ECONOMIC AND COMMERCIAL BRIEF

Thailand; On the Road to Recovery The Thai economy returned to modest growth in 1999 with 4.2 per cent growth in real Gross Domestic Product (GDP). Although this was much lower than the 10 per cent average annual GDP growth in the 'boom' years up to the mid 1990s. it constituted a solid rebound from the 10.2 per cent fall experienced in 1998 after the financial crisis struck Thailand and spread throughout Asia. Thailand began rebuilding from the crisis under an IMF-led assistance package worth US$ 17.2 billion, which allowed Thailand to rebuild its depleted foreign exchange reserves and eventually to stabilize the currency. From the start, the government recognized that rebuilding the financial sector and resolving non-performing debt would be the key to Thailand's return to growth. Beginning in early 1999, with the macro-economy stabilized, the government increasingly focused on stimulating domestic demand and investment though a variety of programs outlined in major stimulus packages. Challenges ahead With the economy bottoming out in late 1998,Positive growth began in the first quarter of 1999, with real GDP finishing 0.2 per cent above the same period in 1998 and continuing to make gains throughout the year. Real GDP for the year reached 4.2 per cent and the Thai government has projected growth of 4.5 to five per cent for 2000. The most important drivers of the economic expansion were increased domestic consumption and exports. Private consumption rise 3.5 per cent in 1999 and exports by the end of 1999 and exports by the end of 1999 were up by 7.4 to five per cent for 2000. exports climbed 30 per cent over the same period in 1999 and the government revised their forecast for export growth to 9.6 per cent for the year. Manufacturing, trade and services are expected to be major contributors to growth, but public enterprise investment is expected to increase and the fiscal deficit is likely to continue at least through 2001. Thailand is making significant progress in addressing remaining obstacles to solid economic growth over the medium term and given continued progress and the absence of major external shocks, such as a major US downturn, the Thai economy should again expect moderate growth in 2001. Political framework Thailand is a constitutional monarchy ruled by King Bhumipol Adulyadej (Rama IX), a much revered monarch who has reigned since 1946. The King plays little part in day-to-day government operations, but serves as a powerful symbol of Thai national identity and commands enormous moral authority, which he has used on occasion to resolve internal crises or to draw the government's attention to pressing social problems. Real power, however, lies in the hands of democratically elected government led by a Prime Minister. Since World War II, Thailand has alternated periods of democratically-elected civilian governments with authoritarian rule, brought about by coups d'etat. The military last seized power in 1991, but after middle-class protests and royal intervention, civilian rule was restored in 1992. since then, the military has taken pains to avoid interfering in the operation of civilian government. Because Thailand has so many political parties, each civilian government has been a multiparty coalition and inherently unstable. No elected government has yet completed a four-year term. Following democratic reform, Chuan Leekpai of the Democrat party came to power in November 1997 and led the government until the last general election on 6 January 2001, which was decisively won by the Thai Rak Thai party led by Thaksin Shinawat, a prominent and highly successful businessman, The new Prime Minister and his government will assume power in February 2001 and have promised major reforms. However, most observers do not expect major government economic policy changes that would affect business prospects for foreign investors, regardless of the composition of the incoming government. Doing business in Thailand can be challenging, but the government appreciates the need for foreign investment and this is certain to remain a central tenet of Thai economic policy basic strengths and the government's policy initiatives should provide better opportunities for US investors and business over the medium term as the economy recovers from the economic crisis that began in 1997. External political view Thailand's external political view is increasingly centered on development of strong regional economic and security forums. Thailand is a major force in the Association of southeast Asian Nations ( ASEAN), of which it held presidency in 2000, and plays an active role in economic organizations such as the Asia-Pacific Economic Cooperation forum (APEC) and world forums such as the World Trade Organization (WTO) of which former commerce minister Supachai Panitchpakdi was Deputy Head. In 1996, Thailand hosted the first Asia-Europe Summit (AEM), which brought together heads of government from 25 countries in the European Union (EU) and East Asia. With little immediate military threat to its sovereignty, Thailand has focused its international policy on trade development and investment, while addressing security regional dialogue known as the Asean Regional Forum (ARF). Trade and security relations Thailand's trade relations have traditionally been oriented toward distant markets, particularly those in North America and Europe though more recently also that of Japan, Implementation of an Asean Free Trade Area (AFTA) is contributing to growing trade between Thailand and its ASEAN partners. This trend will likely continue as AFTA is fully implemented by 2003. Thailand has already implemented the first round of duty cuts on very high-tariff goods imported from ASEAN countries. Principal growth sectors Thailand's economic recovery from the 1997-98 economic crisis is led by exports, and these sectors currently have the