A year after changing foreign exchange system to the managed float on July 2, 1997, the Thai economy experienced the baht volatility, which severely depreciated until the early of 1998. Inflation climbed up, and net foreign capital outflaw tightened liquidity in domestic financial system to the point that obstructed production and exports. However, a positive economic stability indicator is a sharp decline of current account deficit.
The baht gradually resumed stability in the first half of 1998. However, tight liquidity, high interest rate and sudden economic recession in 1997 led to the contraction in dometic production and investment, while unemployment raised. This reflected the severe impact of crisis in financial system on real economic sector.
In the second half of 1998, volatility risk of yen against US dollar will remain its influence over baht. Moreover, regional economic recession is likely to be an export constraint. Therefore, it is necessary to prepare to cope with external conditions by easing liquidity problem and efficiently utilizing budget to facilitate economic recovery in 1999. 1. The world economy is an uncertain factor for recovery.
Thailand was the first country in this region that fell into economic crisis in 1997. Afterwards, Thai economic recovery was depressed by the volatility due to continued economic crises in the region such as Korean and Indonesian crisis. The recent major crisis is the volatility of yen against US dollar. If this situation worsens to the point that effects regional and world economy, it will be an obstacle for the Thai economic recovery.
1.1 Japan's economy gradually recovered in 1996, after 4 years of stagnation, with the growth rate of 3.9 percent. The expansion was more stable in the early of 1997. However, economic activities in the second quarter turned to a severe decline. This loss in dynamics of economic expansion was caused by many internal factors especially consumption tax increase, public expenditure reduction, and weakness of financial system which was partly a result of asset price devaluation in the early of 1990s.
1.2 In the second half of 1997 and early of 1998, Asian economic crises had an impact on Japan's financial system. Concerns on domestic financial system increased and the new round of asset price devaluation reduced domestic demand. Furthermore, Asian economic crises hurt export sector. Japan's economy inevitably turned to recessionary cycle. By the fiscal year 1997, an economic contraction of 0.7 percent was first recorded in two decades. The Japanese government, therefore, announced economic stimulation measures worth 16 trillion yen on April 24, 1998. However, the economy in May and June remained in downward trend, as observed from the slowdown of business fixed asset investment, manufacturing output, major price indices and weakening private consumption.
1.3 The weakness of Japan's economy and Asian economic crises persisted during the peak period of the US economy. In 1997, the US economic growth was 3.8 percent, the 9-year highest rate, while inflation was around 2.0 percent, the lowest rate in 32 years. In addition, 24-year low unemployment rate brough down inflationary pressure in the period of high growth. Meanwhile, investors' inconfidence in Japan's and Asian economic conditions induced capital movement from Asia to the US. As a result, the yen continued to depreciate to record an 8-year low of 146.19 yen/US dollar on June 15, 1998.
1.4 Due to the severe depreciation of yen, investors were anxious that Chinese and Hong Kong currencies would be devalued and a second round of economic crisis might occur. Consequently, Asian recovery might become more difficult and further effect the world financial stability. Finally, the Japanese and the US government co-operated together to intervene the exchange market to the value of around 2 billion US dollar on June 17, 1998. This was the first intervention after 1995, and could bring the yen up to 130.67 yen/US dollar. However, after this intervention, the yen continued to depreciate due to Japan's weak fundamental economic factors. 2. Exchange rate gradually resumes stability but remains in caution.
Since Thailand has changed foreign exchange system from pegging to a basket of currencies to managed float system on July 2, 1997, the movement of baht can be summarized into 3 periods as follows:
2.1 Average reference rate of baht against US dollar continued to depreciate over months since July 1997, of which the average rate was 30.268 baht/US dollar, dropping by 17.42 percent from June 1997. In January 1998, the average rate was 53.815 baht/US dollar, dropping by 18.83 percent from December 1997 and the lowest rate was recorded at 56.061 baht/US dollar on 12 January 1998.
2.2 Later on, the baht had gradually appreciated. This is partly due to the Bank of Thailand's waiving of exchange market separation measure from January 30, 1998 onward. Consequently, average exchange rate of baht between February - May 1998 appreciated by 13.97, 10.73, 4.49 and 0.86 percent as compared to January - April 1998 respectively.
2.3 However, from the late May to mid-June 1998, baht returned to depreciate, resulted from depreciated yen against US dollar. Average baht in June dropped by 8.25 percent from the previous month and the reference rate at the end of June was 42.313 baht/US dollar. 3. Inflation is expected to slowdown in the second half of the year.
3.1 After the change of exchange system in July 1997, inflation rose eontinuously from 4.4 percent in June to 7.7 percent in December 1997 and 10.7 percent in June 1998 respectively. This was attributable to the volatility of exchange rate that pushed up production cost and price, the increase of value added tax rate from 7 to 10 percent and the high demand for rice exports.
3.2 During the first half of 1998, inflation was up to 9.7 percent on average, compared to 4.4 percent in the same period of last year. Both food and non-food inflation rose by 11.8 and 8.3 percent on average, compared to 3.4 and 5.1 percent in the same period of last year.
- Prices increased for all items in the food category especially price of rice,flour and flour products increased by 41.5 percent, compared to 26.5 percent in the same period of last year due to high demand for rice. Price of eggs, dairy products, groceries, non-alcohol drinks and ready to eat food increased by 12.1, 9.1, 8.3 and 8.8 percent, compared to 15.4, 13.5, 16.3 and -2.3 percent in the same period of last year respectively.
