- Financial conditions: Money market interest rates remained unchanged but real interest rates declined. Bank deposits and credits, both household and commercial, expanded. However, liquidity remained high. The Thai baht continued to appreciate in nominal terms, but depreciated in real effective terms. SET index was volatile due to the fluctuation in foreign capital movement.
- Policy rate was kept unchanged at 3.25 percent during the first quarter, even though many countries had lowered their policy rate in response to the recovery in domestic economy while upward pressures on core inflation had increased. The Federal Reserve Board lowered Fed Fund Rate 3 times from 4.25percent in December to 2.25 percent in March and cut further to 2.0 percent at the end of April due to higher risks to economic growth. Euro zone and Japan maintained policy rate at 4.0 and 0.5 percent respectively. In the first quarter, most Asian Central Banks tended to maintain their policy rates and cautiously monitored the proceeding impacts of the subprime crisis, which in turn will affect the export market especially to United States and Euro area. The accelerating inflation rate heightened policy alert in the upward direction. On the other hand, the opposed pressure also increased from widening of interest rate differential between Fed Fund Rate and domestic policy rate.
- Commercial banks’ deposit and lending rates were on hold in line with the policy rate. However, real interest rate declined due to inflation acceleration. Average 3 - month and 12-month time deposit rates of five major commercial banks have remained at 2.13 and 2.32 percent respectively in the first quarter. The MLR lending rate was averaged at 6.99 percent per annum. Adjusted by accelerate inflation rate at 5.3 percent in March, the real 12-month time deposit rate turned to negative of 2.99 percent while the real lending rate declined to 1.69 percent. In April, inflation rate continued its raise at 6.2 percent, has decelerated the real 12-month time deposit rate and the real lending rate to negative of 3.89 percent and 0.79 percent respectively.
- Commercial banks’ deposits and credits accelerated. Commercial banks’ deposits grew by 2.5 percent at the end of the first quarter compared to that of 0.1 percent at the end of the fourth quarter of 2007. The growth was due to increasing in special saving products with high deposit rates offered by commercial banks. Deposits increased rapidly in the account with less than 1 million and more than 50 million baht. Commercial banks’ credits expanded 11.1 percent compared to that of 3.8 percent at the end of December 2007.
In terms of credit extended by depository corporations(A), it expanded by 5.9 percent compared with 4.0 percent at the end of fourth quarter of 2007. The increase was seen in most sectors. Household credits expanded by 8 percent, slightly picked up a pace from the previous quarter. Loans to corporate sector expanded by 2.9 percent from 0.7 percent at the end of December 2007. Increasing commercial credits showed investors’ confidence in economic growth and prospect. Considering by sectors, loans to manufacturing, wholesale and retail, real estate, and agricultural sectors have increased at 3-13 percent, whereas loans to construction sector has declined. Furthermore, loans to financial intermediation expanded by 93.2 percent. Due to central bank provided soft loans to SME’s via financial institutions in order to strengthening SME’s productivity. Loans to personal consumption slightly increased from the previous quarter and expanded by 13.3 percent from March 2007. This was mainly attributed to increased of housing loans and purchase and hire purchase loan, which continually growth in high pace since mid 2007.
Credit card spending slightly decreased from the preceding quarter, but cash advance increased. Therefore, credit card outstanding balance expanded from the first quarter 2007 by 5 percent.
- Liquidity in commercial banking system has increased. Accelerating of commercial bank credit led credit to deposits ratio increased from 94.8 percent at the end of December 2007 to 96.5 percent at the end of March 2008, however still indicating ample level of liquidity. Besides excess liquidity in banking system, estimated as disposable liquidity, was approximately 1,035 billion baht at the end of March, higher than 822.2 billion at the end of December 2007. This was due to the increasing of financial institutions’ investment in the repurchase market with net lender position.
*** Note: (A) Depository Corporations comprises of all depository corporations excluding the Bank of Thailand, namely, domestically-registered commercial banks, branches of foreign banks, international bank facilities, finance companies, specialized banks, thrift and credit cooperatives, and money market mutual funds.
- NPLs declined. NPLs in financial institutions (excluding BIBF and credit fanciers) at the end of the first quarter 2008 equaled 249.4 billion baht, which is 3.76 percent of total credits. It declined from 3.95 percent from the previous quarter.
