THAILAND ECONOMIC UPDATE

1. THAILAND ECONOMIC UPDATE December 9, 2010 At Center for Strategic and International Studies Kirida Bhaopichitr Senior Economist World Bank

2. 2 Overview What happened to the Thai economy so far in 2010? Growth momentum has slowed down since 2010 Q2 Fiscal and monetary policies remain accommodative, supporting domestic demand Capital flows have surged What is the outlook for the remainder of 2010 and 2011? Slow but steady growth in advanced economies means lower demand for Thai exports and lower but less volatile GDP growth Exports to emerging markets, domestic consumption and inventories can offset some, but not all, of the weakness in external demand What does this mean for policy? The immediate focus will be on managing higher levels of capital inflows In the long term, Thailand needs to implement a strategy to achieve shared and sustainable growth beyond the recovery 1. Growth slowed down in the second quarter, but that was better than expected given the political crisis and the slowdown in the global recovery. 2. Over the next two years, Thailand's economic outlook will be driven by the "new normal" of slow growth and low interest rates in advanced economies. 3. This means slower growth for Thai exports, and because exports are the main engine of the Thai economy, slower GDP Growth 4. It also means there will be more capital inflows and pressure on the exchange rate. 5. The key challenges for both monetary and fiscal policies is to balance (i) continuing to respond to slow growth in external demand with (ii) preparing Thailand to face the next shock. That will require a prudent pace of withdrawal of both monetary and fiscal policy stimulus. For monetary policy, it will also mean managing capital flows and its impact on the exchange rate. For fiscal policy, an eventual return to lower deficits should be accompanied by expanded social insurance mechanisms and public investments. 6. In the long term, Thailand needs to implement a broader strategy to pursued shared and sustainable growth.1. Growth slowed down in the second quarter, but that was better than expected given the political crisis and the slowdown in the global recovery. 2. Over the next two years, Thailand's economic outlook will be driven by the "new normal" of slow growth and low interest rates in advanced economies. 3. This means slower growth for Thai exports, and because exports are the main engine of the Thai economy, slower GDP Growth 4. It also means there will be more capital inflows and pressure on the exchange rate. 5. The key challenges for both monetary and fiscal policies is to balance (i) continuing to respond to slow growth in external demand with (ii) preparing Thailand to face the next shock. That will require a prudent pace of withdrawal of both monetary and fiscal policy stimulus. For monetary policy, it will also mean managing capital flows and its impact on the exchange rate. For fiscal policy, an eventual return to lower deficits should be accompanied by expanded social insurance mechanisms and public investments. 6. In the long term, Thailand needs to implement a broader strategy to pursued shared and sustainable growth.

3. 3 Real GDP Growth has slowed, but better than expected

4. 4 Manufacturing remained the main driver of growth

5. 5 Much of the growth in manufacturing output went towards buoyant exports

6. Exports contributed the most to real GDP Growth since 2009Q4 6

7. Thailand’s merchandise exports continued to grow vigorously reaching record highs in June 2010 7

8. Export performance underpinned by strong export price increases 8

9. The financial crisis reinforced the growing share of ASEAN’s & China’s market for Thailand’s exports 9

10. The external environment will be characterized by a “new normal” of slower growth 10

11. Slower growth in advanced economies will translate into lower GDP growth Thailand next year 11

12. 12 Core inflation has been low, but headline rose from food prices

13. 13 Capital Flows has increased sharply but should slow down as current account declined

14. Baht appreciated rapidly since August, but in real terms remains in line with regional peers 14

15. 15 How can Thailand boost its competitiveness and achieve shared and sustainable growth in the next decade? Improving delivery of public services The World Bank’s ongling Public Financial Management Review has revealed substantial disparities in the delivery of public services (health, and education) across different provinces of the country. This is in large part due to institutional constraints within the central-local fiscal relations and local governance structures that ought to be addressed in order to achieve the governments objectives of citizen participation in determination of public services and fostering greater accountability for service delivery to citizens. Skills development to take advantage of innovation-led growth. Thailand is lagging behind its peers in educational outcomes, and firms continue to report a shortage of skilled labor that prevents them from undertaking higher value-added tasks in Thailand. As highlighted by the Bank’s recent Social Monitor on higher education, access to tertiary education is highly concentrated while the labor market pays a high premium for skills, which contributes to Thailand’s high levels of inequality. Accelerating growth in the services sectors The services sectors in Thailand have contracted as a share of GDP in the past 10 years, yet the services sectors can provide both employment and growth opportunities. According to the World Bank’s Investing Across Borders publication, Thailand has some of the most restrictive rules for foreign investment. Phased liberalization of the services sectors, along with other supporting policies (especially related to skills) could bring growth in financial sector, education, health, and creative professions such as advertising, product design and architecture. Boosting agricultural productivity Social insurance to address aging society and urbanization “The number of people in Thailand aged over 65 years is forecast by the UN to treble by 2050 to 15m. However, 70% of the working population currently has no old age insurance. Historically, the combination of a majority rural population, large families and social norms meant that the elderly were cared for within the family. However, a sharp decline in birth rates over the past 30 years, rising life expectancy and urbanisation have cast doubt on whether this is sustainable.” Improving delivery of public services The World Bank’s ongling Public Financial Management Review has revealed substantial disparities in the delivery of public services (health, and education) across different provinces of the country. This is in large part due to institutional constraints within the central-local fiscal relations and local governance structures that ought to be addressed in order to achieve the governments objectives of citizen participation in determination of public services and fostering greater accountability for service delivery to citizens. Skills development to take advantage of innovation-led growth. Thailand is lagging behind its peers in educational outcomes, and firms continue to report a shortage of skilled labor that prevents them from undertaking higher value-added tasks in Thailand. As highlighted by the Bank’s recent Social Monitor on higher education, access to tertiary education is highly concentrated while the labor market pays a high premium for skills, which contributes to Thailand’s high levels of inequality. Accelerating growth in the services sectors The services sectors in Thailand have contracted as a share of GDP in the past 10 years, yet the services sectors can provide both employment and growth opportunities. According to the World Bank’s Investing Across Borders publication, Thailand has some of the most restrictive rules for foreign investment. Phased liberalization of the services sectors, along with other supporting policies (especially related to skills) could bring growth in financial sector, education, health, and creative professions such as advertising, product design and architecture. Boosting agricultural productivity Social insurance to address aging society and urbanization “The number of people in Thailand aged over 65 years is forecast by the UN to treble by 2050 to 15m. However, 70% of the working population currently has no old age insurance. Historically, the combination of a majority rural population, large families and social norms meant that the elderly were cared for within the family. However, a sharp decline in birth rates over the past 30 years, rising life expectancy and urbanisation have cast doubt on whether this is sustainable.”

16. THANK YOU Thailand Economic Monitor can be downloaded from www.worldbank.or.th