1

Thailand

Economic MonitorNovember 2005

Launch3 November 2005

2

Monitor – Key Messages

Tsunami, drought and oil price rise will reduce GDP growth in 2005 to 4.2%. GDP growth in 2006 will rise to 5%.

Floating of retail oil price is judicious Limit burden on Oil Fund Promote more efficient use of oil and energy

conservation – Reduce oil imports, which helps reduce current account deficits

3

Monitor – Key Messages

Helping firms to reduce production and operation costs will help them in adjusting to high oil prices Improving the Investment Climate can help

reduce costs and also improve firm’s productivity

Key improvements to investment climate needed Reduce regulatory burden Upgrade skills Improve infrastructure

(Results of Thailand Productivity and Investment Climate Study)

4

Real GDP Growth will be 4.2% in 2005

GDP growth is expected to speed up in the second half year as net foreign demand increases

Real GDP Growth 2005

Source: NESDB and World Bank

0

5

10

15

20

25

30

Priv

ate

C

Gov

ernm

ent C

Priv

ate

I

Publ

ic I

Exp

orts

Impo

rts

Ann

ual %

cha

nge

H1 2005 H2 2005 p 2005p

Growth rates of Change in Inventories

H1 2005 = 85.8%

H2 2005p= -45.8%

2005p= 20.0%

5

Sharp oil price rise impact growths of consumption, private

investment, and production this year

Retail oil price this year is 54% higher than in 2002 Raises 2005 inflation to

4.5% – affects consumption

Raises costs of production – affects production and private investment this year

Increase in Retail Oil Price (%)

0

10

20

30

40

50

60

2002-2005 2003-2005 2004-2005

perc

enta

ge c

hang

e

Source: EPPO

6

Rise in retail oil price are promoting conservation

Growth in Gasoline and Diesel Consumption, 2002- 8M 2005

Source: EPPO

-10

-5

0

5

10

15

2002 2003 2004 8M2005

perc

ent,

y-o-

yGasoline High Speed Diesel

7

Exports growth to speed up in 2005H2, while imports slowed

Export Volume Growth

-5

0

5

10

15

20

25

30

2004 H1 2005 Q3 2005

per

cen

tag

e ch

ang

e, y

-o-y

Consumer Goods Raw Materials Capital Goods

Fuel & Lubricant Total

-15

-10

-5

0

5

10

15

20

25

30

35

2004 H1 2005 Q3 2005

per

cen

tag

e ch

ang

e, y

-o-y

Agricultural products Fishery products

Manufactured products Total

Import Volume Growth

Source: BOT Source: BOT

8

FDI are still increasing

Gross FDI inflows rose in 2005 and much higher

than 1988- 1992 levels

0

1

2

3

4

5

6

7

8

Avg1988/92

2003 2004 8M 2004 8M 2005

Bill

ions

of

US$

Gross FDI Inflows

Source: BOT

9

Real GDP growth will rise to 5% in 2006 as domestic demand picks up

Real GDP Growth 2004, 2005p and 2006p

Oil price will rise by 14% in 2006, compared to 30% this year

Real interest remains low at 4-5%

Bank loan continues to expand

Source: NESDB and World Bank

0

2

4

6

8

10

12

14

16

18

Priv

ate

C

Gov

ernm

ent C

Priv

ate

I

Publ

ic I

Exp

orts

Impo

rts

Ann

ual %

cha

nge

2004 2005p 2006p

Growth rates of Change in Inventories

2004 = 39.9%

2005p = 20.0%

2006p = 0%

10

FDI will continue the rise as Thailand remains attractive

0

50

100

150

200

250

300

350

400

2002 2003 2004 Jan-Sep2004

Jan-Sep2005

Bt B

illio

n

100% foreign equity10%<foreign equity<100%

BOI Approval of FDI

Source: BOI

Top 1 China

Top 2 India

Top 3 THAILAND

Top 4 Vietnam

Top 5 South Korea

Ranking of FDI Prospects in Asia 2005-2008

UNCTAD Survey of world’s 325 largest transnational corporations

Source: UNCTAD Global Investment Prospects Assessment, Sep 2005

11

External environment will be more favorable next yearExternal Environment, 2004-2006

Source: World Bank DEC Prospects Group update Oct. 25, 2005.

a/ In local currency, aggregated using 1995 weights.

The G-7 countries are: Canada, France, Germany, Italy, Japan, United Kingdom, and United States.