- Listed companies earning reported high growth. Listed companies on SET showed net profit 152.4 billion baht, which is 33 percent more than the same period in 2007. The increased profit due to rise in total sales and gains from exchange rates. 384 companies posted net profit, while 71 companies reported net losses. Most profitable sectors were energy and banking sectors. Thai commercial bank also reported high earnings, with net profit of 31 billion baht compare to net loss of 7.5 billion baht at the fourth quarter of 2007. That partly because their burden on higher provision for loan loss under the application of International Accounting Standard (IAS39) almost had overcome as they make full provision since the end of 2007. Furthermore, they gained high profit from return on investment and exchange rate.
- Thai baht continued to appreciate in nominal terms as compared to the US dollar but real effective exchange rate weakened. Average exchange rate in the first quarter was at 32.38 baht per US dollar, appreciated significantly by 4.45 and 8.88 percent from the fourth quarter last year and the same period of last year respectively. The appreciation was mainly attributable to various underlying factors including the impact of subprime crisis, especially to financial institutions, that caused US dollar to depreciate further, and the increase in balance of payment surplus. In the first quarter, the movement in Thai baht against the US dollar and other major currencies was volatile. Considering the movement of Thai baht against other currencies, it appreciated against other major and regional currencies but depreciated\\against Japanese Yen and Philippine Peso. Therefore, average nominal effective exchange rate (NEER) and real effective exchange rate (REER) appreciated by 0.88 and 1.96 percent respectively. In April, an average exchange rate was at 31.53 baht per US dollar, depreciated by 0.39 percent from March. Result from market speculation on Federal Reserve Board decision to hold policy rate at 2 percent until the end of the second quarter which trigger appreciation in US dollar. At the same time, increased in import volume had created demand for US dollar from Thais’ importers.
- SET index and trading volume decreased. Average daily trading value was 18.8 billion baht, declined from 19.4 billion baht in the fourth quarter last year. SET index closed at 817.03 points, down from 858.1 points at the end of the fourth quarter last year. Net sale of foreign investor was recorded at 13.9 billion baht. In the first quarter, the market became more volatile. SET index plunged to 728.58 points at the end of January, from unexpected interest rate cut by Federal Reserve Board which directly affects investor confidence. During February through to March, SET slowly rose to 845.76 points (highest point in the first quarter), fueled by foreign net buy from 3 main factors:1) Lifting of the Reserve Requirement on Short-term Capital Inflows by Bank of Thailand 2) implementation of new tax policy to boost economy and 3) increase in oil price.
- Bond trading accelerated. Daily average outright trading increased from 47.3 billion baht in the fourth quarter last year to 62.8 billion baht in the first quarter. Net buy of foreign investors was recorded at 29 billion baht. Bond price index increased slightly. Government bond yields declined, particularly those of medium-term maturity. In April, daily average trading volume was at 84.2 billion baht, with the net buy from foreign investor of 6.7 billion baht.
- Corporate funding (excluding short-term bond) in the first quarter was at 72.7 billion baht compared to 66.3 billion baht in the fourth quarter last year and 42.5 billion baht in the same period last year. Fund raised by both financial and non-financial sectors registered 18.8 and 286 billion baht respectively. The issuance of private placement accounted for 58 percent of total transaction.
1.2 The world economic performance in Q1/2008
In the first quarter, the world economy slowed down as economic activities in most major economies softened. Although the economic growth rate was the same as that in previous quarter, growth components suggest that the U.S economy remains on down trend. For example, residential investment still experienced steady contraction, reflecting the lingered impacts of sub-prime crisis. Its spillover effects had broadened to European financial system and eroded consumer and investor confidences. Similarly, Japanese economy continued to slow down due to contraction in residential investment while the Chinese economy was weakened by the slowdown in exports. Nevertheless, contributed by a strong expansion of intraregional trade and domestic demand recovery, growth in Asian region remained solid.
- The US Economy grew by 2.5 percent, unchanged from previous quarter (and 0.6 percent qoq, annualized). The moderate rate of economic growth was mainly driven by the expansion of net exports, household consumption and inventory accumulation. These factors offset the continual contraction of investment, in particular that in residential sector. The glut in housing market was reflected in various indicators such as housing starts that declined steadily since Q2 of 2006 as well as the reduction of new home sales of 21.8 percent in Q2 compare to 10.2 percent in Q1. This situation continued to put downward pressure on home prices and eroded collateral values of existing loans. Household consumptions, on both durable and nondurable goods, softened while retail sales slowed down from 12.2 percent growth in previous quarter to only 0.1 percent, in line with the reduction in consumer confidence that reached its lowest level since 2003. In addition, the slowdown in domestic demand dragged on production as reflected in a reduction of ISM index which registered at 48.6 in March and a reduction of manufacturing new orders. In terms of stability, inflationary pressure picked up as headline inflation accelerated to 4.1 percent due to the surge in primary commodity and oil prices. Core inflation stood at 2.4 percent compare to 2.3 percent in previous quarter.
