1. 1 Thailand Economic Monitor November 2006 Launch November 14, 2006

2. 2 Outline of Presentation Today I.Real GDP Growth in 2006 II. Real GDP growth in 2007 III.Going forward: Agenda for a balanced and quality growth

3. 3 I. Real GDP Growth in 2006 will be around 4.5% … driven mainly by export growth as domestic demand slowed down sharply Real GDP Growth (1988 Prices)

4. 4 In 2006, domestic demand was depressed by higher energy prices, higher inflation and interest rates, political uncertainties & depressed confidence These have slowed down Household Consumption, Private Investment, and Public Investment this year Growth of Energy Prices, Nominal Interest Rates, CPI Inflation, and Real Interest Rates, Consumer Confidence IndexBusiness Sentiment Index

5. 5 High Oil Prices burden firms Oil prices falling but almost double that of 2002 Manufactures affected: PPI up by 16.1% & Output growth down from 7.1% to 5.5% between 2002 & 2005 Different sub-sectors affected differently depending on their energy & transport intensity Manufacturing sub-sectors and their energy cost share (Fabricated Metal Products = 1) Source: Thailand Input-Output Table 2000

6. 6 Exports growth this year was driven by quantity growth to traditional markets Export Growth in price, volume, and value Contribution to Export Growth by Various Markets Export volume growth of manufactured products, esp. electronics recovered from slowdown last year

7. 7 Export growth began slowing down in 2006H2 while import growth sped up Goods Export Volume and Import Volume Growth Source: BOT Current Account and Trade Account Trade Account is smaller deficit this year and Current Account in surplus from rebound in services receipts Source: BOT and WB staff estimates

8. 8 II. Real GDP Growth in 2007  Oil price continue declining, but remains at a high level  Inflation falling to 2.5% from almost 5% this year  Lower nominal interest rate, but real interest rate rise as inflation declines  Deceleration in global demand  Int’l crop prices not as robust as this year  Real exchange rate in Thailand continues appreciation trend Economic Environment Source: World Bank

9. 9 Real GDP Growth in 2007 will be at around 4.6% Lower inflation and interest rates help increase household consumption growth Public investments disbursed as planned  High oil price, higher real interest rates, real appreciation, policy uncertainties does not support private investment growth  Lower farm income growth support HH consumption growth less than this year  Slowing down of global demand, GSP expiration & real appreciation affects exports Real GDP Growth (1988 Prices)

10. 10 Public investment would accelerate but mega project disbursement delayed  Public investments would accelerate as disbursements will be made for whole year  FY2007 Central Government investment budget increase by 11%  FY2007 SOE approved investment budget for increased by 4.5%  Mega project investment next year will be less than planned Mega Project Investments (Billion Bt) * Source: Public Expenditure Review (OPDC), March 2006 Note: Mega project spending in 2005 is about 7% of total public investment and estimated to be about 16% of total public investment in 2005-2007

11. 11 Private investment next year unlikely grow much faster than in 2006 …. as manufacturing output decelerated from slow down in exports, while firms continue to adjust to high oil price Energy prices used by firm Source: EPPO and MEA Growths of Private Investment, Manufacturing Production, and Capacity Utilization Source: BOT and NESDB

12. 12 Private investment will unlikely grow much faster than in 2006 … as real interest rates rise and real exchange rate appreciate Real Interest Rates (PPI adjusted)Real Effective Exchange Rate Source: BOT

13. 13 Private investment will unlikely grow much faster than in 2006 … as constraints to investments have not been addressed Top 3 constraints to doing business and expansion in 2004 as reported by 1,385 firms in Thailand Source: Thailand PICS 2005

14. 14 Private investment will unlikely grow much faster than in 2006 Business Sentiment Index … as investors sentiments have not recovered much Index = 50 indicates that business sentiment remains stable Index > 50 indicates that business sentiment has improved. Index < 50 indicates that business sentiment has worsened. Source: BOT Business Sentiment Index Survey of 568 Large and Medium-size firms