- Among non-food category, price markedly increased in vehicle and transportation service group by 10.6 percent, compared to 2.6 percent in the same period of last year due to rising price of LPG gas, oil and bus fare. Price of tobacco and alcohol drinks increased by 20.5 percent, compared to 13.1 percent in the same period of last year due to rising price of cigarette, beer and liquor.
3.3 Wholesale price index increased by 19.2 percent, compared to 0.9 percent in the same period of last year. Price of agricultural and food products group, and manufacturing group increased by 21.8 and 17.4 percent, compared to 2.7 and -0.3 percent in the same period of last year respectively. Construction material price index increased by 18.2 percent, compared to 0.3 percent in the same period of last year. Prices rose for all products especially steel products, cemen, concrete, ceramics and electricity and water supply equipment. Export price index was push up by rising production cost to increase by 28.3 percent, compared to 6.3 percent drop in the same period of last year.
3.4 Inflation is likely to be lower in the second half of the year. Possible factors to bring down inflation are less volatility of baht than that in the same period of last year, the likelihood of gradual interest rate reduction will not generate severe inflationary pressure, and continuing contraction of domestic demand. Inflation for the whole year is expected not to exceed 10 percent. 4. Short-term interest rate declined continuously
Short-term interest rate, especially 7-day repurchase rate, which was higher than 20 percent during the first quarter of 1998, declined to the average of 18.81 and 16.38 percent in April and May respectively. Meanwhile, minimum lending rate (MLR) was rather stable during February - May 1998 at around 15.25-15.50 percent.
Real interest rate (MLR - inflation rate) dropped from 6.6 percent in January to 5.1 percent in May, compared to an average rate of 8.1 percent during the period of 1987-1996. 5. Liquidity remains to be domestic constraint.
5.1 Tight liquidity in financial system still persisted due to net capital outflow for foreign loan repayment by commercial banks. In addition, measures aiming at strengthening financial intitutions and improving supervisory system to international standard forced commercial banks to emphasize mainly on stability. Commercial banks with excess liquidity tended to lend their money in short-term market such as repurchase market, which provided average return of more than 19 percent in 7 days repurchase market during July 1997 - May 1998. Furthermore, this lending was treated as non-risk and required no additional provision for sub-standard assets.
Business firm inevitably confronted a severe liquidity shortage, especially most of export oriented business were unable to extend their packing credit line to catch up with weakening baht. Liquidity shortage of domestic business will generate both bad debt and non performing loan (NPL) to financial institutions. Consequently, financial institutions have to add up their reserve and be more strictly in loan providing.
After fiscal and monetary policy has been strictly undertaken in accordance with the IMF framework and the confidence in baht was regained at a certain level, the government, therefore, put efforts to ease liquidity for business sector as follows:
- Announcing 4 emergency decrees especially one on managing government burden to support Financial Institution Development Funds, which has been in action from May 8, 1998 onward. Accordingly, the Ministry of Finance had issued government bonds to the value of 150,000 million baht (50,000 million baht for the first issue and 100,000 million baht for the second issue.)
- The Bank of Thailand announced regulations for debt restructuring and collateral appraisal in the early of June.
- Injecting liquidity to business firms with external loans through state-owned special purpose financial institutions.
5.2 Money supply, deposits and credit of commercial banks. Narrow money (M1) has declined since March in line with the decline of current account deposits. In May, M1 dropped by 8.0 percent, compared to the same period of last year. Broad money (M2) continued to moderate from the early of the year, reflecting a slowdown of private credit. In May, M2 grew from the same period of last year by 13.3 percent.
Commercial banks' deposits and credit grew at a decreasing rate and monthly balance had declined since the early of the year. By the end of April, commercial banks held deposits to the amount of 4,355.0 billion baht while outstanding credit was 5,634.9 billion baht.
5.3 Capital market conditions The SET index closed at 267.33 at the end of June 1998, continuously decreased by 49.3 percent from the same period of last year, which recorded 57.7 percent decline. Investors were reluctant to invest in stock market due to the expectation that most of listed companies are likely to suffer losses. As a result, bearish condition was observed in security trading. Average trading volume for the first half of the year was only 3,022.96 million baht/day, dropping by 23.5 percent, compared to 37.5 percent drop in the same period of last year. 6. Production and consumption severely contracted in the first half of the year.
6.1 Private investment. Investment indicator showed a continued slowdown. Investment index decelerated from 96.3 and 69.7 in January and December 1997 to 61.0 and 40.5 in January and April 1998 respectively. In other words, the index dropped by 44.5 percent during the first four months period of this year, compared to 18.4 percent drop in the same period of last year. Permitted construction area, cement consumption and galvanized iron sales decreased by 71.3, 42.9 and 41.7 percent, compared to -4.1, 9.7 and 11.3 percent increase in the same period of last year respectively. Meanwhile, import of capital goods declined by 14.0 percent, compared to 3.3 percent increase in the same period of last year.
6.2 Private consumption in the first four months continue to decline in line with economic activities and contraction of purchasing power, especially expenditure on durable goods and construction. Regarding vehicle category, sales of automobiles, motorcycles and tires sharply dropped by 71.2, 50.5 and 38.5 percent, compared to 11.7, 10.5 and 6.8 percent drop in the same period of last year. Sales of construction material namely iron rods, galvanized iron and cement decreased by 28.3, 23.8 and 38.9 percent, compared to last year growth of -0.8, 5.3 and 8.2 percent respectively.
