Economy and Trade
With a population approaching 67 million, a developed infrastructure and free-enterprise economy, generally pro-investment policies, and strong exports, Thailand has been an economic success story for over a decade. The country’s economy achieved an average growth rate of 4% per annum during the period 2000 to 2008. Unfortunately the country’s political development has not matched its economic potential. Growth would have been stronger still if not for periods of domestic political uncertainty, rising violence in Thailand’s four southernmost provinces, and the devastating Indian Ocean tsunami of 2004.
The global financial crisis of 2008–09 cut into Thailand’s exports, leading the economy to contract by approximately 2.8%. The Thai government then focused on financing domestic infrastructure projects and stimulus programs to revive the economy even as persistent internal political tension and investment disputes threaten to damage the investment climate.
Thai exports—mostly machinery and electronic components, agricultural commodities, and jewelry—continue to drive the economy, accounting for as much as three-quarters of GDP.
Thailand’s future economic performance depends partly on continued reform of the financial sector, attracting foreign investment, and improving domestic investment and consumption. The latter two would help 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
Responding to a weakening economy and the onset of mild deflationary pressures, the Bank of Thailand reduced interest rates by 250 basis points, to 1.25%, between December 2008 and April 2009. Although the government directed state-owned financial institutions to increase their lending to small businesses, credit growth remained weak.
In April 2010, the Bank of Thailand extended its policy of keeping the key interest rate at 1.25% due to potential risks associated with the country’s ongoing political tensions. Even so, the bank indicated its intention to re-adjust policy to a normal level after assessing the economic impact from the political crisis.
Thailand’s economy recovered strongly through 2010. In the 2011 budget, the government said it expected GDP growth through 2010 to be in the range of 7.0–7.5%, boosted by a recovery in the global economy, particularly among the country’s Asian trading partners. Having developed its intra-Asia export links, Thailand benefitted strongly from the faster-than-expected recovery among emerging economies. Both exports and tourism benefitted. The private sector improved thanks to high commodity prices for farm produce. Strong machinery imports signaled a return of substantial investment by the private sector.
The government also pointed to the role of its stimulus programs, introduced following the global downturn in 2009. A month after the inauguration of a new government, an economic stimulus package valued at around 1.3% of GDP was approved in January 2009. The package was aimed at providing assistance for low-income earners and the elderly, together with extra spending on skills training and public health programs. There were also tax breaks for small and medium-sized firms and for the property and tourism sectors.
Additionally, the government extended a package of economic stimulus measures implemented by the previous administration by another six months. These measures included lower water and electricity charges, free rides on some of Bangkok’s public buses, and free third-class train rides nationwide.
A further stimulus package, focused on public investment in areas including infrastructure, healthcare, and education, followed in October 2009 (the so-called Thai Khem Kaeng, or Strong Thailand, program). Planned investments over a three-year period are estimated to equate to around 5% of GDP per annum, with state enterprises being responsible for around one-third of the infrastructure program over the three-year period. However, much of the funding for infrastructure is being sought either from public–private partnerships or the domestic debt markets. The establishment of a high-level committee on public–private partnerships chaired by the deputy prime minister was an important step toward enticing the private sector to participate in infrastructure investment.
Economic Performance over 12 Months
During 2011 the economy is expected to grow at 3.5–4.5% with inflation peaking at 3.0%, according to the government’s 2011 budget. Growth will be driven mainly by the continuing positive effects from the stimulus and infrastructure spend of the past two years, plus improvements in the global economy. However, by mid August 2011 there were some real doubts about whether or not the advanced economies in Europe and the United States were going to slide back into recession, so the downside risks to these growth expectations were quite marked. With exports playing such a key role in the Thai economy, exchange rate movements are also a threat to growth since they can adversely impact the competitiveness of Thai goods and services.
The 2011 budget set out expenditure of US$65.2 billion, up 28% on the figure in 2010. This is equivalent to 19.4% of GDP.
An IMF report at the end of 2010 anticipated growth of 4% for Thailand in 2011 but welcomed sustained expenditure, particularly on infrastructure, as being key to strengthening Thailand’s economic prospects. However, generating the necessary budgetary resources will be challenging, it said. Two things the IMF wants the Thai government to do are to widen the corporate and personal income tax base by reducing exemptions and deductions. Also, with VAT currently set at 7%, there is considerable scope to raise the VAT level to generate additional revenues.
According to the IMF, the Bank of Thailand has done an excellent job following the Asian crisis of the 1990s in building a stable and robust financial sector. It has consolidated the sector, producing larger institutions with high capital adequacy ratios, good profitability, and strong risk management. On the corporate side, the Asian crisis taught companies not to overextend themselves via too much leverage, which put them in a good position to weather the downturn of 2008–09. The government did well in 2010 in returning the budget to surplus and managed to reduce public-sector debt in total to just 37% of GDP. The country’s international reserves have been boosted to ample levels and inflation is running at a low level. The Thai financial sector is stable, but it is now too small to service the economy adequately, according to the IMF, and will need to be expanded. The Thai economy has slipped from being the second largest in ASEAN to fourth place.
Support for Inward Investment and Imports
There are several government agencies designed to support investors, including the Board of Investment (BOI) and the Department of International Trade Promotion (DITP). Companies receiving investment promotion privileges from the BOI are not subject to foreign equity restrictions in the manufacturing sector, and there are no local content requirements nor export requirements, as Thailand’s investment regime is in compliance with WTO regulations.
The BOI opened the One Start One Stop Investment Center (OSOS) in November 2009. It aims to streamline investment procedures by bringing representatives from more than 20 government agencies under one roof.
Via Thailand’s Board of Investment, the government offers a range of tax incentives, support services, and import duty exemptions or reductions. These incentives are directed at the manufacturing and services, chemicals, mechanical and electrical equipment, agricultural products and minerals, ceramics, and some metals sectors.
Specific exemptions for companies setting up businesses in Thailand include: corporate tax holidays of between three and eight years, and a waiver or reduction of import/export duties on equipment used within the business.
GDP growth: 4% (IMF, 2011 est.)
GDP per capita: US$8,100 (2009 est.)
CPI: 3% (official, 2011)
Key interest rate: 1.50% (central bank, July 2010)
Exchange rate versus US dollar: B31.663 (2010)*
Unemployment: 1.6% (2009 est.)
FDI: US$117.9 billion (December 2010 est.)
Current account surplus: US$12.29 billion (2010 est.)
Population: 66,720,153 (July 2011 est.)
* Thai baht
Source: CIA World Factbook except where stated