1. Thailand’s Economic Outlook.. Weathering the Global Storm
The World Bank
Thailand’s Economic Outlook.. Weathering the Global Storm
Dr. Kirida Bhaopichitr &
Dr. Vatcharin Sirimaneetham
The World Bank
3 November 2008

2. Presentation Today
What are the consequences of the global financial crisis?
What are the impacts on Thailand’s economic outlook?
Can we turn this crisis into opportunity?

3. 1. What are the consequences of the global financial crisis?

4. Before the global financial crisis…
US Debt Outstanding

5. Before the global financial crisis…
Financial Leverage, end-2006
Source: Phatra Securities

6. And the financial crisis begins…

7. And the financial crisis begins…
Source: Phatra Securities

8. Consequences of the global financial crisis…
Real GDP growth will fall across the world
Note: ASEAN-5 includes Thailand, Indonesia, Philippines, Malaysia, and Vietnam
Source: IMF

9. Consequences of the global financial crisis…
Commodity and agricultural prices will fall
Source: World Bank

10. Consequences of the global financial crisis…
Global liquidity will be tight, and banks will be much more careful in lending
Monetary policy will ease around the world, but bank interest rates may not decline as much
Lower global inflation
Currency movements will not be as volatile, as many hedge funds have closed down
Equity markets will be down

11. 2. What are the impacts on Thailand’s economic outlook?

12. Immediate impact high, but less than regional peers
Regional peers are China, Hong Kong, Indonesia, S. Korea, Malaysia, and Philippines
Source: World Bank

13. Immediate impact high, but less than regional peers
Source: SET, Bank of Thialand, and World Bank

14. Immediate impact high, but less than regional peers
Average of currencies are those of China, Hong Kong, Indonesia, S. Korea, Malaysia, Philippines, and Taiwan
Source: BOT and World Bank

15. In the short-run, Thailand’s external vulnerability is small
Thailand has de-leveraged since the 1998 economic crisis
International reserves have built up to over US$100 billion
Remaining foreign investment in stock market ~US$3.3 billion
$ bn
International reserves
$ bn
$ bn
times
Source: Bank of Thailand
Source: Bank of Thailand

16. In the short-run, Thailand’s external vulnerability is small
Thai banking system remains sound, but needs to be closely monitored
Investment in foreign debt instruments = 13% of total debt-instrument holdings
Foreign investments < 2% of assets
Foreign banks account for only 5% of the Thai market.
NPLs = 3.3% of total loans in 2008Q3, compared to 4.4% in 2007Q3
Loan-to-deposit ratio is around 90%, so liquidity crunch unlikely

17. But impact will be larger next year as global economy slows down
Exports of both goods and services (tourism) will be severely affected
Thailand’s key export products in key markets
Tourist arrival by nationality

18. But impact will be larger next year as global economy slows down
Bank loan growth will be lower as banks will be more risk averse (more concerned on credit quality)
Deposit and Credit Growth
Source: Bank of Thailand

19. But impact will be larger next year as global economy slows down
Investment growth will be down
PUBLIC investment growth %
Source: NESDB

20. But impact will be larger next year as global economy slows down
FDI will also be slightly sluggish
Origin of FDI inflows
Source: Bank of Thailand
Source: Bank of Thailand

21. But impact will be larger next year as global economy slows down
Capital account and current account will be lower next year Baht will likely continue to slowly depreciate
Source: BOT

22. But impact will be larger next year as global economy slows down
Oil prices and inflation expected to fall next year
Source: World Bank
Source: MOC and BOT

23. But impact will be larger next year as global economy slows down
Household consumption will also continue to be dampened
Consumer confidence declines
Real wage increase small
Farm income growth down with lower agricultural prices %
Farm Income Growth
Consumer confidence index
Source: UTCC
Source: BOT

24. Real GDP growth will be lower next year
Real GDP growth 4.8% this year and around 4% next year

25. 3. Can we turn this crisis into opportunity?

26. Answer
YES, we can… but only with every one’s hard work and united efforts

27. Turning a crisis into opportunity...
World economy are projected to start to recover from financial crisis in 2011
Thailand is in a competitive position as the impact on us is relatively less
We should take this opportunity to strengthen our competitiveness and poise for a jump in growth as world economy rebounds

28. It is time to improve our productivity and start investing
Private Investment growth, and Capacity Utilization
Source: BOT and NESDB

29. It is time to improve our productivity and start investing
Positive factors that are to our advantage
Low input prices
Lower inflation
Lower interest rate
Depreciated baht

30. Actions we need to take to improve our productivity
Top Constraints to Business and Investments
(Percent of 1,043 firms in 9 manufacturing industries surveyed)
Source: Thailand Productivity and Investment Climate Study (PICS 2007), World Bank, NESDB and Foundation of Thailand Productivity Institute

