate was higher than that of previous quarters. Public investment projects sped up in various infrastructure projects such as projects relating to energy, transportation, and communication, the subsidized housing project for the low-income people, and machinery and equipment investment by state enterprises. In 2004, the Thai economy continued to grow considerably, mainly due to the expansion in domestic demand. While external and internal stabilities remained satisfactory. Private consumption continued to expand, but moderately. In 2004, the MPC accessed that the overall economy, reflected by various economic indicators, continued to grow considerably, mainly due to the expansion in domestic demand. Meanwhile, external and internal stabilities remained sound. Examining household debt and asset prices, there was no clear sign of financial imbalances at the sectoral level that could adversely affect economic stability going forward. Nevertheless, it should be closely monitored in order to prevent the build-up of financial imbalances that could happen in the future. Private consumption remained on an increasing trend in 2004, despite a moderate year-on-year growth rate compared to the previous quarter. This was due to the high base effect in the same period last year. With regard to the consumption indicator, the Private Consumption Index (PCI) grew year-on-year by 2.7 and 4.4 per cent in uary and February, respectively, compared to 4.7 per cent in 2003 Q4. As for its components, durable goods consumption continued to increase albeit moderately, while non-durable goods 14 Bank of Thailand
consumption was on a rising trend. Factors contributing to the expansion included the continued strong rise in farm income, improved employment conditions, the low interest rate environment, and easier financial access for consumer credits from banks and non-bank financial institutions. Table 2.3 Consumer Confidence Index (CCI) 2002 2003 2004 Q3 Q4 Q2 Q3 Q4 Economic conditions 85.4 86.6 91.9 90.9 97.9 108.0 105.3 Job prospects 74.2 74.5 79.9 80.7 89.1 99.7 98.5 Future earnings 106.2 105.6 105.2 104.7 114.1 122.0 118.8 CCI 88.6 88.9 92.3 92.1 100.4 109.9 107.5 Remark: CCI is a diffusion index constructed from a sample survey of 2,216 people nation-wide. CCI takes a value between 0 and 200. CCI > 100 suggests that consumer confidence is improving; = 100 suggests that consumer confidence is stable; < 100 suggests that consumer confidence is deteriorating Source: The University of the Thai Chamber of Commerce The MPC, however, viewed that although private consumption was not affected by the avian flu outbreak, unrest in southern Thailand and demonstrations against privatization of state-owned enterprises, consumer confidence was disturbed. The Consumer Confidence Index declined from 109.9 in 2003 Q4 to 107.5 in 2004. Therefore, if those aforementioned situations persisted and adversely affected consumer confidence, it could undermine private consumption growth going forward. Furthermore, an increase in household debt as well as a decline in the household saving rate since 1999 induced the need to strengthen household spending disciplines. This encouragement was to prevent the acceleration of household spending to exceed that of household income, which otherwise could generate financial imbalances to the overall economy. An increase in the household indebtedness and a decline in the household saving rate could become risk factors, creating financial imbalances in the economy. Inflation Report April 2004 15
In 2004, private investment continued to expand from last year. The Private Investment Index (PII) rose year-on-year by 14.7 and 23.2 per cent in uary and February, respectively, compared to 17.5 per cent in 2003 Q4. The rise in the index was due to investment expansion both in machinery and equipments and construction, in line with strong domestic demand and export performance as well as the recovery in the real estate sector. Index 80 70 60 50 40 30 20 10 0 2001 Source: Bank of Thailand Chart 2.6 Private investment index (1995=100, 3-month moving average) Machinery and equipment Private investment index Construction Apr Jul Oct 2002 Apr Jul Oct 2003 Apr Jul Oct 2004 Feb 67.9 63.0 61.0 Chart 2.7 Capacity utilization and private investment index Per cent Index (1995=100) 90 110 80 70 60 Capacity utilization (sa) (excl. liquor) 90 70 50 50 Private investment index (RHS) 40 1995 1996 1997 1998 1999 2000 2001 2002 2003 30 10 Source: Bank of Thailand 16 Bank of Thailand
