2.3 Production side:
Agriculture, manufacturing, tourism and real estate sector tend to expand comparing with a rate in 2007. For financial sector, higher growth in credit expansion is expected. Nevertheless, many financial institutions are now entering the transition period, as they have to adapt to the new rules and regulations, such as the BASEL II and new deposit insurance act. Production side outlook is as follows:
(1) Agriculture sector is expected to improve especially in key products, for example:
(1.1) Rice: Production of rice tends to improve due to adequate supply of water and favorable price. High price is expected as a result of higher demand from foreign market. In addition, the competitors such as Vietnam and India have revised down its export target in order to maintain its homeland food security, while government already approved the “Thai rice strategy” in order to improve quality and varieties of “Thai rice product”. This strategy aims to strengthen consumer confidence which will lead to better farmer income. Moreover, Thai rice product is gradually delivered into market. The said product is expected to increase by 12.0, compared to a rate in 2007.
(1.2) Cassava: Output of cassava is likely to increase as result of greater domestic demand from alternative energy use, especially Gasohol 91 and 95. Moreover, Ministry of Energy targets the Ethanol production in 2008 for 1.3 million liters per day, increasing from 0.5 million liters per day in 2007. The said target leads to higher demand for cassava in order to serve Ethanol production. Besides, foreign countries, especially China and Korea, also greatly demand for cassava chips and pellets from Thailand. Hence, cassava price is expected to remain at high level.
(1.3) Rubber: With greater global demand and price speculation in the commodities forward market, both output and price of rubber are expected to increase. In addition, many industries such as tire and rubber glove, have increased their natural rubber usages, which responsive to both domestic and international vehicles production
(1.4) Fishery In 2008, the growth in fishery production will decrease in accordance with the extent of king prawn production which accounts for approximately 20 percent of overall shrimp production. Key contracting cause is production factor including higher price of animal food and gasoline. Thailand export still confronts a threat of trade barrier performed by importing countries such as USA. However, a positive factors in 2008 are consequences from dealing with trade partner, such as special profit according to GSP received from EU. Moreover, a deal of Japan- Thailand Economic Partner Agreement (JTEPA) is also a positive consequence that can lower the tariff rate, beneficiary for Thailand in exporting frozen fresh and processed shrimp with decreased rate from 5.0 percent to 0.0 percent. In this regard, Thailand export in 2008 is expected to increase continuously.
(2) The industrial sector. Export-oriented production tends to slow down due to a downward trend of key trading partners’ economies. Nonetheless, production for domestic consumption will benefit from an upward trend of domestic consumption and investment. Particularly, main industries - such as electronics, automobiles, petrochemicals, chemical products , especially motorcycles, as well as alternative-energy car, - are on a positive trend. In 2008, challenging factors will be the fact that small entrepreneurs need to improve their standards and quality of products due to continuously changing in structure of global production with strong competition from low cost producers (e.g., China, India and Vietnam) while oil price is also likely to increase. Therefore, development of labors’ skill is strongly required because various industries still face with lack of skilled labors.
(3) The construction sector. In 2008, the construction sector will be on a positive trend, particularly residential construction in Bangkok and vicinities. This is because of changing consumer behavior encouraged by surge in oil prices. Demand for construction along the route of mass transit system is likely to substantially increase. Office building and manufacturing constructions are also on an upward trend. This upward trend is stimulated by economic recovery, concrete solution in mass transit system and low rate of interest. Furthermore, measures for economic stimulation in real estate sector, enforced in March 2008, also support the trend by providing privilege for real estate business with lower tax rate decreasing from 3.0 percent to 0.1 percent and with lower fee rate for transferring registration and mortage decreasing from 2.0 percent to 0.01 percent. The measures will be supporting factors for recovery of construction and related businesses.
(4) The tourism sector In 2008. The target of foreign tourists is set at 15.7 million people, increased by 9.8 percent or from 14.3 million people in 2007. Revenue is expected to be around 600,000 million baht, an increase from 506,435 million baht in 2007. During 2008 - 2009 government launches “The Year of Tourism in Thailand” with the approaches to develop tourism quality and standard as well as to promote new geographical tourism such as “The Royal Coast”, “Thailand Riviera”. Besides, the government also promotes the quality tourist market such as the old age group, health care-oriented group, conference participants and exhibitors as well as egological and cultural tourists. Moreover, the government targets to upgrade Thailand to be “World Class Destination” by creating value of service standard and safety for tourist, responsive to national competitiveness.