brightest prospects in the Thai economy. Principally, the electronics manufacturing and assembly and the automotive sectors are driving Thailand's export boom. Significant new foreign in vestments in plant and equipment have occurred in these industries, with a number of major companies buying out their Thai manufacturing partners. Others have invested in making Thailand their regional manufacturing hub for Southeast Asia. Exports have continued to demonstrate a strong growth rate of 30 per cent through the first quarter of 2000. Thailand's export strength is found in both traditionally strong sectors such as electronic parts and integrated circuits, fisheries products and apparel, a well as new sectors, notably the automotive industry, where exports of finished vehicles and auto parts and components exceeded US$ 1 billion in 1999 .New large-scale investments in Thailand's automotive sector continue to be made, with a new General Motors assembly plant opening in mid-2000 and other firms, such as Volkswagen, establishing assembly plants and new parts makers also entering the market. Automotive related industries are expected to play an increasingly larger role in the growth of the Thai economy. Thailand is also seeing an emphasis on improving its information technology infrastructure, in response to growth in internet-related services demand, the requirements of supply chain management systems and increased integration o f suppliers in global manufacturing network. Most industry experts foresee strong growth in both the hardware and soft ware markets in industrial, commercial and consumer applications in the IT sectors Some leading sectors from pre-crisis times remain as primary targets for government programs, most notably the agricultural sector, where programs to increase productivity remain priorities on the public agenda. These include a large-scale program to improve water resource management which is being funded by a loan from the Asian Development Bank. Thailand: Key economic indicators Government role in the economy Government has played a major role in setting the framework and establishing conditions for Thailand's economic recovery, particularly in the financial arena. However, with the exception of state enterprises in utilities, transportation, energy, tobacco and commercial banking, the government plays little role in the economy. The government's policy to privatize state enterprises announced in 1998 has encountered significant opposition and progress has been slow. The major exception has been in the financial sector where the government re-privatized two banks, now majority owned by foreign banks, and the sale of another two banks is likely in 2001. The financial crisis led to some budget retrenchment, although this was relatively modest in local currency terms. The 2000 budget was set at US$ 22.6 billion and a budget of US$ 23.9 billion has been projected for 2001. Spending by category remained broadly similar to previous years with education claiming over 25 per cent of the budget. Social services and general administration were allocated 11 and 12 per cent, national security and public order received 16 per cent, while agriculture, communications and transportation, and public health received approximately 7.5 per cent each. The government's proposed 2001 budget, which calls for a deficit of US$ 2.8 billion to continue stimulating domestic demand, is expected to have similar allocations. Balance of payments Thailand traditionally had a balance of payment surplus in which foreign investment and foreign borrowings outweighed a deficit in the current account. In 1997, however, the positions of the capital and current accounts reversed. The current account deficit declined dramatically and the capital account turned negative as foreign investment plummeted and foreign borrowings were repaid. In 1997 the overall balance of payments fell to US$ 10.6 billion, its first deficit in decades, but in 1998 the balance of payments had returned to a surplus of US$ 1.7 billion with a current account surplus, a modest export revival and very weak imports out-weighing a continued deficit in the capital account. The same conditions applied in 1999,with a current account surplus averaging almost US$1 billion per month combining with lower capital outflows to yield an overall balance of payments surplus of US$ 4.6 billion. Officially, the government expects the balance of payments surplus to decline to US$ 0.2 billion in 2000 based on a current account surplus of US$ 1 billion and implied capital outflow of around US$ 7.5 billion. Overall, foreign reserves are expected to remain comfortably above US$ 30 billion, enough to cover seven to eight months of imports and equal to nearly three times Thailand's remaining stock of short-term external debt. Trade barriers During 1999, Thailand's average effective tariff rate was 3.81 per cent, a marginal increase over the previous year, but down significantly from 5.5 per cent and 6.7 per cent in the preceding years. The lower rates reflect Thai government policies to reduce rates in line with the ASEAN Free Trade Area (AFTA) and World Trade Organization commitments. Import tariffs in 1999 accounted for 9.35 per cent of government revenues, significantly down from 14.9 per cent in 1996. Thailand has been working to rationalize a complicated tariff regime, with a multitude of rates, with a system that will dived products into three categories of primary, intermediate and finished goods. In general most imported goods are now divided into six categories as follow: goods such as medical equipment and fertilizers at O per cent; raw materials, electronic components, and vehicles for international transport at one per cent; intermediate goods at 10 per cent; finished products at 20 per cent; and goods where competing Thai products are regarded as needing protection, such as some