Briefing Notes for the Launch in Bangkok, April 2007
Growth and inflation performance and prospects
- GDP growth for 2006 was5.0%, higher than the 4.5% growth recorded in 2005. However Thailand's growth was the lowest of all countries in South-East Asia.
- Ten years after the Asian financial crisis of 1997, Thailand, along with other crisis-hit East Asian economies, has made great strides in reviving the strength of its economy. Between 1999 and 2006, average per capita income in the crisis-hit countries grew by more than 8%.
- GDP growth for 2007 is expected to be lower than in 2006, at 4.7%. Furthermore, with ongoing political tensions the macroeconomic outlook will still be subject to greater downside risks than in other South-East Asian economies.
- Inflation for 2006 at 4.6% was virtually unchanged from the previous year. It is expected to decline considerably to 3.6% in 2007.
Managing the exchange rate- the biggest challenge in 2007
- Pressure for the baht's appreciation is expected to continue in 2007 with the large United States current account deficit and the continuing flow of capital into the region.
- It will be increasingly difficult for monetary authorities to pursue an independent monetary policy in response to shocks, as was the case in 2006, while targeting exchange rates against the backdrop of more open capital accounts.
- Thailand's imposition of capital controls may not be a long term, sustainable solution. The controls may lead to a deterioration of the overall investment climate, a situation that Thailand cannot afford as it has seen a steady decline in investment share in GDP since the 1997 crisis (see below). Also, as economic agents, particularly speculators, become used to such interventions and identify ways to get around them, they become increasingly ineffective.
- Greater exchange rate flexibility is one sustainable solution. It would take away the "one-way bet" that encourages even more capital inflows than otherwise because markets would quickly realize that the currency could move in either direction.
Economic vulnerability is increasing
- Recently Thailand, along with other crisis-hit economies, is displaying renewed vulnerability to a currency crisis. A vulnerability index developed by UNESCAP shows increasing vulnerability in 2006.
- Thailand's vulnerability, in common with other crisis-hit countries, is due to appreciation of the currency driven by short-term capital inflows, and inflation in the economy from higher oil prices.
- Vulnerability in Thailand has also increased from a decline in the ratio of foreign reserves to short-term debt, as higher oil prices eroded current account balances and slowed the accumulation of reserves.
Domestic demand crunch is biting
- Since the Asian financial crisis, the contribution of domestic demand to economic growth has declined sharply in Thailand, along with all other East Asian countries except China. Thailand saw the greatest fall in domestic demand of all East Asian countries, a decline of 19% in 2000-2006 as compared to pre-crisis levels.
- The brake on domestic demand has been investment, rather than consumption. The decline in investment was due to a drop in private investment's share in GDP, which has not yet recovered to its pre-crisis level. Thailand's private investment is the second worst hit in the region, after Indonesia, falling by nearly 50%.
- Construction and machinery and equipment contributed much to the falling share of investment in GDP. The decline in machinery and equipment investment especially raises concerns about the sustainability of growth.
- Shortages of capital funds are hindering the recovery of private investment in Thailand, as well as other countries in East Asia. The stock of private domestic credit as a percentage of GDP declined after the crisis. Credit shortage was very evident in Thailand because loans were allocated more for consumption. The share of individual consumption loans to total loans in Thailand reached 24% in the first half of 2006, up from 12% between 2000 and 2005.
- Further financial reforms are needed to promote private investment- improved risk management by banks, and minimum payment and income requirements for credit cards.
- Capital markets should be further developed, as an alternative source of funds for investors. At the moment mainly large corporations use capital markets in Thailand. More than 70% of total bonds and long-term debt securities between 1999 and 2005 were issued by corporations with assets above 50 billion baht.
- The Government should also take measures to improve the investment climate for private investment. The three main issues are: macroeconomic stability, including macroeconomic policy, policy credibility and certainty; adequate infrastructure; and good governance.
China's huge trade creates challenges and opportunities for Thailand
- Labour-intensive goods still account for many of China's main export product groups. Thailand will face very stiff competition from China in these products, especially in textiles and apparel which will see quotas on China lifted by the United States and European Union in 2008.
- Thailand, as a middle-income ASEAN country, has great opportunities to export technology-intensive intermediate-input goods to China. ESCAP analysis shows that China is still operating as a labour-intensive hub to assemble and then export technology-intensive intermediate goods imported from the Asia-Pacific region. Thailand however is not performing as well as other middle-income ASEAN economies over the last five years in exporting these products. Thailand was the only country in this group whose imports from China outweighed exports to China of such products in 2005.
- Thailand also has a clear opportunity to export agricultural products to China, which are goods in which China is a major importer.
Getting the best out of bilateral and regional trade agreements
- Thailand has recently been an active participant in bilateral trade agreements. It is imperative to minimize the costs and maximize the benefits to the economy of such agreements.
- ESCAP analysis shows that many existing bilateral and regional trade agreements in the region do not stand up to scrutiny. Typically, agreements are short on modes of implementation, agreements on rules of origin and information on what recourse is available for non-compliance.
- UNESCAP proposes some key issues to be considered by policymakers during the conceptual, design, negotiation and implementation phases of an agreement:
- For trade in goods, a comprehensive coverage of products is the best approach, by using a "negative listing" approach with few (if any) exceptions covering tariffs and quantitative barriers and speedy elimination of those exceptions.
- There should be broad coverage in services and a reasonable period for implementation.
- Including clauses for transparency, consultation and dispute settlement is important for the agreement's smooth functioning.
- Using simple and transparent rules of origin, customs procedures and standards will minimize the confusion and administrative costs common to most agreements.
- Including competition policy, mobility of people and mutual recognition of various standards can lead to deeper integration and should thus feature in negotiations.