Electricity consumption moderated to 1.7 percent from 7.3 percent growth in the same period of last year. Consumption by industries declined by 2.2 percent while household consumption increased by 16.7 percent, compared to 7.8 percent increase in the same period of last year, due to recently high temperature.
Sales of beverages declined marginally. Among these, sales of beer and liquor increased by 14.5 and 5.7 percent, compared to 6.9 and -10.6 percent in the same period of last year respectively. Meanwhile, sales of soda and soft drinks dropped by 4.5 percent, compared to 18.1 percent increase in the same period of last year.
6.3 Production by sector: Industrial sector was subdued, while agricultural sector and tourism considerably expanded.
- Agricultural production in 1998 is observed an upward trend. Most crop production increased for example, major rice, maize, tapioca and rubber. Livestock production expanded especially frozen chicken production. Fishery production slightly expanded, especially for the production of black tiger prawn of which frozen shrimp and prawn exports in the first two months recorded a value of 21,386 million baht.
Average farm price for agricultural products in the first four months of 1998 remained an increasing trend from the second half of 1997. Price improved for almost all products such as major crop paddy-grade A, maize, rubber and tapioca.
- Manufacturing output index decelerated by 14.3 percent in the first four months of 1998, compared to 7.8 percent growth in the same period of last year. In light of economic recession and liquidity shortage, producers had to reduce production cost and expenses by, for example, slowdown production capacity, worker lay-off, and some small and medium firms had to shut down.
During the first four months of 1998, manufacturing output declined almost across-the-board, expecially vehicles, construction, food and beverages. Only export oriented production accelerated exceptionally. Especially, canned seafood, canned pineapple, textile and electrical circuits expanded sharply by 120.2, 57.1 72.7 and 35.6 percent, compared to 8.0, 28.4, -2.8 and 5.7 percent growth in the same period of last year.
- Tourism. The total number of incoming tourists during the first quarter of 1998 were 2,043,292 persons, increased by 2.6 percent compared to 2.7 percent in the same period of last year. This was contributed by the reduction of tourists from East Asia of which accounted for 53.4 percent of total tourists, notwithstanding the high growth of tourists from Europe, America, Australia and Middle East. Asian economic crisis was the main reason for lower growth of tourist than 7 percent annual target. However, movements in exchage rate encouraged dramatic growth of tourists from other regions, especially those from Europe, America and Middle East, with longer average stay than Asian tourists. 7. Foreign trade: Exports in US dollar declined but current account remained remarkable surplus.
7.1 Exports in US dollar term decreased by 2.7* percent during the first four months, as an effect of the fall in price by an average of 15.9 percent even though export volume grew by an average of 15.6 percent. In addition, it was also caused by the impact of economic crisis on major markets and domestic liquidity problem.
- Exports of major products. Among 20 major export products, which represent around 56.2 percent of total exports, export decreased for 13 items and increased for 7 items. Export value of agricultural products decreased by 2.8 percent. Rubber is major product with sharp drop in exports by 32.2 percent, while rice exports markedly grew by 22.1 percent and frozen shrimp and prawn exports grew by 8.4 percent. Agro-industrial exports declined by 10.4 percent even though many items have improvement trend. Sugar and tapioca products are major items with declining exports of 38.0 and 17.0 percent respectively. Meanwhile, export of canned seafood and rubber products increased by 30.6 and 13.7 percent respectively. Manufacturing exports declined by 5.1 percent, with downward trend for most items. Export volume declined for garments, electrical circuits, gems and jewelry, shose and parts, air conditioner, fabric and plastic products. On the other hand, export volume increased for computer equipment and parts, radio receiver and television, automobile and parts.
- Export market. Economic crisis and competitiveness shift due to the change in currency deteriorated exports in US dollar term to major Asian markets. Exports to Japan, ASEAN, Hong Kong and South Korea decreased by 15.6, 21.4, 8.8 and 40.5 percent respetively. It also effected exports to Middle East and Eastern Europe to drop by 9.1 and 26.0 percent respectively. Nevertheless, exports to the United States and the EU increased by 17.1 and 13.7 percent respectively, due to continued economic expansion in these regions and depreciated baht against US dollar and European currency.
7.2 Imports in US dollar term decreased by 39.6* percent during the first four months. Continuing decline of imports in all category reflected domestic economic problems in production, exports, investment and private consumption as well as liquidity crunch and exchange rate change. Import of fuel products decreased by 45.7 percent in response to 42.0 percent decrease of crude oil imports. Capital goods imports decreased by 31.7 percent. Among these, import of textile machinery, engines and parts, transistor diodes, electrical circuits, computer and parts deopped by 69.0, 67.9, 10.7, 15.5 and 25.9 percent respectively. Raw material imports decreased by 36.7 percent. Import of major products namely diamond and gems, iron and steel, chemical products, fabric, tread and yarn declined by 45.9, 59.5, 27.7, and 13.4 percent respectively. Consumer goods and vehicle imports also significantly dropped by 34.3 and 89.9 percent respectively.
7.3 Trade balance. According to 2.7 percent slight drop in exports while imports significantly dropped by 39.6 percent, trade balance in the first four months, therefore, recorded a surplus around 3,759 million US dollar, equivalent to around 170,500 million baht, compared to the deficit during the same period of last year around 4,726 million US dollar or around 122,299 million baht.
