Thailand Review July 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. On June 29th the Thai Ministry of Finance adjusted its economic growth forecast for this year upwards to 5.5%. The effects of the disturbances between March and May were slighter than expected and the pace of global economic recovery has also exceeded expectations. In particular, there has been rapid economic recovery among many of the Asian nations that are occupying increasingly important positions as major trading partners of Thailand. As a result, export growth looks likely to exceed earlier forecasts, and the forecast made in March has been upgraded by 1.0% from 4.5%.
2. According to Bank of Thailand's monthly financial and economic report (issued June 30th for May), exports in May were worth US$16.4 billion (up 42.5% compared to the same period in the previous year, up US$2.6 billion on the previous period), and imports worth US$14.1 billion (up 53.5% and US$100 million, similarly). As imports also grow, exports continue to post high growth levels and are increasing. The balance of trade was US$2.3 billion, shifting into the black from the previous month's US$200 million deficit. The foreign currency reserve at the end of May was US$143.5 billion (down US$4.1 billion from the previous month).
3. According to a July 1st announcement by the Thai Ministry of Commerce, the consumer price index increase rate (CPI) for June was 3.5% compared to the same month in the previous year (food and beverages up 7.1%, non-food products up 1.5%), marking nine consecutive months of positive growth. The core CPI for June (excluding perishables and energy) was 1.1% up on the same month in the previous year, marking eight consecutive months of positive growth.

2. Investment trends

1. The Thai Board of Investment (BOI) reported 306 investment applications by foreign capitalized firms (foreign capitalization 10% or more) in the period January to May, 2010 (up 35.4% compared to the same period in the previous year), with a total investment worth of Bht86.3 billion (up 2.1%, similarly). Small scale investment applications worth under Bht100 million accounted for 65% of the total. In terms of numbers of applications/ monetary value by sector, top was agriculture and processed agricultural goods with 33 applications worth Bht6.6 billion, followed by ore, metals and ceramics: seven/ Bht24.6 million, light industry: 16/ Bht2.4 billion, metal goods, machinery and transportation equipment: 82/ Bht18.9 billion, electronic and electrical industries: 61/ Bht11.8 billion, chemicals, paper and plastics: 39/ Bht8.9 billion, and services and public utilities: 68 applications, worth Bht13.2billion. In terms of numbers of applications by investing nations, Japan was top with 120 applications (up 42.9%, compared to the same period in the previous year), worth Bht33 billion (1.9 fold growth, similarly), followed by Singapore: 32/ Bht7.7 billion, China: 12/ Bht6.5 billion, Hong Kong: 11/ Bht2.7 billion, Australia: nine/ Bht2.1 billion, Taiwan: 14/ Bht1.9 billion, India: five/ Bht1.5 billion, and Germany: 14/ Bht1.5 billion.
2. On June 28th the special panel created to resolve the Map Ta Phut industrial estate pollution issue, and comprising representatives from government, enterprises involved in the project, local communities and experts, completed its list of industrial projects that must comply with the provisions of Article 67 of the constitution, bringing to an end seven months of activity. Although the contents of the list of projects that are subject to the provisions of Article 67 have not yet been made public, the list has apparently been whittled down to 18. The full details of the report are expected to be approved at a meeting of the National Environment Committee.

3. Financial trends

1. According to an announcement by Thai Central Bank, the financial institutions’ deposits as of end May, 2010, were worth Bht10.2208 trillion (up 6.5%, compared to the same month in the previous year). Loans were worth Bht9.1025 trillion (up 7.3% compared to the same month in the previous year).
2. On July 6th, the Thai Cabinet approved Dr. Prasarn Trairatvorakul, President of Kasikornbank, as the next Governor of the Bank of Thailand. Dr. Prasarn will replace the current Governor, Mrs. Tarisa Watanagase, when she completes her term of office at the end of September. The new Governor's first term of office is five years. A further term of five years is possible, but the upper limit is 65 years of age.

