1 Thailand Economic Monitor November 2005 Launch 3 November 2005

2 Monitor – Key Messages  Tsunami, drought and oil price rise will reduce GDP growth in 2005 to 4.2%. GDP growth in 2006 will rise to 5%.  Floating of retail oil price is judicious Limit burden on Oil Fund Promote more efficient use of oil and energy conservation – Reduce oil imports, which helps reduce current account deficits

3 Monitor – Key Messages  Helping firms to reduce production and operation costs will help them in adjusting to high oil prices  Improving the Investment Climate can help reduce costs and also improve firm’s productivity  Key improvements to investment climate needed  Reduce regulatory burden  Upgrade skills  Improve infrastructure (Results of Thailand Productivity and Investment Climate Study)

4 Real GDP Growth will be 4.2% in 2005 GDP growth is expected to speed up in the second half year as net foreign demand increases Real GDP Growth 2005 Source: NESDB and World Bank Growth rates of Change in Inventories H = 85.8% H2 2005p= -45.8% 2005p= 20.0%

5 Sharp oil price rise impact growths of consumption, private investment, and production this year Retail oil price this year is 54% higher than in 2002  Raises 2005 inflation to 4.5% – affects consumption  Raises costs of production – affects production and private investment this year Increase in Retail Oil Price (%) Source: EPPO

6 Rise in retail oil price are promoting conservation Growth in Gasoline and Diesel Consumption, M 2005 Source: EPPO

7 Exports growth to speed up in 2005H2, while imports slowed Export Volume Growth Import Volume Growth Source: BOT

8 FDI are still increasing Gross FDI inflows rose in 2005 and much higher than levels Gross FDI Inflows Source: BOT

9 Real GDP growth will rise to 5% in 2006 as domestic demand picks up Real GDP Growth 2004, 2005p and 2006p Oil price will rise by 14% in 2006, compared to 30% this year Real interest remains low at 4-5% Bank loan continues to expand Source: NESDB and World Bank Growth rates of Change in Inventories 2004 = 39.9% 2005p = 20.0% 2006p = 0%

10 FDI will continue the rise as Thailand remains attractive BOI Approval of FDI Source: BOI UNCTAD Survey of world’s 325 largest transnational corporations Source: UNCTAD Global Investment Prospects Assessment, Sep 2005

11 External environment will be more favorable next year External Environment, Source: World Bank DEC Prospects Group update Oct. 25, a/ In local currency, aggregated using 1995 weights. The G-7 countries are: Canada, France, Germany, Italy, Japan, United Kingdom, and United States p2006p % Change from previous year, except interest rates GDP Growth World World (PPP Weights) OECD United States Japan Euro Area World Trade (Volume) CPI Inflation - G7 a/ Oil Price - $/bbl % Change Non-oil Commodity Prices LIBOR (US$. 6 Mo.)

12 Going forward, higher private investment growth needed to avoid supply constraints Capacity Utilization Over 1/3 of sectors have Cap U > 80% More than half of high exporting sector have cap u > 80% or > pre-crisis levels Source: BOT

13 Improved investment climate helps to promote investment and firm productivity  Helps reduce cost of doing business – more urgently needed as firms face high oil prices Firms’ Concerns about Business Climate – Results from Thailand Productivity and Investment Climate Study Source: Thailand PICS, 2005

14 Reducing regulatory burden reduces firms’ costs in doing business Labor Regulations Obstacle for Firms in Thailand Number of Days to Obtain Different Licenses/Permits/Approvals/ Certificates Source: Thailand PICS, 2005

15 Reducing skills shortage can help reduce large wage premiums and firms’ loss of sales Thailand’s Wage Premiums (Total Returns Relative to Workers with Less than Secondary Education Complete) Sales Gain from Reduction in # Weeks Taken to Fill Vacancy for a Professional Source: Thailand PICS 2005 # weeks taken to fill vacancy  Skills shortage vary from sector to sector  Sector with more binding constraints can increase sales by more if constraints are relaxed  Average sales loss across sectors is 15%

16 Improving skills will help increase firms’ technological capacity Lack of skilled ICT workers is the major constraint to firms’ expansion of ICT use ICT use correlates with innovation Source: Thailand PICS 2005 Constraints to Introducing or Expanding IT Use Considered “Important” or “Very Important”

17 Infrastructure Inadequacy needs to be addressed Electricity, transport, telecommunications, and water services need to be improved Cross Country comparison of Mass Rail Transit Length Source: Thailand PICS 2005

18 The Thai Government is consistently pursing these issues  Regulatory burden: –Public sector reforms –A committee has been established to take these issues forward  Skills shortage: –Education reform – secondary education and vocation education  Inadequate infrastructure –Public infrastructure investment plan (Mega- project)

19 Public investment in infrastructure is needed and timely Proposed public investment program is needed, given reduced investments since the crisis Estimated impact on fiscal & current account balance & debt, appears consistent with medium-term macro- stability, given current state of private investment recovery Infrastructure program should be prioritized to reduce cost & raise quality of infrastructure services so that private investors’ competitiveness can be increased

20 Public Investment as % GDP Source: Cabinet meeting Nov 1, 2005 and WB GDP estimations Source: FPO, Sept 26, 2005 and Cabinet meeting Nov 1, 2005 Mega-project Import Content, Mega-project investment plan appears consistent with medium-term macro-stability Given current state of private investment recovery, estimated impact on fiscal, current account, & debt, appears consistent with macro- economic stability

21 Current account deficits are not excessive Current and Trade Accounts Source: BOT for and WB estimates for

22 Mega project investments by sector Getting to the details  Verifying the strategic importance of each investments  Establishing sector investment priorities  Making financial sense  Establishing a mechanism to ensure quality throughout project preparation and implementation Getting to the details  Verifying the strategic importance of each investments  Establishing sector investment priorities  Making financial sense  Establishing a mechanism to ensure quality throughout project preparation and implementation Source: Cabinet Meeting Nov 1, 2005 Prioritizing infrastructure investments will reduce cost & raise quality of infrastructure services

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24 Medium term growth will help Thailand sustain poverty reduction Source: NESDB Note: Based on revised poverty line Poverty Headcount Ratios in 2000, 2002, and 2004