After an unprecedented real gross domestic product (GDP) contraction of 10.2 percent in 1998, the economy began showing positive signs of recovery in the beginning of 1999. Real GDP growth in 1999 was 4.2 percent, led by the manufacturing sector and increased domestic demand boosted through several government stimulus packages. The capacity utilization rate in the manufacturing sector increased to 63 percent from slightly more than 50 percent in 1998. While this was still below normal levels of 70 to 80 percent, manufacturing was nevertheless the engine of economic recovery, with a growth rate of around 11.3 percent in 1999.

Vehicle and transportation equipment production showed the highest rate of growth. New vehicle models boosted domestic demand, and exports expanded as foreign vehicle producers used Thailand as a production center for regional manufacturing. Agriculture showed modest growth of 0.5 percent, with increased production of major crops such as rice, rubber, maize, and cassava partly offset by a sharp decline in farm prices. Domestic demand, which had contracted sharply the previous year, picked up, particularly in the second and third quarters of 1999, and rose to 8.5 percent for the year. Private consumption grew moderately, resulting in part from rising consumer confidence, and modestly expanding farm income. Government stimulus measures, which included reducing the value-added tax rate from 10 to 7 percent and cutting taxes on petroleum products, also helped boost private consumption.

Tourism continued to grow, with the number of tourists reaching 8.5 million in 1999, a 10.1 percent increase from the previous year. The private/business sector investment index declined moderately in 1999, compared with a steep decline in 1998.

INFLATION

Following a year of relatively high inflation of 8.1 percent in 1998, the price level was remarkably stable in 1999. Despite upward pressure from rising oil prices in the world market, inflation was contained at 0.3 percent, the lowest level recorded since Thailand started compiling the index more than 50 years ago. The exchange rate and most commodity prices (aside from oil) remained stable, while domestic demand recovery did not generate upward pressure on prices.

EMPLOYMENT

The economic crisis has resulted in historically high unemployment since mid-1997. The unemployment rate before the crisis was around 1.51 percent. By 1998, this figure had almost tripled to 4.37 percent of the total labor force, and underemployment had increased significantly. The situation eased somewhat in 1999, as the unemployment rate declined slightly to 4.17 percent. Public programs boosted temporary employment, and the agriculture sector absorbed a significant number of laid-off urban workers who had returned to their provinces. Furthermore, both output and employment growth remain below pre-crisis growth rates, after falling sharply in 1998.

TRADE ACCOUNTS

While trade and current account surpluses fell slightly in 1999, external sector performance nevertheless improved significantly as export earnings in dollar terms increased by 7.4 percent. Import growth was higher at 17.7 percent, resulting in a decline in the trade surplus from 10.8 percent of GDP in 1998 to 7.4 percent in 1999. The current account surplus fell from 13.3 percent of GDP in 1998 to 9.1 percent in 1999. Meanwhile, despite increased inflows of foreign direct investments, net capital movements registered a deficit of US$6.1 billion, reflecting large private capital outflows as commercial banks continued to repay their external debts, in particular Bangkok International Banking Facility offshore loans. (This organization, established in 1993, allows licensed banks to operate offshore, borrow abroad, and lend to domestic borrowers in foreign currencies.)

GROSS EXTERNAL DEBT

In December 1999, external debt stood at US$95.6 billion, down from US$105.1 billion at the end of 1998; the share of short-term debt also declined from 27 percent to 21 percent of total external debt during the same period. However, public sector debt as a proportion of total external debt has almost tripled since the crisis began in July 1997, and accounted for 38 percent of total debt. Official international reserves increased to a comfortable level of US$34.8 billion (approximately 9 months of import equivalent) in December 1999. This was remarkable because international reserves essentially had been depleted by December 1997. The high level of reserves prompted the government to suspend disbursement of the US$3.5 billion installment due for disbursement under the US$17.2 billion International Monetary Fund package of August 1997. The exchange rate remained stable at around 37-39 baht per US$ in 1999.