4. Interest rate trends

1. (June review) The MPC (Monetary Policy Committee) on June 2nd decided to keep the policy interest rate unchanged at its current level. The accompanying statement made reference to (1) the fact that the economy appeared to be in good shape, but that the financial problems in Europe and the domestic political situation represented downside risks and (2) lingering inflationary fears. If the economic outlook becomes clear, a certain level of higher interest rates may be expected, in the interests of preventing inflation, and interest rates adopted an upwardly trending attitude. Central Bank Deputy Governor Bandid Nijathaworn commented pointedly that the need for excessively low interest rates in order to foster economic recovery had lessened and that everything was in place for rate normalization, indicating a positive disposition towards higher interest rates. Around mid month, the financial problems in Europe and worsening US economic indices prompted fears of economic deceleration, leading to a global trend of lower interest rates, and the baht interest rate began to drift downwards as well.
2. (Outlook for July) It is interesting to note the comments from the Thai authorities indicating a positive attitude towards higher interest rates, against a backdrop of thriving exports and solid economic performance, but the risks from the financial problems in Europe mentioned at the MPC still remain. Further, economic instability continues to grow in the US and in China. Also, lower interest rates in Europe and the US, etc., lead directly to lower baht interest rates. Globally, interest rates are trending downwards, but given the strength of expectation of a higher interest rate, any lowering of the baht interest rate will likely be a gentle one at best.

5. Exchange rate trends

1. (June review) Early in the month, Europe's fiscal problems and worsening US employment statistics prompted vigorous risk avoidance activity, and the dollar - baht exchange rate for June went to 32.68 baht, its lowest rate in three months. Subsequently, with China's announcement of healthy exports, Thailand's balance of trade for May was a US$2.21 billion surplus, the biggest surplus this year, encouraging continued baht purchasing. With the Chinese government's announcements on June 19th and 20th about greater flexibility in the RMB exchange rate regime, Asian currencies strengthened quickly and the dollar - baht rate advanced to 32.285. But, as it became clear that the Chinese authorities' stance would be one of gradual implementation of renminbi revaluation, the rate returned to the vicinity of 32.40. In the event of rapid developments, Bank of Thailand intervention will discourage any one-sided movement on the part of the baht. From June, worsening US economic indices became more noticeable and the FOMC statement revised its economic review slightly downward, leading to greater concern over US economic health. The yen - baht exchange rate tended to center around the 0.35 mark. The yen strengthened against the dollar and the euro, encouraging the yen - baht rate also to go to around 0.365.
2. (Outlook for July) The Thai economy appears robust, centered on healthy export growth, and this and expectations of interest rate increases are plus factors for the baht. However, negative factors for the baht are increasing abroad, with concerns over economic deterioration in Europe and the US, and the implementation in China of measures designed to curb economic overheating. Given the current struggle between domestic and overseas factors, it does not seem likely that the baht could appreciate by much in the meantime.

6. Political trends

1. In mid June Prime Minister Abhisit presented the framework of a political process aimed at healing the deep rifts in society brought about by the antigovernment demonstrations of the pro-Thaksin United Front of Democracy Against Dictatorship (UDD). Of the five proposed items for reconciliation (1) protection of the monarchy, (2) reform of the news media, (3) an investigation into the responsibility for the deaths and injuries in the recent clashes, (4) social reform, and (5) constitutional reform), work has already begun on drafting the necessary organizations for four of the items, with the exclusion of the protection of the monarchy. Each of these bodies will present a report to the government by October this year and the government will summarize their findings and announce a concrete implementation plan by the end of the year. However, the pro-Thaksin camp are already objecting to a government-led process and to the selection of committee members and appear set to refuse to participate in a joint initiative. It is still uncertain as to whether the initiative will be able to achieve its expected aim of resolving domestic strife.
2. On July 6th, the Thai Cabinet voted to extend the state of emergency for a further three months from 7th, with the exception of a few provinces, citing continuing unrest due to UDD anti-government demonstrations. The demonstrators disbanded after the forced expulsion on May 19th, but Prime Minister Abhisit quoted reports that UDD activities are continuing, including a series of bomb attacks in central provinces on the headquarters of the coalition member Bhumjaithai (Proud Thais) Party.