Thai Economy Remains Resilient Despite Decline in Export Sector

There were few surprises in the BOT’s December economic numbers released yesterday. Nevertheless, these numbers should provide some encouragement to the market that the Thai economy continues to expand at a slow pace despite the sharp decline in the export-manufacturing sector.

In December, Thailand’s total exports fell by 13.7% yoy, marking the seventh consecutive month of year-on-year declines and the fourth consecutive month of double-digit declines. The saving grace here is that imports continue to contract as well, leaving Thailand with still sizeable merchandise trade and current account surpluses. This, plus recent strong capital inflows, should help shore up confidence in the baht.

Two months ago, we were expecting to see the Thai economy contract in 4Q01 and 1Q02. However, we now believe that the Thai economy recorded slight positive growth in 4Q01. These numbers should strengthen the argument that most of the negative factors related to the 9-11 event and the global economic slowdown are now behind us. In fact, we are already starting to see a recovery in IC production and exports last month.

We believe that the BOT’s current estimate of 1.5% GDP expansion in 2001 is appropriate. With the recent encouraging economic signs coming out of the US, we don’t believe that the BOT’s recent revision of economic growth in 2002 to 2-3% is unduly optimistic either. With the economy being supported by the Thai government’s spending and investment stimulus packages and steady growth of domestic consumption, an improvement in Thailand’s export prospects would most likely result in further upward revisions in GDP forecasts.

• Manufacturing Production Index: In December, the manufacturing production index rose by a slight 1.3% yoy. The index was down marginally from the previous two months, but the fact that the index continues to show production expansion even with a 13.7% decline in exports in the month should be considered positive.

Average industrial capacity utilisation slipped to 55.5% in December from 56.0% the previous month. Even with the traditional work stoppage at the end of the year, December’s utilisation rate was the fourth highest of 2001.

Among the individual sectors, the building materials sector is currently showing the strongest growth, which we assume is related to the recent pick-up in housing sales and the renewed government interest in stimulating the economy through infrastructure development. Cement and clinker production rose 42.8% in December.

Also, the auto-manufacturing sector continues to show steady growth. In December, production of passenger and commercial vehicles increased 13.6% to 39,062 units. This is partially due to a pick-up in the domestic market from year-end sales promotions.

IC production was down 32.6% yoy to 377 million pieces. However, December’s production was the highest since March 2001 and up 36.1% from a low of 277 million pieces in July. The capacity utilisation rate in the IC industry currently stands at 64.5%.

• Private consumption: Private consumption continues to be one of the most resilient sectors of the economy, as indicated by a 1.37% yoy increase in the private consumption index. Big-ticket items continue to perform the best, largely due to the reduction in interest rates, freely available credit and previous pent-up demand. Sales of passenger cars and motorcycles expanded by 36.6% and 17.1%, respectively.

Imports of consumer goods declined by 12.43% yoy in December to $463mn, the lowest value since January 2000. This was due to cheaper domestic supplies from the large domestic surplus capacity and efforts by major retailers to primarily stock domestically-produced products.

Typically, we do not pay attention to the official employment termination figures since it represents just a fraction of the private sector staff made redundant but not reported. It is still interesting to note that the official numbers show a sharp fall-off in employee terminations in December to 1,653, the lowest level since the Asian economic crisis began in mid-1997. This supports our view that consumers are starting to feel a little more secure in their jobs.

• Private investment: Private investment indicators were mixed in December. The most promising signs were a pick up in housing construction activity. Domestic cement sales rose 41.6% to 1.9mn tonnes, the highest monthly sales figure since March 1998. Growth in demand for other types of construction materials indicate that the depressed construction market is beginning to recover.

Like consumers, investors are making do without imports. Imports of capital goods dropped 19.6% to Bt17,246mn in December, the second lowest level over the last 24 months. We assume that there is also an absence of planes and ships in these import figures.

• Fiscal position: For the first three months of the 2002 budget (October to December 2001), the government recorded a cash deficit of Bt67.3bn, representing about 1.3% of GDP. Revenue was up 6.6% in the quarter, but expenditure was 14.6% higher than the previous year. We believe that this is part of the government’s plan to accelerate budget disbursement in an effort to stimulate the economy.

The government’s tax revenue indicates a still slow growing economy. In the October-December period, personal income and corporate tax collection grew only 0.11% and 2.67%, respectively. Meanwhile, VAT collections, which is typically used as one of the best indicators of domestic consumption slipped 0.40%.

• External sector: Thailand’s total exports dropped by 13.7% yoy in December to $4,965mn the lowest value of exports since April 2001. It also marks the fourth consecutive month that exports declined by double-digits.

• However since imports declined at a faster rate of 18.1% to $4,372mn, Thailand maintained a large trade surplus $593mn. When combined with the service and transfer account surplus, the current account registered a large surplus of $1,022mn. The BOT used this large surplus as an opportunity to repay $458mn in foreign debt in December, which left the balance of payments at a positive $248mn.

For the full-year 2001, exports declined by 7% and imports by 2.8%. Thailand incurred a trade surplus last year of $2,527mn, less than half of the previous year’s $5,521mn. Likewise, the current account surplus declined to $6,200mn in 2001 from $9,383mn in 2000. During the year 2001, the BOT’s repaid $3.1bn of its loans from the IMF, compared with $0.2bn in 2000.

• Monetary conditions: Overall liquidity in the financial system remained high in December with overnight interbank lending rates averaging 2.14%. Commercial bank credits (adjusting for debt write-offs and credits transferred to AMCs) increased by a slight 0.6% yoy, while commercial bank deposits continued to expand by 4%.

The BOT is clearly accommodating the government with an expansionist monetary policy to go along with the stimulative fiscal policy. The Monetary Policy Board reduced its repo rate by 0.25% on December 25 and again on January 21. We expect that the commercial banks will follow suit with an across-the-board 0.25% rate reduction over the next month.