Thailand at a Glance: 2001-02

COUNTRY REPORT

Thailand At a glance: 2001-02

OVERVIEW Thai Rak Thai (TRT), led by Thaksin Shinawatra, won an overwhelming victory in the January 6th election. The TRT is moving quickly to implement its populist policies, designed to raise rural and urban incomes and stimulate overall growth. The proposed fiscal stimulus will underpin growth during 2001-02, but, by mid-2002, rising inflation and mounting public indebtedness will lead to tighter monetary and fiscal policies. Export growth will be subdued in 2001, owing to the sharp slowdown in global demand. Key changes from last month Political outlook • The TRT has formed a coalition with two parties, enabling the government to avoid no-confidence motions and facilitating the legislative process. However, factional divisions within the TRT and its partners, primarily between reformists and the old-style patronage politicians, could impede progress on policymaking. For investors and the public, there is the risk that constitutional or IMF-inspired reforms could be reversed or delayed by the TRT government. Economic policy outlook • Thaksin has made his policy statement to parliament, outlining nine key programmes for immediate action. The more expansionist fiscal policy is going to be financed this year by a reallocation of funds within the budget formulated by the outgoing Chuan government. More details on the proposed asset management company for banks’ bad debts have been announced. The principal beneficiaries will be the nationalised banks. Economic forecast • Anecdotal evidence of slower than expected economic growth in the first months of 2001 was borne out by the January trade figures which recorded only the second deficit in 30 months. Exports to the US, particularly of electronics, were significantly lower. The trade account is not expected to stay in deficit since the high import content of exports will lead to lower import demand in the months to come.

March 2001

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Outlook for 2001-02

Political outlook

The new government The Thai Rak Thai (TRT) party of Thaksin Shinawatra won an overwhelming victory in the January 6th 2001 parliamentary election. The election was the first to the House of Representatives (the lower house) to be held under the new constitution. The Electoral Commission played an active role, requiring re-votes in 62 constituencies because of allegations of malpractice. The final tally gave the TRT 248 seats in the 500-member house, just short of an absolute majority. Before the final result was announced, Thaksin had formed a coalition with the New Aspiration Party of General Chavalit Yongchaiyudh and the Chart Thai party of Banharn Silpa-archa, both of whom are former prime ministers. The small Seritham party later dissolved itself to merge with the TRT, giving the coalition a total of 339 seats in the lower house.

Thaksin’s 35-member cabinet, announced on February 17th, failed to meet expectations and pre-election promises of a fresh start, as many veteran MPs reappeared in key posts. Other key posts went to relatively inexperienced newcomers whose main qualification for the job was their loyalty to Thaksin. In total, 17 of the 22 full ministerial posts went to members of the TRT. On the positive side, the fact that the key economic posts were filled by Thaksin’s most trusted supporters bodes well for the smooth and quick implementation of the TRT’s election promises.

The key post of finance minister went to one of Thaksin’s closest aides, Somkid Jatusripitak. While Somkid’s lack of banking experience provides some cause for concern, it probably means that Thaksin himself will be closely involved in policy planning and implementation. The powerful Ministry of the Interior went to Thaksin’s right-hand man, Purachai Piemsomboom, while the Ministry of Foreign affairs went to yet another close aide, Surakiart Sathirathai, a former finance minister. The appointment of General Chavalit Yongchaiyudh as defence minister is particularly controversial. There is no one more closely associated with the old-school of Thai politics. He has already stated his intention to reinstate the seniority system for military promotions and is widely expected to demote the current army commander-in-chief, General Surayud Chulamont, who is much respected for his efforts to depoliticise the armed forces.

A further area of political uncertainty is the December 2000 indictment against Thaksin for filing false asset statements in 1997. It now rests with the Constitutional Court to reach a verdict. If the court upholds the ruling then Thaksin would be banned from politics for five years–this, however, could be backdated to 1997. On March 1st Thaksin’s lawyers submitted his rebuttal of the indictment and the trial is expected to start in the next couple of months, although the final ruling is unlikely to be handed down within the year and could take up to two years.