3. Economic Policy Management for 2008
In the remaining period of 2008, the government should continue to properly manage economic risks and reduce the impact of downside risks on the Thai economy. Such risks include (1) higher than expected oil price which affects higher costs of production of business sectors and higher costs of people’s standard of livings and (2) the slowdown in the global economy that affects export sectors. The economic management in the short-run should focus on reducing the impact of oil price on low income households and small and medium entrepreneurs, promoting energy savings and efficiencies, accelerating uses of alternative sources of energy to meet targets. Meanwhile, government should expedite implementing the long-term measures to upgrading Thailand’s competitiveness. First, government should control the implementation of infrastructure development projects as planned, particularly transport and logistic systems and Bangkok Mass Transit. Secondly, government should closely monitor the implementation of measures to increase production efficiency and of the management of small and medium enterprises. Thirdly, the economic restructuring should be pushed, particularly increasing value creation of products, improving production efficiency, upgrading product standard and food safety, and promoting agricultural product processing. Fourthly, the rules and regulations that affect investment and business operation should be clear. Lastly, government should set strategies and mechanisms to regulate and promote international capital flow, both short-term capitals and direct investment in order to have capital inflows at the desirable levels that benefit the country. Management guidelines are as follows.
3.1 Driving measures on energy savings and energy efficiency improvement continuously as well as accelerating the use of NGV in transport sectors to meet the targets. In addition, government should continue promote the uses of alternative energy as planned (i.e plans for E10/95 E10/91 E20/95 B2 and B5)
3.2 Increasing government measures to expand the coverage of social welfare to the underprivileged, elders and retirees in order to reduce the impact on standard of livings. As now, 755 million elders out of 6.33 million elders receive social pension. In addition, 229,985 disabled out of 1.098 million disabled receive social pension.
3.3 Stabilizing prices of agricultural products by focusing on improving efficiency, developing production and upgrading product quality. In addition, government should build mechanisms that cause farmers to receive high fair prices.
3.4 Driving the measures of SMEs credit expansions to meet the target would help SMEs to survive and prosper with efficiency improvement. SMEs funding supports include the 5000 million baht SME fund to help SMEs affect from baht appreciation and the 40,000 million baht fund to help SMEs to upgrade efficiency, technology and production process.
3.5 Accelerating budget disbursement in fiscal year 2008 to achieve target of 94 percent disbursement rate of government budget(particularly the budget for well-being strategy and projects to increase potential of communities, including those to reduce poverty and strengthening SME). The target rate of disbursement of SOE’s investment budget is set to be 90 percent. This scheme of implementation must be carried out in line with the implementation of provincial and provincial cluster development plan.
3.6 Management of median prices of public projects to be in line with changes in inflations. This will prevent the delay of project implementation and support the revival of investment. (prices of construction materials increased by 15-20 percent since 2007).
3.7 Building up investors’ confidence by implementing policies to build the foundation of Thai economy and enhance competitiveness in long-run. Government should keep the continuity of policy implementation of public investment projects to improve infrastructure, particularly the mass transit system in Bangkok and the vicinity areas. The approved projects should be expedited for construction in 2008. The development of logistic systems, the amendment of law and regulation that will be hurdles of private investment growth, and the implementation of “the 2008-2009 years of investment” should be expedited.
