Date: 18 April 2013
The event will be held in Bangkok, Thailand, with the participation of distinguished participants from academia, government, civil society, international organizations, and the press. The list of well known participants making opening remarks, presentations and commenting on the publication includes:
Mr. Aynul Hasan
Chief, Development Policy Section
Macroeconomic Policy and Development Division
United Nations Economic and Social Commission for Asia and the Pacific
Country briefing note <download pdf file>
Economy gets a strong rebound from late-2011 floods
- The economy exhibited a robust post-flood recovery in 2012, with output growth rebounding to 6.4% on reconstruction and revived business activities. The severe floods had pushed growth down to only 0.1% in 2011.
- There was a quick turnaround of production in domestic-oriented sectors, such as food and construction materials, but as production capacity started to pick up in the middle of 2012, the global environment sharply deteriorated and exports dipped.
- Thus growth in 2012 was supported mainly by domestic demand, especially private consumption. In addition to favourable employment conditions, consumer spending benefited from government schemes, such as tax relief for first-car purchases, higher minimum wage levels in key economic areas and higher salaries for civil servants with university degrees. The return of overseas tourists also contributed to the growth outcome. Replacement of damaged production facilities helped to boost fixed investment although weak export orders held back investment growth somewhat.
- The economy is projected to grow by 5.3% in 2013. Private consumption should remain strong, supported by higher wages and modest inflation, although fiscal schemes, such as waived excise tax for first-car purchases, have expired. The economy-wide adjustments to a higher-wage environment could affect growth performance, especially among small and medium-sized enterprises. The outlook will also depend on how speedily the public investment plan on water management moves forward.
- Average annual inflation rate declined from 3.8% in 2011 to 3% in 2012. Food inflation, which reached nearly 8% in 2011 as a result of flood damage, softened as agricultural production regained its former position. Inflation expectations may rise slightly as the application of higher minimum wages is extended to all provinces in 2013.
Fiscal policy looks to large-scale investments and consumption-boosting measures
- Fiscal deficit was at manageable levels, at 1.9% of GDP in 2011 and 2.7% in 2012.
- A large-scale public investment plan for water management contributed to fiscal policy support, although the boosting impact could be lower than planned due to slow disbursement of funds.
- The Government temporarily waived excise taxes for first-car purchases, introduced higher minimum wages nationwide and raised salaries for civil servants.
- To help the business sector cope with higher minimum wages, corporate income tax rate was reduced from 30% to 23% in July 2012, and further to 20% in January 2013.
Monetary policy faces pressure on the exchange rate
- The policy interest rate was lowered to support the recovery from a sharp, flood-related economic downturn and was further reduced to 2.75% in October 2012 as the global slowdown deepened. It has since stayed the same, as of 1 April 2013.
- To guard against the impact of liquidity injections in the advanced economies, in particular the pressure on exchange rates and asset prices, countries in Southeast Asia took various policy measures such as limiting currency forwards, imposing capital controls and promoting capital outflows.
- Thailand lifted the limit on individuals making direct investments abroad, but this action has raised concern that long-term funds are being traded for short-term funds, making the country more vulnerable to a sharp capital reversal.
Strong currency is becoming a concern
- Export performance gradually improved on restored export-oriented production capacity, but it was still constrained by weak export orders. Total merchandise exports expanded modestly by 5% in 2012, partly on the low base effects.
- While automobile exports advanced solidly, shipments of electronics and electrical products fell markedly. Agricultural exports also dipped, reflecting the lower exports of rice and generally less supportive prices.
- Foreign direct investment inflows picked up somewhat after the 2011 floods and remained largely stable afterwards. Portfolio inflows trended upwards in the third quarter.
- After the start of 2013, the Thai baht appreciated sharply, by nearly 3% in January alone, partly because of increased capital inflows into short-term securities, as reflected in record stock market performance. Given that Japanese investment is dominant, the yen's depreciation also served to strengthen the baht as businesses were expected to benefit from cheaper capital imports from Japan .
Output and employment impacts of minimum wage increases
- ESCAP analysis indicates that a minimum wage policy, if designed carefully along with supportive adjustment measures, boosts prospects without adversely affecting businesses. For example, recent minimum wage hikes in Thailand are projected to increase employment growth by up to 0.6 of a percentage point by 2015, while real GDP growth is expected to increase by 0.7 of a percentage point above the level foreseen if no minimum wage increases were implemented.