International relations Foreign policy, which had a low profile during the election campaign, has become the new government’s immediate focus of attention after a border

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incident with Myanmar in early February. Myanmar soldiers reportedly hit the Thai town of Mae Sai with stray shells during a battle against ethnic guerrillas. Thai soldiers returned fire, and three Thai villagers were killed and seven injured. The border was immediately closed to all trade. The new Thai administration is keen to improve relations with the Yangon government, primarily in order to enhance commercial ties but also to co-operate on the drugs problem.

Foreign policy is set to have a different focus under the new Thaksin administration. The Chuan government alienated many of Thailand’s neighbours by taking a vocal and aggressive stance on human rights. The new foreign minister, Surakiart, has stated that relations and economic co-operation with other Asian countries are to be the new priority but that this will not involve any interference in the internal governments of those countries.

Economic policy outlook

Policy trends In late February Thaksin presented his policy statement to both houses of parliament. He outlined nine “emergency” programmes for the revival of the economy, which he pledged to start implementing within the next three months. These include his electoral promises of a three-year suspension on some farmers’ debt repayments, a Bt1m (US$23,000) fund for each of Thailand’s more than 70,000 villages, a national asset management company and a universal healthcare scheme. The other programmes include the creation of a people’s bank and a bank to grant loans to small and medium-sized enterprises (SMEs); steps to encourage the depoliticisation of the management of state enterprises; the establishment of narcotics suppression, prevention and rehabilitation programmes; and a continued drive against corruption. The new finance minister , Somkid Jatusripitak, has separately announced that shares of public enterprises will be offered to the Thai public instead of selling them to foreigners. Economic and industrial policy generally is likely to be less welcoming to foreigners, at least until widening economic imbalances necessitate a more open policy by mid-2002.

One of the key promises of the Thai Rak Thai (TRT) party during the election campaign was to create a national asset management company (AMC) or centralised debt restructuring mechanism. The AMC will buy the banks’ non- performing loans (NPLs) at a discount to net book value and issue the banks with low-yield, interest-bearing long-term government bonds. The agency is expected to buy and manage about Bt120bn (US$3bn) in NPLs from private commercial banks and about Bt900bn from state banks, with the assets subsequently managed by outside professionals, not the civil service. It is expected to be operational by end-2001.

Key to the success and the cost of the AMC is the price at which the government buys the NPLs. Banks will be pushing for low discounts to prevent erosion of their capital base, but the AMC will find it difficult successfully to manage the assets if the price of the NPLs is not realistic. A significant risk is that the government will end up simply warehousing bad loans without

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forcing highly leveraged Thai corporations to undertake necessary restructuring and rationalisation.

Fiscal policy The government is moving quickly to implement its electoral promises. The farmers’ debt moratorium and healthcare initiatives will begin to be implemented from April 1st. A few more details on the government’s proposals have become available.

• The farmers’ debt moratorium scheme applies to farmers with debts of less than Bt100,000 (about US$2,325) with the Bank of Agriculture and Agricultural Co-operatives (BAAC). This will involve an estimated 2.1m eligible borrowers with a total debt of Bt75bn and is expected to cost the government Bt5-7bn per year.

• The universal healthcare plan will provide every citizen with access to hospitals or doctors for only Bt30 (66 US cents) per visit. The scheme is expected to cover the whole country by October 2002.

• The village fund plan is expected to be introduced in October 2001, after the end of this fiscal year in September. It is intended that the money be used to finance small-scale business ventures on a revolving credit basis with minimal interest obligations.

• The implementation of the proposed cut in corporation tax from 30% to 25% over five years will also be delayed to begin in the 2001/02 fiscal year. Somkid has reiterated that the government has no plans to raise taxes.

The new government has pledged not to raise the projected budget deficit for the year ending September 2001. The proposed additional spending is to be financed by a reallocation of funds within the existing budget. The EIU expects some modest overshooting of the budget target given Thaksin’s impatience to see his policies implemented. A significant widening of the budget deficit is expected in 2001-02 , particularly in the light of the need to finance the national AMC.

