Country Forecast August 2010

1. Country Forecast August 2010 Thailand Editor: Nick Owen Editorial closing date: 5th August 2010

2. Five-year forecast summary

3. Five-year forecast summary The Economist Intelligence Unit expects the political scene to be turbulent in the next five years, as competing political forces vie for power ahead of the inevitable death of the widely revered monarch, Bhumibol Adulyadej. Thailand’s global business environment ranking improves to 38th (out of 82 countries) in the forecast period (2010-14), from 43rd in the historical period. However, its regional ranking is unchanged, at ninth out of 17 countries. Economic growth will be weak in 2010-14. After shrinking by 2.2% in 2009, real GDP will expand by an average of only 4.4% a year in the forecast period owing to the continued weakness of the global economy, which will hamper activity in Thailand's export-driven economy. The tougher competitive environment will prevent a surge in exports in the latter part of the period. Real GDP growth(%)

4. Five-year forecast summary The forecast for market opportunities is poor. After falling in 2009, personal disposable income will rise only slowly in 2010-11, before growth starts to accelerate in 2012-14. Despite efforts to narrow the wealth divide, there is unlikely to be much change in this respect in the forecast period, with market opportunities remaining limited in rural areas. Prospects for long-term economic growth are heavily dependent on whether governments will have the necessary political authority to enact structural reforms and develop the country's infrastructure in the next five to ten years. Reform of the education system will eventually contribute to rising productivity, but gains in productivity will be limited. Household consumption per head(US$)

5. Business environment rankings Methodology

6. The political environment

7. Political outlook Highlights Thailand's political scene will be turbulent in the next five years. Following the 2006 coup, which ousted the government led by the then prime minister, Thaksin Shinawatra, a new constitution drafted by a military-appointed committee was promulgated. There has since been a rebalancing of power and influence in favour of the establishment (comprising the military, the monarchy and the bureaucracy) at the expense of elected politicians. In the next five years there is unlikely to be a lasting resolution of the protracted power struggle between the old royalist bureaucratic elite and the new capitalist class that is aligned with Thaksin. The current coalition government, which was formed in December 2008, is headed by the Democrat Party. Although the government survived severe civil unrest during the Songkran (Thai New Year) holiday in April 2009, and again in April-May 2010, when anti-government protesters occupied the commercial centre of the capital, Bangkok, it has yet to address the grievances that lie at the root of the crisis. The reign of King Bhumibol Adulyadej, which has spanned more than six decades, could come to an end in the near future, as the king is suffering from a host of ailments. His death will usher in a period of profound uncertainty and prolonged political instability as contending political forces, including the military, the palace, and Thaksin and his supporters, intensify their battle for control over Thailand's future. More from ViewsWire…

8. Demographics

9. Demographic outlook Effective family-planning programmes, sex education and changing social norms, such as later marriages and smaller families, mean that population growth will remain slow in the forecast period, at an average of 0.9%. Despite slow population growth, the number of households is expected to rise rapidly in the forecast period, largely as a result of a reduction in average household size. Internal migration and changing social patterns mean that it is increasingly common for households to consist of nuclear, rather than extended, families. Slow population growth will not reduce the availability of labour: owing to the shortage of job opportunities and political repression in neighbouring countries, migrant labour from Myanmar, Cambodia and Laos will remain abundant in Thailand in the forecast period.

10. The business environment forecast

11. Business environment outlook The Economist Intelligence Unit’s business environment rankings assess a country’s relative attractiveness as an investment location, both globally and regionally. Thailand’s business environment will show a slight improvement in the forecast period (2010-14) compared with the historical period (2005-09), with its score rising to 6.82, from 6.28 previously. Although the country’s global ranking rises, improving from 43rd in 2005-09 to 38th in 2010-14, Thailand remains in ninth place regionally.

12. Macroeconomic environment • The macroeconomic environment will improve in the forecast period, mainly owing to a return to greater stability after the global recession of 2008-09. • After recording a surplus equivalent to 7.7% of GDP in 2009, Thailand’s current-account position will weaken, with the surplus falling to 4.5% in 2010. The surplus will then average 5.3% of GDP in the latter four years of the forecast period. The risk of a payments crisis is low.