fabrics, clothing, refrigerators and air conditioners, at 30 per cent. Since 1997 duties on over 4000 items have been reduced and the governments, in July 2000, announced plans for reductions on a further 542items (mainly chemical products and machinery) to improve the competitiveness of Thai producers. A previous round of reductions. Targeted at stimulating industrial production, was announced in August 1999. Anomalies in the Thai tariff schedules remain. In some cases import duties on component parts and materials destined for assembly in Thailand are higher than on the finished products. Most of these problems are expected to be addressed as Thailand completes its adoption of the new simplified system. Investment climate The Thai governments has long maintained an open, market-oriented economy and encouraged foreign direct investment as a means of promoting economic development, employment and technology transfer. Thailand welcomes investment from all countries and seeks to avoid dependence on any one country. Over the past three years, in concert with the IMF, the Thai government has embarked on an economic reform program intended, in part, to foster a more competitive and transparent climate for foreign investors and creditors in an effort to stimulate investment. A primary focus of this Property Leasing Act, which will to some extent liberalize restrictions on property ownership by non - Thais. Of more direct interest to non-financial investors is the new alien Business Act which became law in early 2000 and governs most investment activity by non-US nationals, opens additional sectors to foreign investment, and increases maximum ownership stakes in some sectors above the current 49 per cent limit. The ministerial regulations that will guide implementation of the Act are currently under review. Many aspects of the reform measures enacted in the aftermath of the crisis were controversial and strongly resisted by the political opposition and other powerful elements of Thai society. The fact that the government was able to persevere with its reform agenda in the face of strong domestic opposition is indicative of its commitment to economic reform and an open investment climate. Income distribution Thailand's GDP totaled US$ 123 billion in 1999.Compared to some of their neighbors, Thai citizens enjoy a comparatively rich per capita income of US$ 2,370. In Thailand's largest city, Bangkok, residents enjoy a rich per capita income of US$ 6,000 and in this country of abundant food and natural resources, a level of purchasing power parity exceeding that of many countries with higher income levels of abundant food and natural resources, a level of purchasing power parity exceeding that of many countries with higher income levels. According to the World Bank, Thailand is expected to attain its pre-crisis level of output in 2002 and its pre-crisis level of welfare in 2003. The minimum daily wage is equivalent to roughly US$ 5.80 per day in the Bangkok area, slightly less in outlying provinces. Labor force The Thai government projects a labor force in 2000 of 33.06 million workers out of a population of 62.7 million. This figure includes all Thais 13 years of age or older who are actively seeking work. A government survey in February 2000 estimated unemployment at 4.3 per cent, compared to 4.2 per cent in 1999. In 2000, official estimates are that 39.8 per cent of the employed Thai work force was still engaged in agriculture, either on a par-time or full-time basis. It is common for rural laborers to take jobs off the farm during slack periods in the planting and harvest cycle, or to carry on a small business in addition to farm work. The shift of workers from the agricultural sector is continuing; the proportion of those working the land continues to drop, especially in the northeast where agricultural productivity and investment is marginal. As a consequence, recent years there has been a constant flow of rural, generally unskilled, Thais seeking work in Bangkok and the more industrialized regions, both as seasonal workers and on a permanent basis. This avail-ability of migrant labor has contributed to Thailand's rapid industrial growth, particularly in the light manufacturing and construction sectors, but has created its own social problems in both the rural areas where young people have left their traditional communities and in the cities to which they have migrated. The economic downturn has stemmed the shortage in the labor market of workers with at least a secondary education. When Thailand's economy recovers, however, it is likely that highly skilled and experienced engineers, technicians and managers will again be in short supply. Thailand's education system is still geared toward the needs of a largely agrarian, traditional economy and society, and lags behind the country's contemporary skill requirements. The government has made great progress over the last two decades in providing basic education. Primary enrollment in Thailand is now about 95 per cent and the adult literacy rate is reportedly one of the best in the region. However, compulsory education is only through grade six, and a plan to introduce legislation to raise compulsory education to the north grade was abandoned because of resistance in rural areas and budget concerns. Thailand's social security system is considered inadequate by Western standards and does not cover unemployment compensation. The labor relations climate is generally peaceful with strikes relatively infrequent. Less than two per cent of the total labor force is unionized, with about 10 per cent of the industrial workforce organized. In 2000 the union right of state enterprise workers were restored and state enterprise labor unions were being re-certified and electing new union leaders. Opportunities and best non-agricultural sector prospects Given the Thai economy's long-term dynamism and diversity, there are