- The Thai economy plunged sharply by 4.3% (YOY) in the fourth quarter of 2008, much deeper than expectation, as compared to 5% growth achieved in the first 3 quarters. The contraction was attributed mainly to the deterioration in global economic conditions which caused Thai exports and tourism to contract. In addition to the global recession, the rapid pace of deterioration was exacerbated by political uncertainty and frequent changes of government. This domestic uncertainty has also delayed the disbursement of government budget and the implementation of public projects.
- Overall economic expansion in 2008 was 2.6%, slowed down significantly from a 4.9% growth in 2007, and economic momentum has weakened. However, economic stability remains in check and manageable, as reflecting in a low inflation and low unemployment rates. A low inflation of 2.1% in Q4 stemmed from the sharp drop in oil and commodities prices. For the whole year, inflation rate averaged at 5.5%. Current account turned into a small deficit of 178 million US dollar.
- Policy rate was aggressively cut down and has led money market to follow suit. However, the real interest rates increased and become positive due to a more rapid decline in inflation. Hence, the monetary policy is actually not yet accommodative, especially during the period of economic slowdown and low public confidence. Private credit decelerated whilst deposit accelerated and thus excess liquidity rose. Thai baht weakened in line with the depreciation of regional currencies. Meanwhile, stock market fluctuated with lower SET index and smaller trading volume, which was spurred by capital movement in a midst of global financial and economic crisis. Political disturbances also weighed heavily on investors’ confidence and consequently on the performance of stock market.
- In 4Q08, fiscal balance recorded large deficits of 129,003 and 208,134 million baht, on a budget balance basis and on a cash balance basis, respectively. This resulted from a shortfall of revenue collection while expenditures have been accelerated. Public debts at the end of November 2008, equivalent to 37% of GDP, rose from the 36.92% registered at the end of September. The increase was contributed by the rise in debt of non-financial state-owned enterprises.
- In 2009 deterioration in global economic and financial conditions is a key risk factor for the Thai economy. The Thai economy is predicted to contract quite sharply in the first half of 2009 when the world economy hit bottom and severely affect Thai’s export, tourism and investors’ confidence. However, the economy is expected to recover in the latter half, supported by the implementations of the following packages: 1) stimulus package of around 116,700 million baht as a supplementary to the FY 2009 budget; 2) measures in the urgent economic recovery plan; 3) the medium and long-term public investment scheme; 4) acceleration of disbursement of FY 2009 and 2010 government budget; and 5) more accommodative monetary policy together with credit expansion and guarantee scheme provided for SMEs.
- NESDB revised 2009 forecast to (-1%) - (0%), mostly reflecting a sharper-than-expected contraction in exports and tourism which are depressed by gloomier outlook of the world economy. Inflation is predicted to be (-0.5%)-(0.5%). Unemployment could surge to 2.5%-3.5%. Current account is likely to be in a surplus of about 0.0%-1.0% of GDP.
- Economic measures in 2009 are aimed to stimulate domestic consumption in the short-run and generate a sustained economic growth through public and private investment in the second half of the year. While these measures cover a wide range of areas, the focus is on government-financed projects and investment under the pro-active fiscal policy, together with supportive monetary policy to help stimulate domestic demand. The measures are also aimed at providing a relief and cushion to those affected by the economic turmoil. These include, for example, subsidies for elderly persons, training for unemployed, soft loan and credit guarantee scheme for SMEs in return for an agreement to refrain from laying off workers, and an extension of tax allowances to reduce tax burden. Price guarantee scheme is also launched to stabilize agricultural prices.
1.1 The Thai economy plunged sharply by 4.3% (YOY) in the fourth quarter of 2008, much deeper than expectation, as compared to 5% growth achieved in the first 3 quarters. The contraction was attributed mainly to the deterioration in global economic conditions which caused Thai exports and tourism to contract. In addition to the global recession, the rapid pace of deterioration was exacerbated by political uncertainty and frequent changes of government. This domestic uncertainty has also delayed the disbursement of government budget and the implementation of public projects. In overall, the Thai economy expanded by 2.6 percent in year 2008, slowed down rapidly from an expansion of 4.9 and 5.2 percent in 2007 and 2006 respectively.