7.4 Services and transfer balance and current account. In addition to the surplus in trade balance, services and transfer balance also gained a surplus of around 1,309 million US dollar or around 59,800 million baht. As a result, current account recorded a surplus of around 5,068 million US dollar or around 230,300 million baht, compared to a deficit of 3,458 million US dollar or around 89,571 million baht in the same period of last year.
7.5 Balance of pyament. During the first four months, private net capital outflow was 4,350 million US dollar, equal to 214,400 million baht, due to large sum of foreign loan repayment. It was partly offset by a surplus in public capital movement of 652 million US dollar or 27,100 million baht, and the Bank of Thailand's foreign loan disbursement of 2,274 million US dollar. As a result, net capital movement recorded a deficit of 1,424 million US dollar or around 86,700 million baht and balance of payment for the first four months registered a surplus of 2,580 million US dollar, equal to 95,700 million baht.
7.6 International reserve position as at June 15, was around 26.1 billion US dollar with 12.0 billion US dollar outstanding swap obligation. 8. Fiscal conditions fell into cash balance dificit of around 18,600 million baht.
During the first 8 eight months of fiscal year 1998, government total revenue collected was 520,275 million baht, declining by 5.6 percent, compared to 3.2 percent rise in the same period of last fiscal year. Revenue from excise taxes on automobiles, liquor and import duties reduced drastically in line with economic contraction and imports slump. Revenue from personal and business income taxes, and oil taxes stood rather close to last year level. Only the revenue from value added taxes that considerably increased, partly due to raising tax rate in August 1997.
Expenditure amounted to 506,351 million baht, dropping by 11.3 percent, compared to 24.2 percent growth in the same period of last year. This was contributed by strictly budget disbursement during January-April in accordance with revenue collection and the IMF agreement. However, cash balance for the first 8 months recorded a deficit of 18,661 million baht.
While stability problem of exchange rate diminished, economic sector and business are confronting with serious liquidity crunch. With the improved stability of the baht, the government would be able to adjust fiscal policy in favor of economic stimulation, in order to prevent a severe contraction which will cause further problem of business shut down and unemployment. The progress can be observed from the success in negotiation with the IMF as stated on the fourth Letter of Intent that the government was allowed to run a budget deficit up to 3 percent of GDP instrad of a 1-percent surplus in the first LOI. This means that the government can inject additional budget of around 117,000 million baht to the economic system. 9. Economic policy recommendation for the second half of 1998
The possibility for Thai economic recovery within 1998 depends on both external and internal factors. External factors are the uncertain change of yen and its impact on world economy, which may be an obstacle to Thai economic recovery. An important internal factor is financial system restructuring to resume its regularly supporting role for other economic sectors. Experiences from financial crises in other countries indicated that economic recovery could occur only after the performance of financial system had improved. Burden of financial system recovery accounted for 1.6 percent of GDP in case of the US S&L crisis, and 3.3-9.0 percent in case of financial institution crises in Norway, Sweden and Finland. Major economic policies to be urgently undertaken are as follows:
(1) Recapitalizing financial institutions to meet the standard and create stability in the financial system. As indicated in the LOI with the IMF, commercial banks and finance companies are required to submit their recapitalization plan within August 15, 1998.
In case of Japan, which adopted a lower standard for capital reserve to assets at 4 percent, expected additional capital funds requirement for the whole banking system would be around 441-14,527 billion yen.
(2) Debt restructuring between financial institutions and local borrowers has been readily prepared both in regulation announcement, tax incentive and coordination entity. However, debt restructuring takes time in practice. Therefore, coordinating entity has to expedite the porcess in order to benefit the overall financial system and the economy in the second half of 1998.
(3) Foreign funds mobilizing scheme by encouraging mare private participation in state enterprises is limited in the short run. Many problems arise such as inappropriate stock prices due to the bearish stock market, conflicts with labor or existing management and public misperception.
(4) During the collapse of private financial institutions, state-owned special purpose financial institutions are distributing channel of external loans to ease liquidity in economic sectors especially export oriented, and rural small and medium scale industries. Therefore, policy to accelerate credit flows through these institutions should be addressed. These agencies, namely Bank for Agriculture and Agricultural Co-operatives, Gevenment Housing Bank, IFCT, Small Industrial Finance Corporation and EXIM bank have to improve their efficiency in response to the enlarging roles in the second half of the year.
(5) The disbursement of external loans, namely structural adjustment loan (SAL) and social investment project loan (SIP) from the World Bank and Asian Development Bank, should be speeded up and properly utilized to cushion social impact and facilitate economic restructure to enhance competitiveness.
(6) Issuing Government bonds in international market to increase liquidity.
(7) Since foreign exchange earning from exports declined in the first half of 1998, the government has to further solve the problem and promote exports especially in growing markets and in products with favorable world price. In addition, tourists should be facilitated and encouraged to spend more.
(8) Each ministry is responsible for accelerating the disbursement of additional budget for fiscal year 1998 to meet the target. Especially for the case of construction contracts, barriers in operation should be solved in order that services can be successfully delivered. In addition, regulations obstructing regional economic stimulation should be relaxed, for example, the prohibition of arranging government agencies' seminar in other provinces.
(9) The volatility of yen may influence investors' concern for other currencies in this region. Therefore, it is necessary to carry out policy focusing on the stability of baht to resume investors' confidence and encourage capital inflows for productive investment. * According to preliminary figures from the Custom Department, exports declined by 4.6 percent during the first five months period. * According to preliminary figures from the Custom Department, imports declined by 39.6 percent during the first five months period.
