Economy and Trade
With a well-developed infrastructure, a free-enterprise economy, and generally pro-investment policies, Thailand was one of East Asia’s best performers from 2002–2004, averaging more than 6% annual real GDP growth.
Although the country recovered slowly from the 1997 economic crisis, domestic political uncertainty, rising violence in Thailand’s four southernmost provinces, and repercussions from the devastating Indian Ocean tsunami of 2004 led to a slowing down of real GDP growth to 4–5% between 2005 and 2007. Much of this slowdown was led by falling exports, which in 2007 accounted for 70% of GDP.
The 2008 global financial crisis has further darkened Thailand’s economic horizon. Continued political uncertainty will hamper the resumption of infrastructure mega-projects. Tourism—a significant contributor to the Thai economy (about 6%)—has also been hard hit. Thanks to the political protests that closed Bangkok’s airports from late November to early December 2008, tourism figures declined significantly at the end of December.
Future economic performance depends on continued reform of the financial sector, attracting foreign investment, and improving domestic investment and consumption, to balance Thailand’s past reliance on exports. Thailand also faces the challenge of institutionalizing social protection mechanisms to help workers and vulnerable persons, including the poor, women, children, the elderly, and the disabled.
Economic Policy over 12 Months
As export growth weakened in 2008, and inflationary pressure became less of a concern, the Bank of Thailand loosened monetary policy. Interest rates were reduced to 1.5% by February 2009, and the baht was allowed to depreciate relative to the dollar to stimulate exports.
In January 2009, a month after the new government was inaugurated, a US$3.3 billion economic stimulus package was approved. The funds will be used to support social security, free education programs, create jobs, and provide low-interest loans to farmers. The government will also extend a package of economic stimulus measures implemented by the previous government by another six months. These include lower water and electricity charges, free rides on some of Bangkok’s public buses, and free third-class train rides nationwide. A portion of the funds will be doled out in a one-off allowance of US$57 to nine million low-income, private-sector employees and government officials.
This was supported by a US$1.2 billion economic stimulus package of tax cuts, approved later in January 2009. The package includes a new personal income-tax deduction on mortgage-loan principal payments of up to US$8,572 per year—a significant change from existing rules, where only interest payments of up to US$2,857 per year can be deducted from personal income tax. The property tax incentives will apply only to new homebuyers who make purchases this year, although existing homebuyers will still be eligible for a tax deduction of US$2,857 a year for mortgage interest payments.
Small and medium-sized enterprises (SMEs) in all sectors earning less than US$28,572 will also be exempted from income taxes. The tax allowance will benefit up to 970,000 SMEs. As part of an attempt to boost the venture capital business, the government also agreed to exempt income tax on gains arising from share transfers of SMEs, and scrap initial capital requirements for the venture capital provided. Exemptions on income tax, value-added tax, special business tax, and stamp tax on income generated from asset transfers, asset disposals, and other transactions stemming from debt restructuring were also included.
To stimulate tourism, the government allowed higher tax deductions for companies that pay for seminars or meetings. The cabinet agreed to waive visa fees for three months, cut the landing fee by 20% for regular flights, and by up to 50% for chartered flights, and waive property tax for hotel operators. An exemption on entrance fees for national parks was allowed in a bid to revive its key tourism industry.
Economic Performance over 12 Months
In the final quarter of 2008, the pace of GDP growth evidently weakened as various adverse factors, both domestic and global, intensified. The marked slip in global growth caused Thai exports to shrink in this quarter, both in value and volume terms. In December 2008, a coalition government, headed by Democrat Party leader, Abhisit Vejjajiva, was installed. The period immediately preceding this had been marked by increased political unrest, culminating in protesters storming Bangkok airport in November and December 2008, adversely affecting the country’s tourism industry, and hammering already-soft private-sector confidence. Thailand has seen its exports particularly badly hit by the global downturn, recording a 26% fall in January 2009. Thailand’s Ministry of Finance has accordingly revised its forecast for GDP growth in 2008, from September 2008’s 5.1% forecast, down to 3.0%. Additionally, the GDP growth forecast for 2009 has been set at between 0% and 2.0%.
The Bank of Thailand’s Inflation Report, issued on January 23, 2009, forecasts a consumer price index (CPI) inflation rate of between −1.5% and 0.5% in 2009, and a core inflation rate of between 0.5% and 1.5%, reflecting increasing downward pressure on commodity prices.
Thailand’s political scene will remain unstable in the forecast period, owing to the persistent power struggle between, on one side, the established bureaucratic and royalist elites, and the urban middle class; and on the other, the rural populations, lower income families, and other forces aligned with Thaksin Shinawatra, the former prime minister who was ousted in the September 2006 military coup.
Particularly worrisome are the country’s projected exports for 2009, which are expected to decline by 10%. Commentators are urging the Thai government to accelerate the disbursement of its budgeted expenditures, promote investment in each province, find ways to end the political unrest, restore confidence among investors, and promote tourism.
According to The Economist, the economy will contract sharply in 2009, as the global economic slowdown will have a negative impact on exports. Ongoing concerns about political stability will also continue to prevent a major improvement in consumer and investor sentiment in the early part of the forecast period. However, as the global economy picks up, GDP growth in Thailand will accelerate to an average annual rate of 3.6% in 2011–2013.
The fall in global prices for crude oil and non-oil commodities from the highs that they reached in 2008 should also contribute to a more benign outlook for inflation in the forecast period.
Support for Inward Investment and Imports
Thailand is keen to encourage inward investment, particularly in view of the slowing global economy, and has declared 2009 as the “Year of Investment.” The Board of Investment is the government organization dealing with facilitating investment.
Tax Exemptions
Tax exemptions for companies setting up businesses in Thailand include corporate tax holidays for eight years, and a waiver of import/export duties on equipment used within the business. For 2008–2009, increased incentives have been introduced for six priority industries comprising alternative energy, high technology, environmentally friendly products, tourism, high-tech agricultural and mega-projects. Further information is available at: www.pwc.com/extweb/service.nsf/docid/ACFD0E3D3688819ECA25752700354A2C
Statistics
GDP growth: 3.0% (2008, est., Ministry of Finance)
GDP per capita: US$8,700 (2008, est.)
CPI: 5.5% (2008, est.)
Key interest rate: 1.5% (February 2009)
Exchange rate versus dollar: baht per US dollar—33.37 (2008, est.)
Unemployment: 1.2% (2008, est.)
FDI: US$80.83 billion (2007, est.)
Current account deficit/surplus: −US$1.049 billion (2008, est.)
Population: 65,905,410
Note: estimates for this country explicitly take into account the effects of excess mortality due to Aids; this can result in lower life expectancy, higher infant mortality, higher death rates, lower population growth rates, and changes in the distribution of population by age and sex than would otherwise be expected (2009, est.).
Source: CIA World Factbook except where stated
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