The Business Sentiment Index (BSI) in 2004 slightly declined from the previous quarter despite the favourable expansion in private investment. The fall in business confidence was due to concerns about the increasing cost of raw materials, an appreciation of the baht, and the avian flu outbreak. If the decline in business confidence prolonged, it could moderate private investment going forward. However, the recent BSI for the next 3 months indicated that businesses were confident that the business environment would improve. Table 2.4 Business Sentiment Index (BSI) 2002 2003 2004 Q3 Q4 Q2 Q3 Q4 Business performance 55.5 57.0 57.6 52.4 53.7 58.8 56.8 New orders 45.6 46.7 48.0 42.8 43.3 48.2 47.6 Investment 54.5 53.9 55.7 53.0 52.5 54.1 55.1 Employment 52.8 52.5 53.7 52.4 50.4 51.8 53.0 Production costs (inverted) 43.6 42.4 36.8 42.1 42.6 41.5 37.0 Production 52.2 52.6 55.5 48.3 50.4 54.3 53.7 BSI 50.8 50.9 51.2 48.6 48.9 51.5 50.6 Remark: BSI is a diffusion index constructed from a sample survey of 856 large business establishments nation-wide. BSI takes a value between 0 and 100. BSI > 50 suggests that business confidence is improving from the previous month. = 50 suggests that business confidence is stable; < 50 suggests that business confidence is deteriorating from the previous month. Source: Bank of Thailand Going forward, the MPC deemed that if the decline in business confidence was only temporary, private investment should accelerate following expansion in domestic and external demand. Furthermore, over the past year certain industries, such as the vehicle, tyre, electronics, and canned seafood industry, had increased their capacity utilizations beyond that of the average precrisis level, suggesting that investment expansion in the aforementioned industries may increase. The improvement in business performances, reflected by improved performance and net profit margin of listed non-bank Going forward, private investment should accelerate following the expansion in domestic and external demand. Inflation Report April 2004 17
companies, and credit expansions of commercial banks and specialized financial institutions should be positive factors supporting stronger business confidence and businesses ability to expand their investments. Public expenditures increased further, both in consumption and investment. In fiscal year 2004 Q2, government spending increased further both in consumption and investment, indicating the government s intention to increase its role in supporting economic expansion after reducing its direct stimulus in the previous fiscal year budget. During uary and February 2004, government expenditure increased year-on-year by 16.1 per cent with a disbursement rate of 13.9 per cent, compared to a yearon-year contraction of 14.1 per cent with a disbursement rate of 12.5 per cent during the same period in 2003. Government revenue grew by 4.6 per cent, slowing down from the previous quarter as non-tax revenue declined following a decrease in relatively volatile state enterprises income remittance. Nevertheless, revenue from consumption-based and income-based taxes continued to rise, reflecting considerable expansion in economic activities in the previous period. Billion baht 60 40 20 0-20 -40-60 -80-100 1999 Chart 2.8 Government cash balance 2000 2001 2002 2003 6.9 -Feb 2004 Source: Comptroller General s Department, Ministry of Finance 18 Bank of Thailand
On the external front, export value in uary and February 2004 averaged 7,058 million US dollars per month, growing 19.6 per cent from the same period last year, compared to 23.0 per cent in 2003 Q4. Export expansion was due both to price and quantity growth, reflecting a continued favourable export trend both in the electronics and non-electronics sectors owing to gradual improvements of trading partner economies. The wellperformed export products included electrical appliances, computers, integrated circuits, vehicles, plastic products, rice, and natural rubber. Exports were expected to increase continuously following improvements in trading partner economies. Regarding export destinations, exports to the US, which accounted for 16.3 per cent of total exports, continued to increase since December 2003 after contracting in the previous period. Higher exports to the US were mainly due to improvements in the US economy following the increase in household and business spending. Exports to Japan, Europe, and regional countries continued to expand, particularly exports to ASEAN member countries and China. Chart 2.9 Trend of exports (seasonal adjusted, 3-m ma) Index (1995=100) Value, Price & Quantity of Exports 190 160 Quantity 130 Value 100 Price 70 2001 Apr Jul Oct 2002 Apr Jul Oct 2003 Million USD Export Value 8,000 7,000 6,000 Export value 5,000 4,000 Electronic (RHS) Non-Electronic 3,000 Apr Jul Oct Apr Jul Oct 2001 2002 2003 Source: Bank of Thailand Feb Apr Jul Oct 2004 Apr Jul Oct 2004 Million USD 2,250 2,000 1,750 1,500 1,250 1,000 Inflation Report April 2004 19
