Thailand economic update 2011

Thailand's Economic Growth 2010-2011

From the radio, TV and news in Thailand, we've heard optimistic reports on Thailand's growth forecasts for 2011.  These report that it could be increased from 3% to 4-5%. That could be overly optimistic.  The World Bank's Thailand Economic Monitor - November 2010 commented that Thailand's growth is expected to slow to 3.2% in 2011. Although tourism rebounded strongly in the last quarters of 2010, the overall GDP still contracted due to slowing exports and the decline in consumption, caused by the loss of farm income during a severe drought, said the World Bank.

According to Thailand's Board of Investment(BOI), automotive had been the country’s vibrant sector, in which in 2010 for the first time Thailand even began exporting cars to Japan. The BOI hopes that the sector would be on its way to becoming a global Top 10 automaker by 2014, when local capacity is projected to hit 2.3 million units. (read more of our article about automotive in Thailand). The Thai Auto Institute said in November 2010 that auto production in 2010 alone could reach between 1.6 million and 1.8 million units already. Thailand’s largest auto manufacturer, Toyota, has reported a one to two month back order for almost every model, seeing this trend to continue as a result of growth in both domestic and export markets. Manufacturing capacity utilization in Thailand has now snapped back to pre-crisis levels at close to 70%.  The service sector has continued to do well in Thailand.

The significant contributing factors to the 2011 economic growth in Thailand:

1. Domestic political tensions
Despite the fact that the local economy weathered the clashes of red and yellow shirts in May 2010, confidence still matters in driving economic growth.  It is likely that Thailand will see an election in 2011.  An election could potentially bring more chaos and conflict this year, said the Bangkok Post newspaper.  In January, over 50,000 so-called red shirts demonstrated to make the point that they have not gone away and still are looking for further reforms.

2. Export decline
These are due to three main factors: the global financial crisis, the appreciation of the baht(local currency) and increased costs in Thailand. Specifically, this is how they may affect exports in 2011:

a.  Global financial troubles:  Although most of Asia began recovering from the global crisis the US, the EU and Japan are still far from recovered and this will affect Thailand in 2011.

b.  Baht appreciation: the baht has continued its appreciation, raising concerns over Thailand’s export competitiveness. This means Thailand will have a harder time on meeting comparative export prices in 2011 and that 2011 will not be the golden year for Thailand's manufactured exports.  The Bangkok Post newspaper reported that specialists foresaw the baht continuing to appreciate in 2011, possibly breaking 29 to the US dollar by midyear.

c.  Thailand's increased costs: the minimum wage will rise, as will the salaries of public servants and others who index their earnings to those two benchmarks. Inflation is always followed by higher interest rates which already showed their first rise in January 2011.  All factors point toward higher inflation this year, reported the Bangkok Post newspaper, although the figure will definitely be much lower than in China, Vietnam or most of Thailand's neighbors. This will further reduce the growth in exports in Thailand.

3. The need for more investment

Thailand badly needs to boost its private investment.  According to the Thailand Board of Investment (BOI)'s Investment Review, Frederico Gil Sander, the World Bank’s Thailand economist, told participants of the 16 November 2010 seminar in Bangkok that Thailand needed more investment.  He said that machinery is one area ripe for local investment, as over 85% of equipment in the country is imported. The services sector is another example where opening the door to more investment would promote sustained economic growth in the country, he noted.  “It is easy to invest in Thailand’s manufacturing sector, easier than in all of Asia in fact. But the reverse is true in services here. Thailand is falling behind in services,” Sander said. He suggested the reform of regulations to open the sector, emphasizing there is “a lot of potential for high-quality services investment.”

Calling this a big task, Sander urged Thailand to achieve shared and sustainable development by accelerating growth in the services sector, boosting agricultural productivity, building social insurance mechanisms to address the aging population, and enhancing manpower skills. A better environment for R&D and innovation is also needed, reported BOI.  Sander suggested that linking the country’s North and Northeast with Myanmar, China and Laos would also promote Thailand’s economic development by generating new opportunities for local businesses.

4. The need for regulatory reforms

The World Bank also recommended that Thailand should boost the services sector through regulatory reforms, developing the skills of Thai workers through improvement of the quality of education, raising agricultural productivity, and promoting innovation-led growth.  Along with these options, strengthening social safety nets to cover informal workers and those in the agricultural sector could help the government ensure that growth is more equitable in the long run.

On the fiscal policy side, the Work Bank writes that “…deficits in most countries are projected to remain substantially larger than pre‐crisis averages at least through 2011, as governments worry about the downside risks to growth despite the clear recovery in private investment and consumption. Moreover, in the region’s middle‐income countries some temporary stimulus measures are becoming permanent and governments are planning to boost infrastructure spending to address gaps accumulated since the 1997–98 Asian financial crisis.” This is true in Thailand as well, with the introduction of the agricultural price insurance scheme, pension, and education subsidies. At the same time, capital expenditures in Thailand have increased under the stimulus package, aimed at enhancing the nation’s water, transportation and other infrastructure.

The World Bangk report does state that although Thailand’s infrastructure could be better, the quality of its infrastructure is better than most of its neighbors.  This is a fact that we have long pointed out - Thailand has a clear advantage in terms of quality of roads, ports, electric and other infrastructure to Vietnam, Cambodia.Laos, Philippines and Indonesia and this gap is actually increasing.

Clearly, there remain challenges ahead for Thailand and for the region, particularly as unemployment in major export destinations pressures demand for manufactures. At the same time, significant progress has been made and Thailand’s economy has returned to the path of growth and progress, looking to the future and ever increasing levels of investment and trade.

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