Thai economy in the past three quarters grew by 9.3 percent (YoY) and is likely to continue to expand in the fourth quarter of 2010. Key factors responsible for this expansion were the continual recovery of global economy and domestic demand. Nevertheless, Thailand at present is experiencing severe flooding which will undoubtedly affect the economy in the fourth quarter of 2010. Thai economy in the fourth quarter of 2010 is therefore expected to expand at decelerated rate.
Supporting Factors:
(1) The world economy continued to expand at a satisfactory rate though it decelerated from the first half of 2010. In addition, economic recovery in major economies remains delicate, specifically Japan and EU. Regardless of the global economy, major trading partners of Thailand (ASEAN countries and new industrial economies (NIEs), and China) remain beneficial to Thai exports. Moreover, the increase in diversification of Thai export market would lessen the impact from economic deceleration of major countries.
(2) Investment continued to expand. This was due to the momentum of exports and domestic consumption. Together with the appreciation of Thai baht, these lead investors and entrepreneurs to readjust and accelerate their investment plan especially in the import of machinery and equipment.
(3) In the fourth quarter of 2010, number of tourists is expected to reach 4 million persons. As a consequence, industries related to tourism sectors such as hotels and restaurants, trade and transportation sectors are likely to benefit.
(4) Liquidity in the financial system remains at a satisfactory level. An excess liquidity of commercial banks in the third quarter stood at 1.26 trillion baht. Meanwhile, the improvements of capital and bond markets provided support for business financing. The special financial institutions (SFIs) still able to approve credits in order to support the expansion of grass root economy. In the first eight months of 2010, SFIs approved the total credits of 830,925 million baht, exceeding this year target of 777,220 million baht.
(5) The interest rate remains low. The real deposit interest rate in October and real loan rate stood at -1.68 percent and 3.2 percent respectively. From the fourth quarter of 2010 up to first half of 2011, the interest rate is expected to remain low. This will become a major force for private consumption and investment.
Risk Factors and Limitations
(1) An appreciation of Thai baht lessens export competitiveness of some Thai commodities to countries which their currencies are weaker than Thailand such as China and Vietnam.
(2) The prices of major agricultural products tend to increase as a result of flood. This will lead to a higher inflation rate in the future.
(3) The fluctuation in oil prices: The injection of 600 billion US dollars of Quantitative Easing 2 (QE2) into the global economy has resulted in the depreciation of US dollars as well as a decrease in yields on Treasury bill. This has led investors to shift their investment position. Normally, investors would shift their investment position towards Euro currency and European bonds. However, since Euro zone economy situation at present remains fragile. This has ultimately pushed investors to invest in other currencies and commodities, especially oil. Together with promising signs of global economic recovery, this has led to a higher demand of crude oil and an increase in oil speculators. An average crude oil price in Q4/2010 is expected to be in the range of 80-85 US dollars per barrel.
(4) A momentum loss of consumption in durable goods such as electronics and automobiles: these commodities have been the key drivers of private consumption during the past three quarters. In the third quarter, these factors expanded by 31.7 percent. Consequently, private consumption increased by 5.1 percent but it is expected to grow at a slower pace during the fourth quarter. This is due to a high base effect from last year as well as a deceleration in consumption during the fourth quarter. Such slowdown in consumption was mainly from a high consumption after crisis period. Thus, the trend of consumption is likely to lose its momentum during the last quarter of 2010.
Thai Economic Outlook for 2010
Thai economy in 2010 is projected to expand by 7.9 percent compared to the contraction of 2.3 percent in 2009. The headline inflation is expected to be 3.2 percent, increasing from —0.9 percent in 2009. Current account is projected to generate a surplus of 4.3 percent of GDP, a slowdown on surplus of 8.3 percent of GDP in 2009. In the press release on 23rd August 2010, Office of the National Economic and Social Development Board (NESDB) revised GDP projection upward to 7.0 — 7.5 percent with 3.0-3.5 percent headline inflation and a current account surplus of 4.9 percent.