--Development News Bulletin, National Economic and Social Development Board, Volume 13, No.8 : August 1998--
The baht gradually resumed stability in the first half of 1998. However, tight liquidity, high interest rate and sudden economic recession in 1997 led to the contraction in dometic production and investment, while unemployment raised. This reflected the severe impact of crisis in financial system on real economic sector.
In the second half of 1998, volatility risk of yen against US dollar will remain its influence over baht. Moreover, regional economic recession is likely to be an export constraint. Therefore, it is necessary to prepare to cope with external conditions by easing liquidity problem and efficiently utilizing budget to facilitate economic recovery in 1999. 1. The world economy is an uncertain factor for recovery.
Thailand was the first country in this region that fell into economic crisis in 1997. Afterwards, Thai economic recovery was depressed by the volatility due to continued economic crises in the region such as Korean and Indonesian crisis. The recent major crisis is the volatility of yen against US dollar. If this situation worsens to the point that effects regional and world economy, it will be an obstacle for the Thai economic recovery.
1.1 Japan's economy gradually recovered in 1996, after 4 years of stagnation, with the growth rate of 3.9 percent. The expansion was more stable in the early of 1997. However, economic activities in the second quarter turned to a severe decline. This loss in dynamics of economic expansion was caused by many internal factors especially consumption tax increase, public expenditure reduction, and weakness of financial system which was partly a result of asset price devaluation in the early of 1990s.
1.2 In the second half of 1997 and early of 1998, Asian economic crises had an impact on Japan's financial system. Concerns on domestic financial system increased and the new round of asset price devaluation reduced domestic demand. Furthermore, Asian economic crises hurt export sector. Japan's economy inevitably turned to recessionary cycle. By the fiscal year 1997, an economic contraction of 0.7 percent was first recorded in two decades. The Japanese government, therefore, announced economic stimulation measures worth 16 trillion yen on April 24, 1998. However, the economy in May and June remained in downward trend, as observed from the slowdown of business fixed asset investment, manufacturing output, major price indices and weakening private consumption.
1.3 The weakness of Japan's economy and Asian economic crises persisted during the peak period of the US economy. In 1997, the US economic growth was 3.8 percent, the 9-year highest rate, while inflation was around 2.0 percent, the lowest rate in 32 years. In addition, 24-year low unemployment rate brough down inflationary pressure in the period of high growth. Meanwhile, investors' inconfidence in Japan's and Asian economic conditions induced capital movement from Asia to the US. As a result, the yen continued to depreciate to record an 8-year low of 146.19 yen/US dollar on June 15, 1998.
1.4 Due to the severe depreciation of yen, investors were anxious that Chinese and Hong Kong currencies would be devalued and a second round of economic crisis might occur. Consequently, Asian recovery might become more difficult and further effect the world financial stability. Finally, the Japanese and the US government co-operated together to intervene the exchange market to the value of around 2 billion US dollar on June 17, 1998. This was the first intervention after 1995, and could bring the yen up to 130.67 yen/US dollar. However, after this intervention, the yen continued to depreciate due to Japan's weak fundamental economic factors. 2. Exchange rate gradually resumes stability but remains in caution.
Since Thailand has changed foreign exchange system from pegging to a basket of currencies to managed float system on July 2, 1997, the movement of baht can be summarized into 3 periods as follows:
2.1 Average reference rate of baht against US dollar continued to depreciate over months since July 1997, of which the average rate was 30.268 baht/US dollar, dropping by 17.42 percent from June 1997. In January 1998, the average rate was 53.815 baht/US dollar, dropping by 18.83 percent from December 1997 and the lowest rate was recorded at 56.061 baht/US dollar on 12 January 1998.
2.2 Later on, the baht had gradually appreciated. This is partly due to the Bank of Thailand's waiving of exchange market separation measure from January 30, 1998 onward. Consequently, average exchange rate of baht between February - May 1998 appreciated by 13.97, 10.73, 4.49 and 0.86 percent as compared to January - April 1998 respectively.
2.3 However, from the late May to mid-June 1998, baht returned to depreciate, resulted from depreciated yen against US dollar. Average baht in June dropped by 8.25 percent from the previous month and the reference rate at the end of June was 42.313 baht/US dollar. 3. Inflation is expected to slowdown in the second half of the year.
3.1 After the change of exchange system in July 1997, inflation rose eontinuously from 4.4 percent in June to 7.7 percent in December 1997 and 10.7 percent in June 1998 respectively. This was attributable to the volatility of exchange rate that pushed up production cost and price, the increase of value added tax rate from 7 to 10 percent and the high demand for rice exports.
3.2 During the first half of 1998, inflation was up to 9.7 percent on average, compared to 4.4 percent in the same period of last year. Both food and non-food inflation rose by 11.8 and 8.3 percent on average, compared to 3.4 and 5.1 percent in the same period of last year.
- Prices increased for all items in the food category especially price of rice,flour and flour products increased by 41.5 percent, compared to 26.5 percent in the same period of last year due to high demand for rice. Price of eggs, dairy products, groceries, non-alcohol drinks and ready to eat food increased by 12.1, 9.1, 8.3 and 8.8 percent, compared to 15.4, 13.5, 16.3 and -2.3 percent in the same period of last year respectively.
