Economic Report

(Extracted from 2002 Economic Outlook)

The Thai economy is expected to grow at a rate of 3.5-4.0 percent in 2002. The recovery of internal and external demand will play an important role in restoring the economy. Private consumption and investment are anticipated to continue expanding, due primarily to the recovery of both business and consumer confidence and a low interest rate environment, as well as effective government policies. Furthermore, the world economy has recovered faster than expected; as a result, this has considerably stimulated Thai exports. In 2002, monetary policy is also expected to play a more important role in stimulating the economy. Since inflation is expected to remain low, the policy interest rate, i.e. the 14-day repurchase rate, is likely to remain at a low level to continually stimulate domestic demand continually.

REAL GROSS DOMESTIC PRODUCT : In 2001, the Thai economy grew at a rate of 1.8 percent, compared to a 4.6 percent growth rate in 2000. The slowdown in the Thai economy was mainly attributed to the adverse impact of the sluggish world economy since exports, which accounted for more than 60 percent of GDP, contracted by 6.9 percent. While the growth rates of private consumption and private investment were 3.4 and 5.1 percent, respectively, the growth rates of public consumption and public investment were 1.6 and -6.6 percent.

According to the National Economic and Social Development Board (NESDB), the Thai economy is expected to expand by 3.5-4.0 percent as both internal and external demand is likely to recover. The domestic demand is now retrieved as a result of government stimulus policies and the remained low interest rate. Also, the cyclical pick-up of the world economy would substantially benefit Thailand’s export volume.

Private consumption is forecast to increase at a rate of 3.5 percent, compared to 3.4 percent in 2001. Higher consumer confidence and a low interest rate environment will be the main supporting factors for increased private consumption in 2002. Private investment is expected to grow at a rate of 5.8 percent, slightly higher than that of 2001. Construction will be a key driving force for private investment, as a result of the government policies to stimulate the real estate sector and a low interest rate environment. It is also anticipated that investment in machinery and equipment will pick up in 2002 although to a lesser extent since excess production capacity still prevails in many sectors of the economy.

In 2002, fiscal spending is expected to remain an important force for economic growth as government consumption and investment are expected to grow at the rates of 8.0 and 2.0 percent, respectively. In addition, economic recovery of trading partners will lend support to economic growth in 2002. Export value is anticipated to expand at a rate of 1.7 percent, compared to -6.9 percent in 2001. Imports are also expected to recover, in tandem with consumption, investment, and exports. Import value is forecast to be at a rate of 4.5 percent, compared to -2.8 percent in 2001.

INFLATION : Although the baht depreciated by more than 10 percent in 2001, headline inflation was recorded at 1.6 percent, only slightly higher than it was in 2000 (1.5 percent). The subdued inflation was a result of the slowdown in the Thai economy coupled with a decline in oil prices.

Headline inflation in 2002 is projected to be 1.3 percent, due mainly to the low pressure on volatile oil prices. Core inflation in 2002 is likely to be in the target range of 0.0-3.5 percent and is expected to be around 0.5-1.0 percent.

EMPLOYMENT : In 2001, the labor force expanded by 1.8 percent, whereas the number of persons employed increased by 2.6 percent, reflecting the ability of the labor market to absorb new labor entries. Thus, the unemployment rate dropped slightly to 3.3 percent, compared with 3.6 percent in 2000, with the economy still producing below its potential level.

EXTERNAL TRADE ACCOUNTS : In 2001, Thailand’s exports experienced a sharp decline of 6.9 percent in US dollar, due mainly to a slowdown in the world economy. Even with the plunge in exports, the trade balance in 2001 remained in surplus (US$2.5 billion) since imports declined by 2.8 percent. The service balance decreased slightly from a surplus of US$3.9 million in 2000 to a surplus of US$3.7 million in 2001. Therefore, the current account recorded a surplus of US$6.1 billion (5.3 percent of GDP), declining from a surplus of US$9.3 billion (7.6 percent of GDP) in 2000.

Thailand’s trade surplus in 2002 is expected to decrease to US$0.9 billion. As the economy begins to rebound, imports are expected to grow by 4.5 percent, while exports are likely to increase at a rate of 1.7 percent. Travel and income receipts are also expected to increase more than travel and income payments. Therefore, the current account in 2002 is expected to remain in surplus at US$4.4 billion, or 3.6 percent of GDP.

GROSS EXTERNAL DEBT : External debt declined from US$79.7 billion in 2000 to US$67.5 billion at the end of the year 2001, and was comprised of US$28.3 billion for public external debt and US$39.2 billion for private external debt. The drastic decline was mainly a result of increase in both public and private long-term external repayments.