In this release of 22nd November 2010, NESDB raised the GDP projection to 7.9 percent with 3.2 percent headline inflation and a current account surplus of 4.3 percent due to the following reasons:
(1) The world economy and trade volume tend to grow at a faster pace than previous forecast. In this projection, the global economy and trade volume in 2010 are projected to expand by 4.3 and 7.5 percent respectively, compared to the previous estimation of 3.9-4.3 and 7.5 percent respectively. However, an appreciation of Thai baht partly affected export sector. From the global economic recovery, the growth rate of exports remains at the same pace as the previous projection.
(2) High economic growth during the past three quarters and continued expansion of key economic indicators will support Thai economy in the last quarter of 2010. Even though a flood will reduce agricultural production in the fourth quarter, the economic growth is likely to be compensated by the expansion of service sector, particularly in tourism and manufacturing sectors.
(3) Household consumption tends to expand at a faster pace than in previous projection. Household consumption grew by 5.1 percent in the first nine months. Therefore, household consumption is expected to rise by 4.9 percent, revised upward from the previous projection of 4.1 percent.
(4) Total volume of imports is forecasted to grow by 25.5 percent, compared to an expansion of 24.9 percent in the previous forecast. An upward revision is due to a continued expansion in private consumption and investment that tend to increase considerably.
(5) Trade balance is forecasted to record a surplus of 13.3 billion US dollars. Together with a surplus of service account balance, the current account is expected to register a surplus of 13.6 billion US dollars or 4.3 percent of GDP, a downward revision from the previous projection due to an increase in projected value of imports.
Supporting factors for Thai economic expansion
(1) Thai economy in 2011 will continuously expand. The momentum of 2010 economic improvement, particularly the domestic demand will be an economic impetus and offset the deceleration of the external demand.
(2) The income of grass root consumers is expanded as a consequence of (i) increase of civil servants’ salaries, minimum wages, and private officers’ salaries; (ii) the tendency of the rise of farm income due to the pickup of major agricultural product prices — such as prices of rubber, cassava, and sugar cane — as well as the implementation of the farm income guarantee measure; (iii) the 21.8 percent expansion of 2011 fiscal budget from the prior year which will enlarge the government expenditure; and (iv) the low rate of unemployment The above factors will contribute to the continual growth of the domestic demand.
(3) The interest rates tend to be at the low level, specifically during the first half of 2011 due to
(i) the US, EU, and Japan have been implementing the loosen monetary policies in order to accelerate the economic revival. Thus, the interest rate policy adjustment in these countries is predicted to occur in the forth quarter of 2011; and (ii) the developing countries are worrying about their currencies’ appreciation so that they avoid raising their interest rates to prevent the capital inflows which could in turn cause the appreciation of their currencies.
Risk Factors and Limitations
(1) The world economic revival is still fragile specifically the recovery of the EU countries and Japan which mainly rely on the external demand. Nevertheless, the external demand of these countries tends to be affected by the exchange rate fluctuation. Thus, the engines of economic growth of these countries in 2011 tend to slowdown, compared to 2010. Together with the limited monetary and fiscal policies, the EU and Japanese economies are likely to expand at a low level. Under the above conditions, the US and Chinese economic growths would decelerate since the EU countries and Japan are their major trading partners.
(2) The political condition remains unstable despite the calmness during the latter half of 2010 affected the continuation of fiscal policy implementation and the government management. As a consequence, the investors’ confidence would be affected and lead to delay of their investment in Thailand.
(3) Agricultural production and farm income face a risk from (i) the weather fluctuation principally the deluge at the end of 2010 which would generate the continuous impact in the first quarter of 2011; and (ii) the baht appreciation against US dollar as well as Vietnamese dong which is the main competitor in rice exports.
(4) The capital flows from major economies to developing countries particularly Asian countries lead to the continual appreciation of currencies in this region as well as Thai baht, lowering the competitive advantage of their exports. Furthermore, the capital movement in order to speculate in capital and real estate markets could cause the rise of asset prices, especially in the real estate market which indicated by the increase of detached house price by 2.5 percent in the third quarter of 2010, the first improvement since the first quarter of 2007.
(5) The labor shortage in some industries is one of the key barriers to their expansion. Despite the higher orders during the economic recovery, the producers are unable to respond to consumers’ demand, lowering the opportunity to expand their businesses.