15. 15 Private investment next year will unlikely grow much faster than in 2006 … as investors esp. FDI wait-and-see amidst uncertainties in policies and external demand BOI Net Applications by Sectors (Billion Bt) Investors have been more cautious since last year JETRO ’ s Business Sentiment Survey of Japanese companies in Thailand Source: JETRO

16. 16 As exports slow and imports increase, current account will fall Export falls with slow down in global demand, GSP expiration and real appreciation Imports rise with pick up in investment and rebuilding of stocks Trade account is in greater deficit, and Current account decline to almost zero Trade and Current Account Balance

17. 17 GDP Growth in 2007 will be 4.6% … as domestic demand accelerates, but foreign demand decelerates Real GDP Growth (1988 Prices)

18. 18 III.Going forward: Agenda for a balanced and quality growth Supply side constraints must be relaxed for growth to be sustained as capacity utilization close to pre-crisis levels Private Investment Growth and Share in GDP Source: NESDB NOTE: 1980s share in GDP was 22% Greater investments needed to relax the constraints Capacity Utilization (%) 1995-1996 Average Source: BOT Excess Capacity

19. 19 III. Going forward: Agenda for a balanced and quality growth But firms are finding it difficult to expand in an environment of  High oil prices – a new factor that has raised production costs & reduce firm’s margin  Intensified export competition in both labor & technology intensive goods from China & other middle-income countries, which have rapidly improved human capital and firm/university R&D

20. 20 III. Going Forward: Agenda for a balanced and quality growth What will help promote both investments and productivity of firms? 1)Relax regulations, skills and infrastructure constraints which firms identified as major constraints to their investments & productivity 2)Innovation/knowledge critical for raising productivity will be key 3)More efficient services sector – financial, telecom, ICT, logistics, and business services These would help lower operations costs for firms and increase demand for Thai products

21. 21 (1) Reforms badly needed to improve the investment climate –Improvements in skills of workforce (secondary & vocational education, IT and English skills) –Regulatory burden (reducing processes, streamlining procedures, ensure predictability of time taken for service delivery, ensuring competition) –Relaxation of price controls III. Going Forward: Agenda for a balanced and quality growth

22. 22 Price Controls – How severe are they? 2 lists of product and services that Min of Commerce enforces varying degrees of price control Controlled list (35 products and services) Monitored list (200 products and services) – accounts for roughly 50% of manufacturing sector value added Accounts for < 20% of CPI basket Impact of price control on firms  Reduces margins of firms  In latest Business sentiment index survey (BoT), firms report inability to adjust prices as one of top 3 constraint to doing business  Firms productivity declines Total Factor Productively (TFP) and Price Dispersion in Thailand, 2004 Source: Ariyapruchya et al (2006) Note: Each point represents a firm

23. 23 (2) Actions needed to move Thailand towards a knowledge economy –Increasing S&T graduates –Promoting R&D in firms –Creating university- business linkages –Strengthening role of public research institutes (e.g. NSTDA) III. Going Forward: Agenda for a balanced and quality growth Knowledge Economy Index (0-10) Knowledge Economy Index covers 4 pillars of a knowledge economy: 1. Economic incentive regime 2. Innovation 3. Education 4. ICT Source: World Bank

24. 24 (3) Actions needed to increase efficiency in services sector (45% of GDP, key supporter of industrial sector, large employment and large share of SMEs) Enact laws that will help promote services businesses e.g. Secured Transactions Act Ensuring fair competition III. Going Forward: Agenda for a balanced and quality growth

25. 25 Growth must be more evenly distributed Income distribution must be more even Fight against poverty must continue with improved targeting of the poor III. Going Forward: Agenda for a balanced and quality growth Source: WB Computation from SES data (Baht/Month) Average Per Capita Real Consumption Poverty Map of the Northeast Region, 2004 Source: NSO

26. 26 Summary of Key Messages Real GDP growth this year will around 4.5% supported by exports Real GDP Growth next year will speed up slightly to 4.6% as exports slow down and private investment recovery will be slow Supply constraints needs to be relaxed if Thailand’s growth is to be sustained Future investments must come with higher productivity (quality) for Thailand to be competitive Distribution of growth especially to the poorest must be ensured