(Update 2)ECONOMIC OUTLOOK THAI ECONOMIC PERFORMANCE IN Q1 AND OUTLOOK FOR 2009

Economic performance in the first quarter of 2009

• Household consumption expenditures declined, marking its first decline in ten years3 . On the year, household consumption dropped by 2 .6percent in the first quarter, following the stagnation prevailed throughout 2008. The sharp fall of private consumption into negative territory can be explained by the following underling factors. They are (i) the decrease in labor incomes led by the rise in layoffs, particularly in manufacturing sector; (ii) the decline in working hours and annual bonus in business firms;

Although the “6 months 5 measures” stimulus package, which helps reduce living costs of people, was extended for another 6 months and consumer prices has continuously fell, overall purchasing power of people did not improve favorably. In particular, purchasing power of labors and farmers was eroded by income reduction and the increase of food prices. Nevertheless, real purchasing power of salary-based workers picked up as the result of declining cost of living led by the drop in oil and consumer prices.

Consumption expenditure declined markedly on a broad-based basis, ranging from spending on semi-durable goods, non-durable goods, to spending on non-food products. Consumption spending on durable goods dropped by 18 .1 percent; the large drop was seen, in particular, in spending on cars, motorcycles and electrical appliances. Consumption spending on semi-durable goods, non-food and non-durable goods decreased by 8.1 and 4.4 percent respectively. On the contrary, consumption spending on food picked up by 2.5 percent which was partly attributable to the long weekend during a New Year festival. Furthermore, consumption spending on services increased by 5.5 percent.

Private investment continued to contract, and at a faster pace than that in previous quarter. In the first quarter, private investment decreased by 1 7 .7 percent, worsened from the 1.3 percent decline in the fourth quarter of 2 0 0 8 . This sharp contraction was contributed by the decline in investment in construction and, machinery and equipment by 8.2 and 20.3 percent respectively.

Investment in machinery and equipments declined substantially in amidst of deteriorating global economic condition. Under such conditions, entrepreneurs run down their stocks at the expense of production cut and reduction of capacity utilization and investment. This has been reflected in the decline in capacity utilization rate declined to an average of only 5 7 .8 percent in the first quarter.

Furthermore, new investment projects which were approved by the Board of Investment in the previous year were down by 6.6 percent in terms of its number and 32.6 percent in terms investment value. Therefore, demand for investment in machinery and equipments declined.

Investment in residential construction shrank quite sharply by 1 0 .4 percent, due to dampening housing demand provided declining purchasing power and consumer confidence. Although interest rate continually declined and there exist incentives from tax exemption on transfer fee and housing purchase expenses, concerns over income prospects seems to have taken over and thus deferred buyers’ decision. On the supply side, housing supply remained buoyant in particular the supply of condominiums in secondary market that was stemmed from speculative incentive. In addition, the stricter credit standards has caused liquidity shortage problem among contractors and real estate developers, particularly small scale enterprises as has been indicated by numbers of business shutdown of 402 and 119 companies in the first quarter of 2009. Amid unfavorable economic condition in the first quarter, investment in housing construction plunged by 10.4 percent while investment in commercial building construction and industrial plant construction declined by 9.8 and 3.4 percent, respectively.

• Exports continued to contract in the first quarter, driven primarily by deeper global economic

• Agricultural commodity: export volume and price dropped significantly in the first quarter. Export volume and price of agricultural products dropped by 21.2 percent and 13.1 percent respectively and resulted in the decline of export value by 31.4 percent. The decrease in agricultural export was partly attributable to high base effects both in terms of volume and price as the year 2008 experienced record high performance of agricultural exports. The 2008 peak was supported by the world’s inventory reduction and strong demand for energy crops. Major agricultural exports that recorded its volume reduction include, for instance, (i) rice (-32.8%) as other exporting countries have resumed their exports

• Manufacturing products: Export volume and value decreased. Export value of manufacturing products decreased by 19.3 percent with a decrease of export volume of 19.6 percent and the increase in export price of 0.4 percent. Export value of technology-intensive products (which is accounted for 62 percent of total manufacturing export and 55 percent of total export value) declined at an alarming rate of 30.9 percent. Similarly resource-based manufacturing products retreated by 6.5 percent. Export value of labor-intensive products picked up by 44.4 percent but mostly due to the strong increase in the export value of unwrought gold that was imported to satisfy speculative demand. Therefore, the increase in export value of labor-intensive products is likely to be temporary.
• Export of electronics and electrical appliances contracted at an alarming pace but recently signs of recovery in the global market have emerged. This encouraging development will contribute positively to exports of electronics in the remaining months of the year. In the first quarter, export value of electronics and electrical appliances declined at an alarming rate of 32.4 and 30.4 percent

However, the signs of recovery have emerged in the global market, including (i) book to bills ratio of US semi-conductor picked up to 0.61 in March from its lowest level of 0.47 in January 2008 (ii) export value of electronics goods from Asian countries such as Singapore, Taiwan, Hong Kong, South Korea, and Malaysia declined at a slower pace than in previous periods and indicated that the slump in electronic market has bottomed out and is likely to recover in the latter half of 2009. However, risk factors to the recovery are the fluctuation in global economy; particularly in major importing countries of electronic goods such as the US and China.