(6) The inflationary pressure could occur if the agricultural product prices increase too quickly due to the supply shock which was caused by the natural disaster. The higher inflation rate may lead to the rise of interest rate; however, the increase in interest rate would generate the risk of capital inflows which would lead to the baht appreciation. Hence, the policy implementation in order to address the problem of economic stability will be constrained.
Key Assumptions for 2011 Projection
(1) The world economy in 2011 is predicted to grow by 3.6 — 4.0 percent, down from 4.3 percent projection in 2010 due to the economic expansion in developing countries. Due to concerns over the impacts from the currency war generated by the implementation of monetary policy of major economies, the global economy in 2011 is expected to slow down. After the launch of the US quantitative easing 2 (QE2), currencies of many nations are under extreme pressure and thus are likely to appreciate. This will affect the economic recovery of export-oriented countries specifically EU and Japan which are currently at a fragile state. Together with the Chinese monetary policy to appreciate Yuan against US dollar but depreciate against EUR, this will place tremendous amount of pressure on exports as well as the overall economic conditions of EU. Thus, the recovery of EU and Japan is vital to maintain sustainable recovery of global economy in 2011. Besides, the global trade volume in 2011 is projected to pick up by 6.5 — 7.5 percent, down from 7.5 percent in 2010.
(2) The average price of Dubai crude oil in 2011 is expected to be within the range of 80 — 90 US dollars per barrel, increased from the forecasted 77 US dollars per barrel in 2010. Similarly, other organization predicted that WTI crude oil price in 2011 would be in the range of 76.6 — 100 US dollars per barrel. Key factors responsible for the increase in crude oil prices include: (i) higher demand for oil following global economic expansion particularly in Asian economies and; (ii) speculation during the improvement of the global economy and high liquidity in the money market. Although demand for crude oil in 2011 is on the rise, this demand can be satisfied by production of non-OPEC members. This led to low tension in crude oil market and thus crude oil price in 2011 is expected to expand at a relative pace.
(3) Export prices in US dollar are forecasted to grow by 5.5 percent, down from the predicted 8.7 percent in 2010 due to high base effect. Nevertheless, export prices continued to improve because: (i) increase in price of agricultural products in response to increased global demand as well as decline in supply from natural disaster; (ii) pickup of the domestic wage; and (iii) the increase in commodity prices after continual prices fixing policy of government during the economic contraction. Import price in US dollar is expected to expand by 5.3 percent, down from 8.0 percent in 2010 since the oil price which is the main factor of import price is projected to expand at a slower rate than in 2010. This trend can be seen from (i) crude oil price in 2011 tends to increase approximately by 8 US dollar per barrel from 77 US dollar per barrel in 2010 to 85 US dollar per barrel in 2011; and (ii) crude oil price in 2010 tends to increase approximately by 15 US dollar per barrel from 61.6 US dollar per barrel in 2009 to 77 US dollar per barrel in 2010.
(4) Number of foreign tourists in 2011 is predicted to be around 15.8 million persons, an improvement from the 2010 projection of 15.2 million persons.
Thai economic projection for 2011: Thai economy is forecasted to grow by 3.5-4.5 percent with 2.5-3.5 percent headline inflation and 3.3 percent current account surplus to GDP.
Projected growth components in 2011
(1) Total consumption expenditure is forecasted to grow by 4.1 percent with the expansion in household consumption of 4.3 percent decelerated from the 2010 expected figures of 5.0 and 4.9 percent respectively, partially, caused by a high base effect. However this resumption of household consumption will be supported by (i) an increase in public servant’s income and minimum wage, (ii) the farmers’ income guarantee scheme, and (iii) an increase in farmer income caused by higher crop price of which is driven by the increase in crop prices and demand, both for household consumption and usage in alternative-energy production, in the world market. Thus an increase in the household position in both agricultural and non-agricultural sectors, combined with a continually increase in consumers’ confidence, are expected to drive the household consumption in 2011. The public consumption expenditure is expected to expand by 2.7 percent.