13. Fiscal policy Central government budget balance(% of GDP) The government will run budget deficits in 2010­14, but they should be smaller than in 2009, when the deficit reached the equivalent of 4.4% of GDP. The government is also stimulating the economy with a Bt1.4trn (US$40bn) programme of off-budget expenditure, the Thai Khem Khaeng (Strong Thailand) programme. Amid claims of waste, the finance minister, Korn Chatikavanij, has said that the government may not after all seek to borrow an additional Bt400bn (US$12bn) in the next three years, casting doubt on its commitment to the programme. Public debt will rise relative to GDP in 2010-12, before falling back in 2013-14.

14. Monetary policy Money market interest rate(%) • After raising the one-day repurchase (repo) rate from 1.25% to 1.5% in mid-July, signalling the start of the “normalisation” of monetary policy, the Bank of Thailand (BOT, the central bank) will continue raising interest rates. • However, the BOT will not raise the cost of borrowing rapidly, as there are still major risks to the economic recovery, and because core inflation, which stood at 0.7% year on year in the first half of 2010, remains at the low end of the official target range of 0.5-3%. • The authorities are also concerned that raising interest rates too sharply would risk attracting excessive inflows of foreign capital, leading to asset price bubbles.

15. Policy towards private enterprise & competition Privatisation remains a sensitive issue, and the government does not move ahead with efforts to sell state assets. 2010-11: Major problems persist in relation to the enforcement of laws governing the protection of intellectual property. There is no significant progress on privatisation, but the Corporatisation Act may be amended with the aim of clarifying procedures for the transformation of state agencies into public limited companies. 2012-14:

16. Policy towards foreign investment The government avoids making any major amendments to the Foreign Business Act (FBA). Government favouritism towards domestic firms remains limited, but there are problems for some foreign-backed companies, including retailers. 2010-11: Opposition to the sale of assets to foreigners persists, particularly in the utilities sector. A number of segments of the services sector remain protected under the FBA. 2012-14:

17. Foreign trade and exchange controls The government does not pursue bilateral free-trade agreements (FTAs) with major trading partners, but Thailand is party to trade deals concluded by the Association of South-East Asian Nations (ASEAN), of which it is a member. If the baht displays excessive volatility, it could prompt the BOT to reintroduce capital controls. 2010-11: Despite the fact that Thailand is a relatively open economy, unnecessary administrative delays to trade persist owing to the extensive nature of documentary requirements. 2012-14:

18. Taxes The government chooses not to change the value-added tax rate, which stands at 7%. The authorities continue to make efforts to encourage new investment by providing tax incentives. 2010-11: The tax base expands as a result of a comprehensive campaign to legalise the informal economy. A new land and buildings tax comes into effect, and steps are taken towards the introduction of an inheritance tax. 2012-14:

19. Financing Growth in bank lending to corporates remains feeble as a result of the risks that threaten Thailand’s economic recovery. The authorities continue to focus on strengthening the financial sector and increasing its competitiveness. 2010-11: Banks strengthen their financial position, and the regulatory environment is improved further. The BOT tries to expand the local bond market, primarily by developing a more active secondary market. 2012-14:

20. The labour market Labour costs (adjusted for productivity) are still low. Shortages of skilled labour remain a concern. 2010-11: Trade unions remain weak but strongly oppose privatisation. There is a steady increase in the availability of technically skilled labour, but the tertiary-education system remains ineffective. 2012-14:

21. Infrastructure The government pushes ahead with large-scale infrastructure programmes, including several large railway projects, but there could be delays. Radio spectrum and licences are allocated for third-generation (3G) mobile-telephony services (which allow phones to connect to the Internet, send and receive video clips, and download and send e-mail). 2010-11: Progress is made on a number of transport infrastructure projects, which move into the construction phase. The government continues to explore the potential for nuclear energy. 2012-14:

22. The economic forecast

23. International assumptions Economic growth (%) After a period of rapid recovery from the worst of the 2008-09 economic crisis, leading indicators continue to point to a mild weakening of growth in the developed world. However, the Economist Intelligence Unit does not expect any of the large developed economies to slip back into full-blown recession in the short term. We expect global growth of 4.2% in purchasing power parity (PPP) terms in 2010. Global growth will slow in 2011, to 3.6% at PPP rates. International oil prices (dated Brent blend) will average US$80/barrel in 2010 and US$78.5/b in 2011, up from US$61.9/b in 2009.

24. Economic outlook Economic outlook(% real change) Economic growth in Thailand will be unimpressive in the forecast period. After shrinking by 2.2% in 2009 (to register its first annual contraction since the 1997-98 Asian financial crisis), real GDP will expand by an average of 4.4% a year in the forecast period (2010-14). A subdued global economic performance will hamper Thailand's export-driven economy in the next few years, and a more competitive environment will prevent a surge in exports in the latter part of the forecast period. In the early part of the period, and possibly beyond, domestic demand will be adversely affected by continuing political turmoil, which will weigh on the confidence of consumers and investors.