• Gems and Jewelry: Import value expanded robustly driven by the surge in export of unwrought gold. Export value increased by 106.3 percent, mainly attributed to export of unwrought gold where its export value rose by 351.6 percent. The increase in export value of unwrought gold coincided with the rise of gold price in global market which indicated the short term increase of speculative export. Excluding unwrought gold, export value of gems and jewelry picked up by 20.9 percent.
• Vehicles, Parts, and Accessories: Export value dropped by 35 percent due to the reduction of orders from the major importers, such as Australia, Indonesia, Malaysia, Philippine and Japan. The decline in export was mainly attributable to the worsening economic condition and tighter credit condition. Against this development, producers drained their stockpile on the expense of production reduction.
• Food Products (excluding sugar): Export value decreased by 5.1 percent due to worsening economic condition in the major importing countries (such as US, Japan and EU) and stricter rules and regulations that are enforced on importers. The major products which recorded a reduction of its export value are including canned, frozen, and processed crustacean (-8.3%t) fresh, frozen, and processed vegetables and fruits (-12.4 %t). In contrast, export value of frozen and processed chick en increased by 7.9 percent.
• Export markets: Thai exports declined sharply across its major markets. Export to major markets, for instance the US, Japan, EU (27) and ASEAN decreased by 27.0,26.1, 30.8, and 31.6 percent respectively. Likewise, export to other markets also declined, such as China (27.6%t), Hong Kong (-14.2%), Taiwan (-42.5%), etc. In contrast, export value to Australia and Middle East increased by 15.5 and 6.7 percent respectively.

Imports: Import price and volume dropped substantially, faster than the fall in export and domestic demand. In the first quarter, import value in dollar terms decreased by 38.2 percent, marking its first contraction in 7 years4. Import volume declined by 35 percent concurrently with export and domestic demand contraction underling such drastic decline. Import price, on average, decreased by 5.0 percent due mainly to falling oil prices. In term of Thai baht, Import value retreated by 32.6 percent while import price increased by 3.6 percent.

• Import of capital goods contracted both in terms of volume and price. Import value of capital goods contracted by 23.2 percent as a result of ebbing demand for machinery investment in the presence of excess production capacity. In the first quarter, import goods that recorded a strong contraction in its import value were industrial machinery and components, electrical machinery and parts, computer and parts, scientific and medical equipment, and other capital goods. Import volume and price decreased by 21.9 and 1.7 percent respectively.
• Semi-finished goods and raw materials: Import value and volume decreased in line with the cut down in production. In the first quarter, import value of semi-finished goods and raw materials continued to decline by 44.1 percent from the last quarter and was attributable to contraction in production. Import goods that recorded a contraction in its import value were electrical and electronic appliances, chemicals products, iron and steel, jewelry including silver and gold bars, fertilizer and pesticides. Import value of iron and steel declined substantially by 52.0 percent due to the decline

• Fuel and lubricant: Import value and price declined. Import value of fuel and lubricant decreased by 50.2 percent. Import volume of fuel and lubricant declined by 29.1 percent in line with the contraction of economic activities. Import price declined by 29.8 percent in line with oil prices reduction in the world marker. In the first quarter, import value of crude oil decreased by 56.4 percent owing to the decrease in volume and price of 8.7 and 52.2 percent respectively. Moreover import value of

• Import value of consumer goods decreased significantly: Import value of consumer goods

contracted by 16.0 percent owing to more cautious consumption behavior, especially in luxury goods consumption and due also to high base effect of last year when the imports of consumption surged. Import

goods that record a contraction in its import value are household electrical appliances, miscellaneous goods, gems and jewelry, clothing, shoes, other garments, and watch and parts. Likewise, the weakening of Thai baht was reduced consumption of imported consumer goods. In sum, import volume and import price of consumer goods decreased by 15.1 and 1.1 percent respectively, but its was the decline from high base last year.

