Thailand Review June 2010

This article is contributed by Sumitomo Mitsui Banking Corporation, Bangkok Branch. The article will be periodically updated. PDF file is available with details and statistical data.

1. Economic trends

1. Thailand's National Economic and Social Development Bureau (NESDB) reported on May 25th that the nation's gross domestic product (GDP) for the first quarter of 2010 grew at a rate of 12%, compared to the same period in the previous year, the highest rate in the past 15 years. Among the principle factors involved were (1) export expansion, (2) domestic consumption growth, (3) increased private sector investment and (4) increased revenues from tourism, etc. Also, it should be borne in mind that the performance of economic growth in the weeks and months ahead may be significantly affected by factors such as unrest in the domestic political situation and climatic factors such as drought, etc. The forecast for GDP growth for the whole year is being left at between 3.5% and 4.5% for the time being.
2. Bank of Thailand's monthly financial and economic report (issued May 31st for April) puts April's export worth at US$13.8 billion (up 34.6%, compared to the same period in the previous year, and down US$2.3 billion on the previous month), and import worth at US$14 billion (up 43.1%, similarly, and down US$1 billion, similarly). Exports recoiled downwards from the previous month's rapid upward surge, while the import figures reflect a hefty increase in crude oil imports as well as growing imports of raw materials for electrical goods. As a result, the balance of trade was left at US$200 million in the red. At the end of April, the foreign currency reserves stood at US$147.6 billion (up US$3.5 billion, compared to the same period in the previous year).
3. According to a June 1st announcement by Thailand's Ministry of Commerce, the consumer price index increase rate for May was up 3.5% (food and drink 4.6%, non food and drink 2.8%) compared to the same period in the previous year, marking eight consecutive months of positive growth. The core CPI increase rate (excluding perishables and energy) for May was 1.2% compared to the same period in the previous year, marking seven consecutive months of positive growth.

2. Investment trends

1. The Thai Board of Investment (BOI) reported 245 investment applications by foreign capitalized firms (foreign capitalization 10% or more) in the period January to April, 2010, (up 31.7% compared to the same period in the previous year), with a total investment worth of Bht53.3 billion (2.5 times growth, similarly). Small scale investment applications worth under Bht100 million accounted for 63.7% of the total. In terms of numbers of applications/ value by sector, top was agriculture and processed agricultural goods: 25/ Bht5.4billion, followed by ore, metals and ceramics: 4/ Bht2.2 billion, light industry: 15/ Bht2.4 billion, metal goods, machinery and automobile related: 67/ Bht16.9 billion, electronic and electrical industries: 49/ Bht8.4 billion, chemicals, paper and plastics: 28 Bht5.3 billion, and services and public utilities: 57/ Bht12.7 billion. In terms of numbers of applications by investing nations, Japan retained the top position with 99 applications (an increase of 39.4%, compared to the same period in the previous year)/ worth Bht25.6 billion (2.5 times growth, similarly), followed by Singapore 25/ Bht6.9 billion, China 9/ Bht6.4 billion, Hong Kong: 7/ Bht2.3 billion, Taiwan 13/ Bht2 billion, Australia: 5/ Bht1.8 billion, Malaysia 12/ Bht1.4 billion and India 2/ Bht1.4 billion.
2. On June 2nd the Thai Cabinet approved a range of preferential tax measures designed to encourage companies to set up regional operating headquarters (ROH). Companies that set up regional operating headquarters in Thailand will qualify for a 10% reduction in corporate income tax on earnings in Thailand for a period of 15 years, and a 15 year exemption on income tax for earnings abroad.

3. Financial trends

1. According to an announcement by Thai Central Bank, the financial institutions’ deposits as of end April, 2010, were worth Bht9.9627 trillion (up 4.4%, compared to the same month in the previous year). Loans were worth Bht8.9877 trillion (up 5.9% compared to the same month in the previous year). Political unrest triggered a rash of withdrawals, causing the pace of growth in deposits among financial institutions handling deposits (including exchange bills) to cool from 5.7% in March, compared to the same period in the previous year, to 4.6%, similarly. Meanwhile, the financial institutions' total loans grew 5.9%, similarly, maintaining the same level as the previous month.

