Inflation Report - thanachart.co.th · 2016-02-15 · Mr. Aswin Kongsiri Member . Inflation Report October 2012 ... that the taxes would resume in early 2013. This changed assumption,

Inflation Report October 2012

Inflation Report

October 2012

The Inflation Report is prepared quarterly by staff of the Bank of Thailand with the approval of the Monetary Policy Committee (MPC). It serves two purposes: (1) to provide a clear forward-looking framework for economic and inflation forecasting to assist the MPC in making monetary policy decisions and (2) to give the MPC an opportunity to present the explanation for their decisions on various policy issues to the public.

Although individual MPC members may have differing opinions regarding the assumptions on which the forecasts are based, as a group they are in agreement with the forecasts on the outlook for inflation and output as well as the risk factors involved as illustrated in the fan charts.

The Monetary Policy Committee:

Mr. Prasarn Trairatvorakul Chairman

Mrs. Pongpen Ruengvirayudh Vice Chairman

Mrs. Tongurai Limpiti Member

Mr. Ampon Kittiampon Member

Mr. Narongchai Akrasanee Member

Mr. Siri Ganjarerndee Member

Mr. Aswin Kongsiri Member


Thailand Monetary Policy Strategy

Monetary Policy Formulation

• The Monetary Policy Committee (MPC) sets monetary policy in order to attain price stability conducive to sustainable economic growth. The MPC also monitors factors contributing to external stability and financial imbalances.

The Monetary Policy Instrument

• The MPC utilizes the 1-day bilateral repurchase transaction rate as the key policy rate to signal the monetary policy stance.

The Target

• The MPC uses core inflation (excluding raw food and energy) as its policy target with the range of 0.5-3.0 percent (quarterly average). In the event that the target is missed, the MPC is required to explain the reasons thereof to the public.

Forecasting Tools

• To assist the MPC in making monetary policy decisions, the Bank of Thailand has developed a macroeconomic model to forecast economic conditions and inflation outlook. The model is also employed to evaluate the impact of various factors on the economy and to offer guidelines for appropriate monetary policy responses.


Contents

1. Growth and Inflation Prospects and Monetary Policy 1

1.1 Growth and inflation prospects 1

1.2 Economic outlook 3

1.3 Inflation pressure 11

1.4 Monetary policy decisions 13

1.5 Appendix 15

2. Recent Economic Developments 17

2.1 The global economy 17

2.2 The domestic economy 24

2.3 Costs and prices 34

3. Monetary and Financial Stability 37

3.1 Financial markets 37

3.2 Financial institutions 39

3.3 Non-financial sectors 42

BOX: Quantitative Easing III and its impact on Thai economy 47

Inflation Report October 2012 1

1. Growth and Inflation Prospects and Monetary Policy

1.1 Growth and inflation prospects

Thailand’s growth starts to decelerate to normal amid softened inflation outlook.

The Thai economy is poised to moderate in the second half, as short-term factors fueling first half’s rebound dissipated (Chart 1.1). Flood reconstruction tapered off sooner than expected, while pent-up consumption demand has already been met. Meanwhile, the impact of sluggish global demand on exports has become more apparent. The MPC, however, assesses well-supported domestic demand to help offset export weakness to some degree, thus keeping this year’s growth forecast unrevised. But going forward, the global economy will likely weigh on exports and

The Thai economy is poised to moderate in the second half of the year, after short-term factors fueling first half’s demand pick-up dissipated. The impact of sluggish global demand on exports and related manufacturing production has also become more apparent, possibly weighing on investment going forward. The MPC, however, views well-supported domestic demand to help cushion against global economic risks to some degree. Looking ahead, inflation is viewed to soften further. Demand pressure subsides with domestic growth that is expected to lose some momentum due to the global slowdown, while cost pressure moderates with next year’s softer global oil prices.

The majority of the MPC deemed in its latest meeting that, with upside risks to inflation contained, monetary policy easing was warranted to shore up domestic demand in the period ahead and ward off the potential impact from the global economy, which remained weak and fragile. The MPC thus voted 5 to 2 to reduce the policy rate by 0.25 percent, from 3.00 to 2.75 percent per annum.

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Chart 1.1 Thailand’s GDP growthQuarterly percentage change (seasonally adjusted)

OutturnIR Oct 12 forecast

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Note: At 1988 prices (seasonally adjusted)

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private investment more than assessed, driving down next year’s growth projection (Table 1.1).

The global economy, given its weak prospects and high uncertainty, continues to be the major source of downside risks to growth. Recovery in the euro area and the U.S. will take time given lackluster momentum overall. On the other hand, Asian economies will suffer more visibly from the global economy in line with further signs of export slowdown. While recent monetary policy easing in Europe and the U.S. helps support near-term sentiment, the MPC deems that such efforts are unlikely to change the deteriorated global growth outlook. Unanticipated risks to Thailand’s growth from the domestic front also exist, though somewhat balanced. Implementation uncertainty and disbursement delay pose some risks to public spending under the 350-billion-baht water management plan. But on the upside, the government may also manage to expedite its long-term infrastructure investment commanding a total sum of 2.27 trillion baht. Looking ahead, the MPC judges downside risks to growth to dominate, mainly from global economic risks. The fan chart for growth is thus skewed downward over the projection period (Chart 1.2).

Inflation pressure is viewed to soften in the period ahead. Demand pressure subsides with (1) domestic growth outlook that is more affected by the global slowdown; and (2) flood reconstruction that tapered off early, while cost pressure also softens partly from next year’s softer global oil prices. These views, altogether,

Table 1.1 Forecast summary

Percent 2011* 2012 2013

GDP growth 0.1 5.7 4.6(5.7) (5.0)

Headline inflation 3.8 3.0 2.8(2.9) (3.4)

Core inflation 2.4 2.1 1.7(2.2) (1.9)

Note: * Outturn( ) Inflation Report July 2012

Source : Office of the National Economic and Social Development Boardand calculation by Bank of Thailand

Annual percentage change

Note: The fan chart covers 90 percent of the probability distribution.

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Chart 1.2 GDP growth forecast

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result in lower core inflation forecasts. Additionally, the MPC also revises its assumption that the government would postpone the reintroduction of fuel excise taxes over the projection period, compared to the previous view that the taxes would resume in early 2013. This changed assumption, in effect, drives down next year’s headline forecast substantially. Looking ahead, the MPC judges risks to inflation to remain weighed to the downside, given greater risks to domestic growth due to the global slowdown. Accordingly, the fan charts for inflation remain skewed downward over the forecast period (Chart 1.3 and 1.4).

1.2 Economic outlook

Thailand’s growth momentum starts to decelerate back to normal, while the impact of slowing global economy on exports and investment may be more than assessed.

The Thai economy is poised to moderate to its normal trend in the latter half of the year, after near-term factors fueling first half’s demand surge waned off. Exports and investment are also viewed to suffer from the global economy more than assessed. Nonetheless, overall strength in domestic demand will help sustain near-potential economic growth in the period ahead.

Growth momentum decelerating to normal

The Thai economy is poised to moderate to its normal trend in the latter half of the year, as near-term factors fueling first half’s demand pick-up dissipated. In particular, private sector’s reconstruction investment tapered off earlier than

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Chart 1.4 Core inflation forecast

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expected, and pent-up consumption demand has already been met. The impact of weak global demand on exports and relataed manufacturing production has also become more apparent, as reflected in slowing foreign orders and capital utilization for export-oriented industries such as hard-disk drives and integrated circuits, as well as in falling imports of capital goods and raw materials. The MPC, however, assesses domestic demand momentum to sustain, which will help offset the negative impact of the global economy and support near-potential economic growth in the period ahead (Chart 1.5 and Table 1.2).

Overall, the MPC keeps its growth forecast for 2012 unrevised at 5.7 percent, assessing domestic demand to retain traction despite some moderation hinted by investment and import indicators. For 2013, growth is projected to continue, but at a pace slower than expected due to: (1) persisting weakness and concerns in the global economy, which are likely to affect exports and domestic spending more than expected; and (2) delayed disbursement for government’s investment on water management projects.

More weakness in global growth outlook Recent easing in major economies may help support near-term sentiment, but is unlikely to change the deteriorated global growth outlook.

Thailand’s trading partners’ economies are viewed to weaken from the previous assessment (Chart 1.6), especially for advanced economies where growth is likely to remain subpar given the prolonged and widespread impact of the European sovereign debt crisis. The MPC projects

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Chart 1.5 Level of GDPBillion baht

Q1 Q1 Q1 Q12011 2012 2013 2014

IR Jul 12 forecastIR Oct 12 forecast

Source: Office of the National Economic and Social DevelopmentBoard and calculation by Bank of Thailand

Note: At 1988 prices (seasonally adjusted)

Table 1.2 Forecasts for GDP and componentsPercent 2012 2013

GDP growth 5.7 4.6 Domestic demand 6.8 5.3 Private consumption 5.8 3.8 Private investment 12.4 6.8 Government consumption 3.0 2.5 Public investment 6.3 21.7 Exports of goods and services 3.5 9.6 Imports of goods and services 5.9 11.0

Note: At 1988 prices

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Chart 1.6 Growth assumptions for Thailand’s trading partners

Left axis: Jul 12 (baseline) Right axis: Change in baselineOct 12 (baseline) assumptions

Oct 12 (worse case)


the euro area’s economy to contract for the rest of the year as previously assessed (Chart 1.7). While the debt crisis is not expected to intensify much further, delayed resolution and implementation hurdles will continue to affect businesses and investors’ confidence. Core member countries’ exports to non-euro destinations have also started to show signs of slowdown following the weak global growth. Nonetheless, solid economic fundamentals of core countries such as Germany, as well as non-euro export demand that should improve slowly with the global economic recovery, will help shore up euro area’s growth next year. But the euro area’s recovery will be gradual, given that European governments still need to implement fiscal consolidation, while banks may need to recapitalize and are likely to maintain credit standards for households and businesses. These factors will put constraints on the euro area’s demand recovery going forward. On the other hand, growth in the U.S. is viewed to remain subpar (Chart 1.8), with momentum slightly dampened from the previous assessment. Despite recent improvements in several sectors, the labor market remains weak overall. Businesses also seem to postpone investment and hiring, awaiting details on the reduction of fiscal deficits and the extension of stimulus expiring this year.

Additional monetary policy easing by the European Central Bank (ECB) and the Federal Reserve (FED) helps support near-term sentiment to some degree, but is unlikely to improve much on growth prospects. The ECB has announced its Outright Monetary Transactions (OMTs), which involves unlimited bond purchases in secondary

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Chart 1.8 Growth assumptions for the U.S.


