East Asia Update April 2007

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Thailand
Thailand grew by 5 percent in 2006, slightly better than 4.5 percent in 2005, on the back of strong export growth and a sound macro and fiscal situation. This means that average annual GDP growth rate in the last two years was 1.3 percentage points below the average for the previous three years. This is in part because the easy gains from increased utilization of excess capacity were exhausted and in part because investor and consumer confidence remains depressed. Exports grew by 8.5 percent (4.3 percent in 2005) while imports grew by only 1.6 percent (9 percent in 2005), contributing to most of the growth last year, as total domestic demand grew by only 1 percent. Inflation is expected to fall by more than 2.5 percentage points this year. GDP growth is forecast at 4.3 percent in 2007. Growth in private investment was only 4 percent, down from 11 percent in 2005, and is projected to be not much better in 2007. Even this low growth was owed mainly to foreign investment expanding at a real rate of 25 percent in 2006 – continuing the momentum it has shown in the post-recovery period – as private domestic investment experienced negative growth. Domestic Thai investors, in both tradable and non-tradable sectors, have remained skittish throughout the recovery period because of structural factors -in part greater market uncertainty arising from China’s WTO accession and in part investment climate constraints like high regulatory burden, inadequate availability of right skills and a growing deficit in infrastructure that kept investors costs in Thailand high relative to competitors. Shorter-term factors have worsened investor confidence, especially the perception of heightened policy uncertainty resulting from recent changes. Higher oil prices from 2004 onwards have imposed adjustment costs on investors. The increased political uncertainty -- political disturbances in 2005, followed by coup in 2006 and impending transition in 2007 – is contributing to the wait-and-see attitude of investors. In the last four months investors’ perception of greater policy uncertainty has been added to the above list, which is likely to affect private investment in 2007 adversely. This was due mainly to the December 2006 capital controls to stem the real bhat appreciation - even though most of these controls have now been relaxed -- and the January 2007 Cabinet approval of amendments to the Foreign Business Act (viewed as making foreign investment more restrictive than before). Public investment growth is unlikely to offset this significantly, as good governance is a key policy plank of the Government, which will slow public funds disbursement. Several measures are being put in place to make public procurement more transparent and accountable, which is commendable. The Ministry of Finance nevertheless plans to make every effort to raise public investment, especially in appropriate infrastructure thereby increasing aggregate domestic demand and catalyzing additional private investment. However, public investment is projected to rise by 5 percent in 2007, given the additional scrutiny and the transition to better procurement practices. The challenge going forward is to improve private investor confidence in Thailand through quick policy actions. Unless the Government adopts measures to address the sources of the policy uncertainty, it is likely to linger in 2007. The signing of the Japan-Thailand FTA (following recent approval by National Legislative Assembly) will no doubt contribute to improving investor perceptions, especially the Japanese. The approval of a modified FBA amendment, that not only rationalizes the law but also includes liberalization of some key services sub-sectors critical to Thailand’s development strategy, will also remove many of the misgivings of foreign investors. In addition, if the Government takes actions to reduce the regulatory burden – actions that were highlighted in the NESDB-World Bank investment climate assessment – investor confidence will improve. Addressing the continuing pressures for real bhat appreciation in a manner that maintains market confidence would also help to improve business sentiments. The current account surplus is projected to continue in 2007 (1.3 percent of GDP instead of 1.6 percent in 2006) together with falling debt-service obligations. The Government will thus have to signal the use of other measures to support agricultural and labor-intensive manufactures – exporters who employ a large share of labor force and remain most vulnerable to appreciation – in the transition period, to enhance market confidence. Measures targeted at those sub-sectors will permit them to adjust gradually, either by enhancing productivity or by transferring employees to other sectors. In addition, increasing domestic demand to reduce the current account surplus can lower the pace of real appreciation (e.g. lowering nominal interest-rates; raising public investment, etc).

East Asia Update April 2007

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The Government has taken several actions recently, in respect of the energy and financial sector which needs to be implemented. The recent energy sector reforms are contributing to rationalization of that important sector. Similarly, the financial sector would benefit from the impending approval of several Acts: the recent cabinet-approved Central Bank Act, the Securities Exchange Commission Act and the Currency Act would have to be passed by the National Legislative Assembly and the Deposit Insurance Act and the Secured Transactions Act would have to be approved by both the cabinet and the assembly. This is expected to be followed by many of the actions cited above, in order to strengthen investor and consumer confidence.