4. Interest rate trends

1. (May review) The baht interest rate for May started off the month in upward trending mode. Early in the month, the stock market responded to Prime Minister Abhisit's proposal of an early general election by accelerating upwards, while bonds that had erstwhile been purchased as part of risk avoidance plummeted (higher yield). However, the Thaksin camp rejected the offer and the stock market clearly shifted down gear, causing bond prices to rise (lower yield). Also, the ripples of Greece's financial problems continue to spread throughout Europe and risk avoidance has become the order of the day world wide, driving interest rates down. In addition, political demonstrations in Thailand have inevitably affected tourism, consumption and investments adversely and, along with the growing view that the policy interest rate would remain unchanged for the foreseeable future, baht interest rates closed the month trending slowly downwards.
2. (Outlook for June) The MPC (Monetary Policy Committee) on June 2nd decided to keep the policy interest rate unchanged. The accompanying statement cited concerns over (1) potential downside risk due to the situation in Europe and Thailand's domestic political situation, in spite of healthy economic performance, and (2) possible inflation moving forward. In terms of a clear economic outlook, anti-inflationary interest rate hikes may be expected, and it is thought likely that any decrease in interest rates will be limited in scale.

5. Exchange rate trends

1. (May review) May's dollar - baht exchange rate kicked off the month in the vicinity of US$1 to Bht32.30. Early in the month, Prime Minister Abhisit made the reconciliatory offer of a general election in mid November (originally January 23rd), and stock markets began to rise and the baht strengthened. However, after the Thaksin camp refused the offer, political uncertainty swept the nation once more and the baht began to sell slowly. Also, although measures to provide Greece with some degree of financial support were put in place, the malaise refused to go away and actually began to spread throughout other European countries, triggering vigorous risk avoidance activity. This and the accompanying weakness of Asian currencies were among the main factors behind baht depreciation. Amidst growing tensions as a blockade grew up around the demonstration sites, government forces began to expel the demonstrators on 19th, bringing the demonstration under control. However, there were some violent clashes between demonstrators and security forces, and the baht fell against a backdrop of uncertainty that included a night time curfew. Further, reflecting increased tensions over the situation in Europe and on the Korean peninsula, the flow of capital out of Asia began to pick up momentum, and the dollar - baht rate closed the month in the 32.50 range. The yen - baht rate, which started the month in the 1 yen to mid 0.34 baht range, saw the baht weaken against the backdrop of political uncertainty, while risk avoidance measures helped to accelerate the yen so that the rate rounded out the month with the yen going high and the baht low, in the low 0.36 range.
2. (Outlook for June) The expectation is that factors such as (1) capital outflow due to risk avoidance activities and (2) the shift of April's trade statistics into a balance of trade deficit, etc, will cause dollar selling/ baht purchasing pressure to ease. It is difficult to tell at this stage whether the trend will turn out to be a temporary one, but it is believed that the baht will find it difficult to appreciate in this timeframe.

6. Political trends

1. On May 19th, Thailand's security forces implemented a forcible expulsion of the demonstrators of the United Front of Democracy Against Dictatorship (UDD) from the Ratchaprasong area of central Bangkok. On the afternoon of that same day, UDD leaders called on the demonstrators to disband, and the rioting was brought to an end. However, some elements refused to cooperate and there were over thirty fires started in Bangkok by angry protesters, and some major commercial facilities were destroyed in the city's business and shopping districts. According to a government announcement, the forcible expulsion resulted in seven deaths and 88 people injured. Press reports suggested that some radical UDD members could well be planning terrorist activities in retaliation for the forcible expulsion, and the Thai government has decided to keep emergency measures in place for the time being.
2. On June 7th, Prime Minister Abhisit conducted a Cabinet reshuffle in order to strengthen his administration's authority in the wake of the antigovernment demonstrations and to heal the rifts within the coalition, and inaugurated the second Abhisit Cabinet after replacing eight ministers. With regard to the previous Cabinet, the opposition Pheu Thai (For Thais) Party launched a vote of no confidence last week against six Cabinet members, including the Prime Minister. Though the motion failed against all six ministers, there were some no confidence votes from within the coalition and some are beginning to voice concerns over rifts within the administration.