Modest/uneven economic growth Dilemma in financial system Globalization to impact investment flows

1. Thailand : Economy and Stockmarket • Modest/uneven economic growth • Dilemma in financial system • Globalization to impact investment flows • Increasing industry consolidation • Selective investment opportunities • Stockmarket Outlook 13 November 2000

2. Thailand Economy : Modest growth ahead • As the Bank of Thailand sees it :- • GDP Growth of 4.5-5.0% in 2000 and 4.0-5.5% in 2001 • Core inflation of 1.5-2.0% in 2000 and 2.0-3.0% in 2001 • Export growth of 15-20% in 2000 and 6.0-12% in 2001 • Import growth of 28-32% in 2000 and 10-15% in 2001 • A CA surplus of US$9-10bn in 2000 and US$6-8bn in 2001

3. Quarterly Economic Performance

4. Economy : Reasons to be cautions on growth • There are several reasons why economic growth could disappoint :- • Nominal growth rates are very low by historic comparison (no chance to “grow” out of trouble) • Deflationary pressures • FDI flows are sluggish • Limited room for the government to borrow further • Continued weakness in the banking sector • Corporate loan demand is constrained (leverage/int.rates) • Government has talked reform, but implementation weak • US economic landing may not be soft • High oil prices • Weak Euro has hit purchasing power in Euro-land • On this basis, we are more comfortable with 4% rather than 5.5% growth in 2001

5. Economy : Growth is patchy ……... • There are undoubtedly bright spots :- • Exports are strong (+22% ytd) • Vehicles sales have jumped (+30% ytd) • Mobile phone sales are buoyant (+35% ytd) • Electricity consumption is rising • SET earnings are improving • Significant refinancing of US$debt with Baht debt • But look at :- • Industrial Capacity Utilisation (58% in September) • Manufacturing production fell 0.5% YoY in 3Q • Cement sales fell 11% YoY in 3Q • Commercial Bank credit (ex-BIBF) fell 9.4% YoY to September • Passenger car sales rose 2% YoY in 3Q

6. Economy : …. And likely to stay that way • The scope for the current economic recovery to broaden appears limited • Government borrowing levels are high (and an election is imminent) • Consumer confidence is still lacking (dampened by low agricultural prices and limited job creation in manufacturing/construction) • Bank deposit rates are low • Investment is subdued, though there is scope for a modest acceleration in 2001 • For the foreseeable future, growth drivers will remain :- • Manufactured exports • Tourism • Vehicle (manufacturing) • Telecommunications • Petrochemicals

7. The Financial System : A major dilemma • Still high levels of NPLs • Domestic banks under-capitalised to clear bad debts (encourages delaying tactics) • Restructuring focused on large companies. • Infrastructure for delivery of loans to SMEs is (to say the least) inadequate • Bankruptcy laws still weak • Democrat government opposed to national AMC, yet few alternatives • Scope to revive bank lending (an engine for economic growth) is limited • High bank spreads have failed to restore shareholders equity (and borrowers have suffered) • Limited scope to lower deposit rates (politically sensitive) • Tax regime discourages M&A activity

8. Non-Performing Loans : Bank Sector

9. Globalization to Impact Investment Flows • Capital allocation to follow “Western” norms • Profile of emerging markets in portfolio flows is also changing • IT revolution changing nature of competition • Increasing importance of (western) standards of corporate governance • International standards of fiscal/monetary management • Thailand scores badly on corporate governance (but is not alone in this regard in Asia) • Thailand scores well on monetary management (shift to inflation targeting), but less well in fiscal management • Thailand is a proven destination for outsourcing assembly/manufacturing, but scope to attract services seems limited • Continuing concerns over education, corruption, politics • Investors will focus on core competencies (such as export assemble, tourism)

10. Industry Consolidation : Making the strongstronger • Thai industry needs to consolidate if it is to be competitive in a globalised / liberalised market • There is evidence of consolidation in the Thai market place :- • The string of collapses in the banking and finance sectors • Superstores gaining market share in the retail sector • However, Thai tax laws stand in the way of M&A activity • Foreign ownership laws still prohibitive • Consolidation is on the (immediate) horizon in steel, cement and petrochemicals

11. Thailand : Investment Opportunities • Lack of investor interest in Thai stocks is hitting the prices of both fundamentally sound and unsound companies • Select companies are fundamentally undervalued absolutely and relatively • Thailand does have companies that aspire to international standards of competitiveness and corporate governance. These include Shinawatra Group, Siam Makro, BEC World, Hanna Microelectronics and Delta Electronics • There are growth segments in the economy and companies growing within these segments. Exporters are well placed to grow, as are the superstores as they expand into upcountry markets. • There are companies gaining market share in segments which may themselves be (temporarily) depressed • There are companies which are emerging from fundamental problems, where the recovery is not being recognised by the market.

12. Thailand Stockmarket : Outlook • Volatile nearterm (election uncertainty and external +/- against a sluggish domestic economic backdrop) • Scope for recovery in 2001 (driven by “value”, political stability, lower oil prices, an easier monetary policy in the US and a (hoped for) soft landing of the US economy, supporting a positive external environment for Thai exports) • Risks are an unsatisfactory election outcome, a hard landing by the US economy, slowing economic growth, domestically, and deteriorating bank NPLs

13. Thailand Stockmarket : Foreign Investor Activity • Foreign premia stabilising • Worst of foreign selling may be over • MSCI re-weightings (based on free float) will likely be marginally negative for Thailand