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Chart 1.7 Growth assumptions for the euro area


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markets. While this measure should help reduce funding costs and support member countries’ fiscal deficit reduction, some concerns remain regarding implementation and possible delay. In the U.S., the FED has also introduced its third round of quantitative easing (QE3). However, this round of QE is not viewed to have an impact as strong as the first two rounds, given bond markets that are in better conditions than in 2008-2009 and market’s anticipation of the measure. Nonetheless, these easing efforts will help contain downside risks to global growth to some extent. In the worse-case scenario for the euro area, the MPC views it possible that Greece might fail to cut its public debt as stated in loan conditions, leading to Greece’s default and eventual exit from the euro area next year. In such event, the OMTs would help limit contagion risks to vulnerable countries such as Spain and Italy, as also reflected in the euro area’s worse-case growth that improves from the previous assessment.

Meanwhile, Asian economies seem to suffer more visibly from global demand, with subdued growth projected going forward. Several countries’ exports have started to contract with exports to advanced economies, especially for manufacturing exports, where foreign orders start to decline. The impact of export weakness on production and consumption has also become visible already in some countries. China’s growth, at the same time, is viewed to soften from the previous assessment, possibly weighing more on regional countries’ exports in the period ahead. Regarding recent easing in Europe and the U.S., the MPC assesses the impact on capital inflows to


be benign due to (1) decreased returns on investment in Asia given already-high asset prices and (2) Asia’s softened growth prospects along with the global economy.

Global demand weighs on Thai exports more visibly

The impact of global demand on Thai exports and export production has become apparent, while imports are likely fall more than expected.

Merchandise exports are likely to soften given the stronger-than-expected impact from the global economy, before improving in the second half of 2013 with global economic recovery. The impact of global demand on manufacturing exports have become more apparent, especially for electronic products and electrical appliances where foreign orders start to decline. Exports of automobiles and parts still manage to expand, but with some signs of moderation going forward. Meanwhile, agricultural exports are viewed to weaken partly due to rice exports, which suffer from high rice prices given the rice mortgage scheme. Rubber exports are also likely to soften with global demand conditions. Looking ahead, rice exports will continue to face challenges given that the rice mortgage scheme has been extended. The MPC anticipates export weakness to pass on to export production as well as private sentiment and spending more visibly in the period ahead.

Imports are also likely to decelerate to the normal trend. A slight contraction is expected in the third quarter given falling imports of raw materials and intermediate goods, as well as

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slower imports of capital goods. This reflects flood reconstruction that tapered off early. Possibly, weakness in imports of raw materials may also signal softer demand momentum going forward.

Relative to the previous assessment, the MPC expects the current account1/ balance to improve, registering a surplus in 2012. This owes to both (1) lower deficit in service account given higher tourism revenue and lower freight expense; and (2) improved trade balance with imports falling much faster than exports, in line with dissipated reconstruction demand. For 2013, the current account surplus is expected to be lower than in 2012, given lesser claim payouts from foreign insurance companies (Table 1.3).

Private demand is projected to moderate, but with sustained momentum

Consumption and investment start to moderate to normal in the second half, with near-term boosts waning off. Major risks arise from exports given weak global demand conditions.

Despite some deceleration to its normal trend, private consumption is viewed to retain momentum and continue to serve as the key growth driver in the period ahead. Consumption momentum in the second half of this year will moderate somewhat as short-term factors fueling first half’s pick-up dissipated, including pent-up demand that has been fulfilled. But looking ahead, consumption prospects remain strong given several supporting factors. (1) Government’s

1/ Including reinvested earnings

Table 1.3 Forecasts for the external sector

2012 2013

Growth in value of exports* (F.O.B., percent)

4.4 9.0

Growth in value of imports* (F.O.B., percent)

7.0 9.3

Trade balance (billion U.S. dollars)* 12.3 12.7

Current account balance (billion U.S. dollars)* 3.7 2.3

Note: *Data revision according to definitions in IMF’s Balance of Payments Manual, 6th edition (BPM6), and Ministry of Commerce’s revised database


stimulus measures remain, especially the first-car scheme with tax rebates starting from October 2012 onward. This will help support consumption through the first half of 2013. (2) Households’ income prospects are favorable, given the increase in minimum wage and civil servant’s salary, along with the government’s intervention for key products such as rice, rubber, sugar cane, and cassavas. (3) Overall monetary conditions remain supportive, with banks unlikely to tighten their household credit standards soon.

Private investment shows signs of slowdown given reconstruction spending that waned off early. Private investment in the third quarter is bound to moderate from the preceding quarter from machinery and equipment investment, along with slowing imports of capital goods. However, over the medium- and long- term, the MPC still views investment outlook to remain favorable thanks to (1) businesses’ overall confidence and commitment to long-term plans; (2) continued demand for investment in Thailand, as reflected in high demand for investment loans and high amount of investment promotion requested; (3) Thailand’s strengths in infrastructure, skilled labor, and well-established supply chains especially for automobiles and parts; and (4) investment in 3G projects starting from 2013 onward.

Supportive factors and high investment demand will continue to benefit investment in the period ahead. Nonetheless, some key challenges still need to be monitored. (1) Businesses remain concerned about labor shortage and increased

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wage costs, both affecting businesses’ decisions to base production in Thailand. (2) Implementation uncertainty and delayed disbursement pose some risks to government’s investment especially on long-term water management and infrastructure projects. (3) Protracted global slowdown may also weigh on investment decisions in export-oriented industries over the period ahead.

Some delay in fiscal spending

Part of fiscal stimulus is viewed to soften given delayed disbursement for investment expenditure and spending on water management. But overall, fiscal spending will continue to play a key role in supporting private demand.

Fiscal spending continues to provide stimulus over the projection period, with budget deficits for fiscal year 2012 and 2013 amounting to a high percentage of GDP (Chart 1.9). But relative to the previous assessment, the MPC views fiscal stimulus to soften from delayed investment spending both in the budget and on water management projects (Table 1.4). For fiscal year 2012, disbursement of investment budget is likely to be further delayed, since priority is given to the central budget alloted for flood rehabilitation and prevention (120 trillion baht in total), which has a designated deadline. This, in effect, causes some delay on other investment projects. And in light of flood devastation, several government offices also have to revise their investment plans and projects, thus adding more time to the process. The MPC expects the delayed investment to be carried over to fiscal year 2013. On the other hand, disbursement of current expenditure

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Chart 1.9 Budget balance

Percentage of GDP

Fiscal year

Source: Bureau of the Budget and calculation by Bank of Thailand

OutturnIR Oct 12 forecast

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Table 1.4 Assumptions on public sector expenditure

Unit: Billion bahtAs of Jul 2012 As of Oct 2012

FY 2012 FY 2013 FY 2012 FY 2013

General government consumption 1,477.3 1,565.3 1,479.3 1,570.4

Public investment 638.9 766.4 602.8 763.6

Total 2,116.2 2,331.7 2,082.0 2,334.0

Note: FY denotes fiscal year.


should be as expected. Regarding the 350-billion-baht water management plan, disbursement will start gradually from the second half as anticipated earlier. However, expecting some additional delay, the MPC lowers its disbursement assumption for this portion of spending, and delays the spending more into future fiscal years.

1.3 Inflation pressure

Inflation outlook softens from the previous assessment, given the stronger impact of global economic slowdown on domestic growth and government’s policy on retail energy prices. Risks to inflation remain weighed to the downside.

Softer inflation pressure overall Both demand and cost pressures are likely

to soften from the previous assessment. Demand pressure subsides with domestic growth outlook that is more affected by the global slowdown, as well as flood reconstruction that tapered off early. Nonetheless, the MPC still expects some demand pressure to remain given near-potential economic growth, as reflected in the output gap that opens slightly over the projection period (Chart 1.10)

Cost pressure is also viewed to subside, partly from next year’s softer-than-expected global oil prices (Chart 1.11) due to persisting weakness and concerns in the global economy. However, global oil prices will remain supported by existing supply concerns, given tensions in the Middle East and low OPEC spare capacity. Besides oil prices, other costs remain relatively benign. Non-fuel commodity prices (Chart 1.12) are likely to grow slowly due to global growth concerns. On

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Chart 1.10 Output gap

IR Oct 12 forecast

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Chart 1.11 Assumptions on Dubai oil price


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Chart 1.12 Assumptions on non-fuel commodity prices


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the other hand, domestic fresh food prices (Chart 1.13) will be weaker than expected for the rest of this year given abundant supply in almost all products. However, prices are expected to edge up gradually next year, partly from the impact of the recent drought in the U.S. on global crop prices, which passes on to fodder prices and, in turn, gives some upward pressure to domestic prices of meats, eggs, and dairy products.

Additionally, the MPC’s new assumption on government’s energy price policies also drives down 2013’s headline forecast considerably (Table 1.1). This time, the MPC assumes the government to postpone the reintroduction of fuel excise taxes over the forecast period to help cushion energy and transportation costs, compared to the previous view that the taxes would start in early 2013. This changed assumption also implies no increase in transportation costs over the forecast period. However, the gradual increase in prices of liquefied petroleum gas (LPG) for the transport sector is likely to be implemented as expected.

Looking ahead, the MPC judges downside risks to inflation to outweigh upside risks. Downside risks arise from weakened domestic growth outlook given global economic concerns. In particular, the impact of the global economy on exports and investment may be stronger than assessed, especially in case of disrupted fiscal stimulus in the U.S., intensified debt crisis in the euro area, or protracted slowdown in emerging market economies. Still, some upside risks to inflation also remain from tensions in the Middle East that may pressure global oil prices, and from

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Chart 1.13 Assumptions on fresh food prices



the impact of minimum wage hike on domestic prices that may be more than estimated.

1.4 Monetary policy decisions

Additional monetary policy easing

The MPC voted to reduce the policy rate in its latest meeting, deeming that an easing was warranted to shore up domestic demand and ward off the impact from the global economy.

In its meeting on 5 September 2012, the MPC assessed overall risks to the global economy to remain elevated. Recovery in the U.S. continued to be tepid, while the euro area’s economy had entered recession and was projected to weaken further in the latter half of the year. The impact of weaker global demand on Chinese and Asian economies also became more apparent. On the other hand, the Thai economy grew faster than expected in the second quarter, with consumption and investment momentum projected to sustain. Nonetheless, the impact of slowing global demand on Thai exports would become more apparent. Meanwhile, inflation pressure moderated and inflation forecasts stayed within the target range. The MPC viewed the impact of global demand on the Thai economy to have increased to some extent. However, domestic demand remained firm and current monetary conditions were accommodative enough to support economic expansion. The MPC thus voted 3 to 2 to hold the policy rate at 3.00 percent per annum, with two votes in favor of a 0.25 percent decrease. Two members were unable to attend this meeting due to obligations abroad.

