Thailand’s Economic Outlook.. Weathering the Global Storm The World Bank Thailand’s Economic Outlook.. Weathering the Global Storm Dr. Kirida Bhaopichitr & Dr. Vatcharin Sirimaneetham The World Bank 3 November 2008

Presentation Today What are the consequences of the global financial crisis? What are the impacts on Thailand’s economic outlook? Can we turn this crisis into opportunity?

1. What are the consequences of the global financial crisis?

Before the global financial crisis… US Debt Outstanding

Before the global financial crisis… Financial Leverage, end-2006 Source: Phatra Securities

And the financial crisis begins…

And the financial crisis begins… Source: Phatra Securities

Consequences of the global financial crisis… Real GDP growth will fall across the world Note: ASEAN-5 includes Thailand, Indonesia, Philippines, Malaysia, and Vietnam Source: IMF

Consequences of the global financial crisis… Commodity and agricultural prices will fall Source: World Bank

Consequences of the global financial crisis… Global liquidity will be tight, and banks will be much more careful in lending Monetary policy will ease around the world, but bank interest rates may not decline as much Lower global inflation Currency movements will not be as volatile, as many hedge funds have closed down Equity markets will be down

2. What are the impacts on Thailand’s economic outlook?

Immediate impact high, but less than regional peers Regional peers are China, Hong Kong, Indonesia, S. Korea, Malaysia, and Philippines Source: World Bank

Immediate impact high, but less than regional peers Source: SET, Bank of Thialand, and World Bank

Immediate impact high, but less than regional peers Average of currencies are those of China, Hong Kong, Indonesia, S. Korea, Malaysia, Philippines, and Taiwan Source: BOT and World Bank

In the short-run, Thailand’s external vulnerability is small Thailand has de-leveraged since the 1998 economic crisis International reserves have built up to over US$100 billion Remaining foreign investment in stock market ~US$3.3 billion $ bn International reserves $ bn $ bn times Source: Bank of Thailand Source: Bank of Thailand

In the short-run, Thailand’s external vulnerability is small Thai banking system remains sound, but needs to be closely monitored Investment in foreign debt instruments = 13% of total debt-instrument holdings Foreign investments < 2% of assets Foreign banks account for only 5% of the Thai market. NPLs = 3.3% of total loans in 2008Q3, compared to 4.4% in 2007Q3 Loan-to-deposit ratio is around 90%, so liquidity crunch unlikely

But impact will be larger next year as global economy slows down Exports of both goods and services (tourism) will be severely affected Thailand’s key export products in key markets Tourist arrival by nationality

But impact will be larger next year as global economy slows down Bank loan growth will be lower as banks will be more risk averse (more concerned on credit quality) Deposit and Credit Growth Source: Bank of Thailand

But impact will be larger next year as global economy slows down Investment growth will be down PUBLIC investment growth % Source: NESDB

But impact will be larger next year as global economy slows down FDI will also be slightly sluggish Origin of FDI inflows Source: Bank of Thailand Source: Bank of Thailand

But impact will be larger next year as global economy slows down Capital account and current account will be lower next year Baht will likely continue to slowly depreciate Source: BOT

But impact will be larger next year as global economy slows down Oil prices and inflation expected to fall next year Source: World Bank Source: MOC and BOT

But impact will be larger next year as global economy slows down Household consumption will also continue to be dampened Consumer confidence declines Real wage increase small Farm income growth down with lower agricultural prices % Farm Income Growth Consumer confidence index Source: UTCC Source: BOT

Real GDP growth will be lower next year Real GDP growth 4.8% this year and around 4% next year

3. Can we turn this crisis into opportunity?

Answer YES, we can… but only with every one’s hard work and united efforts

Turning a crisis into opportunity... World economy are projected to start to recover from financial crisis in 2011 Thailand is in a competitive position as the impact on us is relatively less We should take this opportunity to strengthen our competitiveness and poise for a jump in growth as world economy rebounds

It is time to improve our productivity and start investing Private Investment growth, and Capacity Utilization Source: BOT and NESDB

It is time to improve our productivity and start investing Positive factors that are to our advantage Low input prices Lower inflation Lower interest rate Depreciated baht

Actions we need to take to improve our productivity Top Constraints to Business and Investments (Percent of 1,043 firms in 9 manufacturing industries surveyed) Source: Thailand Productivity and Investment Climate Study 2007 (PICS 2007), World Bank, NESDB and Foundation of Thailand Productivity Institute