25. Wage and price inflation Consumer price inflation(%; annual av) Owing to higher international prices for oil and other commodities, consumer price inflation in Thailand will accelerate to 3.6% in 2010, following a year of mild deflation in 2009. Inflation will be within the 2-3% range in 2011­14. The economy's growth trajectory will not be steep enough to generate substantial demand-pull inflation. As unemployment remains high, there will be no significant upward pressure on wages. In the forecast period real wages will rise only slowly, increasing by an average of 1.2% a year in local-currency terms. The limited increase in nominal wages in the forecast period will reflect the flexibility of the labour market, the weakness of trade unions, the sizeable and growing workforce, and the steady supply of migrant labour from Myanmar, Laos and Cambodia.

26. Exchange rates Exchange rates We expect Thailand’s currency, the baht, to appreciate by 5.5% on an annual average basis in 2010 as the economy’s strong fundamentals, and particularly the healthy current-account position, counter any negative sentiment arising from the political turmoil affecting the country. A wide differential between Thai and overseas interest rates will also support the currency as the Bank of Thailand (the central bank) continues to tighten monetary policy after raising its policy interest rate, the one-day repurchase (repo) rate, for the first time in two years in mid-July 2010.

27. External sector External sector(US$ bn unless otherwise indicated) Thailand's current-account surplus will fall in 2010, owing mainly to a contraction in the trade surplus as imports expand more rapidly than exports. It will then rise steadily in 2011-14. The services deficit will remain large. Hopes of a revival in tourism receipts have been dashed by violent clashes this year in the main shopping and tourist district of the capital, Bangkok. Services outflows will rise later in the forecast period as a result of higher trade volumes. On the income account, debt-servicing costs will remain fairly low. However, repatriation of dividends and profits by foreign investors will mean that income outflows remain high.

28. Foreign direct investment

29. Foreign direct investment Stocks and flows After growing since 2003, net foreign direct investment (FDI) inflows (including earnings reinvested by companies already operating in the country) fell in 2008 as continued political instability and the global financial crisis took their toll. In 2008 net FDI inflows were worth US$7.3bn. Despite heightened political instability since 2006, inward FDI has been supported in recent years by cheap credit in developed countries (although such cheap finance has ceased to be available since late2008). In 2008 the stock of inward FDI stood at an estimated US$100.9bn, equivalent to 40% of GDP or US$1,500 per head of population. Inward foreign direct investment stock, 2010(% of GDP)

30. Foreign direct investment Determinants Thailand has traditionally been an attractive investment destination, owing to its relatively competitive labour costs, low cost of living and flexible labour laws. Incentives offered by the Board of Investment (a government agency charged with promoting investment) generally take the form of exemptions from corporate income tax and duties on imported machinery. Thailand has generally been regarded as open to foreign investment. However, foreign investor sentiment deteriorated steadily in 2007, when the military-appointed interim government attempted (albeit unsuccessfully) to amend the Foreign Business Act in a manner that was widely interpreted as being nationalistic. The changes were aimed at removing ambiguities in the law that have been used by foreign firms to evade restrictions on overseas ownership of companies in certain sectors. Inward foreign direct investment stock per head, 2010(US$)

31. Foreign direct investment Potential Thailand has suffered from a high degree of political uncertainty since the September 2006 military coup, and continues to do so. Owing to the global economic downturn and the fact that the political scene is set to remain unstable, foreign investors are likely to take a wait-and-see approach to major investment plans. Aside from concerns over short-term political instability, there are still a number of weaknesses that limit the potential for strong growth in FDI in Thailand in the next five years. The country's attractiveness as a location for investment has been diminishing, owing to a rising cost base and uncertainty about political commitment to liberalisation. The country's poor infrastructure, a result of underinvestment since the 1997-98 Asian financial and economic crisis, has been another factor deterring potential investors. Annual inflows of foreign direct investment(US$ m)

32. Market opportunities

33. Market opportunities GDP per head(US$ at PPP) After falling in 2009 in line with the contraction in the economy, disposable income per head will rise steadily in the forecast period (2010-14), although it will grow at a slightly slower pace than in 2005-09. This partly reflects the fact that income levels rose strongly in the early years of the 2000s as a result of populist government policies. Despite efforts to narrow the wealth divide, there is unlikely to be much change in this respect in the forecast period, with market opportunities remaining limited in rural areas. A relatively small proportion of personal disposable income is spent on accommodation, leaving a greater share for expenditure on consumer goods. Demand for consumer goods is therefore high in Thailand compared with many other countries in South-east Asia.