- Among non-food category, price markedly increased in vehicle and transportation service group by 10.6 percent, compared to 2.6 percent in the same period of last year due to rising price of LPG gas, oil and bus fare. Price of tobacco and alcohol drinks increased by 20.5 percent, compared to 13.1 percent in the same period of last year due to rising price of cigarette, beer and liquor.
3.3 Wholesale price index increased by 19.2 percent, compared to 0.9 percent in the same period of last year. Price of agricultural and food products group, and manufacturing group increased by 21.8 and 17.4 percent, compared to 2.7 and -0.3 percent in the same period of last year respectively. Construction material price index increased by 18.2 percent, compared to 0.3 percent in the same period of last year. Prices rose for all products especially steel products, cemen, concrete, ceramics and electricity and water supply equipment. Export price index was push up by rising production cost to increase by 28.3 percent, compared to 6.3 percent drop in the same period of last year.
3.4 Inflation is likely to be lower in the second half of the year. Possible factors to bring down inflation are less volatility of baht than that in the same period of last year, the likelihood of gradual interest rate reduction will not generate severe inflationary pressure, and continuing contraction of domestic demand. Inflation for the whole year is expected not to exceed 10 percent. 4. Short-term interest rate declined continuously
Short-term interest rate, especially 7-day repurchase rate, which was higher than 20 percent during the first quarter of 1998, declined to the average of 18.81 and 16.38 percent in April and May respectively. Meanwhile, minimum lending rate (MLR) was rather stable during February - May 1998 at around 15.25-15.50 percent.
Real interest rate (MLR - inflation rate) dropped from 6.6 percent in January to 5.1 percent in May, compared to an average rate of 8.1 percent during the period of 1987-1996. 5. Liquidity remains to be domestic constraint.
5.1 Tight liquidity in financial system still persisted due to net capital outflow for foreign loan repayment by commercial banks. In addition, measures aiming at strengthening financial intitutions and improving supervisory system to international standard forced commercial banks to emphasize mainly on stability. Commercial banks with excess liquidity tended to lend their money in short-term market such as repurchase market, which provided average return of more than 19 percent in 7 days repurchase market during July 1997 - May 1998. Furthermore, this lending was treated as non-risk and required no additional provision for sub-standard assets.
Business firm inevitably confronted a severe liquidity shortage, especially most of export oriented business were unable to extend their packing credit line to catch up with weakening baht. Liquidity shortage of domestic business will generate both bad debt and non performing loan (NPL) to financial institutions. Consequently, financial institutions have to add up their reserve and be more strictly in loan providing.
After fiscal and monetary policy has been strictly undertaken in accordance with the IMF framework and the confidence in baht was regained at a certain level, the government, therefore, put efforts to ease liquidity for business sector as follows:
- Announcing 4 emergency decrees especially one on managing government burden to support Financial Institution Development Funds, which has been in action from May 8, 1998 onward. Accordingly, the Ministry of Finance had issued government bonds to the value of 150,000 million baht (50,000 million baht for the first issue and 100,000 million baht for the second issue.)
- The Bank of Thailand announced regulations for debt restructuring and collateral appraisal in the early of June.
- Injecting liquidity to business firms with external loans through state-owned special purpose financial institutions.
5.2 Money supply, deposits and credit of commercial banks. Narrow money (M1) has declined since March in line with the decline of current account deposits. In May, M1 dropped by 8.0 percent, compared to the same period of last year. Broad money (M2) continued to moderate from the early of the year, reflecting a slowdown of private credit. In May, M2 grew from the same period of last year by 13.3 percent.
Commercial banks' deposits and credit grew at a decreasing rate and monthly balance had declined since the early of the year. By the end of April, commercial banks held deposits to the amount of 4,355.0 billion baht while outstanding credit was 5,634.9 billion baht.
5.3 Capital market conditions The SET index closed at 267.33 at the end of June 1998, continuously decreased by 49.3 percent from the same period of last year, which recorded 57.7 percent decline. Investors were reluctant to invest in stock market due to the expectation that most of listed companies are likely to suffer losses. As a result, bearish condition was observed in security trading. Average trading volume for the first half of the year was only 3,022.96 million baht/day, dropping by 23.5 percent, compared to 37.5 percent drop in the same period of last year. 6. Production and consumption severely contracted in the first half of the year.
6.1 Private investment. Investment indicator showed a continued slowdown. Investment index decelerated from 96.3 and 69.7 in January and December 1997 to 61.0 and 40.5 in January and April 1998 respectively. In other words, the index dropped by 44.5 percent during the first four months period of this year, compared to 18.4 percent drop in the same period of last year. Permitted construction area, cement consumption and galvanized iron sales decreased by 71.3, 42.9 and 41.7 percent, compared to -4.1, 9.7 and 11.3 percent increase in the same period of last year respectively. Meanwhile, import of capital goods declined by 14.0 percent, compared to 3.3 percent increase in the same period of last year.
6.2 Private consumption in the first four months continue to decline in line with economic activities and contraction of purchasing power, especially expenditure on durable goods and construction. Regarding vehicle category, sales of automobiles, motorcycles and tires sharply dropped by 71.2, 50.5 and 38.5 percent, compared to 11.7, 10.5 and 6.8 percent drop in the same period of last year. Sales of construction material namely iron rods, galvanized iron and cement decreased by 28.3, 23.8 and 38.9 percent, compared to last year growth of -0.8, 5.3 and 8.2 percent respectively.
