ECONOMIC OUTLOOK THAI ECONOMIC PERFORMANCE IN Q3 AND OUTLOOK FOR 2008 -

The Thai economy in the third quarter of 2008 expanded by 4.0 percent, slowed down from 6.0 and

5.3 percent in the first and second quarter respectively as a result of weakening domestic demand and a

slowdown in export. In the first three quarters of 2008, the economy grew at a satisfactory rate of 5.1

percent, This will help absorb impacts from worsen global economic condition in the coming period.

Overall economic stability remained positive as inflationary pressure softened as oil and

commodity prices declined, but trade balance and current account recorded a deficit. In the third quarter,

headline inflation was 7.3 percent; with monthly headline inflation continuously slowed down from 9.2

percent in July to 6.4 and 6.0 percent in August and September respectively, and decelerated further to 3.9

percent in October. However, trade and current account balances registered a deficit. This was attributable

to the slowdown in export in contrast with accelerated import expansion, and the impacts of full-blown

global financial crisis and domestic political uncertainties on tourism incomes as well as low tourism-

season. Unemployment rate remained low at 1.2 percent.

Policy rate adjusted upward and inflation rate deceleration raised real interest rate, though

remained negative. Credits accelerated while deposits contracted and signaled a tighter liquidity condition.

Thai baht vis-?-vis USD depreciated steadily since mid April. SET index on average declined and remained

periodically volatile following foreign capital movement amid global financial turbulence caused by widening

effect of a full-blown financial crisis.

Fiscal balance recorded deficit, on budget balance basis, but cash balance continued to record

surplus from the previous quarter FY 2007. This resulted from higher revenue but slight increase

expenditures. Public debts at the end of September were 3.41 trillion baht, increased by 1.0 percent from

the end of June 2008.

In the fourth quarter of 2008, The Thai economy is expected to slow down further as the

deepening global slowdown will restrain export expansion. For the whole year, the economy is expected to

grow by 4.5 percent, compared to 4.8 percent in 2007, with inflation rate of 5.6 percent, average

unemployment rate of 1.4 percent and current account deficit of approximately 300 million USD, compared to a

surplus of 14,049 million USD in 2007.

The Thai economy is likely to moderate in 2009, in spite of stronger impacts from deteriorating

global economic and financial condition on export, while domestic spending and investment remain sluggish.

Against this backdrop, the economy is forecasted to expand by around 3-4 percent with a moderate inflation

rate of 2.5-3.5 percent and current account deficit of 1.2 percent of GDP.

Economic management in 2009 should aim to stimulate and strengthen domestic economy, using

government budget and government project implementation as a key driver. In addition, short-term measures to

mitigate negative impacts from global economic crisis including 1) preparation for layoff-workers with

appropriate welfare scheme and training for skill enhancement, 2) closely monitoring those sectors with

severe impacts such as tourism, export, and real estate, 3) establish supporting mechanism for farmers that

suffered from output price decline by ensuring efficient production planning, fair incomes and sufficient

liquidity.

1. Economic performance in Q3

1.1 The Thai economy in the third quarter of 2008 grew by 4.0 percent, slowed down from 6.0 and 5.3 percent in the first and second quarter respectively. This is owing to the impacts of global financial crisis, the increase in raw material price and investment contraction. Meanwhile, the contribution from net exports declined as import volume accelerated. Overall, the Thai economy expanded by 5.1 percent in the first nine months of 2008.

Key Highlight

(1) In the third quarter, household consumption expanded at the same rate as in the first half of 2008, private investment noticeably softened. Export value expanded at a solid pace but its volume showed a sign of deceleration. Production moderated visibly both in manufacturing and service sectors. Nonetheless, agricultural continued to expand.

Export Volume in the third quarter expanded by 9.0 percent, softened from 9.8 percent in

previous quarter. Services revenues slowed down due to the decline in tourism number. Favorable factors

associated with solid growth in export value are rising world demand for agricultural products and softening

agricultural prices (rice, cassava, and rubber). Manufacturing exports continued to increase both in terms

of value and volume. In all, export value of goods and services grew by 22.5 percent, accelerated from 16.6

percent in the second quarter.

Commodities with strong export expansion in the third quarter were (i) Agricultural products such as rice (129.3 percent), rubber (44.4 percent), cassava (20.6 percent), and (ii) Fishery grew by 11.3 percent, after slipped by 1.4 percent in previous quarter which was attributable to the strong expansion in the export of raw and frozen shrimp (10.3 percent). (iii) Manufacturing products increased by 20.4 percent, up from 13.0 percent in previous quarter. This was due to acceleration in export expansion of electrical appliances (12.0 percent compared to a contraction of 0.4 percent in previous quarter), canned foods (40.8 percent, compared to 34.1 percent in previous quarter), rubber products (23.4 percent, from 14.8 percent in previous quarter), automobile and parts (39.3 percent, from 3.3 percent in previous quarter). However, exports of furniture and parts continued to decline (- 5.0 percent compare to -12.8 percent in second quarter).