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In its subsequent meeting on 17 October 2012, the MPC viewed the global economy to remain weak, although economic indicators in the U.S. improved somewhat and monetary policy easing in advanced economies helped support near-term sentiment. Weak global demand had also weighed on Chinese and regional economies more than expected. Going forward, fiscal risks in the U.S. and challenges in resolving the European sovereign debt crisis still posed significant risks to the global economy. Meanwhile, the Thai economy continued to expand in the third quarter. Domestic spending and investment continued to grow, but at a moderated pace since flood reconstruction had tapered off. Softened global demand also affected exports and related production more apparently, and global economic uncertainty could hamper export recovery in the period ahead. In addition, inflation pressure stabilized at an acceptable level. With upside risks to inflation contained, the majority of the MPC deemed that monetary policy easing was warranted to shore up domestic demand in the period ahead and ward off the potential impact from the global economy, which remained weak and fragile. The MPC, therefore, voted 5 to 2 to reduce the policy rate by 0.25 percent, from 3.00 to 2.75 percent per annum. Two members voted to hold the policy rate at 3.00 percent per annum, deeming current growth momentum to be adequate and that further policy action could await greater clarity in the economic outlook.


1.5 Appendix

Table 1.5 Forecast assumptions2011 2012 2013

Dubai oil price (U.S. dollars per barrel) 106.3 108.0 105.0

Non-fuel commodity prices (%YoY) 17.7 -9.1 3.3

Fresh food prices (%YoY) 2.9 -1.1 13.1Minimum wage in the Bangkok Metropolitan Region (baht per day)

215 279 300

Government consumption (%YoY) 1/ 6.8 7.6 8.5

Public investment (%YoY) 1/ -2.4 9.8 28.1

Fed Funds rate (% at year-end) 0.13 0.13 0.13

Trading partners’ economic growth (%YoY) 2/ 5.2 4.3 4.8

Regional currencies vis-à-vis the U.S. dollar (Index) 3/ 108.7 108.7 106.3

Note: 1/ Including spending on water management plans2/ Weighted by each country’s share in Thailand’s total exports3/ Appreciation against the U.S. dollar indicated by a decrease

Table 1.6 GDP growth forecasts by research houses2012 2013

HSBC 6.3 4.5JP Morgan 5.8 2.7NESDB1/ 5.5-6.0 n.a.Goldman Sachs 5.7 4.8BOT 5.7 4.6FPO2/ 5.3-5.8 4.7-5.7DBS Bank 5.5 5.0Tisco Securities 5.5 4.5UBS 5.5 4.5Deutsche Bank 5.5 4.0Morgan Stanley 5.4 4.0Phatra Securities 5.3 4.5Credit Suisse 5.3 4.0Kasikorn Research 5.0 5.0Standard Chartered 4.4 4.0Note: Compiled and published by Reuters on October 11, 2012, except:

1/ Published on August 20, 2012, with the release of GDP data for 2012 Q22/ Published on September 25, 2012Presented in descending order of 2012’s forecast

Table 1.7 Headline inflation forecasts by research houses2012 2013

Credit Suisse 3.6 3.5Kasikorn Research 3.3 3.8FPO2/ 3.0-3.5 3.0-4.0HSBC 3.2 4.0DBS Bank 3.2 3.7Tisco Securities 3.2 3.5NESDB1/ 2.9-3.4 n.a.Goldman Sachs 3.1 4.4Deutsche Bank 3.1 3.6Phatra Securities 3.1 3.2UBS 3.0 3.5BOT 3.0 2.8Standard Chartered 2.9 3.1Morgan Stanley 2.8 3.3Note: Compiled and published by Reuters on October 11, 2012, except:

1/ Published on August 20, 2012, with the release of GDP data for 2012 Q22/ Published on September 25, 2012Presented in descending order of 2012’s forecast

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Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

> 24 0 0 0 0 0 0 0 0 0

21-24 0 0 0 0 0 0 0 0 0

18-21 0 11 0 0 0 0 0 0 0

15-18 0 54 0 0 0 0 0 0 0

12-15 0 33 0 0 0 0 0 0 1

9-12 0 3 6 1 2 5 5 4 5

6-9 2 0 39 16 19 24 23 21 22

3-6 54 0 44 44 41 40 39 37 36

0-3 43 0 10 32 30 25 25 27 26

(-3)-0 1 0 1 6 8 6 7 9 9

< (-3) 0 0 0 0 1 1 1 1 2

Table 1.8 Probability distribution of GDP growth forecast

Percent201420132012

2012

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

> 7 0 0 1 1 0 1 1 2

6-7 0 1 4 2 2 2 3 4

5-6 3 6 10 6 4 5 7 8

4-5 20 17 18 12 10 10 13 14

3-4 40 28 23 18 16 16 18 19

2-3 28 26 21 21 20 20 20 19

1-2 8 15 14 18 19 19 17 16

0-1 1 5 7 12 14 14 11 10

(-1)-0 0 1 2 6 8 8 6 5

< (-1) 0 0 1 4 6 6 3 3

Table 1.9 Probability distribution of headline inflation forecast

Percent2013 2014

2012

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

> 4.5 0 0 0 0 0 0 0 0

4.0-4.5 0 0 0 0 0 0 0 0

3.5-4.0 0 0 0 1 1 1 1 1

3.0-3.5 0 1 2 4 3 3 4 4

2.5-3.0 7 8 8 10 9 8 9 10

2.0-2.5 32 22 18 18 17 15 16 16

1.5-2.0 41 32 25 22 22 21 21 20

1.0-1.5 17 24 22 20 20 21 20 19

0.5-1.0 3 10 15 14 15 16 15 14

0.0-0.5 0 3 7 7 8 10 9 8

< 0.0 0 0 3 4 5 7 6 6

Table 1.10 Probability distribution of core inflation forecast

Percent2013 2014


2. Recent Economic Developments

2.1 The global economy

The recession in the euro area continued to be protracted with risks to growth remaining elevated. Although the announcement of the European Central Bank (ECB)’s Outright Monetary Transactions (OMTs) operation to purchase government-issued bonds in secondary markets would help ease economic and financial conditions, risks that countries with sovereign debt problems may not be able to lower their budget deficits to the level specified by the EU remained.

The prolonged and uncertain sovereign debt crisis resulted in a continued recession in the euro area economy. In 2012 Q2, the euro area economy contracted by 0.2 percent from the previous quarter (Chart 2.1), owing importantly to fiscal consolidation measures and worsened

The global economy deteriorated further owing largely to the impact of prolonged and highly uncertain European sovereign debt crisis. The slowdown in major economies resulted in a decline in exports in many countries, which was even more apparent in Asian economies. This led to additional monetary easing in many countries to foster economic recovery, going forward.

The Thai economy in 2012 Q3 was projected to decelerate from the preceding quarter following the contraction in exports and export-related manufacturing against the backdrop of the global economic slowdown. Meanwhile, headline inflation in 2012 Q3 accelerated as a result of last year’s low base effect in energy prices and an increase in electricity fee. However, core inflation trended down as a result of an excess supply. Going forward, inflationary pressure would soften, thanks to the slowdown in domestic economy owing to the weakening global outlook.

0.2

0.5

0

0.30.2

0.1

0.40.2

-0.2

0

-0.3-0.1

0

-0.7

-0.5

0

0.5

0

-0.8

-0.3-0.2

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0

-0.8

-0.4

-1.0

-0.5

0.0

0.5

1.0

Euro area Germany France Italy Spain

2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2

Source: Eurostat

Chart 2.1 Economic growth rate in the euro area(Change from the previous quarter)

Percent (Seasonally adjusted)

18 Bank of Thailand

consumer and investor sentiments as a result of heightened uncertainty of the sovereign debt crisis (Chart 2.2).

Looking ahead, the weakening of the euro area economy was expected to continue in 2012 H2 as reflected by a worsening of economic indicators in many countries from the second quarter, including (1) low economic confidence; (2) a slowdown of production in core countries, reflected by the average of German industrial orders during the first 2 months of 2012 Q3 which contracted by 1.2 percent from the previous quarter; and (3) rising unemployment rates in member countries, which, in some were at their historical high.

However, the ECB’s announcement of an OMTs operation to unlimitedly purchase government-issued bonds in secondary markets with full sterilization may help improve market sentiments. The operation would start when a member requests for financial assistance through the European Stability Mechanism (ESM) and complies with agreed fiscal consolidation measures and economic reforms. It was anticipated that this operation would lower costs of funding in financial markets and allow a return to normal of monetary policy transmission mechanism, which would eventually support fiscal adjustment process to some extent.

Going forward, risks to growth from the sovereign debt problem would likely remain high, resulting in a further slowdown in the euro area economy before recovery could gradually firm up. Major risks to the fiscal adjustment process

80

90

100

110

120

40

45

50

55

60

Jan Jul Jan Jul Jan Jul

Purchasing Managers' Index

Economic Sentiment Indicator (RHS)

2010 2011 2012

Sep

Chart 2.2 Purchasing Managers’ Index (PMI) and Economic Sentiment Indicator in the Euro areaIndex Index

Source: European Commission, Markit Economics


included a larger-than-expected economic contraction and an inability to implement planned fiscal consolidation measures due to public protests. This could potentially lead to a suspension of financial assistance from the European authorities which could threaten recovery, going forward. In addition, risk of Greece’s exit from the euro area remained, especially should the Greek government fail to lower its fiscal deficit and Troika cease additional supportive measures.

The United States: Overall, the U.S. economy in 2012 Q3 improved from the previous quarter and would likely expand moderately in the periods ahead, supported by ongoing accommodative monetary policy.

In 2012 Q3, the U.S. economy improved in many aspects, especially in employment and private consumption. Non-farm payrolls increased by an average of 146,000 positions per month in the third quarter compared to an average increase of 67,000 positions per month in the previous quarter (Chart 2.3). The unemployment rate dropped to 7.8 percent in September 2012 - the lowest rate since January 2009. This was in part attributable to an increase in temporary employment during the election period. However, the underutilization and long-term unemployed rates (ratio of workers unemployed for over 27 weeks to total unemployed workers) remained elevated at 14.7 percent and 41.2 percent respectively, compared to the long-run average of 8.9 percent and 17.8 percent, respectively,

0

3

6

9

12

-1,000

-500

0

500

1,000

Jan Jan Jan Jan Jan

Change in non-farm payrollsUnemployment rate (RHS)

Sep

Chart 2.3 U.S. labor market conditions‘000 persons (Change from previous month)

2008 2009 2010 2011 2012

Percent

Source: Bureau of Labor Statistics, US Department of Labor

20 Bank of Thailand

reflecting weak labor market conditions that would take time to recover.