Electricity consumption moderated to 1.7 percent from 7.3 percent growth in the same period of last year. Consumption by industries declined by 2.2 percent while household consumption increased by 16.7 percent, compared to 7.8 percent increase in the same period of last year, due to recently high temperature.
Sales of beverages declined marginally. Among these, sales of beer and liquor increased by 14.5 and 5.7 percent, compared to 6.9 and -10.6 percent in the same period of last year respectively. Meanwhile, sales of soda and soft drinks dropped by 4.5 percent, compared to 18.1 percent increase in the same period of last year.
6.3 Production by sector: Industrial sector was subdued, while agricultural sector and tourism considerably expanded.
- Agricultural production in 1998 is observed an upward trend. Most crop production increased for example, major rice, maize, tapioca and rubber. Livestock production expanded especially frozen chicken production. Fishery production slightly expanded, especially for the production of black tiger prawn of which frozen shrimp and prawn exports in the first two months recorded a value of 21,386 million baht.
Average farm price for agricultural products in the first four months of 1998 remained an increasing trend from the second half of 1997. Price improved for almost all products such as major crop paddy-grade A, maize, rubber and tapioca.
- Manufacturing output index decelerated by 14.3 percent in the first four months of 1998, compared to 7.8 percent growth in the same period of last year. In light of economic recession and liquidity shortage, producers had to reduce production cost and expenses by, for example, slowdown production capacity, worker lay-off, and some small and medium firms had to shut down.
During the first four months of 1998, manufacturing output declined almost across-the-board, expecially vehicles, construction, food and beverages. Only export oriented production accelerated exceptionally. Especially, canned seafood, canned pineapple, textile and electrical circuits expanded sharply by 120.2, 57.1 72.7 and 35.6 percent, compared to 8.0, 28.4, -2.8 and 5.7 percent growth in the same period of last year.
- Tourism. The total number of incoming tourists during the first quarter of 1998 were 2,043,292 persons, increased by 2.6 percent compared to 2.7 percent in the same period of last year. This was contributed by the reduction of tourists from East Asia of which accounted for 53.4 percent of total tourists, notwithstanding the high growth of tourists from Europe, America, Australia and Middle East. Asian economic crisis was the main reason for lower growth of tourist than 7 percent annual target. However, movements in exchage rate encouraged dramatic growth of tourists from other regions, especially those from Europe, America and Middle East, with longer average stay than Asian tourists. 7. Foreign trade: Exports in US dollar declined but current account remained remarkable surplus.
7.1 Exports in US dollar term decreased by 2.7* percent during the first four months, as an effect of the fall in price by an average of 15.9 percent even though export volume grew by an average of 15.6 percent. In addition, it was also caused by the impact of economic crisis on major markets and domestic liquidity problem.
- Exports of major products. Among 20 major export products, which represent around 56.2 percent of total exports, export decreased for 13 items and increased for 7 items. Export value of agricultural products decreased by 2.8 percent. Rubber is major product with sharp drop in exports by 32.2 percent, while rice exports markedly grew by 22.1 percent and frozen shrimp and prawn exports grew by 8.4 percent. Agro-industrial exports declined by 10.4 percent even though many items have improvement trend. Sugar and tapioca products are major items with declining exports of 38.0 and 17.0 percent respectively. Meanwhile, export of canned seafood and rubber products increased by 30.6 and 13.7 percent respectively. Manufacturing exports declined by 5.1 percent, with downward trend for most items. Export volume declined for garments, electrical circuits, gems and jewelry, shose and parts, air conditioner, fabric and plastic products. On the other hand, export volume increased for computer equipment and parts, radio receiver and television, automobile and parts.
- Export market. Economic crisis and competitiveness shift due to the change in currency deteriorated exports in US dollar term to major Asian markets. Exports to Japan, ASEAN, Hong Kong and South Korea decreased by 15.6, 21.4, 8.8 and 40.5 percent respetively. It also effected exports to Middle East and Eastern Europe to drop by 9.1 and 26.0 percent respectively. Nevertheless, exports to the United States and the EU increased by 17.1 and 13.7 percent respectively, due to continued economic expansion in these regions and depreciated baht against US dollar and European currency.
7.2 Imports in US dollar term decreased by 39.6* percent during the first four months. Continuing decline of imports in all category reflected domestic economic problems in production, exports, investment and private consumption as well as liquidity crunch and exchange rate change. Import of fuel products decreased by 45.7 percent in response to 42.0 percent decrease of crude oil imports. Capital goods imports decreased by 31.7 percent. Among these, import of textile machinery, engines and parts, transistor diodes, electrical circuits, computer and parts deopped by 69.0, 67.9, 10.7, 15.5 and 25.9 percent respectively. Raw material imports decreased by 36.7 percent. Import of major products namely diamond and gems, iron and steel, chemical products, fabric, tread and yarn declined by 45.9, 59.5, 27.7, and 13.4 percent respectively. Consumer goods and vehicle imports also significantly dropped by 34.3 and 89.9 percent respectively.
7.3 Trade balance. According to 2.7 percent slight drop in exports while imports significantly dropped by 39.6 percent, trade balance in the first four months, therefore, recorded a surplus around 3,759 million US dollar, equivalent to around 170,500 million baht, compared to the deficit during the same period of last year around 4,726 million US dollar or around 122,299 million baht.
7.4 Services and transfer balance and current account. In addition to the surplus in trade balance, services and transfer balance also gained a surplus of around 1,309 million US dollar or around 59,800 million baht. As a result, current account recorded a surplus of around 5,068 million US dollar or around 230,300 million baht, compared to a deficit of 3,458 million US dollar or around 89,571 million baht in the same period of last year.