2003 2004 2005p 2006p

% Change from previous year, except interest rates

GDP Growth

World 2.5 3.8 3.1 3.1

World (PPP Weights) 3.9 5.0 4.4 4.3

OECD 1.8 3.0 2.4 2.5

United States 2.7 4.2 3.5 3.5

Japan 1.4 2.6 2.3 1.8

Euro Area 0.7 1.7 1.1 1.4

World Trade (Volume) 5.8 10.3 6.4 7.0

CPI Inflation - G7 a/ 1.5 1.7 2.2 2.0

Oil Price - $/bbl 28.9 37.7 53.6 56.0

- % Change 15.9 30.6 42.1 4.5

Non-oil Commodity Prices 10.2 17.5 11.9 -5.9

LIBOR (US$. 6 Mo.) 1.2 1.7 3.8 5.0

12

Going forward, higher private investment growth needed to avoid supply constraints

Capacity Utilization

• Over 1/3 of sectors have Cap U > 80%

• More than half of

high exporting

sector have cap u >

80% or > pre-crisis

levels

Weights Ave 8M 95/96 8M 2004 8M 2005Capacity utilization 59.10 76.41 67.86 70.41

CU in 8M 2005 >90% 9.3 Soy milk 0.1 54.6 115.1 131.5 Tin metals* 0.1 31.0 59.5 103.6 Compressor* 0.2 67.4 92.5 101.6 Craft paper 0.6 n.a. 81.2 101.0 Intermediate petrochemical 0.7 56.0 98.6 100.1 Hard disk drive* 4.7 n.a. 71.5 100.0 Printing & writing paper 0.2 n.a. 89.7 95.4 Rubber glove* 0.3 n.a. 93.3 95.0 Synthetic fibres 0.8 86.8 103.2 92.6 Downstream petrochemical 1.2 126.9 95.5 92.2 Upstream petrochemical 0.4 42.0 93.8 91.080%<CU in 8M 2005 <90% 15.0 Concrete products 0.2 n.a. 71.1 89.6 Pulp 0.6 77.6 92.3 88.9 Tyre 0.9 88.3 87.8 88.8 Zinc metals 0.1 92.1 95.5 87.3 Motorcycle 0.7 79.3 78.9 86.7 Petroleum products 9.5 87.5 84.1 86.3 Washing machines* 0.1 72.0 93.9 84.7 Air-conditioners* 0.9 90.3 82.0 81.8 Commercial car 2.1 86.5 72.2 81.8 Paper board 0.0 n.a. 77.5 80.4

Source: BOT

13

Improved investment climate helps to promote investment and firm productivity

Helps reduce cost of doing business – more urgently needed as firms face high oil prices

0 10 20 30 40 50 60 70

Infrastructure andSupport Services

Skilled Labor Shortage

Regulatory Burden

Percent of Firms Identifying Issues as One of Three Top Obstacles

Firms’ Concerns about Business Climate – Results from Thailand Productivity and Investment

Climate Study

Source: Thailand PICS, 2005

14

Reducing regulatory burden reduces firms’ costs in doing business

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

Hiring procedures forlocal workers

Hiring procedures forforeign workers

Layoff procedures/costof retrenchment

Limits on temporaryhiring

Inflexible salary scalefor skilled workers

Perc

ent o

f Fir

ms I

dent

ifyin

g R

egul

atio

n as

"Se

vere

" or

"V

ery

Seve

re"

Obs

tacl

e

Thailand Malaysia

Avg St. Dev Coeff Variation

Ministry of Commerce 10 20 1.9

Department of Industrial Works 17 22 1.3

Immigration Department 10 14 1.4

Land Office 13 22 1.7

Local Government 10 15 1.6

Labor Regulations Obstacle

for Firms in Thailand

Number of Days to Obtain Different Licenses/Permits/Approvals/ Certificates

Source: Thailand PICS, 2005

Source: Thailand PICS, 2005

15

Reducing skills shortage can help reduce large wage premiums and firms’ loss of sales

Thailand’s Wage Premiums(Total Returns Relative to Workers with Less than

Secondary Education Complete)

Sales Gain from Reduction in # Weeks Taken to Fill Vacancy for a Professional

Source: Thailand PICS 2005 Source: Thailand PICS 2005

Machinery/Equipment

Wood Products/Furnit.