3.8 Promoting tourism sector to strive for the slowdown in 2007 under the campaign of “the 2008-2009 years of tourism for Thailand”
Economic Projection of 2008
Actual Data Projection 2008
2005 2006 2007 Feb 25_f May 26_f
GDP (at current prices: Bil. Bht) 7,095.6 7,830.30 8,485.2 9,231.9 9,418.6
GDP per capita (Bht per year) 109,440.9 120,763.40 128,563.6 139,877 142,705.6
GDP (at current prices: Bil. USD) 176.2 206.6 245.5 286.7 292.5
GDP per capita (USD per year) 2,715 3,186.40 3,720.0 4,344 4,431.9
GDP Growth (at constant prices, %) 4.5 5.1 4.8 4.5 - 5.5 4.5 - 5.5
Investment (at constant prices, %) 10.6 3.8 1.4 6.7 8.5
Private (at constant prices, %) 10.6 3.7 0.5 7.0 9.3
Public (at constant prices, %) 10.8 3.9 4.0 6.0 6.0
Consumption (at constant prices, %) 5.3 3.0 2.7 4.7 4.7
Private (at constant prices, %) 4.5 3.2 1.4 3.8 3.8
Public (at constant prices, %) 10.8 2.3 10.8 10.0 10.0
Export volume of goods & services (%) 3.9 8.5 7.1 5.9 7.3
Export value of goods (Bil. USD) 109.4 127.9 151.2 169.3 171.3
Growth rate (%) 15.2 17.0 18.1 12.0 13.3
Growth rate (Volume, %) 4.3 8.3 7.2 6.0 6.3
Import volume of goods & services (%) 8.7 2.6 3.5 6.6 10.0
Import value of goods (Bil. USD) 117.6 126.9 139.2 161.1 169.8
Growth rate (%) 25.8 7.9 9.6 15.4 22.0
Growth rate (Volume, %) 8.9 0.2 1.5 6.9 11.0
Trade balance (Bil. USD) -8.3 1.0 12.0 8.1 1.5
Current account balance (Bil. USD)(C) -7.6 2.2 14.9 11.6 6.0
Current account to GDP (%) -4.3 1.0 6.1 4.1 2.0
Inflation (%)
CPI 4.5 4.7 2.3 3.2 - 3.7 5.3 - 5.8
GDP Deflator 4.5 5.0 2.7 3.2 - 3.7 5.5 - 6.0
Unemployment rate (%) 1.8 1.5 1.4 1.5 1.5
Source: Office of National Economic and Social Development Board. May 26,2008
Note: (C) Reinvested earnings has been recorded as part of FDI in Financial account, and its contra entry recorded as income on equity in current account.
Global Economy in 2008
The U.S economy: Latest indicators in April showed that the U.S economy remained weak. Although, real GDP in Q1 grew at a stronger rate than market expectation, the main contributor was private inventory accumulation. The economy remained in the period of financial and real economic corrections to the sub-prime crisis. The dynamics of real recession have not yet been reverted as indicated by, (i) turbulences and low confidences in financial system which revealed in widening spreads between returns on financial securities and yields on treasuries, (ii) housing market correction has not yet bottomed out. Case — Shiller index plunged further at a faster pace, (iii) production activities remained weak as shown in the decline of Industrial production index by 0.7 percent, the largest drop in 2.5 years, and (v) private consumption remained sluggish as house price deflation, rising jobless, escalating inflation, and credit standard tightening took a toll on consumption which had resulted a slip by 0.2 percent of retail sales.
In order to stimulate the economy and resolve liquidity problems, the U.S administration has implemented various measures, which are including (i) continued cutting policy rate by the Federal Reserve Bank (Fed) Up to April, the Fed Fund rate has already been lowered by 200 bps, as well as lowered. Moreover, the spread between the discount rate and fed funds rate has been reduced from 100 bps to 25 bps. (ii) In March 2008, under Term Securities Lending Facility (TSLF), Fed allowed financial institutions to borrow up to $ 200 billion by using mortgage-backed securities as collateral. In May 2008, Fed authorized an expansion of collateral to include AAA-rate Asset Backed Securities. (iii) Fed extended amounts of outstanding under the Term Auction Facility (TAF) to $100 billion in March and to $ 150 in May. (v) Fed further raised existing temporary reciprocal currency arrangements with European Central Bank (ECB) and Swiss National Bank (SNB) to $50 billion and $12 billion respectively. (iv) Tax rebates of totally $ 150 billion, and (vi) the Federal Housing Administration has been permitted to underwrite a broader range of mortgages as well as to raise Federal Home Loan Mortgage Corporation and Federal National Mortgage Association lending limits by $ 200 billion.