- Euro-zone economy grew by 2.2 percent in Q1 (0.7 qoq, sa), slowed down from 2.6 percent in the last quarter of 2007. The base of growth increasingly broadened. Growth rates in Germany and France were stronger than in Q4 of 2007 and higher than market expectations due to a strong expansion in their exports. Spain and Netherlands slowed down due to weak domestic demand which was the result of financial market fluctuation and credit standard tightening. Exports softened in line with the slowdown in the world economy and exchange rate appreciation. Price pressures steadily heightened and drove average inflation rate from 2.9 percent in Q4 of 2004 to 3.4 percent, which is above the policy target. Against these developments, the ECB maintained its policy rate at 4.0 percent.
- Japanese economy decelerated from 1.7 percent growth in Q4 of 2007 to 1.0 percent growth in Q1, the continually deceleration since Q2 of 2007. Residential investment continued to decline although housing construction showed signs of recovery. Investment prospects remained weak as indicated by the contraction in non-residential investment for the first time in 5 years. Business profits decreased and business confidence softened. New orders for industrial machinery are likely to contract while private consumption remained fragile as consumer turned to pessimistic about general economic situation and inflation acceleration. Export growth, the main driver for economic expansion in Q1, remained solid in particular exports to China and other Asian countries. However, imports increased at a faster rate and subtracted growth contribution from net exports. Inflation accelerated and drove an average inflation rate to 1.0 percent in Q1. This, encouragingly, may imply the end of prolonged period of deflation. Against these developments, the BOJ kept its policy rate unchanged at 0.5 percent. However, as the core inflation remained at zero rates, it is likely for the BOJ to cut it policy rate if economic development deteriorated further.
- Asian Economy grew solidly due to previous episodes of monetary policy expansion and the recovery of domestic demand, in particular, investment expansion that contained the negative trade effects from the downturn of the U.S economy. Export to intra-regional and new markets expanded at a satisfactory rate while imports increased at a faster rate in line with the recovery in domestic demand. Inflation pressure heightened but partially had been offset by the appreciations of regional currencies. Nevertheless, which was driven by the increases in oil and food prices, the steady rise in inflation is likely to render policy decision in the region more difficult.
- Chinese economy also slowed down from 11.2 percent in Q4 of 2007 to 10.6 percent in Q1 consistent with the slowdown in industrial production from 18.3 percent in the first quarter of 2007 to 16.4 percent in this quarter. On expenditure side, export growth remained buoyant with an expansion rate of 21.4 percent (the export growth rate accelerated from 6.5 percent to 30.6 percent in February before softened to 21.8 percent in April). Imports increased at a faster rate and eroded growth contribution from net exports. However, the growth of aggregate economy remained solid due to the resumption of domestic demand expansion, which partially offset the slowdown of growth contribution from net exports. Retail sales increased by 20.6 percent, picked up the pace from 20.2 percent in Q4 of 2007 quarter. Investment in durable goods increased by 24.0 percent. Higher food costs resulted in an accelerated rate of inflation. Core inflation was at 8.0 in Q1 (and 8.5 percent in April), compare to 6.3 percent in previous quarter.
- South Korea’s economy grew by 5.7 percent in Q1, equal to previous quarter (on qoq basis, the economy grew by 0.7 percent, the slowest pace in 3 years). Consumption cooled down from 4.1 percent growth in Q1 2007 to 3.5 percent. Companies started to scale back their spending. Investment expansion slowed down significantly from 7.2 percent to 0.9 percent over the same period. Exports continued to grow at a satisfactory rate of 12.1 percent but slowed down from 17.0 percent of previous quarter while imports growth slowed down from 14.4 percent to 9.5 percent. Therefore, net exports increasingly contributed to growth in Q1. Unemployment edged up to 3.1 percent in March as manufacturing sector layoff workers. These indicators indicated that the Korean economy had entered a slowing period. Signs of a slowdown emerged in the pace of accelerated inflation and the slowdown in the global economy. Inflation hit a 3 years high of 3.9 per cent in March while consumer sentiments turned pessimistic for the first time in a year and manufacturers' confidence declined from a three- month high. Against these developments, the Bank of Korea kept interest rates at 5 percent.
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