Exports to the main market remained strong. In the third quarter, exports to main market including the US and Japan, increased by 12.0 and 23.6 percent respectively from a low base last year. Export to ASEAN5 and the EU expanded by 31.7 and 9.9 percent respectively. Other main markets with strong export expansion are South Korea, India and the Middle East. On the contrary, export to China and Hong Kong started to moderate in tandem with a slowdown of Chinese economy.

Export share by country

                2003    2004    2005    2006    2007               2008
                                                            Q1      Q2      H1
U.S.            17.8    19.4    19.8    15.0    12.6       11.7    11.0    11.2
Japan           16.8    15.1    14.6    12.6    11.8       11.3    11.4    11.1
EU 15           15.1    15.9    15.0    13.0    12.8       12.8    11.6    10.9
Asian (9)       21.7    21.8    19.9    20.8    21.4       21.6    24.8    22.7
Middle East      4.5     3.3     3.6     4.4     4.9        4.8     5.1     5.9
Australia        1.4     1.6     2.4     3.4     3.8        4.0     4.0     4.7
China            2.9     3.0     5.2     9.0     9.7        9.9     9.3     9.2
India            0.5     0.5     0.6     1.4     1.8        1.7     1.9     2.0
Hong Kong        5.2     5.9     5.4     5.5     5.6        6.1     5.6     5.4
South Korea      1.4     1.8     2.1     2.1     1.9        1.9     1.7     2.4
Taiwan           2.4     2.7     2.9     2.6     2.2        1.7     1.6     1.4
South Africa     0.4     0.4     0.5     0.8     0.9        0.9     1.0     1.0
Others           9.9     8.3     8.0     9.3    10.4       11.6    11.0    11.9
Total          100.0   100.0   100.0   100.0   100.0      100.0   100.0   100.0
Source: BOT

Agricultural production expanded by 9.9 percent, faster than 3.1 and 8.6 percent in the first

and second quarter respectively. This was attributable to the expansion of plantation area following the

recent agricultural prices surge, which eventually led to strong agricultural production expansion such as

rice, oil palm, rubber and cassava. This situation notably raised farm income by 57.0 percent in the third

quarter. In the first nine months, farm income increased by 44.4 percent while agricultural production

expanded by 6.9 percent

Industrial sector expanded by 6.1 percent, down from 9.5 percent and 7.7 percent in the first

and the second quarter respectively. The slowdown was observed both in production for domestic market and

export-oriented production. The latter was affected by the US sub-prime crisis in the US that reduced demand

and thus slowdown production of hard disk drives and electrical appliances. Meanwhile, production of wood

furniture and leather in this quarter declined markedly.

Numbers of foreign tourists dropped by 1.7 percent for the first time in 3 years. In September,

number of tourism contracted by 16.5 percent, due to a prolonged and more violence domestic political

tension as seen from temporary airport shutdown in the south and the enforcement of emergency decree. This

development eroded tourism confidence. The occupancy rate in the third quarter was 53.7 percent, falling

from 57.7 percent in the same period last year. The decline in tourism activities had negative effect on

hotel & restaurant, and transportation sector which expanded by only 0.2 and 1.5 percent compared to 5.9 and

3.6 percent respectively in previous quarter.

Financial sector grew by 9.1 percent from the same period last year, benefiting from credit

expansion, particularly the business loan. This reflected higher demand for operating capital following

rising input prices and transportation cost. Meanwhile, consumer credits continued to grow, supporting by

the expansion of housing loans.

(2) Key concerns: weakening domestic demand

In the third quarter, household consumption grew by 2.6 percent, slightly increased from 2.5

percent in the previous quarter. The continue expansion was supported by (i) the increase in farm income as

a result of higher agricultural prices (ii) minimum wage increased (iii) “6 months 6 measures”(A) economic

package which partly helped ease inflationary pressure and raised purchasing power. Nonetheless, household

spending remained concentrate in the consumption of durable goods which expanded by 9.4 percent, in

particular spending on vehicles and household electrical appliances. Spending on semi-durable goods and

services expanded by 3.4 and 5.2 percent while spending on foods dropped by 0.3 percent.