These measures have led to improvements in investment sentiment and a better credit market condition. Led by banks, the equity markets increased by 11.0 percent from their lowest level. Financial institutions have increasingly recognized the scale of financial losses and are taking remedial steps as witnessed in the recent capital raisings(D). The new lending facilities for securities dealers reduced counter-party risks while a program to allow banks to swap illiquid mortgage backed securities for Treasuries freed-up funds for lending. These policy initiatives have allowed mortgage rates to decline moderately. Junk-bond spreads have narrowed from a peak of 862 bps in March to 692 bps while the high-grade bond spreads have narrowed from the peak of 305 bps to 268 bps over the same period. These developments, together with the surge in inflation and previous measures, implied that Fed is now less likely to reassure the economy by mean of aggressive interest rate reduction.
While financial markets have improved moderately, the majors leading indicators suggested that that the real economy tends to trend down further. New orders decreased while consumer confidence index continued to decline to its 5-year low. In addition, the retrenchment in house prices becomes deeper than market expectation, its effect on lenders and financial markets could further aggravate real economic activities. Supported by tax rebates package and continual interest rate reductions, the economy is likely to gain more ground but its growth momentum remained subject to credit condition that has been tightened further by financial institutions. Therefore, the processes of economic recovery tend to be slow. Taking into account all these developments, the US economy is likely to grow by 0.8 percent in 2008, slightly lower than 1.2 percent in press release on November 25 and down from 2.2 percent in 2007.
***Note: (D) For example, Citigroup, Merrill Lynch, JP Morgan and Wachovia
The impacts of financial turbulence and the slowdown of the U.S economy on other industrialized economies are larger than previously expected: The U.S recession continued to drag on economic performances of other industrialized countries.
The Eurozone is facing with growing divergences in economic performances across its member economies. Germany is beginning to feel the pinch from financial and U.S fluctuations. Spain and Italy seems to entered severe economic corrections. In April, the Purchasing Managers' Index was particularly weak, registered the first decline in new orders since May 2005. Service sector PMI grew at a slightly slower pace with a faster growth in Germany contrasted with weakness in other member countries. The manufacturing PMIs slowed for the third month in April due to the slowing global demand and a stronger Euro. The economic sentiment index decreased from 99.6 in March to 97.1 in April, the lowest level since August 2005. Overall, economic indicators in April pointed to economic deceleration while the Inflationary pressures is likely to drag on consumer spending and the strength of the Euro put downward pressure on exports. European Bank has attempted to ease tight credit condition by opening up its financing window. However, the already weakening real economy is aggravated by the rise in inflation which recorded 3.6 percent in March, its highest level since an establishment of Eurozone in 1999. Therefore, the ECB is facing with policy dilemma in reconciling price stability and solid economic growth. However, as the policy rates have been kept unchanged since September 2550, policy makers increasingly concern about the deterioration in real economic activity. Against this background, the ECB is likely to cut its policy rate by 25-50 bps in the second half of the year, when inflation receded and the slowdown become more materialized. All in, with the deterioration in economic activities, growth for the Eurozone in 2008 is expected to slowdown from 2.0 percent in 2007 to 1.4 percent this year while the inflation rate is forecasted to accelerate from 2.1 percent to 2.8 percent over the same period.
The deceleration in the Japanese economy is likely to continue in 2008. Industrial production output decreased sharply and reflected the impacts of the slowdown in the U.S and Eurozone economies as well as the Yen appreciation. Domestic demand remained weak. In April, sentiment among merchants fell for the first time in three months while consumer confidence recorded its lowest level in five years. While a fall in shipments to the U.S has been cushioned by strong exports to Asia, the latest data showed that Japan's exports to Asia increased 1.9 percent in March, the smallest increase since May 2005 as growth of shipments to China slowed to 3.2 percent from 14.9 percent. With these developments, the BOJ is likely to refrain from interest rate hike. In addition, the latest downgrade economic forecast by BOJ indicated the potential interest rates cut if economic conditions deteriorate sufficiently. The economic growth for the year is likely to slowdown to 1.4 percent from 2.1 percent last year.
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