2.2 Economic Projection for 2008: Private consumption and investment looks set to expand more favourably, compensating for expected slowdown in export. Inflation will elevate as oil prices rise.
2.2.1 Key Themes
- In 2008, the Thai economy is likely to record a stronger and more balanced growth than
that observed in 2007 owing to expected strong recovery in domestic demand; comprising increases in demand for private investment and consumption, acceleration of government budget disbursement under the
planned deficit fiscal stance. Moreover, new government policy to boost investor confidence and tourism, and progress in the mass transit system will also help promote private investment recovery. In addition, the continuing growth in export throughout 2007 and in the beginning of 2008 has suggested that the effect
from global slowdown on Thai exports is smaller than previously forecasted. In other words, Thai
export has gained more resiliency against world market fluctuation.
- Domestic fundamental conditions tend to improve, including general political conditions
and consumer and business confidence. Moreover, interest rates are expected to remain low and be more conducive to stronger of credits. Household incomes are set to increase in all income classes, along with increasing farm income related to increased prices of agricultural products such as rice, rubber, potato
and oil palm, wages and salary increases for government and state-owned enterprise officials, and 1-7 baht minimum wage increase (effective January 1, 2008). However, corporate profits are likely to be squeezed by higher oil prices, despite a lessen impact of baht appreciation this year as baht is likely to move
in a narrower range.
- However, downside risks associated with economic outlook in 2008, rising oil prices
that lead to inflation concern; and the world economic slowdown that could put exports under constraint. Risk could persist under these following two main conditions: (i) An increase in oil prices and their volatility to production-side factors under an already tight market condition (ii) Sub-prime problems in the
US real estate sector which will linger throughout 2008 as well as their spillover effects on the financial and commodity markets in Asia and Europe. These downside risks could jeopardize consumer and business confidences and delay domestic demand recovery through rising production costs, growing inflationary
pressures and deceleration in export-induced domestic demand. Provided that the severity of these risk factors is materialized, the recovery pace of private consumption and investment will be under constraints. While exports could deteriorate more than expected.
- The economic management in 2008 under the new government administration is, therefore, best to undertake persistent measures in managing risks and alleviating the impacts of rising oil prices and a world
economic slowdown. In this regard, economic restructuring scheme must be pursued persistently, with key principles including, value creation, productivity improvement, upgrading of product quality and safety standards and promotion of agricultural products as well as provision of infrastructure and reduction of
regulation burdens that could obstruct private investment. Moreover, the government must undertake measures to promote efficient energy consumption, and manage international capital movements to an appropriate level in order to ensure optimal benefits to the country.
- In this respect, evidences show that Thai exports have recently been less sensitive to
fluctuations in the major industrial economies and the overall global economy. This can be explained by (i) new Thai export destinations gaining more grounds in Thais’ export market while the share of exports to
major trading partners, such as the US and Japan, have fallen; (ii) trading partners with increasing importance to the Thai economy, particularly China, Asia, and Eastern Europe, have grown at a faster pace than economies of other regions. Asia, especially, is now seen as one of the world’s main economic engines; (iii) Thailand has gained more competitiveness in electronic and automobile and parts industries owing to an expansion of production base by multi-national corporations, whereby electronic goods are benefiting from shorter product life cycle that has prompted new product development in a short period of time. Technological advancement has also resulted in more frequent product replacements, in conjunction with increasing benefits from products with high digital content. In addition, automobile exports to Australia have grown significantly following the signing of FTA between the two countries. Exports to the Middle East have increased rapidly owing to surge in income from oil exports; and (iv) Thailand in 2007 benefited from higher prices for exports of major agricultural goods, namely rice, tapioca, corn and rubber, in parallel to an increase prices of other commodities and oil. This is also in part due to an increase in world
demand for energy crops, which are expected to be more expensive in line with rising oil prices throughout 2008. Moreover, price of rice exports will increase in response to the increase in price of wheat, the growing of which has been damaged by the natural disaster in January, and also due to lowering export of rice from Vietnam.
2.2.2 Supporting factors for the Thai economy in 2008
(1) Expected strong recovery in public and private investments under the government campaign of the “2008-2009 Years of Investment” Private Investment have shown signs of recovery starting in the latter half of 2007, having expanded 2.5 percent following 1.5 percent contraction in the first half. Government investments sped up, having grown at 5.8 and 4.5 percent in the third and fourth quarters respectively. Factors supporting investment growth in 2008 are as follows
(1.1) Improving in business confidence is likely to persist to some degree this year. Noticeably, industrial confidence and business confidence index has started to improve continuously since August 2007 as
entrepreneurs increasingly realized that various fundamental factors have become more favorable such as a decline in interest rate, an increasingly stable exchange rate and clearer government policy directions,
which increasingly focused on private investment promotion as well as speeding up of major public investment projects.
(1.2) Continued rising in capacity utilization is a fundamental factor for private investment to take off. In 2007, capacity utilization rate was at 76.1 percent, increased from 73.9 and 72.1 percent in 2006 and 2005 respectively. Various businesses have a clear plan of investment amid rising capacity
utilization which nearly reaches full capacity in many industries, such as petrochemical, paper, cement products, petroleum products, automobile, metal, zinc, tire, electric motor, integrated circuit and hard-disk drive industries. Government policies have also been directed towards private investment
promotion. For that matter, 2008-2009 have been targeted as “year of investment” for Thailand.