EXCHANGE RATE : The average exchange rate of the baht depreciated to 44.5 baht per US dollar in 2001, compared with 40.3 baht in 2000. The exchange rate is expected to be stable in 2002 for the following reasons:

• The upturn in the US economy will positively affect the volume of trade surplus. Therefore, exports are expected to increase in 2002.

• Capital inflows to the securities market are likely to persist throughout the year 2002, while the private sector’s debt repayment continues, but in a lesser amount as a large portion of private external debt has already been repaid.

• External stability is likely to remain strong. International reserves at the end of May were 35.3 billion US dollars, which was equivalent to 2.5 times the short-term external debt and covered more than 4.5 months of imports.

• The Thai economy in 2002 has shown signs of improvement. The GDP growth rate is currently predicted to be 3.5-4.0 percent.

FISCAL POLICY : In 2001, the government continued to implement an expansionary fiscal policy, in order to stimulate the sluggish economy affected by the global slowdown. The government net revenue in FY2001 was 765.4 billion baht while the budgetary expenditure was 876.0 billion baht, leading to a 110.6 billion baht budgetary deficit (GFS basis) or 2.2 percent of GDP.

In FY2002, the government keeps maintaining the expansionary fiscal policy. To cope with the global economic slowdown and the uncertainty of its recovery, especially in the first and second quarters of FY2002, the government intends to have a wider budgetary deficit gap to boost the economy. Following to the GFS basis, it is anticipated that government net revenue will be 800.1 billion baht, while the budgetary expenditure is expected to be 993.1 billion baht. Hence, budgetary deficit is projected to be 202.2 billion baht or 3.9 percent of GDP, which is approximately 1.7 times higher than that in FY2001.

In FY2003, as economic outlook is expected to improve and the private sector is likely to become the major force of economic growth, the government plans to consolidate fiscal policy in concern of fiscal sustainability. To impose fiscal discipline, the government aims to reduce the budgetary deficit, projected to be 156.2 billion baht or 2.8 percent of GDP in FY2003.

With regards to public debt, at the end of March 2001, outstanding public debt was 2,869.4 billion baht or 53.5 percent of GDP. It is expected to peak in FY2002 at 59.18 percent of GDP and then gradually come down to 49.33 percent of GDP in FY 2007.

The government has realized the importance of fiscal sustainability in the medium term. Therefore, it will not allow the debt/GDP ratio to be higher than 65 percent, while the debt service is strictly limited to 16 percent of the government’s budget. Furthermore, to maintain long-term economic development, the ratio of government’s capital expenditure to the budget has to be higher than 20 percent. In the medium term, the government will aim to balance the budget by FY2008.

MONETARY POLICY : Thailand has adjusted its monetary policy in order to suit the changing economic situation. In June 2001, the Bank of Thailand (BoT) adopted a tight monetary policy aimed at strengthening external stability, by raising the 14-day repurchase rate, a policy instrument, from 1.50 percent to 2.50 percent. This slowed down capital outflow and brought international reserves to a satisfactory level. As external stability became strong and inflation remained at a subdued level, at year-end, the BoT started to ease monetary policy not only to stimulate growth, but also to facilitate its fiscal policy, which has reached its limitation. Consequently, the BoT lowered the 14-day repurchase rate twice, from 2.50 percent to 2.25 percent in December 2001 and from 2.25 percent to 2.00 percent in January 2002.

The eased monetary policy should help in stimulating the sluggish economy. The decline in a policy rate will eventually lower the deposit rate. A decrease in the deposit rate would then help commercial banks reduce their operating costs, thus enabling them to lower the lending rate, and hopefully narrow the spread. An expansionary monetary policy therefore should eventually enhance domestic demand, the expected major driving force of economic recovery. As a result, the credits adding back debt write off and transferred loans grew by 1.4 percent in April 2002 after contracting by 13.2 percent in 1999.

MEDIUM-TERM OUTLOOK  : In the medium term, the government has set the macro-economic framework, including an economic growth rate of 5.0 to 6.0 percent per annum, an inflation rate of no greater than 3.0 percent per annum, a current account surplus of 1.0 to 2.0 percent of GDP, and an appropriate level of international reserves.