(2) Total investment is projected to expand by 8 percent, decelerated from the projected 2010 growth of 9.7 percent. Private investment is expected to grow by 9.8 percent, also decelerated from the last year expected figure of 13.9 percent. However, for the year 2011, private investment is expected to be a major driving factor for the Thai economy as it is expected that investment in the industrial sector will expand. In addition the investment environment also improved as the incidence in the Mab Ta Phut industrial zone is solved combined with an appreciation in Thai Baht and a continually low real interest rate. Public investment is expected to expand by 2.5 percent.
(3) Export value of goods in US dollar terms is forecasted to grow by 11.7 percent, decelerated from the expected 2010 growth of 25.1 percent. Both export volume and price are expected to decelerate due to a high base effect and a sluggish in world economic recovery. An appreciation in Thai Baht is also one of the important factors that will put a pressure on Thai export. It is also projected that the agricultural export volume will be reduced because the supply of agricultural product is damaged by the flood which occurred in late 2010. Under these conditions, it is expected that export volume and price will grow by 6.2 and 5.5 percent respectively. Export of goods and services is also projected to expand by 6.0 percent, decelerated from the projected 2010 growth of 14.3 percent.
(4) Import value of goods in US dollar terms is forecasted to expand by 13.4 percent, decelerated from the forecasted 2010 growth of 33.5 percent. This slowdown is expected to be experienced in both export volume and price which are projected to grow by 7.9 and 5.3 percent respectively, compared to the expected growth of 25.5 and 8.0 percent in 2010. However, it is expected that the expansion in import will be consistently supported by an increase in investment and private consumption as well as appreciation in Thai Baht. Import volume of goods and services is likely to rise by 8.0 percent, decelerated from the projected 2010 growth of 20.9 percent.
(5) Trade balance is expected to register a surplus of 12.0 billion US dollars, declined from the expected 2010 surplus of 13.3 billion US dollars. This decline in trade balance, while experiencing an increase in export value, is due to a higher increase in import value than an increase in export value. Once combined with a fact that the services account will reach only a small surplus, the current account is expected to register a surplus of about 12.0 billion US dollars or 3.3 percent of the GDP. This current account surplus is lower than the projected 2010 surplus of 13.6 million US dollars.
(6) Economic stability: current account surplus tends to decline along with a lower tension in inflation. The average headline inflation is expected to be 2.5-3.5 percent which is very close to the projected level in 2010 of 3.2 percent. It is also expected that the unemployment rate will stand at 1.3 percent.
A recovery in world economy and an improvement in domestic political situation, as well as strong economic fundamentals, cause Thai economy in 2010 to accelerate at a high and sustainable pace. In 2011, however, a lower world market demand, along with a high base effect, will cause the Thai economic expansion to be slower. In addition, fluctuation in capital flow, exchange rate, and crude oil price combined with a severe natural disaster also cause intricacy in economic policy management. Furthermore, the expansion in the tourism and investment sector is based on the stability of domestic political situation. Thus the key issues for the economic management in 2011 are:
(1) Assisting those who are affected by the deluge in the late 2010 by implementing the farm income compensation scheme and rebuilding public infrastructure. In addition, the water resource management plan for both agriculture and consumption should be prepared in order to prevent the flood and drought in the future.
(2) Managing and tackling the problem of rising commodities price which is caused by a higher agricultural product price induced by a decrease in supply of agricultural products affected by the flood, and a higher cost of production which is driven by an increase in minimum wage and also a higher demand for those particular commodities in the market.
(3) Encouraging the export sector to consistently use financial instruments to manage risk arising from the exchange rate fluctuation. It is also recommended that financial institutions should create varieties of those instruments which are easy to be used and have low operating costs. More importantly, for the SMEs who have limited access as well as limited abilities to use such instruments, government should provide basic supports and supervise them until they will be able to fully apply those risk hedging tools.
(4) Urgently helping those labors who are affected by the flood and solving the problem of labor shortage in the industrial sector in order to support an incoming expansion in private investment and foreign direct investment.
(5) Creating harmony and solidarity among Thai people through the implementation of reconciliation plan as well as restoring Thai images and confidences of foreign tourists and investors.