(1.3) A number of investment projects were granted approval for investment promotion by
the Board of Investment (BOI) in 2006 and 2007 and expected to start operation by 2008. In 2007, the number of BOI approvals totaled 1,342 projects with investment value of 744.5 billion baht, having increased by
99.5 percent. There were increases in projects spanning over diverse categories including : chemical product, paper and plastic categories which grew at 20.6 percent; services and infrastructure expanding by
210.2 percent; and metal product, machinery, automobile and transportation equipment rose by 127.4 percent. Moreover, electronics and electrical appliances planned investment increase by 69.8 percent. Approximately 74.7 percent (107 projects) of total investment funds approved were planned investment of large projects with investment fund exceeding one billion baht. These include the production of energy-saving and bio-fuel
usage cars and expansion in the production of export-oriented large-sized cars, production of ethanol, petrochemical and chemical products, electricity generation, overseas cargo shipping businesses,
production of hard-disk drives, integrated electrical circuits, hotels, and industrial estate development.
Investment promotion by BOI
2006 2007
(% Y-O-Y) Year Year Q1 Q2 Q3 Q4
Application Approved -2.6 9.8 7.0 2.9 -12.1 11.3
Total Investment -34.7 99.5 65.2 22.6 8.8 55.5
Agricultural Products 53.7 154.5 25.6 192.7 138.3 263.4
Minerals & Ceramics -79.7 1,327.3 1,241.7 2,585.7 2,557.8 740.0
Light Industry 14.3 26.9 43.2 238.1 -60.0 -22.0
Metal Processing -61.8 127.4 47.1 85.4 5.8 268.8
Electronics & Electrical -4.3 69.8 393.4 -66.7 273.6 -16.5
Chemical Plastic Paper 48.5 20.6 -94.1 152.1 209.3 -15.7
Service & Infrastructure -22.8 210.2 636.9 138.3 69.0 166.9
Source : BOI
(1.4) Expedition of Government measures on investment promotion and stimulation is a priority in the first year of administration. Those projects include development of mass transit system, high-speed train and doubletrack rail project and capacity improvement and expansion of the international airports.
Government budget disbursement target rate in 2008 is set at 94 percent. In the fiscal year of 2008, total budget is planned at 1,660,000 million baht6, increasing by 6.0 percent from that of the 2007 fiscal year. Current and investment expenditures are 1,209,546.8 and 404,677.3 million baht, respectively,
expanding by 6.5 and 8.0 percent from the fiscal year of 2007. Fiscal deficit is set at 165,000 million baht. As of 16 February, 2008, 575,874 million baht of budget had already been disbursed, or about 34.7
percent of total planned budget. With respect to the state enterprise investment expenditure, government approved the budget of 289,756 million baht and additional 53,581 million baht investment plan for PTT
Public Company Limited. On January 25, 2008, the total state enterprise investment expenditure which is already approved by the cabinet is 255,993 million baht with a disbursement of 64,507 million baht which
accounts for 25.2 percent. The disbursement target of state enterprise investment expenditure is set at 90 percent. Key investment projects will be urgently executed include mass transit system, double track rail
project (Chachoensao — Sriracha —Laem- Chabung Port), Ua-arthorn Housing projects and electricity transmission lines installation.
(2) Supporting factors for the Thai economy in 2008
(2.1) Interest rates in the financial market in 2008 will remain low. The current policy rate
is 3.25 percent while an average minimum loan rate (MLR) of 5 large commercial banks is 6.99 percent, down from 7.63 and 7.13 percent at the end of Q1 and Q2 respectively. The 12-months deposit rate gradually
decreased from 2.38 percent at the end of Q2 to 2.32 percent since October 2007, while the 3 months deposit rate declined to 2.125 percent. Acceleration in inflation rate resulted in mild negative real saving rate which will help stimulate domestic spending especially with improving consumer confidence.
(2.2) Consumer and business confidences are improving which will support a pick up in private consumption and investment. Industrial confidence index and Business Sentiment Index have improved continually since August of 2007 as entrepreneurs observe various supporting fundamental factors such as lower interest rate, stable exchange rate and government policy priority toward private investment promotion as well as acceleration of government investment projects. As for consumer confidence, the situation has improved since November 2007.
(2.3) Household incomes are likely to increase faster than inflation rate and therefore higher real purchasing power is expected from salary raise in public sector both government officials and state enterprise employees, increase in minimum wage rate by 1-7 baht per day, effective on 1 January
2008. Moreover, rising agricultural product prices, including rice, cassava, maize, rubber and oil palms will contribute to higher farm income. All of favorable factors including improving consumer confidence, rising real income and low interest rates will help stimulate household spending in 2008.
(2.4) Employment rose and unemployment rate remained low, boosting household income. Employment growth averaged 1.6 percent in 2007, whereby underemployment totaled 565,200 persons - falling from
577,900 persons seen in 2006. Average unemployment rate was at 1.4 percent while labor shortage still prevailed in many industries, especially in skilled-labor industries.
(3) Implementation of government policy will support investment recovery and boost income base of low-income group and SMEs. The government has emphasized on a swift implementation of policies during its first year in office to foster strong economic recovery and alleviate poverty through grass-root
economic development that are directed towards strengthening the income-earning ability, lowering expenses and creating career opportunities of individuals especially farmers, labors and those employed in small and
medium enterprises.
(4) In 2008, efficiency in energy usage will continue to improve while utilization of
alternative energy products such as gasohol, bio-diesel and NGV will increase, thus improving Thai economy’s adjustments in a high-energy-price environment. Moreover, car usage demand will increasingly shift towards the use of ECO cars and smallersized cars, with further incentives from greater tax allowances given to users of small ECO cars and gasohol products, whereby car producers are undergoing productive capacity preparation and ripeness towards marketing the mentioned type of cars, including HONDA, Tata Motor,
Ford Focus. Besides, the strengthening of baht will help alleviate the impacts of expensive oil prices.
(Continue to).../2.2.3 Risk factors..