Imports of capital goods and raw materials increased significantly, facilitating domestic production and investment. Import value in uary and February averaged 6,786 million US dollars per month, expanding year-onyear by 22.3 per cent, due to the increase in both price and quantity. Imports of capital goods and raw materials, which accounted for 72 per cent of total imports, increased considerably, strongly supporting domestic production and investment. Meanwhile, imports of consumer goods, both durable and non-durable goods, continued to increase fairly high. Chart 2.10 Trend of imports (seasonal adjusted, 3-m ma) Index (1995=100) 130 Value, Price & Quantity of Imports Feb 110 90 Price Value Quantity 70 2001 Million USD 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2001 Source: Bank of Thailand Apr Jul Oct 2002 Apr Jul Oct 2002 Apr Jul Oct 2003 Import value Apr Jul Oct 2003 Apr Jul Oct Import value Consumer goods (RHS) Capital goods Raw materials Apr Jul Oct 2004 Million USD 1,000 900 800 700 600 500 400 300 200 2004 The current account continued to record a surplus. The acceleration in imports, however, could reduce the trade and current account surplus in future periods. Even though exports continued to expand considerably, the acceleration in imports caused trade surplus to decline during the first 2 months of 2004, from 704 million US dollars in the same period last year to 544 million US dollars. Net tourism receipts (in US dollar terms) continued to increase favourably, contributing to a persistent current account surplus. However, the MPC viewed that the acceleration in imports (particularly those of capital goods) might pose pressure on the trade and current account surplus to decline further in future periods. 20 Bank of Thailand
Production and supply In 2003 Q4, the agricultural sector expanded yearon-year by 6.3 per cent, slowing down from 6.6 per cent in the previous quarter. The non-agricultural sector accelerated by 8.0 per cent, owing to significant expansions in the manufacturing, construction, financial, banking and services sector. This expansion was consistent with the increase in domestic spending and exports. Agriculture In uary and February, outputs of major crops grew by 4.1 and 0.4 per cent year-on-year, respectively, slowing down from 2003 Q4 as output of major crops, particularly rice and sugar cane, declined due to drought and shortage of water for agricultural use. Prices of major crops, mainly rice, natural rubber, and palm oil rose in line with the increase in world demand. Farm income from major crops thus continued to increase favourably and was also one of the main factors contributing to expansion in household consumption. Chart 2.11 Major crop production and price, and farm income Annual percentage change 45 35 Farm income 25 Crop price index (1995=100) 18.1 15 15.3 5 2.4-5 Crop production index -15-25 -Feb 2001 2002 2003 2004 Source: Constructed from Ministry of Agriculture and Co-operatives data Inflation Report April 2004 21
The increasing trend of major crop prices helped support further expansion in farm income. More severe drought could lead to further decline in crop output this year. The water level of major reservoirs was approximately 40-70 per cent of total capacity of water reserves which was lower than last year s level. Nevertheless, this water level remained higher than that of the 1999 drought, thus the impact of water shortage should not be as harsh as before. Going forward, overall major crop prices should remain on the rising trend due to strong external demand, decline in world crop production following natural disasters, and low world crop stock. Farm income should thus increase continuously, but moderately. Tourism Tourism moderated following concerns regarding the avian flu outbreak. The impact, however, was limited and was not as severe as that of the SARS outbreak. In 2004, tourism expanded at a diminishing rate due to the decline in tourists confidence associated with the avian flu outbreak and unrest in southern Thailand. However, the MPC assessed that the effect was limited and was not as severe as that of the SARS problem. Regarding the unrest in southern Thailand, the MPC viewed that it should affect only the 3 border provinces in the southern region, in which there were generally not many tourists. Despite the fact that the number of tourists during the first two months of 2004 was close to that of the same period last year, tourism receipts (in US dollar terms) continued to increase, rising 12.5 per cent year-on-year, compared to 17.7 per cent in 2003 Q4. 22 Bank of Thailand