Uncertainty of Macroeconomic and Policy Factors Macroeconomic and policy uncertainties have adversely affected firms’ investment decisions Uncertainty of Macroeconomic and Policy Factors Source: PICS 2007

Firms need to protect themselves against macroeconomic volatility… Source: PICS 2007

… through acquiring more knowledge on hedging/coping mechanisms Firms Reporting Not Undertaking any Measure vs. the Lack of Knowledge on Coping Measures (Percent of firms) Source: PICS 2007

World Bank’s Knowledge Economy Index* (b) Skills & knowledge need to be improved to move Thailand towards a knowledge economy …But Thailand has not made much progress on this World Bank’s Knowledge Economy Index* * KEI is a simple average of 4 sub-indexes which represents the 4 pillars of the knowledge economy: (1) economic incentive and institutional regime, (2) education and training, (3) innovation and technological adoption, and (4) information and communications technologies (ICT) infrastructure. Source: World Bank

Skills shortage and mismatch have persisted in recent years Number of weeks taken to fill job vacancies for various types of workers Whole Sample (Thailand) Firms in the North Source: PICS 2007

Innovative efforts in the North are more limited than other regions Percent of firms that undertook these innovative activities Source: PICS 2007

Reasons why firms did not conduct innovative activities (% of firms) High costs of innovation and lack of knowledgeable personnel largely explain low innovative efforts Reasons why firms did not conduct innovative activities (% of firms) Source: PICS 2007

To boost innovation, firms view that government’s indirect incentives (e.g. tax deductions) and technical assistance are important Percent of firms viewing these government initiatives as very important to promote innovation sub

But existing government incentive programs for innovation are not widely used Share of Firms Benefiting from Government Initiatives to Promote Innovation (Percent) Source: Thailand PICS 2004 and PICS 2007

(c) Improved regulations and regulatory environment -- needed to lower costs for firms and promote greater competition and productivity Revise regulations to promote investments & productivity esp. in services sector E.g. revise Foreign Business Act, pass Secured Transactions Act Liberalize some industries esp. in services sector Streamline bureaucratic procedures, improve governance, and reduce corruption Reduce amount and uncertainty of time on customs clearance, tax refunds, and inspections Integrate processes into 1-stop center & minimize face-to-face interactions

Multiple regulatory procedures and uncertainty in time taken were voiced by firms as burdensome to business and investment Very Severe or Severe Regulatory Obstacles to Business and Investment (% of firms) Average Days to Obtain Permits to Start Production and Deviations* (22) (147) (115) (82) (25) (23) (19) (21) Source: PICS 2007 *Figures in ( ) are standard deviations from the mean

Objective Measures of Thailand's Infrastructure Services (d) Public infrastructure investments are needed to reduce logistics and production costs Share of transport and logistics cost in total cost of delivering finished goods to customers Objective Measures of Thailand's Infrastructure Services Source: PICS 2007

Thailand’s investment climate is middling compared to other countries Objective Measures of Bureaucratic Process Objective Measures of Infrastructure Services Source: Thailand PICS 2007 and Global PICS

Perceptions become reality Perceptions of worsened investment climate negatively affect investment decisions… Perception of Investment Climate Indicators as Major or Severe Obstacles to Doing Business (Percent of Firms) Business Sentiment Index Source: PICS 2007 Source: Bank of Thailand

Summary: Actions that can improve investment climate Improve business sentiments Certainty and clarity in policies Certainty in public infrastructure investment plans Announcements of productivity improvements assistance to most needed industries More PR on actions taken and on Thailand’s investment climate Facilitate the use of hedging instruments and knowledge to firms Streamlining bureaucratic procedures and time Introducing ICT to reduce bureaucratic process and time

Summary: Actions that can improve investment climate Productivity improvements assistance to most needed industries Gradual liberalization of services industries Pass laws and regulations that promote investment e.g. Secured Transactions Act, Revise Foreign Business Act Public infrastructure investments in most needed areas Putting Thailand on the path to a knowledge economy Improve quality of higher education Foster university - public research institute - industry linkages for innovation Raise standards and enrolment of vocational training

Summary We can turn this crisis into an opportunity for Thailand Thailand has a high growth potential with new investments and productivity growth We all need to work together to unleash Thailand’s potential by improving Thailand’s investment climate

Thank You For more information on World Bank work and reports: Global: www.worldbank.org Thailand: www.worldbank.or.th

**BACK-UP SLIDES**

PICS 2007 surveyed 40 producers in the North, mostly food processing and garments firms Regional distribution of firms in PICS 2007 (%) Industrial composition of firms in the North (%) Unit: Percent