Private consumption also picked up from the second quarter, reflected by a resumption of growth in retail sales after three consecutive months of contraction during the second quarter (Chart 2.4). In particular, automobile sales rose continuously in line with the consumer confidence index in September 2012, which rose to its 7-month high. Even though the above consumer confidence level was considered low relative to its long-run average, it was considered high enough to support private consumption growth, going forward.

The U.S. economy was expected to grow moderately, supported by ongoing accommodative monetary policy. In the September 2012 meeting, the FOMC announced additional stimulus packages which comprised of (1) an announcement to keep the federal funds rate at 0-0.25 percent per annum until at least mid-2015; and (2) an open-ended purchase of Agency Mortgage-Backed Securities (MBS) of $40 billion per month until the labor market improves. The program aimed to lower long-term interest rates, specifically mortgage rates, in order to further support recovery of the labor market and the housing sector, which had shown some notable improvement. In this regard, by keeping the federal funds rate at a low level and lowering mortgage rates, households’ debt service burden would be lowered, thereby increasing disposable income and consumption, which would eventually lend support to economic recovery, going forward.

-4-3-2-10123

Jan Jan Jan Jan Jan2008 2009 2010 2011 2012

Aug

Chart 2.4 U.S. retail salesPercent (Change from previous month)

Source: U.S. Census Bureau, U.S. Department of Commerce


However, there remained risks to growth, both from domestic and abroad, including (1) the transmission of fiscal stimulus to the housing sector which may take time, as banks continued to be cautious in mortgage lending and businesses postponed new investments due to economic uncertainty; (2) lack of clarity regarding the extension of fiscal stimulus measures due to expire at the end of 2012, such as personal income tax relief and extension period of unemployment benefits, together with uncertainty on fiscal deficit reduction (Fiscal Cliff); (3) trade and financial spillovers stemming from the European sovereign debt crisis; and (4) the global economic slowdown, especially in the euro area, Japan and China.

The Japanese economy expanded at a slower rate due to contractions in domestic and external demand.

In 2012 Q2, the Japanese economy grew by 0.2 percent from the previous quarter, decelerating as a result of a slowdown in private consumption particularly that of eco-cars coupled with a decline in exports to major trading partners, namely China, the euro area and Asia, which were all affected by the global economic slowdown and the European sovereign debt problem.

In the periods ahead, the Japanese economy would likely decelerate further as a result of (1) weakening producers’ and investors’ sentiments regarding weak economic prospects, as reflected by the manufacturing PMI index which had been below 50 for four consecutive months

22 Bank of Thailand

since June 2012 (Chart 2.5), as well as a downward revision in the Business Confidence Index by the BOJ’s Tankan Survey; (2) lack of additional fiscal stimulus packages after an expiration of the eco-car subsidy in September 2012; (3) a slowdown in exports following the European Sovereign debt crisis, which not only led to weaker global demand, but also created an upward pressure on the yen, which was regarded as a safe asset, thereby potentially worsening competitiveness of Japanese exports; and (4) the conflict between Japan and China over the Diaoyu or Senkaku Island which could impose risks on manufacturing and exports through a supply disruption in the automobile and electronic industries, as well as affect the tourism sector.

In response to deteriorating outlook, the Bank of Japan conducted further monetary policy easing. In mid-September 2012, the BOJ extended the size of its Asset Purchase Program by 10 trillion yens to slow down the rate of yen appreciation as well as boost the slowing economy. However, the effect of such program was expected to be moderate as households continued to be cautious in their spending as a result of weakening global prospects. In the last monetary policy meeting in October, no further stimulus measures were announced.

China and Asian economies continued to slow down due mainly to contractions in exports to major trading partners.

44

46

48

50

52

54

Jan May Sep Jan May Sep

Chart 2.5 Manufacturing Purchasing Managers’ Index (PMI) in Japan

Source: Bloomberg

Index

2011 2012


In 2012 Q3, economic activities in most Asian economies decelerated (Table 2.1) as a continued contraction in exports to major trading partners began to weigh on manufacturing and consumption in some economies, particularly the export-dependent economies including Hong Kong, South Korea, and Taiwan. This was reflected by consecutive declines in Industrial Production Indices of these countries. However, the domestic demand-led economies, namely Indonesia and Malaysia, were able to maintain growth, thanks to solid consumption and investment.

Going forward, the MPC anticipated that in the second half of 2012, Asian economies would slow down further, owing to the weakening export sector. This was indicated by the continued decline in leading indicators of Asian exports such as China’s and Taiwan’s New Export Orders and the North American Semiconductor Book-to-Bill ratio.

In 2012 Q3, the Chinese economy grew by 7.4 percent, decelerating from 7.6 percent in the previous quarter, on account of weak exports amid the global downturn (Chart 2.6). As a consequence of dimming growth prospects, the Chinese authorities announced additional stimulus packages in September 2012, which included (1) approval of RMB 1 trillion (2.1 percent of GDP) investment projects in transportation system and underground railway construction, part of which had already been incorporated in the 12th Five Year Plan (2011-2015) for National Economic and Social Development; and (2) a RMB 14 billion

Country Jun Jul Aug Sep Year-to-date 2012

China 11.3 1.0 2.7 9.8 7.4

South Korea 0.9 -8.7 -6.0 -2.0 -1.6

Taiwan -3.2 -11.5 -4.2 10.4 -3.9

Hong Kong -4.8 -3.5 0.6 - 0.1

Indonesia -16.0 -7.3 -24.3 - -5.6

Singapore -4.0 -3.3 -8.9 - 0.3

Malaysia 0.4 -7.3 -8.6 - -1.0

Philippines 4.3 6.0 -9.0 - 5.4

Thailand -2.3 -4.5 -6.9 - -1.3

Table 2.1 Asia’s export growth(Annual percentage change)

21.0

13.7

9.511.3

6.3

2.2

20.9

13.1

9.2

1.0

5.7

1.8

20.7

13.2

8.9

2.7

-2.7

2.0

9.8

2.3 1.9

-5

0

5

10

15

20

25Jun Jul Aug Sep

Chart 2.6 China economic indicatorsPercentage change from the previous year (% YoY)

Source: CEIC

Fixed asset investment

(YTD)

Retail trade

Industrial production

Export Import Inflation

24 Bank of Thailand

(0.03 percent of GDP) subsidy for purchases of energy-saving electrical appliances for a period of 1 year starting from 1 October 2012 until 30 September 2013. However, due to the package’s small size, the impact on overall economy was expected to be limited.

For the remaining of 2012, the MPC assessed that the Chinese economy would grow at a moderate pace as export growth remained subdued and the Chinese authorities would likely be more cautious in adopting additional stimulus measures due to risks of speculations in the property market. This was evidenced by house prices and sales which had been increasing for three consecutive months.

2.2 The domestic economy

The Thai economy in 2012 Q2 picked up gradually from the previous quarter in all sectors. A rapid recovery from the flood led to a strong rebound in manufacturing production to compensate production loss during the previous periods as well as accommodate domestic demand expansion. In addition, the government continued to play an important role in stimulating the economy. Although the European sovereign debt crisis and the global economic downturn had not yet affected tourism, impacts on the export sector, export-oriented industries, and the import sector became more apparent toward the end of this quarter.


Economic conditions in 2012 Q2

The Thai economy in 2012 Q2 expanded by 3.3 percent from the previous quarter (Chart 2.7), following expansions in the manufacturing and service sectors. Manufacturing production continued to rise by 2.4 percent from the preceding quarter as industrial production accelerated to compensate production loss during the flood. Nevertheless, the European sovereign debt crisis began to affect manufacturing production toward the end of this quarter, particularly export-oriented industries such as Hard Disk Drives (HDD) and Integrated Circuit (IC).

The services sector continued to expand from the previous quarter by 0.4 percent. Tourism activities grew at a satisfactory level. The European debt crisis had not yet affected the tourism sector since some European tourists viewed Thailand as a good-value-for-money destination. In addition, the majority of tourists were from the East Asian region whose economies continued to grow, albeit moderating. The transportation and trade sectors also expanded in tandem with economic activities, particularly the manufacturing sector which continued to recover from the previous quarter, together with the pressing need for reconstruction and repair services following the flood.

Furthermore, agricultural outputs grew by 0.5 percent from the previous quarter, especially rice output on account of improvement in water supply. Moreover, other agricultural productions such as rubber and cassava continued to expand

-12-8-4048

12

Q1 Q1 Q1

Agriculture ManufacturingTrade ServicesOthers GDP

Source: National Economic and Social Development Board2010 2011 2012

Chart 2.7 Contribution to GDP growth(QoQ, seasonally adjusted)

Percent

26 Bank of Thailand

owing to favorable weather condition and an increase in planting areas.

The continued recovery of manufacturing production resulted in a low level of unemployment rate of 0.6 percent in 2012 Q2. The impact of minimum wage increase on 1 April 2012 and a civil servants’ salary increase to 15,000 baht per month for bachelor’s degree holders in January 2012 was limited. Nevertheless, such measures led to pay rises in other salary ranges and caused average earning to rise by 17.5 percent over the same period last year, higher than the 10-year average increase of 4.4 percent1/.

The recovery in manufacturing production in almost all sectors led to continued growth in private consumption and investment as well as exports. However, towards the end of the quarter, the weakening global economy began to weigh on exports of some industries. Meanwhile, government spending remained a crucial economic stimulus.

The resumption in manufacturing production helped propel domestic demand expansion. Private consumption grew by 1.2 percent from the previous quarter (Table 2.2) owing to pent-up demand, particularly for automobiles and electrical appliances. This was largely attributable to robust consumers’ purchasing power following (1) back-to-normal employment conditions; (2) an increase in minimum wage and

1/

Current average earning is between 250-300 baht per day, higher than the former range of between 150-200 baht per day.

Table 2.2 GDP growth rate

Change from the previous quarter(seasonally adjusted, percent) 2011

2011 2012

Q2 Q3 Q4 Q1 Q2

GDP 0.1 -0.7 1.6 -10.5 10.8 3.3 Domestic demand1/ 1.8 -0.7 0.9 -4.6 7.9 2.4 Private consumption 1.3 -0.6 0.7 -3.6 6.8 1.2 Private investment 7.2 1.2 1.9 -8.1 14.7 3.8 Government consumption 1.1 -1.0 1.7 -5.3 4.5 5.0 Public investment -8.7 -8.3 -2.7 -1.8 3.0 5.6 Exports of goods and services 9.5 -0.7 3.6 -15.5 11.0 3.6

Imports of goods and services 13.7 1.8 5.3 -10.2 8.1 6.2

Source: National Economic and Social Development Board and calculations by Bank of Thailand

Note: 1/Domestic demand excluding changes in stocks


civil servants’ salary; (3) government stimulus packages, especially the tax rebate scheme for first-time car buyers; (4) accommodative monetary policy; and (5) improving consumer confidence.