Key Highlight
(1) Export contracted both in terms of value and volume. Private and public investment declined while household spending slowed down slightly. The contraction of demand resulted in a reduction in manufacturing, transportation, construction and service sectors. The key negative factors which contributed to an abrupt economic contraction in Q4 are as follows:
- The world economic recession severely affected export and tourism sector in the forth quarter.
- The deteriorating financial crisis affected real sector and dampened consumption expenditure, investment and international trade in most countries. In the forth quarter, world economy went into the recession, led largely by the economic contraction of major economies including the US (-0.2%), UK (-1.0%), Japan (- 4.6%), Eurozone (-1.6%), Singapore (-3.7%). South Korea (-3.4%) and Taiwan (-8.4%). Meanwhile, the economy of China, India and Vietnam also slowed down dramatically with the rate of growth of 6.8%, 4.9% and 5.6% respectively.
- As a result of the global economic recession, export and tourism of Thailand noticeably contracted in the last quarter of 2008, along with along with the sharp contraction in its major export markets such as China (-17.5 percent), South Korea (-32.1 percent), Singapore (-34.8 percent), and Vietnam (-24.2 percent). The volumes of Thailand export decreased by 8.9 percent and values in US dollar reduced by 9.4 percent or 100,000 million baht approximately. The number of foreign tourists diminished by 19.4 percent; it represented an approximated decrease of 700,000 visitors. The loss of tourism revenues is estimated to be around 25,000 million baht.
- Domestic political disturbance and airport shutdown aggravated the situation in tourism sector and eroded market sentiments. This eventually depressed private investment and household spending further. In the forth quarter, household consumption increased by 2.2 percent, softened from 2.7 percent of the previous quarter. Whereas, private investment contracted by 1.3 percent compare to the expansion of 3.5 percent in the previous quarter. However, for the whole year of 2008, household consumption expanded by 2.5 percent, compare to 1.6 percent in 2007 and private investment picked up by 3.2 percent, compare to 0.6 percent of the previous year.
- Frequent changes in government delayed budget disbursement and the implementation of government projects. During October - December 2008, the disbursement of government budget registered at 363,711.7 million baht which is equivalent to the disbursement rate of 19.82 percent, lower than the target of 22.50 percent. Particularly, the disbursement of investment budget was only 28,241.7 million baht, compared to 54,751.5 million baht in the same period last year. Similarly, disbursement of public enterprises was lower than that of the same period last year and lower than the target. Disbursement of public enterprises including Petroleum Authority of Thailand registered at 76,208.6 million baht (equivalent to disbursement rate of 24.7 percent of disbursement plan of 355,819 million baht) lower than that of 105,109.9 million baht over the same period last year (which is equivalent to disbursement rate of 29.5 percent). Therefore, the last quarter of 2008, public investment in real term decreased by 10.2 percent whereas, public consumption increased by 10.4 percent.
- Production experienced with a broad-based contraction including manufacturing, construction, transportation and communication, and hotels and restaurants sectors. However, financial sector, wholesale and retail trade sector, electricity and water supply sector, and agricultural production sector continued to expand, though at a slower pace due to the softening domestic demand.
- Industrial sector contracted by 6.8 percent due to the worsening global economic condition that resulted in export demand reduction. Export-oriented industrial production with export to total production ratio of more than 60 percent and between 30-60 percent decreased by 11.5 and 9.9 percent respectively. While domestic-oriented industrial production declined by 1.2 percent due to deceleration in household spending, investment, and the delay of mega-projects. Manufacturing capacity utilization in the fourth quarter was at 61.8 percent, indicated rising in excess production capacity.
- Construction sector contracted by 12.8 percent, which is the 3 consecutive quarters contraction, due to the contraction of demand for hosing and commercial building in tandem with the slowdown in economic activities. Meanwhile, the reduction in government construction was attributable to the delay of Mega-projects investment.
- The number of tourists dropped by 19.4 percent owing to the worsening global economic condition that reduced purchasing power of tourists, the increase in travel cost in Thailand as well as tourists more cautious about political situation in Thailand. As a result, hotel and restaurant sector contracted by 8.3 percent. Meanwhile, transportation sector declined by 10.6 percent after continually decelerated in the first 3 quarters.