• Term of trade continually improved. Export price in dollar terms decreased by 0.5 percent, whereas an average import price declined by 5.0 percent. Thus, term of trade in the first quarter continuously increased by 4.7 percent, from 2.5 percent in the fourth quarter of 2008. This suggests a

positive income effect of international trade.

• Trade balance recorded a surplus of 7,800 million USD (which is equivalent to 275,434 million baht) in the first quarter, as an import contracted at a faster pace than export. However, on the caveat, this was the surplus that accumulated over the period of economic recession.

• Production Side

-Agricultural: In the first quarter of 2009 agriculture sector expanded by 3.5 percent, accelerated from 1.6 percent expansion in the previous quarter. The expansion of agriculture production was attributable to the increase in the production of major crops such as rice and cassava, which increased by 99.0 and 14.3 percent respectively. Rice and cassava production was hastily harvested to meet government's pledging scheme, as February was the deadline. On the other hand, rubber increased by 1.2 percent and palm oil production contracted severely by 18.7 percent. The key factors for the reduction of rubber and palm oil production were unusual weather condition and natural disaster, for example, higher temperature, heavy rain and flooded in the Southern region. Moreover, prolonged economic recession and the reduction in world oil price reduced demand for agricultural crop especially palm oil for both consumption and biodiesel production purpose. Rubber demand slowed down due to the contraction in the automobile and related production.

At the same time, the downward trend of agricultural price in the world market caused domestic price to expand sluggishly by 1.1 percent, compared to 14.2 percent increase in the last quarter of 2008. The downward trend is attributable to the slowdown in crop demand in both domestic and international market as a result of economic contraction, especially palm oil and rubber price decreased by 37.0 and 45.0 percent respectively.

The declined in agricultural production and price lowered farm incomes, in this quarter farm incomes expanded sluggishly by 0.9 percent, compared to 31.5 percent over the whole year of 2008.

• Industrial sector continued to contract for two consecutive quarters. In the first quarter, industrial sector contracted by 14.9 percent. This was attributable to the reduction in demand from trading partners as world economic condition gotten worse and domestic consumption declined. In addition, producers increasingly concern about domestic political situation. In the first quarter, export oriented production contracted by 22.3 percent, particularly in the production of integrated circuits, hard disk drive, televisions and air conditions; with the decline in export values of 46.1, 49.5, 52.0, and 54.7 percent respectively. Likewise, domestic oriented production recorded a 16.7 percent contraction,especially in passenger cars which decreased by 42.8 percent. Furthermore, the delay in mega projects investment caused some construction related industries to contract; for example concrete products, clinker and steel bar and shape steel contracted by 11.4, 16.5 and 53.2 percent respectively. However, the production of necessary consumption commodities has improved including soap, shampoo, detergent and, pulp and craft paper.

Production capacity utilization was at 57.8 percent, significantly declined from 73.5 percent in the first quarter of last year. This reflected the sharp increase in excess capacity in manufacturing production, which could become obstacle for investments expansion in the future. Major industries that utilized their capacity under 50 percent were electronic products (45.6%), electrical appliances (42.9%), vehicle and equipment (43.6%) and iron and steel products (35.6%)

• Construction sector continued to slow down for three consecutive quarters. In the first quarter, construction sector contracted by 7.9 percent, mainly attributable to the spillovers from world economic contraction. The negative spillovers are including 1) slowdown in private investment, 2) the delay of consumer's buying decision, and 3) stricter lending practices adopted by financial institutions which eventually negatively affected both consumers and entrepreneurs. The impact of these spillovers was reflected in (i) the reduction of residential, commercial and industrial building areas permitted of

Public construction contracted by 9.4 percent, less severe than 26 percent contraction in the last quarter of 2008. This was attributable to the acceleration of government investment budget disbursement under stimulus package. However, the decline in price of construction materials of 9.1 percent (first time in 11 quarters) could be view as positive factor as price of steel and concrete products fell by 28.1 and 0.1 percent respectively.

• Real estate sector contracted by 0.4 percent. The contraction was caused by: 1) decline in consumer purchasing power, 2) uncertainty both in domestic and international economic condition, 3) stricter lending practices, which negatively affected liquidity of small to medium size entrepreneurs and home buyer, and 4) consumer postponed their buying decision. Nevertheless, listed companies continually launched new projects. In the first quarter, selling unit of all real estate projects in Bangkok and vicinities area can be separated into: condominiums (36.5 percent), townhouse (28.0 percent), single house (22.7 percent), and others (12.8 percent). These records show that demand for low price condominium and townhouse surrounding Bangkokmass transit system continued to increase.