7.5 Balance of pyament. During the first four months, private net capital outflow was 4,350 million US dollar, equal to 214,400 million baht, due to large sum of foreign loan repayment. It was partly offset by a surplus in public capital movement of 652 million US dollar or 27,100 million baht, and the Bank of Thailand's foreign loan disbursement of 2,274 million US dollar. As a result, net capital movement recorded a deficit of 1,424 million US dollar or around 86,700 million baht and balance of payment for the first four months registered a surplus of 2,580 million US dollar, equal to 95,700 million baht.
7.6 International reserve position as at June 15, was around 26.1 billion US dollar with 12.0 billion US dollar outstanding swap obligation. 8. Fiscal conditions fell into cash balance dificit of around 18,600 million baht.
During the first 8 eight months of fiscal year 1998, government total revenue collected was 520,275 million baht, declining by 5.6 percent, compared to 3.2 percent rise in the same period of last fiscal year. Revenue from excise taxes on automobiles, liquor and import duties reduced drastically in line with economic contraction and imports slump. Revenue from personal and business income taxes, and oil taxes stood rather close to last year level. Only the revenue from value added taxes that considerably increased, partly due to raising tax rate in August 1997.
Expenditure amounted to 506,351 million baht, dropping by 11.3 percent, compared to 24.2 percent growth in the same period of last year. This was contributed by strictly budget disbursement during January-April in accordance with revenue collection and the IMF agreement. However, cash balance for the first 8 months recorded a deficit of 18,661 million baht.
While stability problem of exchange rate diminished, economic sector and business are confronting with serious liquidity crunch. With the improved stability of the baht, the government would be able to adjust fiscal policy in favor of economic stimulation, in order to prevent a severe contraction which will cause further problem of business shut down and unemployment. The progress can be observed from the success in negotiation with the IMF as stated on the fourth Letter of Intent that the government was allowed to run a budget deficit up to 3 percent of GDP instrad of a 1-percent surplus in the first LOI. This means that the government can inject additional budget of around 117,000 million baht to the economic system. 9. Economic policy recommendation for the second half of 1998
The possibility for Thai economic recovery within 1998 depends on both external and internal factors. External factors are the uncertain change of yen and its impact on world economy, which may be an obstacle to Thai economic recovery. An important internal factor is financial system restructuring to resume its regularly supporting role for other economic sectors. Experiences from financial crises in other countries indicated that economic recovery could occur only after the performance of financial system had improved. Burden of financial system recovery accounted for 1.6 percent of GDP in case of the US S&L crisis, and 3.3-9.0 percent in case of financial institution crises in Norway, Sweden and Finland. Major economic policies to be urgently undertaken are as follows:
(1) Recapitalizing financial institutions to meet the standard and create stability in the financial system. As indicated in the LOI with the IMF, commercial banks and finance companies are required to submit their recapitalization plan within August 15, 1998.
In case of Japan, which adopted a lower standard for capital reserve to assets at 4 percent, expected additional capital funds requirement for the whole banking system would be around 441-14,527 billion yen.
(2) Debt restructuring between financial institutions and local borrowers has been readily prepared both in regulation announcement, tax incentive and coordination entity. However, debt restructuring takes time in practice. Therefore, coordinating entity has to expedite the porcess in order to benefit the overall financial system and the economy in the second half of 1998.
(3) Foreign funds mobilizing scheme by encouraging mare private participation in state enterprises is limited in the short run. Many problems arise such as inappropriate stock prices due to the bearish stock market, conflicts with labor or existing management and public misperception.
(4) During the collapse of private financial institutions, state-owned special purpose financial institutions are distributing channel of external loans to ease liquidity in economic sectors especially export oriented, and rural small and medium scale industries. Therefore, policy to accelerate credit flows through these institutions should be addressed. These agencies, namely Bank for Agriculture and Agricultural Co-operatives, Gevenment Housing Bank, IFCT, Small Industrial Finance Corporation and EXIM bank have to improve their efficiency in response to the enlarging roles in the second half of the year.
(5) The disbursement of external loans, namely structural adjustment loan (SAL) and social investment project loan (SIP) from the World Bank and Asian Development Bank, should be speeded up and properly utilized to cushion social impact and facilitate economic restructure to enhance competitiveness.
(6) Issuing Government bonds in international market to increase liquidity.
(7) Since foreign exchange earning from exports declined in the first half of 1998, the government has to further solve the problem and promote exports especially in growing markets and in products with favorable world price. In addition, tourists should be facilitated and encouraged to spend more.
(8) Each ministry is responsible for accelerating the disbursement of additional budget for fiscal year 1998 to meet the target. Especially for the case of construction contracts, barriers in operation should be solved in order that services can be successfully delivered. In addition, regulations obstructing regional economic stimulation should be relaxed, for example, the prohibition of arranging government agencies' seminar in other provinces.
(9) The volatility of yen may influence investors' concern for other currencies in this region. Therefore, it is necessary to carry out policy focusing on the stability of baht to resume investors' confidence and encourage capital inflows for productive investment. * According to preliminary figures from the Custom Department, exports declined by 4.6 percent during the first five months period. * According to preliminary figures from the Custom Department, imports declined by 39.6 percent during the first five months period.
--Development News Bulletin, National Economic and Social Development Board, Volume 13, No.8 : August 1998--