Thailand’s economic growth this year has been mainly driven by high export growth.  Domestic demand, on the other hand, continued to be depressed by high oil prices, higher inflation, rising interest rates, and declining terms of trade.  Political uncertainties since the beginning of the year also lowered consumer and private investor confidence and delayed public investment. Real GDP growth this year is projected at 4.5 percent, the, same as last year. Net exports surged as exports grew strongly, reflecting robust global demand, while imports slowed in line with depressed domestic demand.  Growth in 2007 is expected to be similar to this year. A forecast decline in fuel costs, lower inflation, and interest rates and improved confidence next year should help encourage household consumption and private investment. Public investment growth will also be higher next year as Government budget disbursements, which were delayed in the last quarter of 2006, will resume in January 2007.  Resources on Thailand | | Country Overviews | |
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Export growth, on the other hand, will likely decelerate with the lower growth expected in several of Thailand’s major markets, namely the U.S., Japan, and the EU, and the expiration of the U.S. Generalized System of Preferences for Thailand at the end of 2006. Thailand’s external situation remains robust. Because of a much lower trade deficit and a rebound in the services account the current account is expected to swing to a surplus of around 1.5 percent of GDP in 2006 from a deficit of 2.1 percent last year. The current account surplus would decline to roughly 0.2 percent of GDP next year as exports of goods decelerate while those of imports accelerate. At the end of August, foreign reserves stood at US$59.4 billion or 3.2 times short term external debt. Total external debt is 28 percent of GDP. The fiscal situation remains strong. The government budget is balanced this year, and will be in deficit by about 1.2 percent of GDP in 2007. Public debt as a share of GDP as of August is 41 percent and is projected to remain below 50 percent over the next 5 years. Headline inflation and interest rate peaked this year and are expected to decline in 2007. The sharp rise in inflation this year mainly reflects a rise in domestic retail petrol prices, especially in the first half of the year, following the floating of retail prices since July 2005. Headline inflation this year will be around 5 percent, up from 4.5 percent in 2005. Core inflation has also risen. Inflation in 2007 is expected to ease to around 3-3.5 percent. Political uncertainty has diminished after the interim government was established in October. Consumer and investor confidence indices had been declining since the beginning of the year but improved after the coup in September as political uncertainties have somewhat cleared up. Nevertheless, sentiment has not risen back to in the levels of 2004 or 2005. Both consumers and investors are still waiting to see the policy direction of the interim government, which will be presented to the Legislative Assembly on October 27th, 2006. Private investment growth should strengthen modestly in 2007. This year, the sharp rise in energy prices, rising interest rates, real appreciation of the baht, delays in public spending, political uncertainties, and the uncertain outlook for global demand in coming years have taken a large toll on private investment growth. Private investment will grow at around 4.6 percent this year, the lowest since 2002, although overall manufacturing capacity utilization is very close to pre-crisis levels, with many industries running at more than 90 percent utilization. Next year, private investment growth should pick up slightly as energy prices fall, public investment resumes, political uncertainties are reduced and investor sentiments improve. Foreign direct investment was quite robust this year, expanding in the first 7 months of the year by more than 20 percent from the same period last year, but may be less so next year. Foreign investors will likely remain cautious and wait for greater clarity in policies, especially those related to foreign share holdings. Public investment should speed up in 2007 as disbursements delayed this year start in the beginning of next year. Public investment this year has been delayed, particularly that from the central government budget, reflecting cash flow management problems at the start of the year and delays in disbursing the investment budget due to political uncertainties. The FY2007 investment budget will be disbursed in January next year. Thus, next year, public investment is expected to rise further. However, there may be delays in the large infrastructure projects (known as mega-projects) which will be mostly undertaken by state-owned enterprises, because they will be revised by the interim government. Thus, public investment growth in 2007 should pick up modestly from this year, which should help strengthen investor sentiment and crowd-in private investment. Goods exports in 2006 have risen about nine percent in volume terms and by around 18 percent in value terms. The top three Thai exports remain non-electrical machinery and parts (HS84), electrical machinery and equipment (HS85), and vehicle and parts (HS87). The main export markets continue to be the U.S., Japan, and EU. Services exports growth reflects the rebound of tourism from the tsunami disaster at the end of 2004. As the global environment is quite uncertain next year with world trade volumes and growth in the economies of Thailand’s key trading partners expected to slow, export growth is also expected to decelerate in 2007. Moreover, Thailand’s exports to the US will be affected by the expiration of the US GSP for Thailand at the end of this year, while the Thailand-US bilateral free trade agreement negotiations have been delayed. Private consumption will unlikely be a major driver in 2007. Farm incomes next year will not support household consumption growth as much as they did in 2006, as world prices of Thailand’s key crops, which have increased by 13 percent this year, are projected to rise by only 0.5 percent in 2007. Household borrowing will tend to be limited due to substantial increases in the ratio of household debt to income since 2000. Lending rates, while expected to trend lower next year, will also remain higher than the low levels prevailing before the recent tightening of monetary policy. Thailand needs to focus on supply-side reforms to remain competitive in the coming years. Firms in the Thailand Investment Climate Survey indicated that regulatory burden, shortage of skilled labor and infrastructure inadequacies were constraining business operations and investment. Streamlining regulations (in respect of investment, labor, tax, customs, etc) will be an important step for raising rates of return for firms. Similarly, improvements in secondary education, vocational education, English skills and information technology skills will contribute much to removing the constraint of skill-availability and to expansion of information and communication technology-use by firms. Expansion of infrastructure and infrastructure services will lower logistic costs. Moreover, price controls have been put in place since last year on over 170 consumer products and could limit firm profitability and expansion. These need to be carefully re-considered. The interim government will continue policies to strengthen the quality of growth and has confirmed its commitment to elections in September next year. The interim government had indicated its commitment to pursue policies that promote the quality of growth, whereby the growth is underpinned by good governance practices and gains from growth are more fairly distributed to all sectors and groups in the country. The Government will also focus on political reforms, including revising the 1997 Constitution as well as reducing the problems and violence in the southern part of the country. The details of the policy platform for the up coming year will be presented by the Prime Minister to the Legislative Assembly on October 27th, 2006. Broadly, it will be consistent with the targets in five areas laid out in 10th National Economic and Social Development Plan (2007-2011): (a) improving social capital, (b) improving economic capital, (c) increasing community development and participation, (d) sustaining natural resources, and (e) promoting good governance.
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