1. 1 Thailand Economic Monitor April 2006 Press Briefing 7 April 2006

2. 2 Thailand Economic Monitor Key Messages  Thailand had strong recovery, growth at 6% during 2002-04 with GDP per capita & poverty better than pre-crisis levels;  But slower growth in 2005-2006 due to external shocks & decline in household consumption growth  Export growth has been robust driver throughout recovery  Priv. inv. slow throughout – how to raise priv. inv. & productivity?  YET, medium term prospects look good – given sound macro- situation, rising openness & infrastructure investment plans  ONLY IF -- actions to reduce regulations, enhance skills, invest infrastr. TAKEN to raise investment & innovation, in the face of high oil-prices, rising interest rates and modest real appreciation.

3. 3 Outline of today’s presentation 1.Thai economy in 2005 2.Thai economy in 2006 3.Thailand from a medium term perspective

4. 4 1. Thai economy in 2005

5. 5 1. GDP growth slowed to 4.5% in 2005  In 2005, GDP growth slowed to 4.5%  Higher energy prices dampen growth of private investment & consumption  Softer world demand, drought, tsunami slowed export growth to 15% => Manufacturing production growth fell (from 11%, to 8% and to 5.5% in 2003, 04, 05) Real GDP Growth Source: NESDB and World Bank

6. 6 2. Thai economy in 2006

7. 7 In 2006 GDP growth projected to be 5.0% with downside risks  Growth come mainly from net exports (exports accelerate while imports decelerate)  Domestic demand dampened by high oil price, rising real interest rates, depressed confidence, and political uncertainty Real GDP 1988 Prices Source: NESDB and World Bank Growth will recover to 5% in 2006 due to higher export growth & lower imports

8. 8  Household consumption growth FALL due to high oil prices, rising real interest, rate, low durables demand  Manufacturing growth fall or remain as depressed as last year, due to oil prices  Private investment growth slows down to 9.5 from 11%  Public invest. growth slows to 6.5% instead of rising Real GDP 1988 Prices In 2006 Domestic demand growth will fall further in 2006

9. 9 Higher energy prices reduced manufacturing growth in 2004 & 05 Average retail oil prices are to increase by another 25% this year and firms will need to adjust => Continues to impact production this year Weighted average of Electricity and Petroleum Prices used by manufacturers* Real GDP growth and Growth of manufacturing sector Source: NESDB Source: EPPO Remarks: Petroleum products include Diesel HSD and Fuel oil. Prices are weighted by their consumption. 7.6% 5% 32.8%

10. 10 Manufacturing growth for domestic market slowed MOST in 2005 … As a result of (a) oil-price adjustment by firms and (b) slow down in Household consumption due to rising oil prices, rising HH debt, terms of trade decline, and low consumer confidence HH consumption growth and Consumer Confidence Index Manufacturing Production Index (MPI) growth classified by export group* Source: NESDB and UTCC Source: BOT Remark: * Classified by the ratio of export production to total production of each industry This year, HH consumption will continue to be dampened by high oil price, increased real interest rate, and dampened consumer confidence

11. 11 Private investment FALLS further in 2006 Capacity Utilization, 2002-2005 Source: BOT Remark: *Accounting for 59.1% of the 2000 manufacturing sector value added. Private investment will not rise quickly this year Less favorable environment this year 2006 High oil price/ slow manufacturing growth Rising interest rate Lower public investment growth Lower rise in capacity utilization in 2005

12. 12 Public investment growth will slow to 6.5% this year These will negatively affect private investment growth this year Because…  Delays in the implementation of mega-projects that have been approved  Delays in submission and approvals of projects for the remaining of the year due to political uncertainties  Delays in approval of budget by the Parliament for next fiscal year

13. 13 Trade deficits lower, services surplus higher -- Current account deficit lower than last year Trade and Current Account  Export (goods) value growth same last year, but volume higher (Export growth=15%)  Import (goods) value growth will be significantly lower than last year ’ s (Import growth: 2005=26%, 2006=14%)  Services account surplus higher as tourism recovers after tsunami Source: BOT and WB estmates

14. 14 3. Thailand from a medium term perspective

15. 15 Macroeconomic situation has been strong With low inflation, low real interest rates, & strong current account Real GDP Growth, Inflation, and Real Interest Rates Indicators of External Situation

16. 16 Thailand is committed to increased openness Gross FDI Indicators of Openness … as indicated by increased external trade and FDI, tariff reforms, FTAs

17. 17 Impending public investments will help alleviate infrastructure bottle necks Firms’ Response on Infrastructure (Firms Evaluating constraint as “major” or “severe”) (Percent) ThailandNorthCentral Bangkok & Vicinity EastNortheastSouth Telecommunications11.46.88.88.318.218.324.3 Electricity25.621.921.621.237.032.441.1 Transportation13.813.79.514.015.612.715.9 Source: Thailand Investment Climate, Firm Competitiveness and Growth Study (2006)

18. 18 In the medium term, Thailand must implement reforms to increase private investment Given High oil price Rising real interest rates Slow down in household consumption Real GDP growth and Growth of manufacturing sector Private investment rate and/or rate of innovation needs to be raised for Thailand to sustain high growth rates P Reforms to improve the Investment climate ever more important for growth and poverty reduction

19. 19 Services sector potential tapped by removal of existing restrictions WTO agreement can reduce services restrictions; Telecom, banking, insurance, business services, ports can all benefit for such liberalization; Share of services sector high Productivity growth low- & thus scope to grow Supportive policies needed

20. 20 Reduce regulatory burden on firms to reduce their transactions costs, esp. in Center & East – PLUS remove services restrictions Strengthen vocational education (incl. ICT), generally, & in NE region to fill skill gaps, and secondary education across the board Expedite infrastructure improvements, especially in East & Center, as also for mass transit in Bangkok More public expenditure in NE, given that it receives less public resources per capita though NE has most poor people Promote faster growth in NE by improving trade facilitation & transport links to integrate with Mekong region, & support cross- border private investments from Thailand to CLMV Reduce regulatory burden on firms to reduce their transactions costs, esp. in Center & East – PLUS remove services restrictions Strengthen vocational education (incl. ICT), generally, & in NE region to fill skill gaps, and secondary education across the board Expedite infrastructure improvements, especially in East & Center, as also for mass transit in Bangkok More public expenditure in NE, given that it receives less public resources per capita though NE has most poor people Promote faster growth in NE by improving trade facilitation & transport links to integrate with Mekong region, & support cross- border private investments from Thailand to CLMV Needed Reform Agenda

21. 21 THANK YOU Thailand Economic Monitor can be downloaded from www.worldbank.or.th