                 1) Excise tax cuts bring the price of gasohol 91, 95, E10, E20 and E85 down by 3.30
baht/litre to 0.0165 baht from the current price 3.3165 baht/litre, diesel B2 down by 2.30 baht/litre to
0.005 baht and bio-diesel B5 down by 2.19 baht/litre to 0.0048 baht, effective on July 25th 2008.
                 2) Freeze the price of household cooking gas for 6 months.
                 3) Free tap water for household using less than 50 cubic metres/month.
                 4) Free electricity for households using less than 80 units/month; 50% subsidy for those
using 81-150 units.
                 5) Free travel on 800 non air-conditioned BMTA buses.
                 6) Free travel on all non air-conditioned trains, will cover 16 million persons and cost
the government about 250 million baht.

          - Private investment continued its slow pace with a growth rate of 3.5 percent, compared to 6.5
and 4.3 percent in the first and second quarter respectively. The slow expansion rate was attributable to
higher raw materials cost, softened domestic demand, domestic political uncertainty and global economic
slowdown which eroded business sentiments and eventually caused new investment projects to delay. In the
first 9 months, private investment expanded by 4.8 percent.
          - Government expenditure and public investment in real terms declined by 2.9 and 5.5 percent
respectively. The government budget disbursements increased due to the expansion of current budget, while
investment budget declined. Together with the rising prices, public investment at constant prices declined.
Public investment in construction contracted for two consecutive quarters due to rising cost of construction
material of 26.6 percent, up from 24.6 percent in previous quarter. In the third quarter, public investment
in construction of central government, state owned enterprises and local administration plummeted by 7.3
percent.
          In the fourth quarter of FY2008, disbursement of government budget registered at 397,706 million
baht. Overall, the annual government disbursement in FY2008 (October 2007-September 2008) registered at
1,532,446 million baht. This was accounted for 92.3 percent disbursement rate of planned budget of 1,660,000
million baht (lower than the target of 94.0 percent disbursement rate). The current budget disbursement was
348,267 million baht and the investment budget disbursement was 49,440 million baht. The disbursement of
carry-over budget was 14,829 million baht. Disbursement of public enterprises including Petroleum Authority
of Thailand during July-September registered at 70,974 million baht (increased from 50,071 million baht in
the same period last year).
          - Inventories build up in the third quarter. The build-up of manufacturing inventories for three
consecutive quarters was an unusual trend since the stock should normally be released in the third quarter.
This is because weakening domestic demand and deteriorating global economic condition had lowered demand for
the products. The build-up of inventories are in food and beverage, textile, furniture, radio and
television which indicated further slowdown in these industries.
          (3) Over all, economic stability in 2008 remained strong. Inflationary pressures started to
subside. However, risks associated with current account deficit heightened.
          - Unemployment rate in the third quarter was 1.2 percent and employment rate increased by 1.8
percent.
          - Inflationary pressure has eased since August. In the third quarter, inflation rate was 7.3
percent, somewhat lower than 7.5 percent in the second quarter. The rates subsided in August and September
to 6.4 and 6.0 percent respectively, compared to a high rate of 9.2 percent in July. This lessened
inflationary pressure was partly the effect of the 6 months 6 measures measures economic package, observed
in a decline in inflation rate of electricity, energy light and water supply by 26.1 percent. Moreover, the
excise tax reduction on gasoline and the falling world oil price has softened the inflation in
transportation and communication. However, inflation in food items continues to rise. In the first 10
months, headline and core inflation rate were 6.3 and 2.4 percent respectively.
          - Current account registered a larger deficit in the third quarter. Trade balance was in a deficit
of 1,296 million US dollars, from a surplus of 425 million US dollars in the second quarter and deficit of
109 million US dollars in the first quarter. In the first 9 months, overall trade balance registered a
deficit of 979 million US dollars or equaled to 31,757 million baht. Similarly, service, income and transfer
balance registered a deficit of 1,166 million US dollars as a result of repatriation of foreign investors’
earning and dividend. Moreover, tourism receipts significantly slowed down. Accordingly, current account
balance in the third quarter registered a deficit of 2,461 million US dollars (or equivalent to 83,189
million baht), higher than a deficit of 1,016 million US dollars in the second quarter. Under the
circumstances of export slowdown, as a result of the global recession, the current account deficit has
become a key concern that requires appropriate risk management to maintain external stability. In addition,
current account deficit put a downward pressure on the Thai baht value. In the third quarter, Thai baht was
33.84 bath per US dollar, depreciating from 32.38 and 32.28 baht per US dollar in the first and the second
quarter respectively. On 20 November 2008, Thai baht was 35.07 baht per US dollar.
          - Fuel and Lubricants: import value increased by 60.0 percent, accelerated from 51.2 percent in
the second quarter (as a result of growth rate of price and volume of 44.5 and 9.8 percent respectively). In
the third quarter, import volume of crude oil fell by 10.2 percent, while import price rose by 78.6 percent

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ECONOMIC OUTLOOK THAI ECONOMIC PERFORMANCE IN Q3 AND OUTLOOK FOR 2008 - 2009