Chart 2.12 Number of tourists and occupancy rate Thousand persons 1,200 1,000 800 Occupancy rate 1/ (RHS) Number of tourists Feb Per cent 120 80 69.7 899 40 600 400 %Number of tourists (RHS) SARS 0-10.5-40 200 2001 Apr Jul Oct 2002 Apr Jul Oct 2003 Apr Jul Oct 2004-80 1/ Percentage of total number of rooms Source: Tourism Authority of Thailand and Bank of Thailand Real estate In 2004, the real estate sector continued to expand favourably, driven by strong economic recovery under a low interest rate environment. Regarding real estate indicators, there was no clear sign of economic overheating that could adversely affect economic stability despite the significant increasing trend in condominium prices in the business areas. The real estate sector continued to expand favourably, however, there were no clear sign of economic overheating that could adversely affect economic stability. In uary 2004, land transaction value declined considerably from last month, while construction area permitted in the municipal zone as well as the number of housing registrations in Bangkok and vicinities moderated. These were the result of the termination of the property tax reduction measure on 1 uary 2004 together with BOT s prudential measures launched to encourage financial institutions to be more cautious regarding credit expansion to the property sector, particularly to residential properties with values exceeding 10 million baht and real estate projects of over 100 million baht. Nonetheless, the past significant expansion in Inflation Report April 2004 23
construction areas permitted in the municipal zone and more entries of new real estate developers suggested that supply of real estates should expand further. Demand for real estates was also expected to rise continuously in light of the low interest rate environment and easier financial access. With regard to price pressure, strong competition helped alleviate pressure on property prices. The significant acceleration in prices of construction materials, however, could pose pressure on developers to raise their prices in the future. Chart 2.13 Land transactions and construction areas permitted in municipal zone Billion baht %yoy 120 280 105 240 90 200 75 160 60 45 Change in land transactions 120 30 Land transaction 80 40 15 0 0-40 Jul Jul Jul 2001 2002 2003 2004 Billion baht %yoy 2400 120 2000 Change in construction areas 90 1600 Construction areas 60 1200 30 800 0 400-30 -60 0 2001 Jul 2002 Source: Department of lands and District Jul 2003 Jul 2004 Manufacturing Manufacturing production continued to expand as domestic demand and exports increased favourably. The Manufacturing Production Index expanded by 10.9 and 16.3 per cent year-on-year in uary and February, respectively, compared to 11.7 per cent in 2003 Q4. The increase in MPI was due mainly to strong expansions in external and domestic demand, particularly in the vehicles, electronics, electrical products, as well as food and beverage industries. Production in the steel industry improved since 2003 Q4 owing to the recovery in the real estate sector and increasing steel prices. 24 Bank of Thailand
Export-oriented and domestic-oriented industries 1/ expanded considerably, while industries exporting between 30 and 60 per cent of their production improved slightly in light of improvements in the textile industry associated with increased orders. Index 155 150 145 140 135 130 125 120 115 110 105 100 95 2001 Chart 2.14 Manufacturing Production Index and capacity utilization (seasonally adjusted) Manufacturing Production Index (1995=100) Apr Jul Oct 2002 Capacity utilization (RHS) Apr Jul Oct 2003 Feb Per cent 153.1 95 77.0 Apr Jul Oct 2004 85 75 65 55 45 Source: Bank of Thailand Chart 2.15 Manufacturing Production Index (classified by exports, seasonally adjusted, 3-month moving average) Index (1995=100) 170 160 150 140 130 120 110 100 90 2001 Apr Jul Oct 2002 Source: Bank of Thailand Total index Industries with export ratio below 30 per cent Industries with export ratio between 30-60 per cent Industries with export ratio exceeding 60 per cent Apr Jul Oct 2003 Apr Jul Oct 2004 Feb 168.5 161.4 150.5 126.7 1/ Export-oriented industries refer to industries exporting more than 60 per cent of their production, while domestic-oriented industries refer to industries exporting less than 30 per cent of their production. Inflation Report April 2004 25