31. Uncertainty of Macroeconomic and Policy Factors
Macroeconomic and policy uncertainties have adversely affected firms’ investment decisions
Uncertainty of Macroeconomic and Policy Factors
Source: PICS 2007

32. Firms need to protect themselves against macroeconomic volatility…
Source: PICS 2007

33. … through acquiring more knowledge on hedging/coping mechanisms
Firms Reporting Not Undertaking any Measure vs. the Lack of Knowledge on Coping Measures
(Percent of firms)
Source: PICS 2007

34. World Bank’s Knowledge Economy Index*
(b) Skills & knowledge need to be improved to move Thailand towards a knowledge economy
…But Thailand has not made much progress on this
World Bank’s Knowledge Economy Index*
* KEI is a simple average of 4 sub-indexes which represents the 4 pillars of the knowledge economy: (1) economic incentive and institutional regime, (2) education and training, (3) innovation and technological adoption, and (4) information and communications technologies (ICT) infrastructure.
Source: World Bank

35. Skills shortage and mismatch have persisted in recent years
Number of weeks taken to fill job vacancies for various types of workers
Whole Sample (Thailand)
Firms in the North
Source: PICS 2007

36. Innovative efforts in the North are more limited than other regions
Percent of firms that undertook these innovative activities
Source: PICS 2007

37. Reasons why firms did not conduct innovative activities (% of firms)
High costs of innovation and lack of knowledgeable personnel largely explain low innovative efforts
Reasons why firms did not conduct innovative activities (% of firms)
Source: PICS 2007

38. To boost innovation, firms view that government’s indirect incentives (e.g. tax deductions) and technical assistance are important
Percent of firms viewing these government initiatives as very important to promote innovation
sub

39. But existing government incentive programs for innovation are not widely used
Share of Firms Benefiting from Government Initiatives to Promote Innovation (Percent)
Source: Thailand PICS 2004 and PICS 2007

40. (c) Improved regulations and regulatory environment -- needed to lower costs for firms and promote greater competition and productivity
Revise regulations to promote investments & productivity
esp. in services sector
E.g. revise Foreign Business Act, pass Secured Transactions Act
Liberalize some industries esp. in services sector
Streamline bureaucratic procedures, improve governance, and reduce corruption
Reduce amount and uncertainty of time on customs clearance, tax refunds, and inspections
Integrate processes into 1-stop center & minimize face-to-face interactions

41. Multiple regulatory procedures and uncertainty in time taken were voiced by firms as burdensome to business and investment
Very Severe or Severe Regulatory Obstacles to Business and Investment
(% of firms)
Average Days to Obtain Permits to Start Production and Deviations*
(22)
(147)
(115)
(82)
(25)
(23)
(19)
(21)
Source: PICS 2007
*Figures in ( ) are standard deviations from the mean

42. Objective Measures of Thailand's Infrastructure Services
(d) Public infrastructure investments are needed to reduce logistics and production costs
Share of transport and logistics cost in total cost of delivering finished goods to customers
Objective Measures of Thailand's Infrastructure Services
Source: PICS 2007

43. Thailand’s investment climate is middling compared to other countries
Objective Measures of Bureaucratic Process
Objective Measures of Infrastructure Services
Source: Thailand PICS 2007 and Global PICS

44. Perceptions become reality
Perceptions of worsened investment climate negatively affect investment decisions…
Perception of Investment Climate Indicators as Major or Severe Obstacles to Doing Business
(Percent of Firms)
Business Sentiment Index
Source: PICS 2007
Source: Bank of Thailand

45. Summary: Actions that can improve investment climate
Improve business sentiments
Certainty and clarity in policies
Certainty in public infrastructure investment plans
Announcements of productivity improvements assistance to most needed industries
More PR on actions taken and on Thailand’s investment climate
Facilitate the use of hedging instruments and knowledge to firms
Streamlining bureaucratic procedures and time
Introducing ICT to reduce bureaucratic process and time

46. Summary: Actions that can improve investment climate
Productivity improvements assistance to most needed industries
Gradual liberalization of services industries
Pass laws and regulations that promote investment e.g. Secured Transactions Act, Revise Foreign Business Act
Public infrastructure investments in most needed areas
Putting Thailand on the path to a knowledge economy
Improve quality of higher education
Foster university - public research institute - industry linkages for innovation
Raise standards and enrolment of vocational training

47. Summary We can turn this crisis into an opportunity for Thailand
Thailand has a high growth potential with new investments and productivity growth
We all need to work together to unleash Thailand’s potential by improving Thailand’s investment climate

48. Thank You
For more information on World Bank work and reports: Global: Thailand:

49. **BACK-UP SLIDES**

50. PICS 2007 surveyed 40 producers in the North, mostly food processing and garments firms
Regional distribution of firms in PICS 2007 (%)
Industrial composition of firms in the North (%)
Unit: Percent