Thailand (Global Launch)
Date: 10 May 2012
The Economic and Social Survey of Asia and the Pacific will be released in Bangkok , Thailand , by:
Dr. Noeleen Heyzer
Under-Secretary-General of the United Nations and Executive Secretary of ESCAP.
Mr. Aynul Hasan
Macroeconomic Policy and Development Division
United Nations Economic and Social Commission for Asia and the Pacific
Country briefing note <download pdf file>
The Thai economy suffered from severe floods, but a strong rebound is underway
Thailand 's economy suffered from a series of production chain disruptions in 2011, growing by a mere 0.1% after a strong rebound of 7.8% in 2010. The worst flood in half a century inundated 30 out of 77 provinces, including key manufacturing bases in and around the capital as well as the northern and central regions, which account for half of the country's agricultural output.
Estimated flood damage was $46.7 billion, but the impact went beyond the Thai borders – for instance, global supply of hard-disk drivers was severely affected. Earlier in the year, the impact of the Japan earthquake was felt, especially in the automobile sector.
Investment was seen rising in the third quarter and the country's diversified exports helped ease the impact of the global slowdown, but the devastating flood resulted in a 23% contraction in manufacturing in the fourth quarter of 2011 from the previous quarter.
The Government introduced comprehensive measures including a water management plan, with a view to restore investor confidence. Full output restoration is expected in the second or third quarter of 2012.
Meanwhile, new initiatives including minimum wage increase and rice mortgage scheme are expected to help economic growth become more inclusive in 2012.
In 2012, Thailand is expected to grow faster at 5.8%, driven by large public investments set to take off in post-flood reconstruction. Private consumption and investment are also expected to make strong contributions, as consumer confidence has picked up quickly since the floods.
Inflation has been stable
Inflation remained steady, without a noticeable rise during the severe floods. This was partly due to favourable harvest earlier on in the year. Aggressive monetary tightening in 2010 and through most of 2011 also helped contain inflation, which stood at 3.8% in 2011 as compared to 3.3% in 2010.
Fiscal policy aims at post-flood reconstruction and stronger domestic demand
Fiscal deficit has narrowed from 4.7% of GDP in 2009 to 2% and 1.5% in 2010 and 2011 respectively, but is expected to widen in 2012 due to post-flood reconstruction.
The Government announced a range of measures aimed at boosting domestic demand, including tax incentives for first-time vehicle owners and a rice mortgage scheme for farmers.
A minimum wage increase was also introduced in April 2012, with a parallel cut in corporate income tax rates.
In response to unprecedented floods, the government reallocated 10% of its budget for flood relief and rehabilitation programmes, and announced plans to borrow 400 billion baht ($12.7 billion) to pay for water management projects and an insurance fund to restore investment confidence.
Monetary policy shift gears from curbing inflation to supporting growth
In response to inflationary pressures, not least from high commodity prices, the central bank increased its policy interest rate by a total 220 basis points from July 2010 to August 2011. The severe floods, however, prompted it to cut rates in November 2011 and again in January 2012 by a total 50 basis points, down to 3%.
Export growth slowed and capital flows more volatile in 2011
Current account surplus was at 3.4% of GDP in 2011, down from 4.3% in 2010.
Net exports grew by a slower 17.4% in 2011, compared to 28.1% in 2010, as severe floods took a heavy toll on manufacturing and resulted in a decline in export in the fourth quarter. With imports of capital goods rising amid post-flood reconstruction activities, trade surplus is expected to narrow further in 2012.
With prolonged weak external demand from traditional markets in developed countries, it is a relief to know that South-East Asia's export base has diversified over the past decade, with a higher share of exports now going to regional markets in Asia . For instance, the share of euro zone and United States markets declined from 32% in 2000 to around 20% in 2010. This same period, however, also saw the deepening of regional supply chains, with a rising share of intermediate goods exports. ESCAP analysis shows that the subregion's export dependency on traditional markets remains quite high, once such re-exported goods are considered.
Foreign direct investment inflow was $8.4 billion in 2011, compared to $9.7 billion in 2010 and $4.9 billion in 2009.
Portfolio investment flows exhibited greater volatility in 2011 and large outflows were seen in the second half of the year due to sovereign debt issues in advanced economies and foreign banks seeking to recapitalize repatriated part of their funds. As a result, the Thai stock market lost slightly in 2011, after gaining 41% in 2010, while the Thai baht depreciated against the US dollar in 2011, after appreciating 9.8% in 2010.
Post-flood reconstruction and new policies such as minimum wage increases could help to address both short and long term challenges that the country is facing. In addition to boosting investor confidence and reviving the economy in the short term, careful design and effective implementation could help make the economy more resilient and inclusive in the coming years.