Monetary policy Somkid has stated that the autonomy of the Bank of Thailand (BOT, the central bank) will be respected, but that bank policy must be co-ordinated with the government and should not conflict with the government’s broader economic policies. Investors have also been assured that the government will not intervene in commercial bank interest rates or in the setting of exchange-rate policy. However, the draft Bank of Thailand Act, introduced by the previous government, appears to be under threat. The TRT has stated its opposition to certain sections of the act which they believe would give the bank too much independence. At best, it is likely that the act will be delayed and subsequently amended to reflect the TRT’s desire for more intervention in bank activities.

Both the central bank and the government are keen to maintain a loose monetary policy over the forecast period. However, we expect the widening budget deficit and its negative impact on inflation to force the BOT to tighten policy in 2002.

Economic forecast

International assumptions The global environment will deteriorate markedly for Thailand in 2001. Growth of the world economy is forecast to slow to 2.3%, pulled down by a deceleration in the US economy, which is expected to grow by only 1.4%, and a –0.1% contraction in Japan. Consequently world trade growth is expected to slow to 5.9% in 2001, down from 12.3% in 2000. On a more positive note, lower international oil prices will reduce Thai import costs and exports will benefit from higher non-oil commodity prices, particularly for soft commodities. Thailand will also benefit from the fall in US interest rates as this will lower debt-servicing obligations. The external environment is expected to improve in 2002. A recovery in the US economy towards the end of 2001, will lead to stronger global demand. This partly accounts for the significant increase expected in non-oil commodity prices in 2002. Oil prices are expected to fall modestly again in 2002, while global interest rates will not yet be under pressure to rise.

Forecast summary (% unless otherwise indicated) 1999a 2000b 2001c 2002c Real GDP growth 4.2 4.8 3.0 4.0 Gross agricultural growth 2.5b 2.0 2.5 3.0 Unemployment rate (av) 4.2 3.6 a 3.6 3.2 Consumer price inflation Average 0.2 1.6a 2.8 3.6 Year-end 0.7 1.3a 4.2 3.0 Short-term interbank rate 9.0 7.8 a 7.5 8.5 Government balance (% of GDP) –2.5b –2.6 –3.0 –3.5 Exports of goods fob (US$ bn) 56.8 67.7 73.5 85.4 Imports of goods fob (US$ bn) 42.8 56.1 63.2 75.5 Current-account balance (US$ bn) 12.4 9.0 6.5 6.3 % of GDP 10.0 7.2 5.4 4.8 External debt (year-end; US$ bn) 96.3 80.2 74.6 68.7 Exchange rates Bt:US$ (av) 37.81 40.11 a 42.83 40.50 Bt:¥100 (av) 33.20 37.22a 36.82 36.25 Bt:¤ (year-end) 37.64 39.69 a 46.20 48.59 Bt:SDR (year-end) 51.43 55.07a 59.31 59.72

a Actual. b EIU estimates. c EIU forecasts.

Economic growth Economic growth is forecast to slow sharply in 2001 to 3%, following estimated growth of 4.8% in 2000. The first half of 2001 is expected to be particularly weak owing to much lower external demand for Thai exports. In the second half of the year, the government’s deficit spending will start to underpin consumption and investment while exports will benefit from stronger global growth. This momentum will continue into 2002, when growth will rise to 4%.