The government will continue to implement an expansionary fiscal policy in the next five years. However, to maintain fiscal sustainability, the size of the budget deficit will continue to be smaller over time. According to the ninth National Economic and Social Development Plan, the government’s current expenditure growth is expected to decrease from 8.0 percent in 2002 to 5.0 percent in 2003 and stay at 4.0 percent in 2004 to 2006, while the government’s capital expenditure is likely to maintain a growth rate of 3.0 percent per annum. Over the medium term, the consumer price index inflation rate is expected to be around 2.4 to 2.6 percent.

As the world economy’s recovery is anticipated and the government stimulus plans for the domestic economy are expected to be effective, GDP growth is projected to increase continuously over the medium term, reaching 5.0 and 5.5 percent in 2005 and 2006, respectively. Private consumption and private investment also are expected to improve with average growth rates of 4.5 and 5.9 percent over the 2003-06 period.

The growth rates of exports and imports are expected to increase over time since trading partners’ economies and the domestic economy are likely to improve. However, import growth will be higher than export growth leading to a decrease in the trade surplus, and the trade balance is projected to become negative in 2005. Nevertheless, the current account is likely to remain positive with an average of 1.4 percent of GDP over the 2003-06 period, mainly due to gains from the service sector, especially tourism.

In the medium term, international reserves are anticipated to remain around US$30 billion. Although the Bank of Thailand will still have to pay back the external debt to the IMF in the amount of US$9.6 billion and the debt burden will be ended in 2005, it will not have an impact on the stability of international reserves.

THAI ASSEST MANAGEMENT CORPORATION AND FINANCIAL REFORMS

The health of Thai financial institutions has been improved as the government has implemented several measures to restructure and strengthen the troublesome financial sector. The capital adequacy of the banking sector stays at a satisfactory level, 14.0 percent of risk weighted assets and more than 8.0 percent of Tier 1 capital. In addition, non-performing loans declined from 47 percent of total outstanding loans in 1998 to 10.35 percent at the end of April 2002 as a large portion of NPLs has been transferred to the Thai Asset Management Corporation (TAMC) since July 2001. It is also expected that the recovery of the world economy will enhance the economic activities, thus inducing an expansion in domestic credit.

The establishment of the Thai Asset Management Corporation aims at alleviating the problem of excessive non-performing loans efficiently. The TAMC will purchase default loans from state-owned and private financial institutions and AMCs, then take the lead in dealing with non-performing assets and related corporate restructuring activities. This process should increase the capital adequacy of commercial banks even further. The banks then could provide new lending, thus supporting economic expansion in the near future as well. As of May 2002, the total number of debtor cases transferred to the TAMC amounted to 4,726 cases with a book value of 708.9 billion baht or 54 percent of total assets to be transferred. In addition, 357 cases with book values totaling 157.6 billion baht have now been concluded.

The government has gradually privatized state-owned commercial banks. The plan to privatize two of four state-owned banks are expected to be concluded in the near future, while a strategic plan for the other two banks is also under development.

Several legal infrastructures such as the Central Bank Act Amendment draft and Financial Institution Act draft have been prepared to establish a solid foundation for financial institutions in the future.

CAPITAL MARKET DEVELOPMENT : In 2001, the Stock Exchange of Thailand (SET) revived significantly with improved price stability and active trading activities. The SET index recorded 303.85 points at the end of the year, compared with 269.19 points in 2000. Also, total turnover value in the SET increased substantially to 1,577.75 billion baht, up by 70.81 percent from the previous year, reflecting the fact that investor confidence had returned and the Thai economy was on the path to recovery.

Regarding the policy towards capital market development, the government has emphasised the development of the Thai capital market in recent years, aiming to reinforce the strength of the Thai capital market as well as increasing its role as an alternative source of funds for the private sector. By early January 2002, a master plan had been formulated to cover all facets of the development of the Thai capital market: the equity market, the debt market, and the derivative market. It includes a number of measures that strengthen the demand and supply structure of the capital market, including the steady expansion of the investor base in accordance with the enlargement of quality investment choices, continued development of strong intermediary institutions, a standardized structure of supervision, and the promotion of market transparency and good corporate governance. These measures will increase the efficiency as well as enhance the competitiveness of the Thai capital market as a whole.

As a result of the implemented measures and improved economic conditions, the SET index increased gradually in 2002. For the first six months of the year, the SET index averaged 389.10 points with total turnover value of 1,335.61 billion baht. The daily average turnover volume doubled from the previous year. The improvement in the stock market is expected to continue throughout 2002 as various government measures, including privatization and matching funds, start to bear fruit.

Annex I

THAILAND: OVERALL ECONOMIC PERFORMANCE

Annex II

THAILAND: FORCAST SUMMARY (Percentage Change from Previous Year)