Private investment expanded by 3.8 percent from the preceding quarter from investment in construction, machinery and equipment. The robust investment spending was partly due to ongoing investment for flood-damaged replacement and repair work, as well as production capacity enhancement to accommodate domestic demand expansion as reflected by an increase in imports of machinery and equipment, especially machinery for industrial plants and office equipments. In addition, some investments were due to acceleration of construction projects that had been disrupted during the flood.

Increased private spending and manufacturing production led to growth in imports of goods and services by 6.2 percent from the previous quarter, particularly imports of capital goods such as telecommunication equipment and machinery as well as imports of consumer goods such as food and beverages, electrical appliances, and furniture. Nevertheless, imports of raw material and intermediate goods contracted slightly, specifically imports of base metal materials, chemicals, and integrated circuits, following a decline in manufacturing production due to the weakening global economy at the end of the quarter. In contrast, imports of services expanded from the preceding quarter, owing to rising transport receipts following an increase in import volume.

28 Bank of Thailand

Exports of goods and services expanded by 3.6 percent thanks to recovery in manufacturing production, especially exports of automobiles, metal products, machinery and equipment, computer equipment and parts, and electrical appliances. Nonetheless, in the last month of the quarter, exports of manufacturing products in export-oriented industries contracted sharply, owing to sluggish external demand following the global economic slowdown. Meanwhile, exports of textile and garments continued to contract, mainly due to the impact of European sovereign debt crisis and deteriorating competitiveness. However, exports of services continued to pick up as reflected by an increase in the number of tourists, especially from China, Russia and Japan. In addition, transport receipts also increased in tandem with rising international trade volume.

The fiscal sector maintained its role in stimulating the economy as reflected by an increase in government expenditures from the previous quarter, particularly in wages and salaries, purchases of goods and services, as well as disbursement for flood restoration and prevention.


The outlook on the domestic economy in 2012 Q3 2/

The Thai economy in 2012 Q3 would likely grow modestly from the previous quarter owing chiefly to the sluggish global economy, which started to have a more pronounced effect on the Thai economy than the preceding quarter. Exports and production of export-oriented industries continued their declining trends, which may cause imports of raw materials for export-oriented industries to also decline. In addition, private investment began to show some signs of softening after investment in flood-related restoration had subsided.

Nevertheless, the economy was projected to expand continuously in 2012 Q3 thanks to robust momentum from private consumption and tourism activities partly due to accommodative fiscal policies, particularly the tax rebate for first-time car buyers, as well as favorable employment conditions and income level. 2/ Economic indicators used in assessing the outlook for

2012 Q3 were computed by the Bank of Thailand, except data on the Manufacturing Production Index and capacity utilization rate, which were computed by the Office of Industrial Economics. The number of tourists and the occupancy rate were, in part, compiled by the Tourism Authority of Thailand. Data on the labor market were obtained from the National Statistical Office. The government expenditure data were provided by the Comptroller General’s Department, which compiled by the Fiscal Policy Office, the Ministry of Finance. Economic outlook were obtained from the Economic/Business Information Exchange Program between the Bank of Thailand and business sector.

30 Bank of Thailand

Manufacturing production in 2012 Q3 was projected to decline from the previous quarter. The production of export-oriented industries, especially HDD and IC, was poised to slow down due to the impact of sluggish global economy. Nonetheless, the automobile industry was anticipated to continue to grow strongly for the rest of the year thanks to the tax rebate for first-time car buyers, thereby causing the Manufacturing Production Index for automobiles to remain at a high level. (Chart 2.8)

Despite the sluggish global economy, the manufacturing sector would be well supported by strong domestic demand. As a result, capacity utilization in 2012 Q3 would likely remain stable compared to the preceding quarter. (Chart 2.9). In this regard, capacity utilization of export-oriented industries such as HDD and IC was anticipated to decline while that of domestic consumption industries including automobile, chemical, rubber, and plastic was expected to increase from the last quarter in line with ongoing robust domestic consumption.

The services sector would likely expand in line with the tourism, transportation, and trade sectors. The tourism sector grew continuously and was not affected by the global economic slowdown. The seasonally-adjusted number of tourists was expected to increase from the last quarter, particularly from the East Asian region tourists. The number of European tourists was also anticipated to rise. An increase in the number of tourists would thus lead to a gradual rise in the seasonally-adjusted hotel occupancy

1030507090

110130150170190

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul

MPI VehicleHDD ICElectrical appliances

Source: Office of Industrial Economics, Ministry of Industry

January 2010 = 100

2010 2011 2012

Chart 2.8 Manufacturing Production Index (MPI) classified by sectors (seasonally adjusted)

40

45

50

55

60

65

70


Percent

2010

Aug64.9

Source: Office of Industrial Economics, Ministry of Industry2011 2012

Chart 2.9 Capacity utilization rate (seasonally adjusted)


rate (Chart 2.10). In addition, the transportation and trade sectors were expected to expand well in line with robust domestic consumption. Other services sectors such as real estate and construction would likely expand favorably also, as a result of flood-prevention construction projects and the government’s mega-projects such as the extension of sky train routes.

Agricultural output in 2012 Q3 was projected to grow from the preceding quarter in almost all product categories, especially the second-crop rice output due to favorable water supply from both natural sources and major dams. Moreover, production of cassava which had not been affected by pest outbreaks was anticipated to rise from favorable weather condition. In addition, production of palm oil would also tend to expand following a period of palm tree recovery.

Employment was anticipated to improve from the previous quarter and the unemployment rate would likely remain low. (Chart 2.11) Employment in the agricultural sector was anticipated to increase in line with favorable expansions of agricultural output. Meanwhile, employment in the manufacturing sector was projected to remain unchanged notwithstanding the impact of sluggish global economy.

On the demand side, exports would likely contract in 2012 Q3 following the global economic slowdown. Nonetheless, private consumption would be able to expand further, partly owing to government stimulus packages as well as accommodative monetary policy.

0

20

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80

0

500

1,000

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2,000

2,500


Hotel occupancy rate (RHS)Number of foreign tourists

Source: Department of Tourism and Bank of Thailand

Thousand persons Percent

2010 2011 2012

Chart 2.10 Number of foreign tourists and hotel occupancy rate (seasonally adjusted)

0.00.20.40.60.81.01.21.41.6


Source: National Statistical Office, and calculations by Bank of Thailand

Percent

2010

0.7

2011

Aug

2012

Chart 2.11 Unemployment rate (seasonally adjusted)

32 Bank of Thailand

The weakening external demand following the global economic slowdown would continue to weigh on exports (Chart 2.12), particularly exports of integrated circuit and parts, hard disk drive and electrical appliances. Concurrently, agricultural exports was poised to contract from the previous quarter following an anticipated fall in rice exports as a result of deteriorating price competitiveness, as well as depressed rubber export prices due to the weakening global economy. Nevertheless, exports of automobile and parts was expected to expand continuously. Meanwhile, exports of services was projected to improve from the preceding quarter following an increase in the number of tourists from almost all regions, particularly China and Russia. Moreover, as concerns over security measures began to abate, the number of tourists from Malaysia would increase toward the end of the quarter after having declined continuously as a result of the bombing incident in Songkla province in March.

Domestic demand was anticipated to grow continuously. The Private Consumption Index in the first two months of 2012 Q3 (Chart 2.13) increased as reflected by VAT collection, increasing imports of consumer goods, especially food and beverages, coupled with continued growth in automobile sales.

However, private investment would likely decrease from the previous quarter as reflected by a decline in the Private Investment Index in the first two months of 2012 Q3 (Chart 2.14), partly as demand for post-flood reconstruction tapered off. In addition, some businesses were more concerned

60

70

80

90

100

110

120

Jan2010

Apr Jul Oct Jan2011

Apr Jul Oct Jan2012

Apr Jul

Export volume index (including gold)Agricultural productsManufacturing productsFishery products

Source: Bank of Thailand

Index (January 2008 = 100)

Chart 2.12 Export volume index classified by products(seasonally adjusted, 3-month moving average)

110115120125130135140145150

Jan2010

Apr Jul Oct Jan2011

Apr Jul Oct Jan2012

Apr Jul


Index (2000 = 100)

Chart 2.13 Private Consumption Index (PCI) (Seasonally adjusted)

160170180190200210220230240250

Jan2010

Apr Jul Oct Jan2011

Apr Jul Oct Jan2012

Apr Jul


Chart 2.14 Private Investment Index (PII)(Seasonally adjusted, 3-month moving average)

Index (2000 = 100)


over the heightened risk of the global economic slowdown. Nonetheless, there remained supporting factors for private investment going forward, including strong business confidence in the Thai economy as reflected by the Business Sentiment Index in the next three months which continued to be above 50, as well as rising values of application and issuance of investment promotion certificates by the BOI.

Deteriorating exports and manufacturing production as a result of the weaker global economic outlook, together with declining private investment would result in a drop in imports of goods and services (Chart 2.15), especially imports of raw material and intermediate goods such as electronic parts. In addition, waning imports of capital goods, particularly machinery used in the electrical appliance industry, stemmed from decelerating private investment and the base effect. Meanwhile, imports of services would likely decrease in line with a decline in freight payments as a result of imports contraction.

Fiscal stimulus would continue to maintain its crucial role in supporting the economy in this quarter as reflected by increased government disbursements (Chart 2.16) of both current expenditures, especially purchases of goods and services, as well as capital expenditures on investment for flood restoration and prevention program, for example. Nonetheless, total disbursement of the 2012 budget would likely be lower than the target of 93 percent due mainly to a less-than-expected disbursement of current expenditures.

50

70

90

110

130

150

170

Jan2010

Apr Jul Oct Jan2011

Apr Jul Oct Jan2012

Apr Jul

Import volume indexConsumer goodsRaw material and intermediate goodsCapital goods



Chart 2.15 Import volume index classified by products(Seasonally adjusted, 3-month moving average)

0

100

200

300

400

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

2010 Budget2011 Budget2012 Budget

Billion bahtChart 2.16 Disbursement of government budget

Note: Excluding principal repayments and replenishments of the treasury reserve

Source: Comptroller General’s Department, Ministry of Finance

34 Bank of Thailand

On the whole, the Thai economy in 2012 Q3 was poised to moderate from the preceding quarter, largely attributable to contracting exports and manufacturing production of export-oriented industries. Nonetheless, tourism and private consumption would continue to grow robustly while fiscal stimulus would still be present. In this light, the bright outlook for domestic demand would continue to provide momentum to support Thai economic growth, going forward.