- Agricultural sector expanded by 1.8 percent, slowed down from previous quarter which was attributable to natural disaster and partly the reduction in export demand that are stemmed from global financial crisis, in particular demand for rubber and cassava.
(2) Economic stability remained in checked but development in unemployment situation requires close monitor.
(2.1) Domestic economic stability remained in checked but close monitor should be given to unemployment situation.
- Inflation rate dropped sharply to 2.1 percent in the fourth quarter from 5.0, 7.5, and 7.2 percent in the first three quarters. As a result, an average inflation rate in the first three quarters was at 5.5 percent. In January 2009, inflation rate turned to a negative rate of -0.4 percent after dropped to a rate of 0.4 percent in December 2008. Core inflation in the forth quarter was at 2.1 percent and at average rate of 2.4 percent for the whole year of 2008. Producer price index in the forth quarter increased by 2.9 percent and 12.4 percent for the whole year of 2008.
However, price of foods continued to increase in all items and resulted in 14.4 percent increase in food price index in the fourth quarter and an average of 16.6 percent for the year 2008. The increase in food price eroded household spending on foods that increased by only 1.4 percent, compare to 20.4 percent increase in total spending on foods & beverages. However, foods and beverages price index increase by 11.2 percent in January 2009 as price of fruits & vegetables, milk & diary products was softened. However, it is necessary for the government to ensure fair price of the necessary products for consumers.
- Average unemployment rate in Q4 remained low at 1.3 percent and the year 2008 was at 1.4 percent. However, there is a sign of rising unemployment rate, in particular, in manufacturing and investment that seriously fell down.
(2.2) External stability remained in check.
- International reserve at the end of December registered 110.247 billion Us Dollar and Net Forward Position recorded 6.920 billion USD (equivalent to 4.0-4.4 time of short term foreign debt or 7.6 months of import).
- Current account registered a deficit of 1,971.5 million USD (equivalent to 68,338 million baht) which is the continually deficit from a deficit of 1,346 million USD in previous quarter. However, surplus in first half of the year turned the balance in 2008 to register a surplus of 178 million USD or equivalent to 10,393 million baht. (which comprised of trade balance surplus of 217 million USD and service balance deficit of 416 million USD).
- Exchange rate in the fourth quarter was averaged at 34.8 baht per USD, depreciated compare to 32.88, 32.28, and 33.84 baht per USD in the first three quarters. In the fourth quarter, Thai baht fluctuated in the range of 33.70-35.68 baht per US dollar consistent with movements of other regional currencies.
Private Consumption
(%YOY) 2006 2007 2008 share (%) Privateconsumption 3.02 1.60 2.51 100 Durable goods -2.46 -4.24 9.63 11.4 Semi-durable goods 2.65 1.27 1.67 13.5 Non-durable goods 5.57 3.63 0.89 48.5 - Food 3.47 3.66 1.35 20.3 - Non-food 7.12 3.61 0.56 28.2 Services 1.19 0.57 3.10 26.6
Source: NESDB
Economic condition by sectors in the fourth quarter and the whole year of 2008
- Household consumption expanded at a sluggish rate. In Q4, household consumption increased by 2.2 percent, softened from an average rate of 2.6 percent in the first three quarters. The supporting factors for consumption expansion in Q4 are including (i) employment expansion (ii) the increase in farm incomes of 17.7 percent (iii) the increase in houshold purchasing power due to inflation decereleration and (iv) contribution from “6 months 6 measures” economic package that reduced living costs of people. However, consumers increasingly concerned about the negative impacts of world economic recession on their income and employment prospects. In addition, the phychological impacts from deteriorating political condition, that eventually leaded to successive demonstrations and the shutdown of Suvarnabhumi and Don Muang Airports between the 25th November and the 3rd December of 2008, deferred household consumption decision.
Most of consumption indicators continued to expand but at a slower pace. Real VAT revenues increased by 1.0 percent while the import volume of consumption goods rose by 1.6 percent. Motorcycle sales value, the main indicator for household consumption in rural areas, picked up by 5.8 percent. Passenger car sales grew noticeably, from a very low base, by 47.9 percent as consumers waited for benefit from tax incentives for eco-car in January 2008 and postponed their decision in Q4 of 2007.