many industry sectors with attractive opportunities for US companies. As a general observation, companies that made long-term strategic decisions to invest and manufacture on Thailand have not changed their minds about the merit of their strategy, although many have revised their short-and medium-term tactics to cope with the financial crisis. Nonetheless, the combination of industrial growth and developmental growing pains means significant opportunities for American firms interested in taking on the challenge of this complex, but rewarding, market. Among the most promising sectors for investment are; airport and ground support equipment, water resources equipment, automotive parts/ services equipment, medical equipment, laboratory and scientific instruments, education/ training services and supplies, franchising, food processing equipment, computer software, computer services, electronic components, computers and peripherals telecommunications equipment, leasing services, and electronic industry production/test equipment. Following are some of the sectors that may be of greatest interest. A more complete listing and in-depth information on each sector are avail-able from the Us Embassy's Commercial Office. Airport and ground support equipment Construction of the New Bangkok International Airport, with a budget of approximately US$ 3.5 billion, has budget of scheduled for completion in late 2004. the construction of this new airport will follow its original master plan of two runways and one passenger terminal designed to accommodate 30 million passengers annually. US companies are strongly encouraged to participate as suppliers from this project since there are no specific requirements for materials, equipment and components. To cope with increasing passenger demand, the government has also decided to invest US$ 118.9 million in expansion and improvement of the existing international airport. The best prospects for Airports and ground support equipment and services, in the near term, are as follow: navigational aid equipment for control towers, instrument landing systems, passenger bridges, baggage handing/detection systems, and aircraft refueling system. Water resources equipment and services Water resources development and management has always been a Thai government priority and a budget of approximately US$ one billion is allocated each year for this, with some water resource projects also financed by loans from international financial institutions or by aid from foreign government. There is a growing demand for engineering services and equipment required for water resources development comprises engineering design, construction and equipment and has growth potential for international engineering consultants in the design of projects requiring advanced technology. Best prospects in this US$ 632 million market include; project engineering and management consultancy, and direct investment/participation in state enterprises' privatized projects. Pollution control equipment Thailand' pollution control equipment market has grown continuously over the past two years, despite the recession. Environmental infrastructure demands such as water treatment processors wastewater treatment systems, solid waste and medical waste disposal facilities, and air pollution monitoring stations are major concerns in the fiscal budgets of government sectors. Best prospects in this US$ 159 million market are; air pollution monitoring devices and instruments, odor control systems and monitors, solid waste medical waste and hazardous waste incineration systems and accessories, solid waste landfill components and equipment, industrial wastewater treatment chemicals/ equipment and sludge de-watering systems, water purification and distillation parts and equipment for industrial processing, and sewerage pipe cleaning machines and equipment. Automotive parts/service equipment {add business1.jpg} Thailand's automobile market recovered in 1999 and is expected to reach the pre-crisis production peak of 600,000 units within five years, with an average growth of 22 per cent a year. Thailand has directed its policies at becoming an integrated automotive hub for the region and this year exports are expected to grow 44 per cent with vehicle exports reaching 180,000 units. With rebounding domestic sales, change of government policies governing the industry, and a competitive after-sales service sector, the US$ 6,520 million market offers opportunities in OEM parts and components, accessories, know how in parts manufacturing, equipment for tire and brake centers, pumps of all kinds, and emission control testing equipment. Medical equipment As the economy improves, imports of medical devices are expected to increase with an estimated market growth rate of 12 per cent. This growth will derive mainly from the private sector, as the governments is still cautious in spending on upgrading government facilities. The private hospital sector is recovering and shows good potential for the medical device market. In this US$ 249 million market, the best sales prospects are; heart valves and artificial blood vessels, stents/ cardiovascular equipment and accessories, disposable diagnostic test kits, respiration/ resuscitation devices and accessories, dental hand pieces and accessories, and non-invasive surgical equipment. Laboratory and scientific instruments The demand for laboratory, scientific and testing equipment in Thailand is expected to grow by about 13 per cent over the next few years due to upgrading of college and university laboratories, increased compliance with international standards, completion of a Science Park Project under the Ministry of Science, Technology and Environment, and the increasing importance of environmental and pollution issues. Best sales prospects in the US$ 236 million market are: gas analyzers, chromatographs, spectrometers, incubators, wafer