To sum up, with the exception of private investment and commercial bank credits, indications of recovery are growing. Private consumption and manufacturing production picked up in particular in the second and third quarter of 1999, and the performance of the external sector steadily improved.

EXCHANGE RATE

At the onset of the crisis, the Baht depreciated substantially to 53.7 baht per US$ in January 1998. With sound stabilization measures including various structural reform measures undertaken by the government, the baht has become stable and less volatile. The appreciation of the baht was helped by a steady gain in international reserves, a decline in short-term foreign debt, as well as the stability in the regional currencies markets. By the end of 1999, the exchange rate was 37.84 baht per US$, about 49 percent lower than its pre-crisis level of 25.34 baht per US$ at the end of 1996.

FISCAL POLICY

In 1999, the government maintained the expansionary fiscal stance adopted in 1998, after the fiscal and monetary targets of the adjustment program of 1997 and early 1998 plunged the economy into a deep recession. The government continued to relax its public sector deficit target. Under the Eighth Letter of Intent to the International Monetary Fund in September 1999, the consolidated deficit ¨C including the cost of financial restructuring, estimated at 1.7 percent of GDP ¨C was projected at 7.2 percent of GDP for 1999, compared with 5.5 percent the previous year. During 1999, the government launched two economic stimulus packages, along with tax and tariff reductions. The March 1999 package was aimed at stimulating domestic demand, providing liquidity for key sectors such as exports and agriculture, and providing a social safety net to minimize the impact of the crisis on the poor. The second fiscal package, introduced in August 1999, was aimed at stimulating sluggish private investment and included tax measures, equity investment measures, measures to promote recovery of the real estate sector, and measures to restructure financial facilities for small and medium-sized enterprises (SMEs).

MONETARY POLICY

Despite an easing of monetary policy, the growth rate of money supply continued to slow in 1999, in line with the decrease in commercial bank credits and deposits. At the end of 1999, the increase in money supply (M2) and M2A (including finance and securities companies) was 2.1 percent and 1.3 percent, respectively, compared with 9.5 percent and 6.1 percent at the end of the previous year. With high liquidity in the money market, interest rates dropped to very low levels, with the interbank rate at 1.23 percent, prime rate at 8.25 ¨C 8.50 percent, and deposit rates at 4.00 ¨C 4.25 percent in December 1999. However, the credit crunch continued because of the banks¡¯ concern with existing levels of non-performing loans (NPLs), and tightened loan-loss provisioning and capital adequacy requirements. Credit extension by commercial banks posted negative growth throughout; the total amount of NPLs in this financial sector was 2,074 billion baht, or 38.5 percent of total loans outstanding in December 1999.

MEDIUM-TERM OUTLOOK

The economy is expected to build on its 1999 performance, growing at a slightly higher rate in 2000 and 2001, but not to return to pre-crisis growth levels. Capacity utilization in the manufacturing sector should reach normal levels of around 70 percent in the first half of 2000, which should be reflected by a return to positive private/business sector investment levels.

While the recovery in 1999 was primarily export-driven with additional support from public stimulus measures and tourism, domestic consumption must rise if GDP growth is to continue in 2000 ¨C 2001. In the financial sector, the transfer of bad bank loans to newly established Asset Management Companies (AMCs) is expected to reduce the level of NPLs held by commercial banks by 2001. However, if these plans are derailed, banks are unlikely to undertake the required volume of new lending to fund a sustained recovery in production and economic growth. As demand catches up and capacity utilization rises, inflation in 2000 is forecast at about 2.5 to 3 percent.

Implementation of the August 1999 fiscal package, along with continued financial restructuring, will keep the consolidated deficit at 6 to 7 percent of GDP in 2000. If the growth rate of trade continues, the trade surplus will continue to shrink to about 4 percent of GDP in 2000. This will also translate into a decline in the current account surplus to about 5 to 6 percent of GDP. Gross official reserves are expected to be maintained at the same level in 1999, and external debt and the debt-service ratio are expected to decline further.

THAILAND: OVERALL ECONOMIC PERFORMANCE