The increase in consumption spending in Q4 was mainly attributable to the expansion of durables goods consumption of 7.7 percent, in particular, spending on passenger cars and electrical appliances (such as washing machines and air-conditioners). Consumption spending on services and foods expanded by 6.5 and 2.0 percent respectively but consumption spending on semi-durable goods declined by 3.1 percent.
For the whole year of 2008, private consumption expanded by 2.5 percent which was mainly attributable to the increase in durable goods consumption. Overall, consumption spending on durable goods, semi-durable goods, nondurable goods and services grew by 9.6 percent, 1.7 percent, 0.9 percent and 3.1 percent respectively. Among non-durable goods, consumption spending on foods picked up by only 1.4 percent, compare to 3.7 percent in 2007, which indicated the impacts of high food prices on low-income group. Meanwhile, consumption spending on durable goods picked up noticeably due to a strong expansion of consumption spending on cars and electrical appliances in the first half of 2008.
- Private investment contracted both investment in construction and investment in machinery and equipment. In Q4, private investment contracted by 1.3 percent, compare to decelerate rates of expansion of 6.5 percent, 4.3 percent and 3.5 percent in Q1, Q2 and Q3 respectively. Although the decline in oil prices has lowered pressure on production costs since August 2008, the deteriorating global economic condition and successive demonstrations eroded investor confidences as reflected in a reduction of business sentiment index (BSI) in which the current BSI index and the next 3-months expected BSI index dropped from 41.1 and 47.5 in Q3 to 36.5 and 40.2 in Q4.
Investment by destination sectors: In Q4, investment in machinery and equipment contracted by 1.3 percent in line with a 7.8 percent reduction in domestic sales of machinery (at 1988 price) between October and November. In addition commercial car sales contracted by 32.7 percent as deteriorating economic prospects deferred entrepreneurs’ decision while the imports of capital goods (at 1988 price) slightly increased by 4.3 percent.
Investment in construction plunged by 0.7 percent in Q4, due to the contraction of investment in commercial building construction and housing construction of 2.8 and 1.2 percent respectively. Meanwhile, investment in industrial plant construction and other constructions expanded by 2.1 and 1.5 percent respectively, compare to their contraction in Q2 and Q3.
For the whole year of 2008, private investment picked up by 3.2 percent. Investment in machinery and equipment increased by 4.2 percent. In contrast, investment in construction contracted by 0.2 percent due to the decline of investment in industrial plant construction and other constructions by 4.8 and 5.7 percent respectively while investment in housing construction and commercial building construction continued to increase by 0.9 and 5.9 percent respectively.
- Export value contracted due to global economic recession and the airport shutdown. In Q4, export value in dollar terms contracted by 9.4 percent which is attributable to the economic recession in major export destination countries such as Japan, Eurozone, ASEAN as well as a sharp economic slowdown in new export destination countries such as China and India. In addition, the new regulation in European market that requires registration and permission for the use of hazardous chemical substances in electrical appliances as well as the impacts from Suvarnabhumi and Don Muang Airport shutdown between 25th November and 3rd December 2008 also contributed to the contraction of export. In dollar terms, export volume declined by 13.4 percent while export price increased by 4.6 percent. In baht terms, export value decreased by 7.1 percent but export price picked up by 7.4 percent.
Export of Agriculture
2007 2008
(%YOY) year year Q1 Q2 Q3 Q4
Rice Value 34.2 121.8 108.1 155.8 134.2 -18.0
Price 9.4 5.5 13.6 91.0 88.4 59.6
Quantity 22.7 110.2 82.7 35.1 23.4 -48.6
Rubber Value 4.5 51.1 33.6 30.5 47.1 -21.3
Price 7.8 40.4 33.8 26.9 43.8 -3.1
Quantity -3.0 7.7 0.0 2.9 2.4 -20.9
Cassava Value 23.1 -2.2 13.5 20.0 23.3 -35.2
Price 18.6 61.1 58.9 61.9 39.3 13.1
Quantity 3.8 -39.3 -29.3 -25.5 -11.8 -40.6
Corn Value 48.6 110.3 229.6 -6.6 201.4 27.4
Price -7.0 64.3 15.0 186.1 27.2 -1.9
Quantity 22.7 79.1 181.1 -43.5 136.6 22.1Source: Ministry of Commerce