2.3 Costs and Prices

Inflation

In 2012 Q3, headline inflation stood at 2.94 percent, accelerating from 2.52 percent in the previous quarter due chiefly to a surge in prices of energy and raw food. (Chart 2.17) Energy prices in 2012 Q3 increased by 7.54 percent from the same period last year, sharply accelerating from 3.03 percent in the previous quarter. This increase was caused by 1) a low base effect due to an exemption of oil fund levy last year; and 2) a rise in electricity fees for the periods of June to August 2012, and September to December 2012, respectively.

Prices of raw food in 2012 Q3 edged up by 4.80 percent from the same period last year, slightly accelerating from 4.21 percent in the previous quarter as a result of elevated prices of vegetables and fruits from the previous quarter following a decrease in supply due to unfavorable weather conditions.

-4

-2

0

2

4

6

8

Q12008

Q12009

Q12010

Q12011

Q12012

Core inflation Raw foodEnergy Headline inflation

Chart 2.17 Contribution to headline inflation

Source: Trade and Economic Index Bureau, Ministry of Commerce and calculations by Bank of Thailand.

Percent


Core inflation in 2012 Q3 decelerated slightly from 2.00 percent in the previous quarter to 1.84 percent, thanks chiefly to a decline in prices of food and beverages (Chart 2.18), especially prices of prepared food which decelerated in line with lower costs of meats and eggs as a result of the excess supply. Meanwhile, prices of non-food and beverages accelerated from the previous quarter owing to 1) an increase in excise taxes on tobacco and alcoholic beverages at the end of August 2012; and 2) a base effect of the decrease in prices of public transportation services following the reduction in domestic oil prices last year.

The pass-through from costs to prices in 2012 Q3 trended down towards its normal level owing to the softening domestic demand. Such change was reflected by the deceleration of the quarter-on-quarter core inflation to 0.4 percent which was a level consistent with the 5-year average rate after standing slightly above for the first two quarters of 2012 – a period of strong rebound from the flood. (Table 2.3)

Production costs conditions

Producer Price Index (PPI) increased by 0.3 percent in 2012 Q3, slightly decelerating from 0.5 percent in the previous quarter, (Chart 2.19) reflecting moderate production costs as a result of the global economic slowdown. In this regard, prices of manufactured products (excluding petroleum products) contracted while those of agricultural, mining and petroleum products stabilized from the preceding quarter.

-2

-1

0

1

2

3

4

Q12008

Q12009

Q12010

Q12011

Q12012

Non-food and beveragesFood and beveragesCore inflation

Chart 2.18 Contribution to core inflationPercent

Source: Trade and Economic Index Bureau, Ministry of Commerce and calculations by Bank of Thailand.

Table 2.3 Quarterly inflation

Unit: Percent 20112011 2012

Q3 Q4 Q1 Q2 Q3

Percentage change from the previous year (%ΔYoY)

- Headline Consumer Price Index 3.81 4.13 3.97 3.39 2.52 2.94

• Core Consumer Price Index 2.36 2.79 2.82 2.74 2.00 1.84

• Raw food 8.66 7.08 10.22 5.78 4.21 4.80

• Energy 5.59 8.67 0.66 3.62 3.03 7.54

Percentage change from the previous quarter (%ΔQoQ)

- Headline Consumer Price Index - 0.5 0.2 0.5 1.2 1.0

• Core Consumer Price Index - 0.6 0.3 0.6 0.6 0.4

• Raw food - 1.6 2.1 -2.6 3.1 2.2

• Energy - -1.5 -5.3 7.9 2.4 2.6

Source: Trade and Economic Index Bureau, Ministry of Commerce

-15-10-505

10152025

Q12008

Q12009

Q12010

Q12011

Q12012

Producer Price Index : Manufactured productsProducer Price Index : Mining productsProducer Price Index : Products of agriculture Producer Price Index

Chart 2.19 Contribution to producer price indexPercent

Source: Trade and Economic Index Bureau, Ministry of Commerce, and calculations by Bank of Thailand.

36 Bank of Thailand

Inflationary pressure in the period ahead

Inflationary pressure would likely weaken in tandem with the softening domestic economy which stemmed from weakening global prospects, coupled with a slight decline in inflation expectations. Nonetheless, cost pressures were poised to remain moderate, going forward.

(1) Demand pressure would likely soften following the slowdown in domestic economy, mainly due to weakening global prospects.

(2) Inflation expectations would slightly decline as reflected by the 12-month ahead inflation expectation in August 2012 of 3.3 percent, which decreased slightly from 3.4 percent in the previous month, though remaining close to its 5-year average (Chart 2.20).

(3) Cost pressures would likely to remain moderate in line with global oil and commodity prices. However, prices of meats and eggs might increase in the period ahead due to higher costs of animal feed as a result of the drought in the U.S. Nevertheless, the pass-through from such costs to overall prices of fresh food should only be modest as an excess supply situation was expected to persist, going forward.

01234567

0%

20%

40%

60%

80%

100%

2008 2009 2010 2011 2012

> 6% 4-6% 2-4% < 2% Median (RHS)

Long-term average

Chart 2.20 12-month ahead inflation expectation (August 2012)

Share Percent

Source: Bank of Thailand’s Business Sentiment Survey


3. Monetary and Financial Stability

3.1 Financial Markets

Improvement in global financial market conditions due to monetary policy easing in major countries boosted investor confidence and led to an increase in equity and bond investment. As a result, equity and bond prices rose steadily and the Thai baht edged higher at the end of 2012 Q3.

Money and bond markets

Short term interest rates continued to stabilize in 2012 Q3 before falling after the MPC reduced the policy rate by 0.25 percent, from 3.00 percent to 2.75 percent per annum at the meeting on 17 October 2012. The overnight interbank rate and the 1-month government bond yield on 18 October 2012 were at 2.65 and 2.79 percent per annum, respectively (Chart 3.1).

Overall, government bond yields exhibited some degree of volatility in 2012 Q3 due to

Risks to Thailand’s overall financial stability increased owing to the weak global economy and monetary policy easing in major countries. Contraction in exports weighed more heavily on the corporate sector, while equity and bond prices rose steadily. Meanwhile, debt servicing abilities of low-income households began to show signs of weakness. Nonetheless, stability in other sectors remained sound. Financial institutions continued to be robust and the real estate sector showed no risk of a housing bubble.

Going forward, key risks to be monitored included (1) a possible adverse impact of the overall economic slowdown on income and debt servicing abilities of households and corporates, thus potentially leading to loan quality being compromised; and (2) volatility in the Thai financial markets and the Thai baht arising from the Federal Reserve’s third round of Quantitative Easing (QE3).

2.5

2.7

2.9

3.1

3.3

3.5

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

1-day repurchase rateOvernight interbank rateGovernment bond yields

Mar 21Jan 25Percent

2012

May 2 Jun 13 Jul 25 Sep 5 Oct 17

Source: Bank of Thailand and The Thai Bond Market Association (ThaiBMA)

Chart 3.1 Money market short-term interest rates

38 Bank of Thailand

changing global financial market and bond supply conditions (Chart 3.2). At the end of the quarter, yields of all maturities fell as a result of non-resident inflows into the Thai bond market, partly due to further monetary policy easing in major countries. Nonetheless, the overall impact of QE3 on the Thai economy continued to be limited (more details in BOX: Quantitative Easing 3 and its impact on Thai economy).

The overall government bond yields decreased following the MPC’s decision to reduce the policy rate on 17 October 2012 (Chart 3.2).

Equity market

Thailand’s stock exchange index in 2012 Q3 increased steadily from the previous quarter which was mainly due to return of foreign investment to the Thai and other stock markets in the region after sentiment regarding the European sovereign debt crisis improved. In 2012 Q3, foreign investors’ net sell in the stock market totaled at 1.48 billion baht compared with the net buy of 19.32 billion baht in the previous quarter (Chart 3.3).

Going forward, the rising SET index would be closely monitored as the Price to Earnings Ratio (P/E ratio) in 2012 Q3 rose to a level higher than the historical average (2008 - 2012) while the ratios in other regional stock markets started to stabilize (Chart 3.4). Moreover, the effect of QE3 together with risks associated with global financial conditions on stock market volatility also warranted monitoring in the periods ahead.

2.75

3.00

3.25

3.50

3.75

4.00

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

10 Y

5 Y

1 Y3M

2 Y

1M

Chart 3.2 Government bond yieldsPercent

2012Source: The Thai Bond Market Association (ThaiBMA)

Oct 18

Chart 3.3 The Stock Exchange of Thailand index

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-20

0

20

40

60

400

600

800

1,000

1,200

1,400


Net buy/sell of foreign investors (RHS)SET index

Source: Stock Exchange of Thailand.

Index Billion baht

2010 2011 2012

Times

Chart 3.4 Average Price to Earnings by country

Source: Bloomberg

5

10

15

20

25

30

South Korea Singapore Malaysia Thailand (SET index)

Philippines

2008-2011 2012 Q1

2012 Q2 2012 Q3


Foreign exchange market

In 2012 Q3, the Thai baht depreciated slightly against the U.S. dollar from the previous quarter, owing importantly to the global economic slowdown and investors’ concerns over the European sovereign debt crisis that would potentially spread to Italy and Spain. The Thai baht averaged at 31.36 baht per U.S. dollar in 2012 Q3, slightly depreciating from the second quarter’s average of 31.32 baht per U.S. dollar (Chart 3.5). The Nominal Effective Exchange Rate (NEER) in 2012 Q3 and the Real Effective Exchange Rate (REER) over July-August period averaged at 101.88 and 102.00 respectively, weakening slightly from the previous quarter’s averages.

However, the overall volatility of the Thai baht in 2012 Q3 increased from the previous quarter (Chart 3.6). At the beginning of the quarter, the baht weakened as a result of investors’ rising concerns over the European sovereign debt crisis and the global economic slowdown. Nevertheless, the baht resumed an appreciation trend during the latter part of the quarter after several central banks had announced additional monetary policy easing, especially QE3, which improved foreign investors’ confidence and prompted their return to the Thai stock market.

3.2 Financial institutions

Commercial bank interest rates in 2012 Q3 remained unchanged from the previous quarter while deposits continued to grow well.

666870727476788082

29

30

31

32

33

34


Baht/USD1/

Dollar index2/

2010

Sep 28

2011

30.78

72.72

2012

Chart 3.5 Exchange rate and trade-weighted dollar index

Baht/U.S. dollar Index

Sources: 1/ Bank of Thailand2/ Bloomberg

0

2

4

6

8


5.50

Source: The Bank of Thailand2010 2011 2012

Chart 3.6 Baht actual volatility (up to September 28, 2012)

Percent (annualized)

40 Bank of Thailand

The stability of the financial sector was sound but certain risks would be closely monitored in the periods ahead, including the impact of the global economic crisis on the overall Thai economy, loan quality, and consumer loan expansion, particularly the continued high growth of personal loans.