34. The long-term forecast

35. Long-term outlook Real GDP growth(% annual change) The long-term outlook is heavily dependent on whether the governments that hold office in the next five to ten years possess the political authority required to push through structural reforms and develop the country’s infrastructure. GDP growth will accelerate in the next 20 years but will be sluggish relative to that of other Asian economies. Reform of the education system has long been promised, but successive governments have largely failed to modernise the curriculum or increase the number of students receiving secondary- and tertiary-level education. As a result, the Thai workforce is characterised by a lack of technological skills and poor foreign-language ability.

36. Long-term outlook Demographic trends:Thailand's population will age in the long-term forecast period, with the median age set to rise from just over 30 years to around 40. Slower population growth, coupled with longer life expectancies—even taking into account the expectation that deaths from HIV/AIDS will limit the increase in longevity—will account for the demographic shift. By 2030 it is estimated that about 13% of the population will be over 65 years old, compared with only around 6.3% in 2000. The workforce (using the Thai definition of people aged 15-65 years) will account for a slightly smaller share of the population in 2030. External conditions: Thailand faces a challenging external environment in the forecast period, largely owing to the inexorable rise of its huge neighbour, China. Thailand's traditional labour­intensive export industries, particularly textiles and footwear, are already suffering from a lack of competitiveness compared with China and even cheaper locations, such as Cambodia, Vietnam and Bangladesh. The government is aware of Thailand's problems in maintaining competitiveness, and has been trying to promote niche industries in which the country has, or could quickly develop, a comparative advantage. However, China's economic expansion will also provide Thailand with opportunities for growth. Long-term performance: The Economist Intelligence Unit is optimistic that the plans to bring about significant improvements in Thailand's transport network (and thus reduce the production and distribution costs of businesses) will be implemented. Thailand's competitiveness in relation to its regional neighbours has been declining, owing to the generally slow progress in implementing comprehensive liberalisation in important sectors, such as power and communications.

37. Long-term outlook GDP per head(US$ at PPP; index, US=100) Nominal GDP(US$ at PPP; index, Thailand=100)

38. Resources

39. Map

40. Comparative GDP, 2009 Gross domestic product(US$ bn; market exchange rates) Gross domestic product per head(US$; market exchange rates)

41. Basic data Land area 514,000 sq km Population 65.74m (2007) Climate Subtropical Weather in Bangkok Hottest month, April, 35-40°C; coldest month, December, 20-31°C; driest months, January-March, no rain; the wettest month in central and northern regions is September, with 305 mm average rainfall, and in the south is December, with 400 mm average rainfall Language Thai Currency Baht (Bt); Bt1 = 100 satang Time 7 hours ahead of GMT Public holidays January 1st (New Year's Day); February 1st (Makhabuja—regulated by Buddhist calendar); April 6th (Chakri Day); April 13th-15th (Songkran Festival); April 28th (Visakhabuja—regulated by Buddhist calendar); May 1st (Labour Day); May 5th (Coronation Day); July 1st (beginning of Buddhist Lent—regulated by Buddhist calendar); August 12th (Mother's Day—the queen's birthday); October 23rd (Chulalongkorn Day); December 5th (Father's Day—the king's birthday); December 10th (Constitution Day); December 31st (New Year's Eve)