Rubber/Plastics

Electronics/Elec. Appliances

Auto-parts

Clothing

Textiles

Food Processing

4

5

5

6

6

7

7

8

8

9

0 5 10 15 20 25 30 35 40 45 50

% Sales Gain from Reduction in Skill Shortages

Num

ber

of D

ays T

aken

to F

ill L

ates

t Vac

ancy

fo

r a

Prof

essio

nal

# w

eek

s ta

ken

to

fill

vac

ancy

Skills shortage vary from sector to sector Sector with more binding constraints can increase sales by more if

constraints are relaxed Average sales loss across sectors is 15%

0

5

10

15

20

25

30

35

40

45

50

High school/Por Wor Chor

Por Wor Sor College Degree

per

cen

t

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Improving skills will help increase firms’ technological capacity

• Lack of skilled ICT workers is the major constraint to firms’ expansion of ICT use

• ICT use correlates with innovation

Source: Thailand PICS 2005

Constraints to Introducing or Expanding IT Use Considered “Important” or “Very Important”

Constraints Small Medium Large

Lack of knowledge and trained IT personnel 42% 35% 33%

Lack of experienced consultants to provide or design IT-based solution systems 39% 37% 32%

High cost of IT equipment and maintenance 20% 18% 18%

Low returns to investments in IT 15% 12% 11%

17

Infrastructure Inadequacy needs to be addressed

Frequency of Phone Interruptions Last Year

0 1 2 3 4 5 6 7

Indonesia

Philipines

Brazil

Malaysia

Thailand

Percentage of Water Coming from Own Sources

0 10 20 30 40 50 60 70

Malaysia

Brazil

Philipines

Thailand

Indonesia

Electricity, transport, telecommunications, and water services need to be improved

CityPopulation (Million

persons)Length of Mass Rail Transit

Lines (Km.)Bangkok 9 44KL 1.4 65Manila 10 46Hong Kong 7 219Singapore 4.2 89London 7.4 463Beijing 13 113

Cross Country comparison of Mass Rail Transit LengthNumber of Times of Power O utage

0 5 10 15 20

Turkey

Russia

China

Malaysia

Thailand

Source: Thailand PICS 2005

18

The Thai Government is consistently pursing these issues

Regulatory burden: – Public sector reforms– A committee has been established to take these

issues forward

Skills shortage:– Education reform – secondary education and

vocation education

Inadequate infrastructure– Public infrastructure investment plan (Mega-

project)

19

Public investment in infrastructure is needed and timely

• Proposed public investment program is needed, given reduced investments since the crisis

• Estimated impact on fiscal & current account balance & debt, appears consistent with medium-term macro-stability, given current state of private investment recovery

• Infrastructure program should be prioritized to reduce cost & raise quality of infrastructure services so that private investors’ competitiveness can be increased

20

Public Investment as % GDP 2005-09

Source: Cabinet meeting Nov 1, 2005 and WB GDP estimations Source: FPO, Sept 26, 2005 and Cabinet meeting Nov 1, 2005

Mega-project Import Content, 2005-09

0

1

2

3

4

5

6

7

8

9

10

2005 2006 2007 2008 2009

% G

DP

Non-megaprojectMega-project

0

50

100

150

200

2005 2006 2007 2008 2009B

illio

n B

t

0.0

0.5

1.0

1.5

2.0

2.5

% G

DP

Import content (LHS)% of GDP (RHS)

Mega-project investment plan appears consistent with medium-term macro-stability

Given current state of private investment recovery, estimated impact on fiscal, current account, & debt, appears consistent with macro-

economic stability

21

Current account deficits are not excessive

Current and Trade Accounts

Source: BOT for 2003-04 and WB estimates for 2005-06

-10

-8

-6

-4

-2

0

2

4

6

8

10

2003 2004 2005p 2006p

US$

Bill

ion

-8

-6

-4

-2

0

2

4

6

8

% o

f G

DP

Current AccountTrade AccountCurrent Account (% GDP)Trade Account (%GDP)

22

Mega project investments by sector Getting to the details

Verifying the strategic importance of each investments

Establishing sector investment priorities

Making financial sense

Establishing a mechanism to ensure quality throughout project preparation and implementation

Getting to the details

Verifying the strategic importance of each investments

Establishing sector investment priorities

Making financial sense

Establishing a mechanism to ensure quality throughout project preparation and implementation

Source: Cabinet Meeting Nov 1, 2005

Prioritizing infrastructure investments will reduce cost & raise quality of

infrastructure services

0

50

100

150

200

250

300

350

400

450

Mas

s T

rans

it

Tra

nspo

rtat

ion

Hou

sing

Wat

erR

esou

rces

Edu

catio

n

Pub

lic H

ealth

Oth

ers

Bill

ion

Bt

23

THANK YOU

Full report can be downloaded from

www.worldbank.or.th

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Medium term growth will help Thailand sustain poverty reduction

Region 2000 2002 2004Bangkok and vicinity 1.6 2.2 1.6Central 10.5 8.0 5.1North 23.5 18.7 16.2Northeast 35.0 23.7 17.2South 17.1 13.8 7.8Whole Kingdom 21.3 15.5 11.3

Source: NESDB

Note: Based on revised poverty line

Poverty Headcount Ratios in 2000, 2002, and 2004