1. Thailand Economic Monitor December 2008 Issue Press Release 10 December 2008 World Bank, Bangkok Office

2. 2 Presentation Today 1. Global impact of global financial crisis 2. Impact on Thailand, 2008 and 2009 3. What can we do to mitigate the impact and ensure sustained growth?

3. 3 1. Global impact of global financial crisis

4. 4 Consequences of the global financial crisis… Real GDP growth will fall across the world Source: World Bank (DECPG, December 2008) Note: a/ GDP in 2000 constant dollars; 2000 prices and market exchange rates b/ Simple average of Dubai, Brent and West Texas Intermediate c/ Unit value index of manufactured exports from major economies in US dollars

5. 5 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 Equity markets will be down Currencies weaken, but movements will not be as volatile as before

6. 6 2. Impact of global financial crisis on Thailand, 2008 and 2009

7. 7 Immediate financial impact high, but less than regional peers Source: World Bank Sep 15th, Lehman declares bankruptcy Closure of airports

8. 8 Source: BOT and World Bank Immediate financial impact high, but less than regional peers Sep 15th, Lehman declares bankruptcy Closure of airports

9. 9 Source: SET and World Bank Immediate financial impact high, but less than regional peers Sep 15th, Lehman declares bankruptcy Closure of airports

10. 10 In the short-run, Thailand’s external vulnerability is not large 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 Source: BOT $ bn times Source: BOT Reserves and Balance of Payments (BOP)

11. 11 In the short-run, Thailand’s external vulnerability is not large 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 total assets  Foreign banks account for only 12% of the Thai market  Net NPLs = 3.3% of total loans in 2008Q3, compared to 4.4% in 2007Q3  Loan-to-deposit ratio is around 91%  Bank of Thailand can inject additional liquidity, if needed

12. 12 But impact already felt on real sector, particularly, exports...Exports grew only by 5.2% in October, the slowest since 2002 Some key products and markets experiencing a large drop in October 2008 (% year-on-year) Source: BOT and MOCSource: MOC Export Growth (% year-on-year)

13. 13 Exports will likely expand by 19.5% in 2008… Source: World Bank and national authorities Source: BOT Contribution to export growth by markets (%), 10M 2006-10M 2008 Export growth rates in selected East Asian economies (% YoY) … after growing robustly by 23% in the first 10 months, mainly to ASEAN & new markets

14. 14 Next year, exports will only expand by 8% as global economy slows sharply World’s Real GDP Growth (%) and Share of Thai Exports Source: Ministry of Commerce and World Bank forecasts (DECPG, December 2008) Note: 1. Market share is in 2007. 2. East Asia refers to East Asia and the Pacific, which includes Japan and China

15. 15 Export products with primary destinations to the US, EU, and Japan will be badly affected Source: BOT and MOC Some top export products and major markets …They are automotive parts and components, jewellery, food items, and electronic integrated circuits

16. 16 Exports of services, particularly, tourism receipts will also be adversely affected by global crisis & political unrest Tourist arrival by nationality Monthly tourist Arrival growth, year-on year Source: Bank of ThailandSource: Tourism Authority of Thailand

17. 17 Private investment growth will not be strong next year Bank loan growth will be lower as banks will be more risk averse (more concerned on credit quality) Source: Bank of Thailand Growth of Commercial Bank Credit to Businesses

18. 18 Private investment growth will not be strong Business sentiment index, 2008 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: BOI BOI Approvals Source: BoT

19. 19 FDI will continue to be sluggish as major investors are hit by global financial crisis Origin of FDI inflows Source: Bank of Thailand Gross FDI Inflows

20. 20 Balance of payments will turn negative next year …but reserves to remain at comfortable levels Source: BOT Balance of Payments Source: BOT & WB projections

21. 21 Household consumption will likely continue to be dampened  Consumer confidence declines  Real wage increase small  Farm income growth down with lower agricultural prices Source: UTCCSource: BOT Consumer confidence indexFarm Income Growth

22. 22 Falling oil prices, raw material prices, and inflation are good news Prices for 2009-2011 are traded futures prices. Sources: US Energy Information Administration (spot prices) TradingCharts.com (futures prices) Source: MOC and BOT InflationCrude Oil Prices ($/barrel)

23. 23 Real GDP growth is estimated at 3.9% for this year and at 2% for next year Real GDP Growth, 2007-2009 Source: NESDB & projections by World Bank

24. 24 Slow down in businesses will affect employment of low income groups Proportion of the Poor Household Classified by Economic Activities, 2007 Source: NSO Employment by Industry, October 2008 (Million persons) Source: NESDB

25. 25 3. 3. What can we do to mitigate the impact and ensure sustained growth?

26. 26 Short term measures Provide safety nets for the unemployed, poor, and vulnerable Provide credit extension to SMEs The government has implemented 3 fiscal packages to mitigate the impact of the rise in food and fuel prices in the first half of the year (tax cut, price subsidy, credit and grant extension) The October package aims to mitigate the impact of global financial crisis to the capital market and ensure that SFIs extend credit to SMEs Additional Bt100,000 billion budget deficit proposed

27. 27 There must be balance between the short- term and medium-term impact Fiscal stimulus important for  Short-term impact to protect vulnerable groups and SMEs from financial crisis – but could improve targeting  Medium to long-term impact to ensure that Thailand’s competitiveness is maintained and Thailand can jump on band-wagon of global recovery in the next few years

28. 28 Turning a crisis into opportunity... World economy are projected to start to recover from financial crisis in 2011/12 We should take this opportunity to strengthen Thailand’s competitiveness and poise for a jump in growth as world economy rebounds

29. 29 Key to Thailand’s sustained growth is investments by the private sector Source: BOT and NESDB Private Investment growth, and Capacity Utilization

30. 30 Thailand needs to overcome constraints to investment and productivity improvements Top Constraints to Business and Investments (2007) (Percent of 1,043 firms in 9 manufacturing industries surveyed) Source: Thailand Productivity and Investment Climate Study 2007 (PICS 2007), World Bank, NESDB and Foundation of Thailand Productivity Institute

31. 31 Firms need to protect themselves against macroeconomic volatility… Source: PICS 2007

32. 32 … through acquiring more knowledge Firms Reporting Not Undertaking any Measure vs. the Lack of Knowledge on Coping Measures (Percent of firms) Source: PICS 2007

33. 33 Skills & knowledge need to be improved to move Thailand towards a knowledge economy World Bank ’ s Knowledge Economy Index* Source: World Bank …But Thailand has not made much progress on this * 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.

34. 34 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 Source: PICS 2007 Objective Measures of Thailand's Infrastructure Services

35. 35 Public investment needs to be sped up, and Thailand has capacity to increase it Source: NESDB Real Public Investment Growth (%) Thailand’s Fiscal Sustainability Guidelines (%) Source: Fiscal Policy Office

36. 36 Summary 2009 will be a challenging year for Thailand Thailand has high potential to weather this global financial crisis and turn this crisis into an opportunity We all (Government, private sector, academia) need to work together to unleash Thailand’s potential by improving Thailand’s investment climate

37. 37 Thank You Thailand Economic Monitor will be posted on www.worldbank.or.th December 15, 2008