42. Business environment rankings: Methodology Outline of the model The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by Country Forecasts using a standard analytical framework. It is designed to reflect the main criteria used by companies to formulate their global business strategies, and is based not only on historical conditions but also on expectations about conditions prevailing over the next five years. This allows the Economist Intelligence Unit to utilise the regularity, depth and detail of its forecasting work to generate a unique set of forward-looking business environment rankings on a regional and global basis. The business rankings model examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure. Each category contains a number of indicators that are assessed by the Economist Intelligence Unit for the last five years and the next five years. The number of indicators in each category varies from five (foreign trade and exchange regimes) to 16 (infrastructure), and there are 91 indicators in total. Almost one-half of the indicators are based on quantitative data (eg, GDP growth), and are mostly drawn from national and international statistical sources for the historical period (2005-09) and from Economist Intelligence Unit assessments for the forecast period (2010-14). The other indicators are qualitative in nature (eg, quality of the financial regulatory system), and are drawn from a range of data sources and business surveys adjusted by the Economist Intelligence Unit, for 2005-09. All forecasts for the qualitative indicators covering 2010-14 are based on Economist Intelligence Unit assessments. The main sources used in the business rankings model include CIA, World Factbook; Economist Intelligence Unit, Country Risk Service, Country Finance, Country Commerce; Freedom House, Annual Survey of Political Rights and Civil Liberties; Heritage Foundation, Index of Economic Freedom; IMF, Annual Report on Foreign Exchange Restrictions; International Institute for Management Development, World Competitiveness Yearbook; International Labour Organisation, International Labour Statistics Yearbook; UN, Human Development Report; US Social Security Administration, Social Security Programs Throughout the World; World Bank, World Development Report; WorldDevelopment Indicators; World Economic Forum, Global Competitiveness Report. Back to Rankings

43. Business environment rankings: Methodology Calculating the rankings The rankings are calculated in several stages. First, each of the 91 indicators is scored on a scale from 1 (very bad for business) to 5 (very good for business). The aggregate category scores are derived on the basis of simple or weighted averages of the indicator scores within a given category. These are then adjusted, on the basis of a linear transformation, to produce index values on a 1-10 scale. An arithmetic average of the ten category index values is then calculated to yield the aggregate business environment score for each country, again on a 1-10 scale. The use of equal weights for the categories to derive the overall score reflects in part the theoretical uncertainty about the relative importance of the primary determinants of investment. Surveys of foreign direct investors' intentions yield widely differing results on the relative importance of different factors. Weighted scores for individual categories based on correlation coefficients of recent foreign direct investment inflows do not in any case produce overall results that are significantly different to those derived from a system based on equal weights. For most quantitative indicators the data are arrayed in ascending or descending order and split into five bands (quintiles). The countries falling in the first quintile are assigned scores of 5, those falling in the second quintile score 4 and so on. The cut-off points between bands are based on the average of the raw indicator values for the top and bottom countries in adjacent quintiles. The 2005-09 ranges are then used to derive 2010-14 scores. This allows for intertemporal as well as cross-country comparisons of the indicator and category scores. Measurement and grading issues The indices and rankings attempt to measure the average quality of the business environment over the entire historical or forecast period, not simply at the start or at the end of the period. Thus in the forecast we assign an average grade to elements of the business environment over 2010-14, not to the likely situation in 2014 only. The scores based on quantitative data are usually calculated on the basis of the numeric average for an indicator over the period. In some cases, the "average" is represented, as an approximation, by the recorded value at the mid-point of the period (2007 or 2012). In only a few cases is the relevant variable appropriately measured by the value at the start of the period (eg, educational attainments). For one indicator (the natural resources endowment), the score remains constant for both the historical and forecast periods. Back to Rankings

44. Indicator scores in the business rankings model aOut of 17 countries: Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. Note. A single asterisk (*) denotes scores based on quantitative indicators. Indicators with a double asterisk (**) are partly based on data. All other indicators are qualitative in nature.

45. Indicator scores in the business rankings model aOut of 17 countries: Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. Note. A single asterisk (*) denotes scores based on quantitative indicators. Indicators with a double asterisk (**) are partly based on data. All other indicators are qualitative in nature.

46. Indicator scores in the business rankings model aOut of 17 countries: Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. Note. A single asterisk (*) denotes scores based on quantitative indicators. Indicators with a double asterisk (**) are partly based on data. All other indicators are qualitative in nature.

47. Indicator scores in the business rankings model aOut of 17 countries: Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. Note. A single asterisk (*) denotes scores based on quantitative indicators. Indicators with a double asterisk (**) are partly based on data. All other indicators are qualitative in nature.

48. Indicator scores in the business rankings model aOut of 17 countries: Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. Note. A single asterisk (*) denotes scores based on quantitative indicators. Indicators with a double asterisk (**) are partly based on data. All other indicators are qualitative in nature.

49. Indicator scores in the business rankings model aOut of 17 countries: Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. Note. A single asterisk (*) denotes scores based on quantitative indicators. Indicators with a double asterisk (**) are partly based on data. All other indicators are qualitative in nature.

50. Indicator scores in the business rankings model aOut of 17 countries: Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. Note. A single asterisk (*) denotes scores based on quantitative indicators. Indicators with a double asterisk (**) are partly based on data. All other indicators are qualitative in nature.