Interest rates, deposits and credits

The deposit and lending rates of the four largest commercial banks1/ remained unchanged in 2012 Q3 partly as a result of the policy rate hold. At the end of the period, the 12-month time deposit rate and the MLR registered at 2.86 and 7.13 percent per year, respectively.

At the end of August 2012, private credits grew by 15.93 percent (Chart 3.7), slightly declining from the last quarter’s growth of 16.49 percent. This was partly owing to slowdown in corporate loans after investment expenditures for flood-related reconstruction had tapered off. Meanwhile, loans extended to the household sector continued to expand rapidly in tandem with consumer loans expansion, including other personal2/, mortgages, and auto-leasing loans, which was partly attributable to government’s stimulus measures, such as the tax rebate scheme for first-time car buyers. Going forward, the Senior Loan Officer Survey of September 2012

1/ Bangkok Bank, Krungthai Bank (KTB) , Kasikorn Bank

(K-bank) and the Siam Commercial Bank (SCB) 2/ Other personal loans include personal loans under

supervision (non-collateral loans) and personal loans not under supervision.

-5

0

5

10

15

20

Jan Jan Jan Jan

HouseholdBusiness + OFIPrivate Credits

Credits to the household sectorCredits to the business sectorPrivate credits

Chart 3.7 Other Depository Corporations’ private credits Annual percentage change

Source: Bank of Thailand2009 2010 2011

Aug

2012

15.93


revealed that private credits, both corporate and household loans, were projected to grow steadily (Chart 3.8).

In August 2012, deposits and bills of exchange (B/E) expanded well by 12.15 percent over the same period last year. This was partly due to intensified competition in commercial banks’ deposit mobilization whereby commercial banks offered special deposit products in attempt to maintain their market share of deposits in place of maturing bills of exchange and to support ongoing strong credit expansion.

Stability of Financial Institutions

Financial institutions stability in 2012 Q3 remained strong, as reflected by the regulatory capital to risk-weighted assets ratio of 15.68 percent in August 2012, which was higher than the legal requirement of 8.50 percent. In addition, financial institutions’ liquidity increased from the previous quarter following an expansion in deposit base. Asset quality also remained intact, as evident by delinquency and NPL ratio of 5.62 percent – a level close to that of the previous period (Chart 3.9).

Nonetheless, expansion in NPL and delinquent loans was projected to be in an upward trend, particularly those of other personal loans which had been accelerating during the last 6 months and thus warranted close monitoring in the periods ahead. In addition, the Thai economic slowdown could pose a threat to debt servicing abilities of Thai private sectors and could adversely affect asset quality of financial institutions in the next period.

-100

-50

0

50

100 2012 Q1 2012 Q2 2012 Q3 2012 Q4

-100

-50

0

50

100 2012 Q1 2012 Q2 2012 Q3 2012 Q4

Source: Senior Loan Officer Survey

Chart 3.8 Expected demand for corporate and consumer loans in 2012 Q4

+ Increased

- Decreased

+ Increased

- Decreased

Expected demand for corporate loansin the next 3 months

Expected demand for consumer loans in the next 3 months

Large corporate SMEs Overall Housing Credit card Other

0

5

10

15

Jan Jul Jan Jul Jan Aug

Total private creditsCorporate loansConsumer loans

Chart 3.9 NPL and Delinquency ratio

2010 2011 2012Source: Bank of Thailand

Percent

42 Bank of Thailand

3.3 Non-financial sectors

There was greater risk to the stability of non-financial sectors. The negative impact of global economic slowdown on Thai corporate sectors became more pronounced and debt servicing abilities of low-income households began to show sign of deterioration. Fiscal stability remained sound but with continued risk accumulation.

Household Sector

The stability of households’ income and employment remained robust, as reflected by improvement in employment in July 2012 as unemployment rate (seasonally adjusted) declined from the first half of the year, from 0.79 to 0.56 percent. Households’ average earning remained strong (Chart 3.10).

Looking ahead, important risks to household sector’s stability would stem from:

(1) The more evident impact of global economic slowdown which might affect future households’ income;

(2) Deteriorating households’ debt servicing abilities due to continued increase in household debt, as reflected by accelerating consumer loan expansion, especially auto-leasing and other personal loans.

Moreover, there was sign of deterioration in debt-servicing abilities of low- and middle- income households (monthly income of less than 25,000 Baht), as evident by continued growth in their NPL and delinquent credits from non-banks.

100

110

120

130

140


Index (2003 = 100)

2010 2011 2012

Chart 3.10 Households’ income*

Note: *Seasonally adjusted, real income Source: Office of Agricultural Economics, National Statistical Office,

calculations by Bank of Thailand

Employees’ average earning

12-month moving average


Corporate sector

In 2012 Q2, overall corporate performance remained healthy, despite a slight decline from the last quarter. Meanwhile, the global economic slowdown weighed more evidently on the export sector which continued to moderate. The resultant negative impact on corporate income, liquidity and abilities to service debt would be closely monitored going forward.

Despite a slight decline from the previous quarter, overall performance of non-financial companies listed in the stock exchange of Thailand remained sound. The median of firms’ operating profit margin (OPM), reflecting corporate profitability, slightly dropped from 7.06 percent in the previous quarter to 6.89 percent – a level which was still higher that the average level prior to the 2008 global financial crisis of 6.43 percent. Meanwhile, corporate debt servicing abilities and liquidity continued to be strong, as reflected by the median of the interest coverage ratio (ICR) and the debt to equity ratio (DE) of firms, which stabilized at 3.73 and 0.86, respectively, from the previous quarter.

However, the export sector, especially industries which were largely dependent on demand from European countries such as electronics and jewelry, continued to moderate as the global impact on the Thai economy magnified (Chart 3.11). The resulting adverse impact on corporate income, liquidity and debt servicing abilities thus warranted close monitoring in the periods ahead.

Chart 3.11 Thailand’s export value index

50

100

150

200

Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul

Note: * Seasonally adjusted, 3-month moving averageSource: Customs Facilitation and calculations by Bank of Thailand

(14.7% of total export volume as of 2011)

Index (January 2007 = 100)*

Electronics

Total export value

2007 2008 2009 2010 2011 2012

44 Bank of Thailand

Real estate sector

Risk of a real estate bubble remained low. However, going forward, there were several issues which would be closely monitored including acceleration in condominium prices, foreign investment in the real estate sector, and a moderation in housing demand due to slowdown in domestic economy.

The recovery in real estate sector solidified since the first half of the year, as shown by an upward trend in the three-month moving average number (seasonally adjusted) of all residential unit transfer registration in Bangkok and its vicinity in spite of a modest decrease by 3.65 percent in August 2012 from the previous month (Table 3.1). Nonetheless, the low-rise housing market had not returned to normal conditions, as reflected by the number of low-rise housing registration during the first eight months of 2012 which was lower than the average of the past four years (2007-2011), partly due to consumers’ and developers’ lingering concern over flood risk earlier this year (Chart 3.12).

Risk of a real estate bubble remained low as increased house prices could be accounted for by rising costs of production such as increased land prices from more constructed expansion of public transportation networks and a hike in costs of construction materials and wages.

Moreover, the prospect of financial accelerator- induced bubble from credit expansion remained contained. On the lenders’ side, credit standard for mortgage loans of commercial banks was at normal level (Chart 3.13). On the borrowers’ sides, albeit more leveraged households, their

102.5

23.743.1 35.8

97.3

19.336.6 41.4

020406080

100120

Total Single-detached housessemi-detached houses

Townhousecommercial buildings

Condominiums

Average of the first eight months in 2007-2011Average of the first eight months in 2012

Thousands of units

Source: Real Estate Information Center (REIC) and calculations by Bank of Thailand

Chart 3.12 The registration number of transferred residential units in Bangkok and its vicinity

Chart 3.13 Housing Affordability Index: HAI

0.0

0.5

1.0

1.5

2.0


1.5

Times

Note:(1) HAI = borrower’s income / qualified income

where qualified income is calculated by using a debt service to income of 35%(2) Calculated from borrowers who buy new residential units in Bangkok and its vicinity.(3) 50th percentile (seasonally adjusted and 3-month moving average)

minimum criteria

2010 2011 2012


debt servicing abilities remained strong, as reflected by the debt service coverage ratio (DSCR) in August 2012, which stabilized from the previous quarter at 4.34 times and was higher than commercial banks’ standard lending practice of 2.00 times.

Going forward, risks to the real estate sector to be closely monitored included (1) a broad-based increase in house prices, especially condominium (Chart 3.14); (2) speculative pressure in the real estate sector stemming from capital inflows from QE3; and lastly (3) a potential decline in households’ income on the back of slowing Thai economy, which might suppress future housing demand.

Fiscal Sector

The stability of the fiscal sector was well maintaned, as reflected by public debt-to-GDP ratio of 44.19 percent in July 2012 which was substantailly below the 60 percent threshold for fiscal sustainability. Nonetheless, this was an increase from the previous month’s level of 43.52 percent, owing to the Bank of Agriculture and Agricultural Cooperatives (BAAC)’s borrowing for the government’s rice pledging scheme.

Looking ahead, a continuation of the rice-pledging scheme next year coupled with disbursement of government spending in mega infrastructure investment within the next 2-3 years could move pubic debt closer to the fiscal sustainability threshold, reflecting greater risk on fiscal burden which would potentially limit fiscal policy space in cushioning against the global economic crisis (Chart 3.15).

Chart 3.14 Housing price index in Bangkok and its vicinity

90

100

110

120

130

Jan2010

Jul Jan2011

Jul Jan2012

Jul

Single-detached houses and land price indexTownhouses and land price indexCondominiums price index


Note: New mortgage approvals by commercial banks, calculated by hedonic regression (3-month moving average, seasonally adjusted


107114117

41.9 42.3

41.140.6

41.4

42.4 42.643.5

44.2

3839404142434445

2010 2011 Jan Feb Mar Apr May Jun Jul

Note: Fiscal yearSource: Public Debt Management Office

Percent of GDP

2012

Chart 3.15 Public debt to GDP

46 Bank of Thailand

Q3 Q4 Q1 Q2 Q3 Jul Aug Sep

Bond market

Bond spread (10 years - 2 years) 2.1 1.3 0.4 0.2 0.2 0.3 0.4 0.3 0.3 0.3 0.5

Equity market

SET index 584.0 849.8 1,025.5 1,060.7 979.2 1,120.0 1,168.7 1,228.0 1,198.7 1,222.3 1,266.3

Actual volatility (SET index)1/ 26.0 17.6 21.3 22.3 28.9 13.1 16.7 11.0 15.5 11.9 10.2

Price to earnings ratio (times) 19.9 13.5 12.5 12.3 11.4 13.9 15.0 17.4 17.0 17.3 17.9

Actual volatility (บาท) 3.7 3.4 4.8 4.5 5.9 6.0 4.5 4.7 5.4 4.2 4.8

Nominal effective exchange rate (NEER) 98.5 102.9 101.8 101.7 101.2 101.2 101.4 101.2 101.0 101.2 101.5

Real effcetive exchange rate (REER) 102.0 102.9 97.5 102.0 101.2 101.1 102.1 n.a. 101.9 102.0 n.a.

Minimum lending rate (MLR)3/ 6.0 5.9 6.9 7.2 7.3 7.2 7.1 7.1 7.1 7.1 7.1

3-month fixed deposit rate3/ 0.9 1.0 2.4 2.7 2.9 2.9 2.9 2.9 2.9 2.9 2.9

Regulatory capital to risk-weighted asset (%) 16.1 16.2 15.1 15.7 15.1 15.2 15.0 n.a. 14.9 15.7 n.a.

Net profit (billion Baht) 92.2 123.0 147.2 37.4 31.1 40.1 49.1 n.a.

Return on assets (ROA) 0.9 1.1 1.2 1.2 1.0 1.2 1.4 n.a.

Loan to deposit and B/E 85.8 88.3 89.8 89.6 89.8 90.3 92.4 n.a. 91.9 90.8 n.a.

Debt to financial assets 41.2 41.6 44.1 44.6 44.0 43.9 44.7 n.a.

Financial institutions :

Personal loans 6.1 6.0 5.8 5.1 5.8 5.6 5.7 n.a.

Credit card 5.4 4.2 4.8 4.4 4.8 4.6 4.6 n.a.

Thai commercial banks :

Consumer loans 6.2 4.8 5.2 4.3 5.2 4.9 4.7 n.a.

Mortgage loan 5.2 4.1 4.0 3.6 4.0 3.8 3.7 n.a.

Auto leasing 9.6 7.3 8.9 6.5 8.9 8.1 7.3 n.a.

Operating profit margin (%) 5.8 6.9 6.8 6.9 3.5 7.1 6.9 n.a.

Debt to equity ratio (times) 0.7 0.7 0.8 0.8 0.8 0.8 0.9 n.a.

Income coverage ratio (times) 3.2 4.7 4.1 4.3 2.2 3.6 3.7 n.a.

Current ratio (times) 1.5 1.5 1.5 1.5 1.5 1.5 1.4 n.a.

RRegistration number of transferred residential units

in Bangkok and its vinicity (3-month moving average) 161,240 183,469 151,362 45,537 28,283 32,104 40057.0 n.a. 13,157 12676.2 n.a.

Sigle-detached houses and semi_detached houses 37,845 37,762 31,238 9,353 5,233 6,222 7955.0 n.a. 2,555 2549.7 n.a.

Townhouses and commercial buildings 67,281 72,343 59,833 18,009 10,115 11,762 14964.0 n.a. 4,902 4847.0 n.a.

Condominiums 56,114 73,364 60,291 18,175 12,935 14,120 17138.0 n.a. 5,757 5256.3 n.a.

Registration number of finished residential units

in Bangkok and its vinicity (3-month moving average) 94,977 106,893 81,856 24,555 14,268 22,243 31559.0 n.a. 7,949 9810.7 n.a.

Sigle-detached houses and semi_detached houses 30,136 33,207 33,275 9,499 6,014 7,718 7856.0 n.a. 2,814 2927.7 n.a.

Townhouses and commercial buildings 11,116 13,767 13,847 4,398 2,642 3,423 2631.0 n.a. 786 1123.1 n.a.

Condominiums 53,725 59,919 34,734 10,658 5,612 11,102 21072.0 n.a. 4,992 6238.1 n.a.

Housing price index5/

Sigle-detached houses (including land) 100.0 100.6 104.9 104.8 104.9 103.0 103.1 n.a. 105.5 107.1 n.a.

Townhouses (including land) 98.9 103.6 110.2 112.2 110.2 110.7 112.7 n.a. 113.6 114.4 n.a.

Condominiums 100.2 99.1 113.9 10.8 113.9 108.6 112.7 n.a. 114.6 117.1 n.a.

Land 100.5 106.9 111.5 108.8 111.5 117.5 110.5 n.a. 112.2 114.5 n.a.

Public debt to GDP (%) 43.8 42.5 40.3 42.3 40.3 41.4 43.3 n.a. 44.2 n.a. n.a.1/ Daily volatility (using exponentially weighted average method ) 4/ Only listed companies on SET (Median)2/ Based on data of all commercial banks 5/ Based on data of new mortgage approvals by commercial banks3/ Average value from 4 large Thai commercial banks (using hedonic regression method)

Capital adequacy

Sectoral indicators for assessing conditions and vulnerabilities to financial stability

1. Financial markets sector

FX Market

2012

2. Financial institutions sector2/

201120102009 2011Indicators

Liquidity

Earnings and profitability

6. Public sector

3. Household sector

NPL and delinquency ratio (%)

4. Non-finanicial corporation sector4/

5. Real estate sector


Quantitative Easing 3 and its impact on Thai economy

The weak U.S. labor market and stumbling economic growth prompted the FOMC, on September 28, 2012, to launch the third round of monetary policy easing, so called the Quantitative Easing 3, after having launched two similar programs in November 2008 and November 2010. The main differences between QE3 and its predecessors are (1) targeting of the housing market through purchases of mortgage-backed securities (MBS); (2) open-ended monthly allocation of 40 billion dollars

for MBS purchases until the labor market improves substantially, in an effort to further reduce longer-term interest rates, especially mortgage rate, to reduce household expenses and improve housing market condition and employment; and (3) the announcement by the Fed to keep the federal funds rate at 0-0.25 percent per annum until at least mid-2015, which signals its primary focus on economic growth. (Table 1)

However, the impact of QE3 on the U.S. economy is expected to be limited, especially in the short-run as businesses continue to postpone new investment and hiring owing to heightened risks of uncertainties surrounding the economy. These uncertainties stem chiefly from (1) risk of a discontinuation of fiscal stimulus (i.e. Fiscal cliff) and unclear budget deficit resolution plan; (2) the prolonged European’s sovereign debt crisis; and (3) the slowdown of the world economy.

The impact of QE3 on the Thai economy is expected to be smaller than that of QE1 and QE2 due to the followings:

1. Flows of capital into Asia and Thailand, induced by QE3, is anticipated to be less compared to QE1 and QE2 owing to the following factors. (1) A noticeable slowdown in Asian economies, contributed mainly by continuous contraction in exports. The International Monetary Fund (IMF), in October, revised down July’s projections for 2012 and 2013 economic growth of developing countries in Asia from 7.1 to 6.7 percent, and 7.5 to 7.2 percent, respectively. (2) Capital market returns in Asia and profit-making opportunities for investors have reduced significantly compared to the QE1 and QE2 periods. The gap between the return on investments in regional bond markets and the U.S. government bond has narrowed significantly. Notably, the gap between returns on long-term government bonds in Southeast Asian countries and the U.S. government bond has reduced by 1.1 percentage points since the Federal Open Market Committee’s implementation of QE1 and QE2. Moreover, the SET Index has risen to its new record of 14-year high, reflected by the

Table 1 The U.S. Federal Reserve’s Quantitative Easing measuresQE1 QE2 QE3

Duration 25 Nov 2008- 31 Mar 2010 3 Nov 2010- 30 Jun 2010From 13 Sep 2012 until the U.S. labor market recovers

Amount 1,725 billion dollars 767 billion dollars Open-ended

Composition

1) 300 billion dollars forpurchasing long-term U.S. government bonds

1) 600 billion dollars forpurchasing long-term U.S. government bonds

1) 40 billion dollars permonth* for purchasing Mortgage-backed Securities (MBS)

2) 1,250 billion dollars forpurchasing Mortgage-backed Securities (MBS)

2) 167 billion dollars forpurchasing long-term U.S. government bonds to reinvest in the principal payments

3) 175 billion dollars forpurchasing Agency Bonds (Fannie Mae, Freddie Mac, Ginnie Mae, and Federal Home Loan Banks)

Note: *The amount could be increased if necessary.Source: FOMC

48 Bank of Thailand

price to earnings ratio (P/E) in 2012 Q3 which was at 17.4 compared to the 2008-2011 average of 13.2. Hence, the QE3 measure would induce lesser capital inflows into the region than its predecessors. (Chart 1)

2. Thailand’s capital flow has become more in balance, in part as a result of the BOT’s capital account liberalization plan, which will help reduce the pressure on baht appreciation. During the QE2 period, the BOT relaxed the regulations on

Thai direct investment abroad In spite of a total of 4,271 million dollars of inflows into the Thai stock market, outbound investments1/ reached as high as 5,815 million dollars, thereby contributing to only 1,566 million dollars of net capital inflows. Going forward, there are various factors that will further support outbound investments, including (1) the decline of asset values in advanced economies, especially those in recession; (2) the upcoming ASEAN Economic Community (AEC); (3) the surge in local labor costs; and (4) the opening-up of Myanmar through business acquisitions and direct investment in infrastructures.

3. Thailand’s property market dynamic does not mainly depend on foreign capital inflows. Unlike other Asian countries, for example Singapore and Hong Kong who are exposed to risks of property price bubbles as a consequence of quantitative easing measures, there has been no signs of such phenomenon in the Thai real estate sector. Although prices of condominiums edged higher, these were not results of QE1 and QE2 given that foreign direct investment in real estate properties during such periods was neither substantial nor increasing significantly. Rather, such increases in prices were due to the government’s property stimulus packages during 2008 Q2 and 2011 Q2, along with improvements in public transportation networks, and increases in construction costs such as land price, construction materials and wage. (Chart 2) 1/ Thailand direct investment (TDI), excluding profits and dividends, which are not repatriated.

40

60

80

100

120

140

Q12007

Q12008

Q1 2009

Q1 2010

Q12011

Q1 2012

SingaporeHong KongThailand (Condominium)

Note: Hedonic price using data on new loans extended by commercial banks(seasonally adjusted, 3-month moving average)

Source: CEIC and calculations by Bank of Thailand

Chart 2 Risk from Quantitative Easing measures toAsian property prices

Index (2010= 100)

QE1 QE2

Chart 1 Price to Earnings ratio (P/E) for selected securities markets

Source: Bloomberg

0

5

10

15

20

25

30


Ratio

2010 2011 2012

S. Korea

ThailandPhilippines

Singapore

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