meters, and analytical instruments. Education, training services As the Thai economy stabilizes, an even larger number of Thai students will seek to study abroad. American education institutions and ESL programs must gain greater exposure to potential students in Thailand in order to maintain their narrowing advantage in this US$ 590 million market. Best sales prospects in this field include; education and training equipment, educational games and toys, English language schools, computer training centers, and examination preparatory schools. Franchising The franchise industry is very popular among Thai investors and this is one of the very few sectors expecting average growth of 30 per cent over the next few years. The quality, standards and innovations offered by US franchises are well known to potential investors, although franchising fees are perceived as very high and start-ups require a large capital investment. The best sales prospects for Us franchises in this US$ 1,950 million market are; food and restaurant franchises, retail and convenience stores, hotel chains, service franchises such as automotive after sales services, cleaning and maintenance services, and internet related services. Food processing equipment The recession caused the food processing equipment market to contract by 40 per cent to US$ 317.5 million in 1998 However, the food processing equipment market improved dramatically in 1999, and is expected to continue to grow by 20 per cent annually over the next few years. The best sales prospects in this US$ 457.2 million market include; cooking or heating machinery, water filtering or purifying equipment, fruit/vegetable/herb processing equipment, snack food and confectionery equipment, and fast/ convenience food equipment. Computer software and services Thailand's computer software and services market was the least impacted by the economic crisis compared to other sectors in the IT market and expects the highest growth rate in value, starting at 14 per cent in 1999. Thailand has increasingly accepted IT as a means to enhance its competitiveness as the country moves towards business globalization. The market value ratio of hardware, software, and services for 1999 is projected at 51 per cent, 19 per cent and 30 per cent respectively. The 1999 computer service market represents US$ 52 million for maintenance services and US$ 153 for professional services. The breakdown between revenues of foreign and locally owned companies is roughly 65/35 with the US commanding an 80 per cent share of foreign companies' revenue. The US is the leading computer service provider with an excellent reputation for quality and enhanced technology. Economic Outlook 2002- A Summary of NESDB Press Release dated 17 June 2002 (I) First Quarter of 2002 {add bangkokcity2.jpg} The Thai economy expanded at a high rate - 3.9% in the first quarter of this year as a result of domestic stimulus programs and high quantities of export goods. Internal supporting factors composed of (1) low interest rate which the Bank of Thailand and commercial banks lowered had stimulated durable good consumption (2) higher farm prices leading to greater farm income (3) the rebound of the stock index by 34 % compared with the end of 2001 enhancing shareholders' wealth and boosting investors' confidence and (4) successful stimulus program in real estate sector such as lowering transfer fee, and measures supporting civil servants to have their own houses. External supporting factors consisted of (1) lower oil prices in the world market compared with the same period of last year and (2) the recovery of the global economy, which started to positively affect Thai exports. (II) Latter Half of 2002 In the latter half of this year, the Thai economy is expected to expand further as domestic demand and export volume remain the main driving forces. Key supporting factors are: the recovery of the world economy, particularly the USA, EU, and Japan, which was mainly caused by expansionary fiscal and monetary policies; low interest rate will help stimulate durable goods consumption and boost private investment; inflation remains subdued; in the first five months inflation rate was only 0.5% as gasoline price was rather stable; stock index is likely to be higher towards the end of the year, which will help generate good atmosphere for consumption and investment; licensed construction areas throughout the country increased by 37% and 68.8% in the fourth quarter of 2001 and the first quarter of 2002, respectively. This reflects high potential growth in real estate sector in next periods. (III) Economic Projection for 2002 High economic growth in the first quarter of this year is a good start for the year as a whole, particularly, if the pick-up of the world economy in the latter half of this year helps generate balance between internal and external driving forces. Therefore, it is expected that the economic growth in 2002 is in the range of 3.5 -4.%. Projections by sector for 2002 is summarized as follows: private consumption expands by 3.5%, closed to that of last year; private investment expands by 5.8%; government consumption expands by 8% as government investment grows by 2%; value of exports in US dollar terms is 64.3 billion, growing by 1.7% compared with that of last year. - most of which will be due to increases in quantities rather than prices; value of imports is 63.4 billion US dollars, growing by 4.5%; current account registers a surplus of 4.4 billion US dollars, equivalent to 3.6% of GDP. Source: American Chamber of Commerce in Thailand and Ministry of Foreign Affairs Related Documents Thailand's road to recovery by Ministry of Foreign Affair Gross Domestic Product (GDP) : 1Q/2002 Related Links National Economic & Social Development Board Bank of Thailand The Official Gateway and Guide to Thailand for Investors

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