All sectors are now contributing to economic growth

The May economic figures released by the Bank of Thailand (BOT) last Friday indicate that the Thai economy is continuing to grow at a moderate rate of 3-4%. Now that the export sector has turned positive, we are seeing a much more broad-based economic recovery with all sectors – consumption, investment and exports – contributing to economic growth. As a result, domestic production continues to rise with the manufacturing production index up 8.4% yoy and industrial capacity utilisation increasing to 59.1%.

The most encouraging sign is the 4.3% increase in exports to US$5,758mn, the highest export figure in 14 months. Thailand had negative export growth for 11 consecutive months before turning to a positive 1.1% in April. Export volume was actually up by an impressive 17% in May, but average export prices have fallen 10.8% from the previous year due to price-cutting and the strengthening baht. It is also interesting to note that exports to the US, ASEAN and Japan rose by 6.2%, 9.9% and 2.4%, respectively.

As the BOT has repeatedly pointed out, there are a number of potential factors that could negatively affect the Thai economy in the second half of this year – with concerns about the strength of the US economy being on top of the list. The BOT will track the US and European economies for two-three months to get a clearer signal on second half growth. Despite the BOT’s cautious stance, we still believe there is room to revise upward Thai GDP growth forecasts to the 3.8-4.2% range.

• Manufacturing production: In May, the manufacturing production index grew by 8.4% yoy, the third consecutive month of growth by more than 8%. It’s also encouraging that the recovery in the manufacturing sector is spread out to almost every industry. The electronics sector is seeing the fastest recovery with production increasing 33.8% yoy. Meanwhile, production of construction materials, iron & steel products, and vehicles & transportation equipment continues to show strong growth due to rising consumer demand and low interest rates. Average industrial capacity utilisation improved to 59.1%, but was still below the March figure of 63.1%, which was the highest level since the beginning of the 1997 crisis.

• Private consumption: The private consumption index rose by 4.5% yoy in May. The recovering Thai economy, low interest rates and booming stock market continued to boost consumer confidence and spending. Sales of passenger cars and motorcycles grew by 22.9% and 20.1%, respectively. Imports of consumer goods grew at a real rate (based on 1995 prices) of only 2.9%, which is very surprising given the previous month’s growth of 14.9% and the increase in consumer spending.

• Private investment: The private investment index slowed some from previous months with sales of commercial cars, imports of capital goods and cement sales rising only 12.4%, 3.8% and 8.4% yoy consecutively. Part of this is due to an increase in last year’s base. Overall, we believe that private sector investment will remain strong, particularly with the low interest rate environment, improving manufacturing sector and rising demand for housing.

• External sector: Exports in May jumped 4.3% yoy to US$5,758mn – the highest figure in 14 months. This compared with a 1.1% increase in April which was preceded by 11 consecutive months of negative export growth. With May imports declining 2.8% yoy to US$5,420mn, Thailand registered a trade surplus of US$518mn while the current account recorded a surplus of US$564mn. Despite a BOT debt repayment of US$292mn to the IMF, the balance of payments enjoyed a surplus of US$563mn, aided by continuing capital inflows.

• Monetary conditions: Overall liquidity in the financial system remained high in May, despite a small decline from the previous month ahead of corporate income tax payments. Overnight interbank lending rates averaged 1.67%, well below the 14-day repurchase rate of 2%. Commercial bank loans (adjusting for debt write-offs and credits transferred to AMCs) increased 2.7%, compared with a 1.8% rise the previous month, while commercial bank deposits expanded by 5.6%.