Labour market conditions Employment in the nonagricultural sector expanded significantly, while there were no apparent signs regarding pressure on wages. Overall employment conditions improved. Improvements were mainly observed in the manufacturing, wholesale and retail trade, real estate, construction, services and financial sectors, contributing to the low unemployment rate. Meanwhile, there was no clear sign of wage pressure. According to the survey conducted by the National Statistical Office, employment grew by 2.8 per cent yearon-year in February following employment increase in the non-agricultural sector. Employment in the agricultural sector, meanwhile, declined slightly owing to impacts from the drought and avian flu outbreak. The unemployment rate averaged 2.4 per cent of total labour force, close to that of the same period last year. The overall average wage remained stable. Thousand persons 2,500 2,000 1,500 1,000 500 0 Source: National Statistical Office Chart 2.16 Unemployment In thousand persons rate Feb 02 Feb 03 Feb 04 934.9 781.2 829.3 2.8 2.3 2.4 Per cent of total workforce 8 2002 2003 2004 Apr Jul Oct (RHS) 6 4 2 0-2 26 Bank of Thailand
3. Monetary Conditions in the Last 3 Months Over the past 3 months the MPC assessed that momentum of economic growth remained sound owing to the strong domestic demand. In addition, the global economic recovery had mitigated the downside risks to Thai output expansion. Yet there had been no sign of overheating that might impinge upon economic stability going forward. Although price pressures increased following rising production cost as well as demand, the MPC assessed that core inflation would remain within the target range and that the prevailing monetary policy and interest rates were appropriate for the economic condition. The MPC thus accordingly maintained the policy interest rate at 1.25 per cent per annum. However, the MPC viewed that during this period of continued economic growth, in addition to monitoring price pressure which served as a primary goal in maintaining economic stability, the conduct of monetary policy going forward should involve a close monitoring of financial imbalances in each economic sector that might occur as a response to future asset price adjustments and household balance sheets. Interest rates Money market interest rates in the first quarter of 2004 remained low, continuing from the end of last year, in line with the policy rate and similar to the international short-term interest rate (LIBOR). The movement was within a narrow range and consistent with high liquidity in the financial system. In uary, the 1-day repurchase rate adjusted downwards from the previous month to an average of 0.95 per cent per annum although liquidity tightened towards the Chinese New Year festival and Money market rates remained low since the end of last year, moving in line with high liquidity in the financial system. Inflation Report April 2004 27
during the SLIPs redemption period, prompting large commercial banks to make provision of cash reserves at the BOT in preparation for withdrawals. Meanwhile, the overnight interbank rate also declined to an average rate of 1.02 per cent per annum. In February, liquidity on the whole remained high except towards the end of the month when liquidity tightened as commercial banks borrowing demand increased. Also, large commercial banks, acting as sales representatives for the Airports of Thailand Public Company Limited stocks, reduced its investment demand in the repurchase market in order to maintain higherthan-average cash reserves in preparation for the shares payment in early March. This led to an increase in the 1-day repurchase rate while the overnight interbank rate moved in line with interest rates in the repurchase market. Per cent 5 Chart 3.1 LIBOR and Thai repurchase rate 4 3 2 1 7-day LIBOR 7-day repurchase rate 20 Apr 1.07 1.03 0 Sep Oct Nov Dec Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Feb 2001 2002 2003 2004 Mar Apr Source: Bank of Thailand In March, commercial banks invested their excess liquidity in the repurchase market. Excess liquidity of the commercial banks arose from the higher-than-average cash reserves maintained in the previous month, and the SLIPs redemption amount yet to be withdrawn. Liquidity, however, tightened slightly during the long holidays and the ending 28 Bank of Thailand