International assumptions summary (% unless otherwise indicated) 1999 2000 2001 2002 Real GDP growth World 3.5 4.8 3.3 3.9 OECD 3.0 4.0 1.9 2.7 EU 2.4 3.3 2.6 2.6 Exchange rates (av) ¥:US$ 113.9 107.8 119.5 120.0 US$:¤ 1.07 0.92 1.00 1.09 SDR:US$ 0.731 0.758 0.755 0.731 Financial indicators ¥ 2-month private bill rate 0.27 0.24 0.50 0.50 US$ 3-month commercial paper rate 5.18 6.32 4.89 5.39 Commodity prices Oil (Brent; US$/b) 17.9 28.4 23.9 23.0 Gold (US$/troy oz) 278.8 279.3 258.8 255.0 Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.2 9.0 16.1 Industrial raw materials (% change in US$ terms) –4.2 14.6 0.7 12.6

Note. Regional aggregate GDP growth rates weighted using purchasing power parity exchange rates. Although overall GDP growth is forecast to slow in 2001, there will be a significant rise in both public consumption and investment. Gross fixed investment is expected to rise by an average 6.8% in 2001-02: this will be almost entirely attributable to public works and projects. Import growth is also expected to rise strongly in 2001-02 because of rising consumption and exports.

Gross domestic product by expenditure (Bt bn at constant 1988 prices; % change year on year in brackets unless otherwise indicated) 1999a 2000b 2001c 2002c Private consumption 1,539 1,590 1,640 1,700 (4.0) (3.3) (3.2) (3.6) Public consumption 266 297 310 318 (0.9) (11.7) (4.5) (2.5) Gross fixed investment 547 580 615 661 (–4.0) (5.9) (6.0) (7.5) Final domestic demand 2,352 2,466 2,565 2,678 (1.7) (4.9) (4.0) (4.4) Stockbuilding 4.4 –5.0 –10.0 3.5 (2.2)d (-0.3)d (-0.2)d (0.4)d Total domestic demand 2,356 2,461 2,555 2,682 (4.4) (4.4) (3.8) (4.9) Exports of goods & services 1,659 1,971 2,129 2,337 (9.9) (18.8) (8.0) (9.8) Imports of goods & services –1,176 –1,459 –1,624 –1,839 (10.6) (24.1) (11.3) (13.2) Foreign balance 483 512 505 499 (1.3)d (1.0)d (–0.2)d (–0.2)d GDP 2,859 2,996 3,085 3,208 (4.2) (4.8) (3.0) (4.0)

a Actual. b EIU estimates. c EIU forecasts. d Contribution to real GDP growth.

Inflation Inflation remains subdued, despite the recent weakness of the baht which pushes up the cost of imports. Subdued domestic consumption means that producers are unable to pass on increased costs. Furthermore, if export growth slows as expected, rising inventories will place additional downward pressure on prices. Notwithstanding, inflation is expected to rise in 2001-02, primarily as a result of a loose fiscal policy and its impact on demand for goods and services. By the end of 2002 the EIU forecasts that inflation will have breached the BOT’s 3.5% ceiling. Real wages will rise by a modest 1.1% in 2001 and then by 0.6% in 2002.

Exchange rates The baht staged a modest rally as a result of the TRT’s election victory. However, it has since weakened in response to the deteriorating economic outlook, particularly on the trade front. Neither the government nor the central bank is expected to intervene in the foreign-exchange market unless the baht goes into freefall. Some baht weakness in the near term, and in this difficult export environment, will be tolerated as a means of enhancing competitiveness. The baht is forecast to strengthen in 2002 in line with the modest economic upturn and stronger export revenue.

Thailand has recorded large surpluses on the merchandise trade account since External accounts the 1997/98 baht devaluation and economic recession. However, merchandise export growth is expected to fall significantly in 2001 in line with lower demand from Thailand’s main markets. The US typically absorbs about 20% of Thai exports, particularly electronics, while Japan and the rest of Asia together account for 46% (1999). The high import content of Thai exports will feed through to lower import demand and, on the price front, Thailand will benefit from lower international oil prices. Notwithstanding, the trade surplus is expected to be lower in 2001 as expansion in the second half of the year will lead to additional import growth. The current-account surplus is expected to fall sharply in 2001, reflecting a deterioration on the services and income account as well as the reduction in the trade surplus. Debt interest payments due in 2001-02 are high and the higher level of imports (compared with the immediate post-crisis period) means that the services account will return to a small deficit.

Editors: Caroline Bain (editor); Graham Richardson (consulting editor) Editorial closing date: March 19th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule