Relatório Inflacao Tailandia 0IRE - 150811

Inflation Report
July 2011
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 Mrs. Atchana Mrs. Suchada Mr. Ampon Mr. Praipol Mr. Siri Mr. Krirk-krai Trairatvorakul Waiquamdee Kirakul Kittiampon Koomsup Ganjarerndee Jirapaet Chairman Vice Chairman Member Member Member Member Member
Inflation Report July 2011
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. Overview 2. Inflation and Economic Conditions Inflation trends Production cost conditions Pass-through from cost to final prices Aggregate demand in 2011 Q1 and the outlook for 2011 Q2 Production and supply in 2011 Q1 and the outlook for 2011 Q2 BOX: Soaring food prices and its implications on core inflation 3. Monetary Conditions and the Exchange Rates Money market conditions Banking system Monetary base and money supply Exchange rates 4. Financial Stability Conditions and Outlook Non-financial corporate sector Household sector Real estate sector Financial institutions External Sector 5. Economic Growth and Inflation Outlook Forecast assumptions Output and inflation projections Assessment of risks Forecasts by research houses BOX: Greece,s sovereign debt crisis and its impacts on the global economy 6. Conclusion Report: Economic/Business Information Exchange Program between the Bank of Thailand and the Business Sector 1 9 9 11 12 14 20 26 29 30 35 39 40 45 45 48 49 51 54 57 59 66 71 77 79 83 85
1. Overview
Industrialized economies expanded more slowly than expected during the first half of 2011. For the U.S. economy in particular, key downside pressures came from elevated oil prices as well as supply disruption especially in the automobile industry due to Japan,s natural disasters, resulting in dampened growth momentum. Moreover, the FOMC announced in June to discontinue its medium- and long-term government securities purchase of 600 billion U.S. dollars (Quantitative Easing II: QE II), while still maintaining its monetary policy stance accommodative to support the U.S. growth. The euro area economy, on the other hand, continued to expand led by core countries especially Germany, but would likely remain plagued by their sovereign debt concerns over the period ahead. Meanwhile, the Japanese economy gained a firmer footing and would likely pick up during the latter half of this year, thanks to the Japanese government,s fiscal stimulus that would soon enter into the economy. Asian countries, growth continued to strengthen thanks to robust domestic and external demand. With inflation pressures building up persistently, many Asian countries would likely tighten their monetary policy, and this could restrain growth to some extent. Over the past three months, the Monetary Policy Committee (MPC) observed that: 1. In the first quarter of 2011, the Thai economy continued to grow firmly by 3.0 percent over the same period last year, slightly moderated from 3.8 percent in the preceding quarter. This translated into a strong 2.0
percent growth on a quarterly basis, up from 1.3 percent in the previous quarter. The momentum owed largely to accelerated exports for both industrial and agricultural products, thanks to the global economic recovery led by emerging market countries. In addition, strong domestic demand also added to the momentum. After contracting in the second half of 2011, private-sector investment rebounded on account of higher machinery and equipment investment. Private consumption also continued to edge higher mainly from spending on durable goods, well-supported by favorable income and employment conditions despite the widespread flood that weakened consumer confidence to some extent. Lastly, public investment continued to lend further support to growth.
Table 1.1 GDP at 1988 prices (seasonally adjusted)

Change from the previous period (Percent) Domestic demand
1/
2010 6.1 4.8 13.8 6.4 -2.8 14.7 21.5 7.8
2010 Q1 1.5 0.7 4.2 1.5 6.4 4.8 4.2 3.1 Q2 2.6 2.3 6.2 -0.5 -0.1 2.3 3.2 -0.1 Q3 -0.6 -0.3 -0.3 -1.3 -16.4 -3.6 0.5 -0.3 Q4 0.9 1.2 -0.6 3.1 21.3 6.2 2.1 1.3
2011 Q1 1.9 0.6 7.0 -0.3 13.3 10.9 10.1 2.0
Private consumption Private investment Public expenditure Net exports of goods and services Exports of goods and services Imports of goods and services Gross domestic product
1/
Note: Domestic demand excluding changes in stocks Source: National Economic and Social Development Board
Recent data in April and May indicated that the Thai economy continued to expand in 2011 Q2 on the back of strong domestic demand. Private consumption grew robustly in line with farm income growth and strong employment conditions, further supported by credit
Bank of Thailand
expansion driven by low interest rates. On the other hand, private investment and exports were likely to subside owing in part to supply disruption in the automobile industry due to Japan,s natural disasters. The adverse impact of the supply disruption, however, should be temporary. 2. Going forward, the MPC views major risks to growth to come mainly from the external front as follows. (1) Trading partners, growth, especially in developed countries, may be fragile. Significant concerns remain over the U.S. real estate market and unemployment, as well as the financial institutions and sovereign debt problems in the euro area that may spread out to other countries. (2) Persistently high oil prices in the global market may drive up domestic retail oil prices, which will undermine income and private spending and dampen growth overall. Lastly, (3) international capital flows may be highly volatile given the uneven global economic growth, which may lead to higher uncertainty and volatility in the global economic landscape.
Chart 1.1 GDP growth forecast

Annual percentage change
14 12 10 8 6 4 2 0 -2 -4 -6 -8 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 14 12 10 8 6 4 2 0 -2 -4 -6 -8
Note: The fan chart covers 90 percent of the probability distribution.
Given the assessment of risk factors and the outlook on the global recovery, the MPC projects the Thai economy to sustain its growth momentum well going forward. The MPC keeps its growth forecast for 2011 unrevised at 4.1 percent, driven mainly by robust exports and domestic demand. Output growth is then forecast to be 4.2 percent in 2012, also unchanged from the previous projection. Despite the Thai economy,s potential to expand at a pace even faster than this, significant risks remain due to both external factors and uncertainties surrounding the new government , s policies. 3. Thailand,s overall financial stability remained sound and supportive to the ongoing domestic expansion. Both domestic and global economic recovery helped strengthen financial positions of businesses, as reflected in their solid profitability and debt-servicing ability. But over the period ahead, businesses will need to cope with heightened pressures due to rising production costs, partly attributable to the new government,s plan on minimum wage raise. In addition, uncertainties in the global economic recovery may also affect Thailand,s exports in the near future. On the other hand, strong income and employment prospects will continue to strengthen households, financial health, though with some threats from uncertainties in the global economy that may weigh on exports, farm income, and households, income. The MPC will also closely monitor the new government,s fiscal stimulus, which may affect household spending and debt accumulation in the longer term. At the same time, domestic stability remained sound with no signs of imbalances in the real estate sector, also with
Bank of Thailand
financial institutions, strong health as reflected in their performance and balance sheets. External stability also remained firm thanks to the continued balance of payments surplus.
Inflation outlook and monetary policy

Headline inflation stood at 4.10 percent in 2011 Q2, picking up from 3.01 percent in the previous quarter in all components. Prices of fresh food, in particular, edged higher in line with rising production costs and unfavorable weather conditions, while energy prices rose with the global oil prices. Meanwhile, core inflation also ticked up from the previous quarter to 2.37 percent, following prices of food and beverages that surged in line with rising costs of fresh food as well as seasonings and condiments. Moreover, rising demand from robust domestic growth also pressured core inflation to the upside. Looking ahead, the MPC projects price pressures to build up strongly with greater pass-through from soaring production costs to consumers, rising demand and cost pressures, as well as higher inflation expectations. In addition, the forthcoming termination of the 30-baht diesel price pegging at the end of 2011 Q3 will likely boost inflation in energy prices and related components.
Chart 1.2 Consumer Price Index

Core inflation target range
Annual percentage change 10 8 6 4 2 0 -2 -4 Core inflation1/ Headline inflation
Jun
4.06 2.55 3.0
0.5
-6 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr 2008 2009 2010 2011
Note: 1/Consumer Price Index excluding raw food and energy items Source: Trade and Economic Index Bureau, Ministry of Commerce
Major upside risks to inflation are still from: (1) higher-than-expected oil prices because of the global crude supply shortage due to unrests in the Middle East and North Africa; and (2) accelerated commodity prices possibly driven by supply shocks due to natural disasters and global demand growth resuming back to its normal trend. On the contrary, downside risks to inflation include: (1) lower outturns of oil and commodity prices due to mild impact of natural disasters, protracted global recovery, or the slowdown in emerging market economies; (2) early resolution of political tensions in the Middle East and North Africa, which will alleviate concerns on crude supply; and (3) the possibility that the government may extend part of its subsidy measures beyond the scheduled termination at the end of December 2011. In light of assessment of pressures and risks to inflation above, the MPC projects headline inflation in 2011 and 2012 to stage at 3.9 and 3.2 percent,
Bank of Thailand
respectively, unchanged from the previous projection. Core inflation in 2011 and 2012 is expected to average at 2.4 and 2.3 percent, respectively, up from the previous forecast given the heightened price pressures from both demand and supply factors. With regard to the new government,s stimulus plans, the MPC judges that these plans may threaten domestic economic stability in the short term during the initial period of adjustment, especially in case that high growth drives up inflation well above the baseline scenario.
Chart 1.3 Core inflation forecast

6 5 4 3 2 1 0 -1 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 6 5 4 3 2 1 0 -1
With regard to monetary policy, the MPC, in its meeting on June 1, 2011, assessed the global growth momentum to sustain despite some drag due to recent disasters in Japan through regional supply chains. At the same time, the Thai economy continued to expand well on the back of robust external and domestic demand. Domestic price pressures built up persistently with steepening production costs and would likely continue to pick up over the period ahead, with
inflation expectations rising gradually in line with greater pass-through from costs to retail prices. The MPC, therefore, decided unanimously to raise the policy interest rate by 25 basis points, from 2.75 to 3.0 percent. Then in its subsequent meeting on July 13, 2011, the MPC judged major industrialized countries to moderate somewhat during the first half of 2011. The U.S. economy suffered notably from elevated oil prices and supply disruption in the automobile sector due to Japan,s natural disasters. These pressures, however, should ease during the second half of the year. On the other hand, the euro area economy continued to grow led by growth in core countries, although sovereign debt concerns would likely remain burdensome over the period ahead. Along with strengthened growth in Asia, the Thai economy sustained its growth momentum on the back of domestic demand and exports, with further support from fiscal stimulus. Meanwhile, inflation pressures remained elevated along with high prices of oil and prepared food. Over the period ahead, the new government , s plans on minimum wage raise and spending boost would likely add more upward pressures to inflation amid strong domestic growth, possibly leading to higher inflation expectations as well. The MPC, accordingly, decided unanimously to raise the policy interest rate by another 25 basis points, from 3.00 to 3.25 percent.
Bank of Thailand
2. Inflation and Economic Conditions

Inflation trends
Trading partners, inflation During the first two months of 2011 Q2, the inflation in Thailand,s trading partners, economies accelerated from the previous quarter, owing to commodity prices that remained elevated, coupled with continued demand growth supportive of pass-through of production costs to final prices. Such development could also be witnessed in Thailand.
The acceleration of , Thailand s trading partners inflation resulted fr om commodity prices that remained elevated coupled with continued demand growth.
Chart 2.1 Inflation in Thailand and other countries

10 8 6 4 2 0 -2 -4 -6 2008 15 May 10 Philippines (4.5) Singapore (4.5) Malaysia (3.3) -5 2008 2009 2010 2011 Indonesia (6.0) 4 2 0 -2 -4 2008 2009 2010 2011 Japan (0.3) 2009 2010 2011
Trading partners (22) May (3.5)
9 Thailand Jun (4.06) 6 3 0 -3 2008 6 US (3.6) May EU-12 (2.7) 2009 2010 2011 Taiwan May (1.7) South Korea Jun (4.4) China May (5.5)
5 0
Source: Various official sources and Bloomberg
Domestic inflation Headline inflation rose to 4.10 percent in 2011 Q2, accelerating from the previous quarter in all components including core inflation, raw food, and energy prices. In the case of raw food, the acceleration in prices of eggs, dairy products, meats, poultry and fish was due to higher costs of animal feeds and
Headline and core inflation stood at 4.10 and 2.37 percent, respectively in 2011 Q2, accelerating from the previous quarter.
unfavorable weather conditions. Meanwhile, higher domestic retail gasoline prices and the increase in electricity charge for the period of May to August 2011 contributed to rising energy prices.
Table 2.1 Quarterly inflation

Unit: Percent 2010 Q2 2010 Q3 Q4 2011 Q1 Q2
Percentage change from the previous year (%YoY) - Headline Consumer Price Index Core Consumer Price Index Raw food Energy Percentage change from the previous quarter (%QoQ) - Headline Consumer Price Index Core Consumer Price Index Raw food Energy 1.0 0.4 4.0 0.5 0.6 0.2 3.4 -2.2 0.2 0.2 -0.8 2.4 1.2 0.7 1.5 4.6 2.1 1.3 4.7 3.0 3.3 1.0 10.3 9.7 3.3 0.9 9.2 10.9 3.3 1.2 13.8 1.5 2.8 1.2 10.2 3.2 3.01 1.46 8.27 5.21 4.10 2.37 9.06 7.92
Source: Trade and Economic Index Bureau, Ministry of Commerce.
Chart 2.2 Contribution to inflation

Contribution to headline inflation
Percent 8 Energy Raw food 6 Core inflation Headline inflation 4 2 2 3
Contribution to core inflation

Percent 4 Non-food and beverages food and beverages
-2
-1
-4 Q1 2008 Q1 2009 Q1 2010 Q1 2011
-2 Q1 2008 Q1 2009 Q1 2010 Q1 2011
Source: Trade and Economic Index Bureau, Ministry of Commerce, and calculations by Bank of Thailand.
Core inflation was at 2.37 percent in 2011 Q2, rising from the previous quarter as a result of the strong pass-through into prices of food and beverages. This development was due to the surge in costs of raw food
10
Bank of Thailand
and condiments, coupled with strong domestic demand in line with economic expansion. Meanwhile, the nonfood and beverage inflation edged lower owing to the base effect i.e. the disappearance of a positive contribution from last April , s termination of the government,s subsidy on water charges. As for other goods and services, prices also began to increase but only slightly. Going forward, inflation trend will likely remain high due to the pressures from high production cost, strong demand, and firm,s cost and inflation expectations.
Production cost conditions

Raw material cost In 2011 Q2, global oil prices continued an upward trend from the previous quarter thanks to the ongoing expansion in global demand and concerns over supply disruptions as a result of the unrests in the Middle East during the beginning of quarter. However, global oil
Overall production costs accelerated from the previous quarter, reflecting in higher global commodity prices, manufactured products in PPI, and labor cost.
Chart 2.3 Production cost conditions

World commodity prices
Annual percentage change 100 World food price 80 60 40 20 0 -20 -40 -60 Q1 2008 Q1 2009 Q1 2010 Q1 2011
Producer price index

Percent 25
Producer price index : Manufactured products Producer price index : Mining products
Dubai oil price 20 15 10 5 0 -5 -10 -15
Producer price index : Products of Agriculture Producer price index
Q1 2008
Q1 2009
Q1 2010
Q1 2011
Source: Bloomberg and Food and Agriculture Organization of United Nation.
Source: Trade and Economic Index Bureau, Ministry of Commerce, and calculations by Bank of Thailand.
11
prices edged lower during mid-quarter in line with the depreciating trend in the U.S. dollar and concerns over the global economic recovery due to the weaker-thanexpected U.S. economic figures and higher risk of a more prolonged European sovereign debt problem. Meanwhile, world food prices continued to accelerate, owing to the pick-up in cereal prices while prices of meat and dairy products remained elevated. Producer Price Index (PPI) inflation dropped slightly to 5.8 percent in 2011 Q2 as prices of agricultural products decreased, mainly from prices of vegetables. Meanwhile, the prices of mining and manufactured products accelerated in line with steepening prices of food, beverage and tobacco, textiles and textile products, chemicals and chemical products, and transport equipments. Such development reflected the higher cost pressures from the non-food and beverage component. Labor cost Labor market data of 2011 Q1 reflected higher pressure of labor cost as wages rose in line with the continued economic expansion. As a result, labor market conditions tightened, contributing to an increase in average earnings from the same period last year. Unit labor cost also edged higher, implying that labor productivity could not catch up with the increase in wages.
Pass-through from cost to final prices

Going forward, the pass-through in the non-food and beverages gr oup is likely to increase in line with pressures from higher cost, solid demand, and inflation expectations.
The strong pass-through in the food and beverages category in the first half of 2011 is likely to soften during the remainder of the year as the increases in world food prices and prices of agricultural products
12
Bank of Thailand
Chart 2.4 Labor wage condition

Average earnings
Bath per month 10,000
Unit labor cost

% change from the same period last year 20 15
9,500 10 9,000 5 0 8,500 -5 2011 8,000 2010 2009 -10 Q1 2008 Q1 2009 Q1 2010 Q1 2011
Source: National Statistical Office.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Note: Unit labor cost = Labor compensation/GDP Source: National Statistical Office and National Economic and Social Development Board, and calculations by Bank of Thailand
in PPI begin to slow, reflecting subsiding pressure on costs of food inputs. On the other hand, PPI for manufactured products continued to increase though the pass-through to final prices in the non-food and beverage category has been limited. Going forward, cost pressures is likely to increase due to 1) the decrease in various energy price subsidies ranging from the lifting of the cap on diesel price at 30 baht per liter in September 2011, the plan to gradually float LPG price to the increases in electricity charge for the industrial sector albeit moderate global commodity prices, and 2) pressures from higher labor cost and strong demand growth, supported by the new government,s policies such as an increase in minimum wage and civil servants, salary, the agricultural products, pledging scheme, and other stimulus policies. Moreover, firms, production cost and inflation expectations will likely enable the higher pass-through from cost to final prices in the periods ahead.
13
Aggregate demand in 2011 Q1 and the outlook for 2011 Q21/

In 2011 Q1, the Thai economy expanded fr om the previous quarter, thanks to both domestic and external demand.
The Thai economy in 2011 Q1 continued its momentum and grew at 2.0 percent over the previous quarter. The economy was propelled by positive developments in both domestic and external demand. Robust expansion of private investment by 7.0 percent contributed significantly to growth in this quarter. In addition, exports of goods and services continued to expand by 10.5 percent, which was the highest quarteron-quarter growth in ten years.
Table 2.2 GDP growth rate

Change from the previous quarter (seasonally adjusted, percent) GDP Domestic demand Private consumption Private investment Government consumption Public investment Exports of goods and services Imports of goods and services 2009 Q3 2.2 1.5 1.2 2.8 3.9 -2.4 7.0 3.6 Q4 3.7 2.1 2.1 3.4 3.7 -4.7 6.9 11.8 Q1 3.1 1.5 0.7 4.2 1.5 1.6 4.5 4.6 2010 Q2 -0.1 2.6 2.3 6.2 -0.5 0.7 2.4 3.1 Q3 -0.3 -0.6 -0.3 -0.3 -1.3 -3.0 -2.3 0.3 Q4 1.3 0.9 1.2 -0.6 3.1 -2.1 4.8 2.0 2011 Q1 2.0 1.9 0.6 7.0 -0.3 3.0 10.5 10.1
Source: The National Economic and Social Development Board and calculations by the Bank of Thailand
In 2011 Q2, the exports of goods and services decelerated from a high growth in the previous quarter, partly due to the slowdown in automobile production and exports caused by Japan , s natural disasters. Nevertheless, this impact is expected to be only temporary, and improved gradually by the end of this
1/
Data used in assessing aggregate demand in 2011 Q1 were obtained from the National Economic and Social Development Board. Economic indicators used in assessing the 2011 Q1 developments and the outlook for 2011 Q2 were obtained from the Bank of Thailand, , except for data on government expenditure, which originated from the Comptroller General s Department and were compiled by the Fiscal Policy Office.
14
Bank of Thailand
quarter. Overall, the outlook for the economy in 2011 Q2 is expected to grow from the previous quarter. The growth momentum would be mainly driven by domestic demand, particularly from continued expansion of private consumption. Total exports in 2010 Q4 accelerated by 10.5 percent from the previous quarter. Merchandise exports gained in all categories, with exports of agricultural products driven up by rice exports. Meanwhile, exports of resourced-based products expanded in line with exports of rubber products and prepared food. Hightechnology exports remained robust, particularly for plastic products and electrical appliances. The exports of automobiles also expanded, as the impact of Japan,s disasters was not evident this quarter thanks to manufacturers, inventory accumulation in earlier periods. In addition, exports of labor-intensive goods excluding gold gained in almost all categories. Lastly, exports of services expanded in line with rising tourism revenue.
Exports of goods and services continued to grow in 2011 Q1, but are likely to slow down in 2011 Q2 due , to Japan s natural disasters.
Chart 2.5 Export volume index classified by products

(3-month moving average)
January 2008 = 100 130 Export volume index (including gold) 120 110 100 90 80 70 60 Jan 2009 Apr Jul Oct Jan 2010 Apr Jul Oct Jan 2011 Apr
Labour-intensive products (excluding gold) Resource-based products Technological products Agricultural products
Source: The Bank of Thailand
15
However, exports in 2011 Q2 are expected to decelerate from the previous quarter, partly due to the slowdown in exports of automobiles caused by Japan,s supply chain disruption. However, the situation started to improve by the end of May. Exports of automobiles and parts were then expected to recover to its normal level starting from 2011 Q3 onwards. In addition, exports of services were expected to decline from a high growth in the previous quarter.
Private consumption continued to grow in 2011 Q1, and was poised to continue into 2011 Q2, supported by high income, strong employment and expansion of private credits.
In 2011 Q1, private consumption expanded by 3.4 percent over the same period last year, decelerating from the previous quarter partly due to the impact of widespread flood on consumers , spending and confidence. Nevertheless, private consumption still managed to grow by 0.6 percent over the previous quarter, mainly due to consumption of durable goods. This expansion was reflected in commercial car sales remaining at high level, and rising automobile leasing provided by financial institutions. Meanwhile, consumption of non-durable and semi-durable goods decelerated from the previous quarter. Private consumption is likely to grow further in 2011 Q2, with support from high income, strong employment, and expansion of private credits. The support is partly reflected in rising farm income in line with agricultural prices, low unemployment, as well as rising credit to household. However, consumption of durable goods was likely to soften as a result of rising interest rates, and higher inflationary pressures. Consumption of automobiles was also anticipated to moderate due to Japan,s supply chain disruption.
Private investment in 2011 Q1 accelerated fr om the previous quarter, but expected to stabilize in 2011 Q2.
Meanwhile, private investment expanded by 12.6 percent in 2011 Q1 over the same period last year,
16
Bank of Thailand
Chart 2.6 Contribution to private consumption expenditure (PCE) growth (QoQ, seasonally adjusted)
Durables Semi-durables PCE Non-durables
Percent 3 2 1 0 -1 -2 -3 Q1 2009
Services
Q1 2010
Q1 2011
Source: The National Economic and Social Development Board and calculations by the Bank of Thailand
Chart 2.7 Business Sentiment Index and Private Investment Index

Index 60 55 Business Sentiment Index 50 45 175 40 Private Investment Index (RHS) 35 30 Jan 2009 165 155 145 Apr Jul Oct Jan 2010 Apr Jul Oct Jan Apr 2011
50.9
May 205.8
Index 215 205 195 185
accelerating by 7.0 percent from the previous quarter. Investment in machinery and equipment expanded from imports of machinery related to export-oriented industries such as electronics, automobiles, and electrical appliances. Moreover, investment in construction sector remained robust, partly due to the housing construction and repairs after the flood. Domestic commercial car sales also continued to grow, with strong support from
17
higher confidence and expanding commercial bank credits to the business sector. However, private investment is expected to stabilize in 2011 Q2. The Private Investment Index (PII) levels in April and May were slightly lower than the average level recorded in 2011 Q1. This was partly reflected in decelerating commercial car sales caused by supply chain disruption since mid quarter. Investment in machinery and equipment is anticipated to grow moderately from the previous quarter as industries already stepped up their machinery imports in order to expand their production capacity in prior period. Nevertheless, investment in the construction sector is likely to grow further, thanks to rising construction areas permitted in municipal zone especially housing and commercial investment in Bangkok. Factors critical to future investment decisions continued to be the rising costs of production, price adjustment difficulties, and economic and political uncertainties.
Chart 2.8 Import volume index classified by products

(3-month moving average)
January 2008 = 100 140 Import volume index 130 120 110 100 90 80 70 60 50 Jan 2009 Apr Jul Oct Jan 2010 Apr Jul Oct Jan 2011 Apr
Capital goods Fuel Raw material goods Consumer goods
18
Bank of Thailand
Positive developments in private consumption and investment led total imports to grow by 10.1 percent in 2011 Q1 over the previous quarter. Imports of merchandise goods expanded in almost all categories, particularly raw materials and intermediate goods such as metal and metal products, electronic parts, and industrial machinery. Furthermore, imports of capital goods expanded in line with imports of drilling platforms, while imports of fuel and lubricants rose along with crude oil imports. Meanwhile, imports of services accelerated from the previous quarter following tourist expenditure. However, the overall imports of goods and services in 2011 Q2 were expected to decelerate from the previous quarter in line with the outlook of domestic demand. The overall government spending contracted in 2011 Q1 which was the second quarter of the fiscal year, by 0.6 percent over the preceding period, partly due to the speeding up of disbursement in the first quarter of the fiscal year. However, the overall public investment expanded from the previous quarter, owing mainly to the investment made by state enterprises. Constructions by state enterprises improved from the previous quarter partly owing to the ongoing projects, for example: the Purple Line city train (Bang Yai _ Rat Burana) of Metropolitan Rapid Transit Authority, the Red Line city train (Bang Sue _ Taling Chan) of the State Railway of Thailand, Baan-Aue-Ar-Thorn project phases 3 _ 5 of National Housing Authority, and expressway extension phase 3 of the Expressway Authority of Thailand. Besides, investment in machinery and equipment by state enterprises expanded along with the imports of a commercial aircraft by Thai Airway
Imports gained in almost all categories in 2011 Q1, but are anticipated to decelerate in 2011 Q2.
19
International Public Company, and imports for system set-up of the Integrated Billing and Customer by CAT Telecom Public Company Limited.
Chart 2.9 Disbursement of government budget

Billion baht 250
2010 Budget 2011 Budget
200
150 100
50 0 Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
Note: Excluding principal repayments and replenishments of the treasury reserve. Source: The Comptroller General,s Department, Ministry of Finance
Government spending is expected to increase in 2011 Q2 from the same period last year, in line with higher disbursement rate and disbursed amount. Moreover, the disbursement of budget related to government measures is also anticipated to increase, particularly the subsidies for civilians affected by floods in 2010, and financial aids for the elderly.
Production and supply in 2011 Q1 and the outlook for 2011 Q23/
Production and supply expanded from the previous quarter, but are expected to stabilize in 2011 Q2.
The overall production and supply grew by 2.0 percent in 2011 Q1 over the previous quarter, accelerating from 1.3 percent in 2010 Q4. The expansion took place
3/
Data used in assessing aggregate supply in 2011 Q1 were obtained from the National Economic and Social Development Board. Economic indicators used in assessing the 2011 Q1 developments and the outlook for 2011 Q2 were computed by the Bank of Thailand, except data on the number of tourists and the occupancy rate, which were in part compiled by the Tourism Authority of Thailand. Data on the labor market were obtained from the National Statistical Office.
20
Bank of Thailand
in all sectors, in particular the manufacturing production which expanded in line with external demand. Meanwhile, agricultural output also improved from the previous quarter, which was affected by unfavorable weather conditions as well as flooding situation. The production and supply are expected to grow moderately in 2011 Q2 over the same period last year. However, the quarter-on-quarter growth is anticipated to be unchanged, partly due to a contraction of automobile production caused by Japan,s supply chain disruption as well as a lower agricultural output from early harvesting in the previous quarter.
Chart 2.10 Contribution to GDP growth (QoQ, seasonally adjusted)

Percent 4 3 2 1 0 -1 -2 -3 -4 -5 -6 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Agriculture Trade Others Manufacturing Services GDP
Source: The National Economic and Social Development Board
Manufacturing production accelerated by 1.6 percent in 2011 Q1 over the preceding quarter. Industries that rely on both domestic and export markets expanded in line with rising production of automobiles to accommodate both domestic and external demand. The production of automobiles was not affected by Japan,s supply chain disruption this quarter, thanks to manufacturers, inventory accumulation in earlier periods.
Manufacturing production edged higher in 2011 Q1, but is expected to contract in 2011 Q2, partly due , to the impact of Japan s natural disaster.
21
In addition, export-oriented industries expanded from the previous quarter, following the production in industries such as electronics and parts, and electrical appliances. Meanwhile, the production of hard disk drives declined from the previous quarter, given the already-high level of inventory, and the downtrend in demand. Nevertheless, domestic-oriented industries slightly contracted from the previous quarter in line with the declining production of petroleum, mainly due to the temporary shutdown of some petroleum refineries from February to March.
Chart 2.11 Manufacturing Production Index (MPI) classified by market (3-month moving average, seasonally adjusted)
January 2008 = 100 120 110 100 90 80 70 60 Jan 2009 Apr Jul Oct Jan 2010 Apr Jul Oct Jan 2011 Apr
MPI growth Export-oriented industries (export > 60%) Both domestic and export industries (export 30% - 60%) Domestic-oriented industries (export < 30%)
Source: The Office of Industrial Economics, Ministry of Industry
The outlook of manufacturing production in 2011 Q2 is likely to decline from the previous quarter. This is partly reflected in the average level of the seasonallyadjusted Manufacturing Production Index (MPI) in the first two months of 2011 Q2, which was lower than the average level recorded in 2011 Q1. In April and May, the production of automobiles was affected by supply chain disruption as a result of Japan,s natural disasters. Nevertheless, major car manufacturers expected to
22
Bank of Thailand
Chart 2.12 Capacity utilization rate (seasonally adjusted)

Percent
70 65 60 55 50 45 Jan 2009
May 58.0
Apr
Jul
Oct
Jan 2010
Apr
Jul
Oct
Jan 2011
Apr
Source: The Office of Industrial Economics, Ministry of Industry
gradually increase their production by the end of this quarter, and resume their normal production in 2011 Q3. Besides, production of hard disk drives is expected to improve, as inventory level starts to decrease and demand is likely to pick up gradually in the second half of the year in order to accommodate the efficiency improvement of office computer. Capacity utilization is likely to decline in 2011 Q2 from the preceding quarter following a drop of production, particularly in automobile industry. The services sector continued to expand in 2011 Q1. In this regard, the hotels and restaurants industry grew by 4.6 percent over the previous quarter in line with the rising number of tourists. Tourists from Japan were slightly decelerated after the incident in March, but the overall tourism sector remained robust. Meanwhile, the seasonally-adjusted occupancy rate rose to 56.5 percent in this quarter from 53.1 percent in 2010 Q4. Moreover, the expansion of the tourism sector led to a modest growth in logistics and transportation services of 1.2 percent over the previous quarter.
The services sector, particularly tourism and transportation, continued to expand from the previous quarter, but it is expected to slow down in 2011 Q2.
23
The services sector is expected to slow down in 2011 Q2. The seasonally-adjusted number of tourists in April and May rose by 3.8 and 0.4 percent, respectively, over the previous months. The occupancy rate was also lower, with a seasonally-adjusted rate of 57.5 in May. Nevertheless, the number of tourists is expected to grow largely over the same period last year, as tourism sector was affected by political turmoil in May 2010.
Chart 2.13 Number of foreign tourists and hotel occupancy rate (seasonally adjusted)
Thousand persons 1,685 Hotel occupancy rate (RHS) Number of foreign tourists 1,485 55 1,285 50 45 40 885 35 685 Jan 2009 Apr Jul Oct Jan 2010 Apr Jul Oct Jan 2011 Apr 30 Percent 65 60
1,085
Source: The Tourism Authority of Thailand and the Bank of Thailand
In 2011 Q1, agricultural output expanded well from the previous quarter, but is expected to contract in 2011 Q2.
Agricultural output grew by 10.1 percent in 2011 Q1 over the previous period, after contracting by 0.2 percent in 2010 Q4. The expansion contributed mainly from second-crop rice output which was early cultivated to make up for the damaged output caused by floods in the previous quarter. Meanwhile, the output of sugar cane reached the record-high, due to last year,s heavy rain and encouraging price for growers to expand their cultivated areas. Meanwhile, tightened supply in both global and domestic markets, rising demand for biofuels, as well as steady growth in the automobile industry drove agricultural prices up significantly particularly prices of rubber and oil palm.
24
Bank of Thailand
In 2011 Q2, agricultural output was expected to contract from the previous quarter, owing mainly to the decline in rice output from early harvesting in 2011 Q1. Moreover, last year public campaign dissuaded second cultivation of second-crop rice due to low level of water in the dam. Major crop prices tended upward steadily due to lowering supply, particularly for oil palm, shrimp, and livestock. Nevertheless, price of rubber was anticipated to slow down as Japan,s disasters led to the global decline in automobile production, and, as a result, lower demand for rubber.
Chart 2.14 Unemployment rate (seasonally adjusted)

Percent 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Jan 2009 Apr Jul Oct Jan 2010 Apr Jul Oct Jan 2011 Apr 0.6
Source: The National Statistical Office, and calculations by the Bank of Thailand
Employment conditions continued to improve in 2011 Q1 from the previous quarter. In this regard, the seasonally-adjusted unemployment rate was 0.6 percent in April, the lowest since 2001 4/ . Moreover, the recruitment difficulty index in May stood at 38.3, still reflecting labor shortage that will likely add to inflation pressures over the periods ahead.
Tight labor market conditions will add to inflation pr essures going forward.
4/
National Statistical Office started to collect monthly employment data since 2001.
25
Soaring food prices and its implications on core inflation

Over the recent period, food prices, including both raw food and seasonings and condiments rose substantially, causing higher pass-through to prices of prepared food. The effect was most notable during 2011 Q2, where prices of many prepared food items were marked up. In April 2011, prepared food price rose by 2.6 percent over the previous month _ a new high record. This rate is considered high compared to its long-run average (since 2000) of approximately 0.2 percent. Such a strong pass-through in turn resulted in an acceleration of core inflation from 1.5 percent in 2011 Q1 to 2.4 percent in 2011 Q2, partly owing to a large share of food and beverages, totaling 24.4 percent in the Core Consumer Price Index basket. This scenario thus motivates the following questions: (1) what are the main factors affecting prepared food prices in Thailand?; (2) how can we explain the dynamic of food inflation; and (3) what are the implications on core inflation? Factors affecting prices of prepared food in Thailand Two steps can be taken in order to find determinants of prepared food prices. The first step is to find an underlying factor that explains the costs of food preparation via constructing the Common Factor Index. This Index is calculated by extracting the Common Factor underpinning the costs of various prepared food inputs, including raw food; namely meat, eggs and dairy products, rice, vegetables and fruits; and seasonings and condiments. The statistical method employed in this calculation is Principle Component Analysis (PCA). The PCA-extracted common trend will then reflect the general factor affecting the costs of food preparation and thus can best explain their variations.
Chart 1 Determinants of food inflation
Meat Eggs and dairy Rice Vegetables Seasonings and and fruits condiments
Principle Component Analysis
% QoQ sa
10 5 0 -5 Q1 1995 Common factor Q1 1997 Q1 1999 Q1 2001 Prepared food price Q1 2003 Q1 2005
% QoQ sa Common factor*

20 0 -20 World food price Q1 2007 Q1 2009 -40 Q1 2011
Thailand,s cost of food preparation is correlated with world food price

Correlation Common factor and prepared food Common factor and world food (1 quarter lag)** Prepared food and world food (1 quarter lag)** 1995 - 2011 0.46 0.32 0.45 2000 - 2011 0.51 0.41 0.59 2006 - 2011 0.57 0.46 0.70
Note: * The constructed common factor is able to explain approximately 42.7 percent of the variation in the 5 variables ** World food is proxied by the International Monetary Fund,s Food Index Source: Ministry of Commerce and calculations by Bank of Thailand
Chart 2 Impact of a supply shock on inflation under different degrees of persistence

Inflation
The second step then is to 40 find the correlation between the Common Factor Index and potential 30 factors underlying the costs of food High persistence 20 preparation. It is found that world food prices significantly affect , 10 Thailand s prepared food prices Low persistence through their impact on the costs of Time 0 food preparation. This relationship is Shock reflected by the high correlation coefficients between world food prices and the Common Factor, the Common Factor and prepared food prices, and world food prices and prepared food prices during 2006-2011 of 0.46, 0.57 and 0.70, respectively (Chart 1). Dynamic of food inflation The speed at which food inflation will subsequently taper off depends on its persistence. In other words, in the case of high persistence, when food inflation spikes up from a supply shock, it will take longer to adjust downwards relative to the case of low persistence. (Chart 2)
26
Bank Bank of Thailand of Thailand
A popular method in calculating , Chart 3 Thailand s inflation persistence inflation persistence is to find (Sum of Auto Regressive Coefficients) Non-food Food the Sum of Autoregressive 0.43 0.42 Thailand (1995 - present) Coefficients (SARC) from the p 0.37 0.33 Thailand (2000 - present) equation t = + it-i + ut , where 0.182 0.021 World mean i=1 0.243 0.000 World median p is the inflation rate and SARC Food and non-food inflation persistence in 91 countries* =i i. In the case of Thailand, =1 30 Thailand = 0.33 inflation generally has a relatively Food 25 high persistence level compared to Thailand = 0.37 20 Non-food other countries, although it has 15 10 edged down since 2000 after the 5 adoption of the Flexible Inflation 0 Targeting regime. In addition, there -1.4 -0.7 -0.1 0.6 1.2 -2.0 is higher persistence in food Note: * Walsh James, Reconsidering the role of food prices in inflation, IMF Working paper (2011) whereby persistence is measured by the Sum inflation compared to non-food of Auto Regressive Coefficients inflation (Chart 3). Upon disaggregating the overall food category into raw food and other food including prepared food and seasonings and condiments, it is found that the persistence in food inflation is mainly caused by such other food. This fact may well reflect the gradual price adjustment process of prepared food outlets/restaurants. The pass-through of food to core inflation Despite the fact that food prices have a relatively high portion in the Core Consumer Price Index basket and food inflation itself is highly Percent persistent, the pass-through of food 0.015 to non-food inflation, evident from the 0.010 impulse response function of a typical 0.005 Vector Autoregressive Model (VAR)1/ 0.000 is not particularly obvious (Chart 4). -0.005 This suggests that in the past, although increases in food prices would speed Quarters -0.010 2 4 6 8 10 12 14 16 18 20 22 24 up core inflation, the risk that core inflation would increase continuously as a result of the pass-through of food to non-food inflation was minimal. In other words, the second round effect of food inflation has been quite low. However, during the present setting where the economy is expanding at a solid pace and demand pressure is strong, as reflected by the higher-than-average capacity utilization rate, a 1 percent increase in food inflation will pass-through to core inflation by 0.05 percentage point more than when demand pressure is tame.2/
Chart 4 Impulse response of non-food inflation to a 1 standard deviation innovation in food inflation
In summary, the large proportion of food in the Core Consumer Price Index basket implies that food inflation dynamic is an important determinant of the overall inflation dynamic. This is reflected in the acceleration of core inflation during the previous periods. Moreover, although food inflation has a rather high persistence level, past data indicates that the pass-through to non-food inflation has not been obvious. In other words, the magnitude of the second round effect of food inflation is not large enough to sustain a continuous rise in core inflation. Nevertheless, when the economy is strong and demand pressure is high, the likelihood of a larger second round effect is estimated to be higher, potentially altering the inflation expectation. The BOT, therefore, places great emphasis on assessing developments and risks that can potentially affect economic growth, inflation and inflation expectation in the periods ahead.
1/ Using quarterly CPI data for food and non-food during 2000 - 2011 and employing 2 lags. 2/ Using the equation 3 3i=1 t-i where Dummy = 1 when there is high demand core,t core,t-1 i=1 t-i
=C+
+ Dummy
pressure, i.e. the capacity utilization rate is higher than its average value since 2000, and Dummy = 0 otherwise.
Inflation Report July 2011 Inflation Report July 2011
27
3. Monetary Conditions and the Exchange Rates

Following the release of the previous report, the MPC judged in the meeting on June 1, 2011, that the global economy moderated somewhat in the first quarter of 2011 but still maintained its overall growth momentum. The US economy showed signs that rising inflationary pressure had begun to weigh on consumption. The euro area was expected to maintain its expansion but sovereign debt problems remained a key risk to the economy. Meanwhile, the Asian economy expanded well on account of both internal and domestic demand. However, risks to global inflation were expected to remain going forward. The Thai economy grew well in the first quarter supported by agricultural production and exports. Inflationary pressure increased more than expected following hikes in the prices of prepared foods. As a result, there is a risk that core inflation may breach the upper end of the target that band in the future periods. The MPC therefore decided unanimously to raise the policy interest rate by 0.25 percentage points, from 2.75 to 3.00 percent per annum. In the following meeting on July 13, 2011, the MPC noted that the advanced economies expanded more slowly than expected in the first half of the year. The U.S. economy was particularly affected by the surge in oil prices and supply disruption in the automobile sector stemming from the Japan crisis which was anticipated to abate in the latter half of the year. The euro area continued to expand from growth in the core member countries while sovereign debt problems
29
remained a key risk to the economy. The Asian economy continued to grow from both internal demand and exports. However, going forward, growth may slow slightly due to monetary policy tightening to contain inflation in many countries. The Thai economy continued to expand in the second quarter primarily from both internal and external demand as well as continued fiscal stimulus. Inflationary pressure remained high. In light of the continued risks to inflation amid robust domestic demand, the MPC deemed it necessary to continue increasing the policy rate and therefore decided unanimously to raise the policy interest rate by 0.25 percentage points, from 3.0 to 3.25 per cent per annum.
Money market conditions

Money market
Short-ter m money market rates rose in line with the policy interest rate.
Short-term money market interest rates for collateralized lending in Thai baht edged higher in 2011 Q2 in line with the policy interest rate. The 1-day repurchase rate and the overnight interbank rate (quarterly average) increased to 2.79 and 2.67 percent in this quarter, respectively. The overnight swap rate that represents the cost of borrowing in Thai baht using the U.S. dollar as collateral also increased to 2.36 percent in line with the increase in the policy interest rate. At the end of 2011 Q2, the difference between the Thai and the U.S. policy rates widened to 2.75 percent due to the total increase in the Thai policy rate by 50 basis points during the second quarter. Meanwhile, the Federal Open Market Committee (FOMC)
30
Bank of Thailand
decided to maintain the federal funds rate at 0-0.25 percent in order to support the slow-than-expected economic recovery.
Chart 3.1 Money market interest rates

Percent 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Overnight swap rate (onshore) Jul Oct Jan Apr 2009 Jul Oct Jan Apr 2010 Jul Oct Jan Apr 2011 Jul Overnight interbank rate (mode) Jul 12 3.12 3-month T-bill rate 3.09 3.00 2.90 1-day repurchase rate
Jan Apr 2008
Source: Bank of Thailand
Chart 3.2 LIBOR, Fed funds rate, and Thai repurchase rate
Percent 5 4 Jul 12 3 2 1-day repurchase rate 1 0 -1 Interest rate differential between 1-day repurchase rate and Fed funds rate Fed funds rate 0.25 0.16 3.00 2.75 7-day LIBOR
-2 Jan Apr 2008
Jul
Oct
Jan Apr 2009
Jul
Oct
Jan Apr 2010
Jul
Oct
Jan Apr 2011
Jul
31
Bond market
Short-term government bond yields edged higher due to policy rate increases.
Government bond yields for short- and mediumterm maturity edged higher compared to the previous quarter following the policy rate increase. In addition, long-term government bond yields decreased due to continued demand.
Chart 3.3 Government bond yields

Percent 5
3 Apr 29, 2011 2 Jun 30, 2011 1 Jul 12, 2011 May 31, 2011
0 3 months 1 2 3 5 7 10 12 14 Maturity (years)
At the end of 2011 Q2, the short end of the implied forward curve, which reflects market expectations of the future policy rate, shifted up from its level at the end of 2011 Q1. The expected short- and medium-term interest rate (1 - 3 years ahead) increased in line with the policy rate, reflecting market expectations that the policy rate would continue to rise in the periods ahead, while inflationary pressure, as reflected by expected interest rates over the next ten years, started to decline.
32
Bank of Thailand
Chart 3.4 Government bond implied forward curves

Percent 5
Apr 29, 2011
4 May 31, 2011
Jul 12, 2011 Jun 30, 2011
2 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Year (s) from now
Equity market Risks of a global economic slowdown stemming from sovereign debt problems in the euro area, fragilities in the recovery process of the U.S and Japan, as well as Thai political uncertainty weighed on foreign investors, sentiments and therefore resulted in a net sale of 43.6 billion baht during May - June 2011. Consequently, the SET index fell to 1,041.48 points at the end of 2011 Q2 after previous rising to 1,093.56 points in April 2011. Looking ahead, more concrete sovereign debt resolution measures for European countries as well as an improved domestic political climate following general elections on 3 July 2011 will likely lift foreign investors, sentiments and attract the return of foreign investment to the market. As such, the actual volatility and the 3-month implied volatility of the SET index, which reflects investors, concerns regarding volatility in the financial market, have both remained low.
The SET index dropped in 2011 Q2 due to both domestic and global uncertainties.
33
Chart 3.5 The Stock Exchange of Thailand (SET) and net buy value of foreign investors
Billion baht
50 40 30 20 10 0 -10 -20 -30 -40 -50 -60 -70
Index SET Index (RHS) Net buy value of foreign investors

1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0
Jan 2008
Jul
Jan 2009
Jul
Jan 2010
Jul
Jan 2011
Source: The Stock Exchange of Thailand
Chart 3.6 Volatility of the Stock Exchange of Thailand (SET) (up to July 12, 2011)
Percent (annualized) 120 SET Index (RHS) Actual volatility 100 1,000 80 60 40 20 400 0 Jan 2008 300 Jul Jan 2009 Jul Jan 2010 Jul Jan 2011 Jul Implied volatility of SET50 (3 months) 700 600 500 900 800 1,100 Index 1,200
Source: Stock Exchange of Thailand and Bloomberg
34
Bank of Thailand
Banking system
At the end of 2011 Q2, the reference lending rates (MLR) and the 12-month time deposit rate of the four largest commercial banks edged up to 6.87 and 2.35 percent respectively, in line with the policy rate increase. The real MLR and the real 12-month time deposit rate of the four largest commercial banks at the end of 2011 Q2 rose from the previous quarter to 2.93 and -1.42 percent, respectively, due to the increase in the lending and deposit rates that exceeded inflation expectations.
1/
Retail interest rates increased in tandem with the policy rate.
, Chart 3.7 Policy rate and commercial banks reference retail rates1/
Percent
8 7 6 5 12-month time deposit rate 4 3 2 1 0 6-month time deposit rate 3-month time deposit rate
Jun 6.87 MLR
Policy rate
3.00 2.35 2.11 1.76
Jan Apr 2008
Jul
Oct Jan Apr 2009
Jul
Oct Jan Apr Jul 2010
Oct Jan Apr 2011
Average rate of the 4 largest commercial banks end-period. When a range is posted by a commercial bank, the average of the minimum and maximum rates is used for calculation. Source: Bank of Thailand
Note:
1/
1/ Minimum lending rate (MLR) and 12-month deposit rate adjusted by expected headline
inflation 12 months ahead with the use of compound interest formula.
35
Deposits of ODCs continued to grow.
Deposits in Other Depository Corporations (ODCs)2/ expanded by 14.4 and 12.9 percent in April and May 2011, from the same period of last year. The mobilization of deposits and bills of exchange served to support credit demand that expanded with the economy as well as manage the cost of funds amid the upward interest rate cycle. In recent periods, specialized financial institutions (SFIs) have become more active in mobilizing deposits through lottery-linked saving products that provide higher returns than commercial bank deposit covered by the government,s blanket deposit guarantee. As a result, deposits at SFIs in April and May 2011 rose by 21.3 and 22.8 percent, respectively.
, Chart 3.8 Commercial banks interest rates1/

Percent 10 8 MLR 6 4 2 0 -2 -4 Jan Apr 2008 Jul Oct Jan Apr 2009 Real 12-month time deposit rate 2/ Jul Oct Jan Apr 2010 Jul Oct Jan Apr 2011 -1.42 Real MLR 2/ 12-month time deposit rate Jun 6.87
2.93 2.35
Average rate of the 4 largest commercial banks Real interest rates are calculated from the compound interest rate formula Source: Bank of Thailand
2/
Note:
1/
2/ ODCs consist of domestically registered commercial banks, branches of foreign banks, inter-
national banking facilities, finance companies, Specialized Financial Institutions (including Government Savings Bank, Government Housing Bank, Bank for Agriculture and Agricultural Cooperatives, Export-Import Bank of Thailand, Small and Medium Enterprise Development Bank of Thailand, and Islamic Bank of Thailand), saving cooperatives, and money market mutual funds.
36
Bank of Thailand
Private credits extended by ODCs continued to grow by 15.3 and 15.6 percent in April and May 2011, respectively, from the same period of last year. This credit expansion was driven mainly by economic growth and the resulting need for working capital loans3/. Meanwhile, loans extended to the household sector remained elevated.
, Chart 3.9 Other Depository Corporations deposits and private credits
18 16 14 12 10 8 6 4 2 0 -2
Private credits still expanded mainly due to household and business loans.
May Private credits 15.6 12.9 Deposits and bills of exchange 8.4 Deposits
Jan Apr 2008
Jul
Oct
Jan Apr 2009
Jul
Oct
Jan Apr 2010
Jul
Oct Jan Apr 2011
, Chart 3.10 Other Depository Corporations private credits by types of debtors

16 14 12 10 8 6 4 2 0 -2 -4 -6 Credits to the household sector Credits to the business sector Other Depository Corporations, private credits
May 15.6
Jan Apr 2008
Jul
Oct
Jan Apr 2009
Jul
Oct
Jan Apr 2010
Jul
Oct
Jan Apr 2011
3/ Credit data from Commercial Banking System
37
Private credit extended by commercial banks in April and May 2011 grew by 12.3 and 13.6 percent, respectively, over the same period of last year. Outstanding loans in the real estate sector started to edge up but remained below its pre-Lehman crisis level. Mortgage loans continued to expand albeit at a lower rate. Furthermore, loans extended to the auto leasing sector continued to grow despite some impact from the supply shortage during the quarter.
Chart 3.11 Corporate loans extended by commercial banks

Index (December 2008)
120
Corporate Construction
110
Finance
Production Commerce Real estate
May 2011
100
90
80
Total corporate loans

70
Dec 2008
Mar 2009
Jun
Sep
Dec
Mar 2010
Jun
Sep
Dec
Mar 2011
Chart 3.12 Consumer loans extended by commercial banks

Index (December 2008)
160 150 140 130 120 110 100
May 2011 Consumer loans Mortgage Private consumption Auto leasing Credit cards
Total consumer loans

90
Dec 2008
Mar 2009
Jun
Sep
Dec
Mar 2010
Jun
Sep
Dec
Mar 2011
38
Bank of Thailand
According to the Senior Loan Officer Survey conducted end-June 2011, private credit demand for both household and corporate sectors in the third quarter continued to increase from the previous quarter in line with economic expansion.
Demand for loans by both households and fir ms gr ew from the previous quarter in line with economic expansion.
Chart 3.13 Expected demand for corporate and consumer loans in 2011 Q3
Expected demand for corporate loans in the next 3 months
100 + Increased 50 0 -50
2010 Q4 2011 Q2 2011 Q1 2011 Q3
Expected demand for consumer loans in the next 3 months

100 + Increased 50 0 -50
2010 Q4 2011 Q2 2011 Q1 2011 Q3
- Decreased
-100 Large corporate SMEs Overall -100
- Decreased
Housing Credit card Other
Expected credit standard for corporate loans in the next 3 months

100 + Eased 50 0 -50 -100 50 0 -50
Expected credit standard for consumer loans in the next 3 months

100 + Eased
- Tightened
Large corporate SMEs Overall
-100
- Tightened
Housing Credit card Other
Source: Senior Loan Officer Survey conducted at the end of June 2011
Monetary base and money supply

In April and May 2011, the monetary base expanded by 9.3 and 9.6 percent, respectively, over the same period last year. This development was due to robust demand for cash as a result of the expanding economy. Broad money also grew at a rate of 15.1 and 14.2 percent in April and May, respectively, over the same period last year. The expansion was a result of deposit mobilization by financial institutions, especially SFIs.
The monetary base expanded in line with robust demand for cash, while broad money picked up as a r esult of deposit mobilization.
39
Chart 3.14 Growth rate of money supply

Annual percentage change 20 15 10 5 0 -5 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Currency in circulation
Monetary base May 9.6 9.2
Annual percentage change 20 15 10 5 0 -5 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Broad money Narrow money
May 14.2 10.7
Jan 2011
Chart 3.15 Contribution to broad money growth

Currency in circulation Demand deposits at Other Depository Corporations Other deposits at commercial banks May Deposits at finance companies 14.2 Other deposits at specialized banks Other deposits at cooperatives Money market mutual funds Securities other than shares Broad money growth

16 14 12 10 8 6 4 2 0 -2 -4
Jan Apr 2008
Jul
Oct
Jan Apr 2009
Jul
Oct
Jan Apr 2010
Jul
Oct
Jan Apr 2011
Exchange rates
On average, the Thai baht appreciated against the U.S. dollar in 2011 Q2 due to strengthening in April despite depreciation over the May-June period.
The Thai currency averaged at 30.29 baht per U.S. dollar in 2011 Q2, appreciating by 0.8 percent from the previous quarter. Factors underpinning the baht appreciation in the first month of the quarter included: (1) strong economic fundamentals; (2) expectations that the Bank of Thailand would continue to raise the policy
40
Bank of Thailand
rate so as to ease inflation pressures; and (3) expectations that the FOMC would maintain an expansionary monetary policy in order to sustain the economic recovery. As a result, more foreign capital flowed into the Thai stock and bond markets.
Chart 3.16 Exchange rate and trade-weighted dollar index

Baht/U.S. dollar 37 36 35 34 33 32 31 30 69.36 29 Jan Apr 2008 Jul Oct Jan Apr 2009 Jul Oct Jan Apr 2010 Jul Oct Jan Apr 2011 Baht/USD 1/ 30.74 Dollar index 2/ 30 Jun Index 88 86 84 82 80 78 76 74 72 70 68 66
Source:
1/ 2/
Bank of Thailand Bloomberg
During the last two months of the quarter, the baht resumed a depreciating trend against the U.S. dollar. This was attributable to increasing risks in the global financial market due to the sovereign debt problem in Greece and uncertainty over the United States, economic recovery. Moreover, foreign investors adopted a waitand-see attitude pending Thailand,s election results. Consequently, capital outflows from the stock market were particularly high during the period. Regional currencies strengthened against the U.S. dollar from the previous quarter. The appreciation was primarily due to inflows of capital into both the stock and bond markets, as markets became more confident
Both major and regional curr encies appreciated against the U.S. dollar.
41
in economic fundamentals and expected regional central banks to further hike policy rates to curb inflation pressures. Nevertheless, the appreciation trend of many regional currencies slowed during the end of the quarter, after foreign investors decreased their holding of risky assets from concerns over the sovereign debt problem in Greece and uncertain global economic recovery, as reflected in the economic data of many countries including China, the United States and the euro area, which came in below expectations.
Chart 3.17 Change in the values of foreign currencies against the U.S. dollar in 2011 Q2
(compared with the previous quarter,s average)
Thailand Malaysia Japan Philippines China UK Taiwan Singapore South Korea Indonesia Euro Australia 0
0.8 0.9 1.0 1.2 1.2 1.6 1.7 2.9 3.3 3.6 5.0 5.9 1 2 3 4 5 6 7 Percent
Source: Reuters
Meanwhile, major currencies such as the yen, the pound sterling and the euro appreciated, on average, against the U.S. dollars. In the beginning of the quarter, the euro appreciated primarily due a policy rate increase by the ECB while the FOMC maintained the same policy rate. This widened the interest rate differential, encouraged markets to invest in the currency, and led to a devaluation of the yen and increased yen carry trade. However, growing concerns over the problem of
42
Bank of Thailand
sovereign debt in Greece in the last two months of the quarter partially contributed to a slowing of the euro,s strengthening whereas the yen appreciated, on average, in the quarter.
Chart 3.18 Nominal effective exchange rate of the Thai baht (NEER) (Trade-weighted, 2007 = 100)
Index 110 May (102.49) NEER Jun (100.63) REER
105
100
95
90
85 Jan 2006 Jul Jan 2007 Jul Jan 2008 Jul Jan 2009 Jul Jan 2010 Jul Jan 2011
Overall, the baht appreciated slightly against the U.S. dollar while most major and regional currencies strengthened substantially. Consequently, the Nominal Effective Exchange Rate (NEER)4/ depreciated by 1.09 percent from the previous quarter. In addition, the Real Effective Exchange Rate (REER)5/ appreciated by 0.68 percent over the April-May period from the previous quarter,s average level primarily due to an increase in the prices of Thai products relative to those of trading partner countries in April. Nonetheless, the average REER in 2011 Q2 may weaken in line with the average NEER.
4/ The Thai baht NEER is calculated as a weighted average of bilateral exchange rate between
the baht and major trading partners currencies (trade-weighted, 2007 = 100)
5/ The real effective exchange rate (REER) is calculated by deflating the NEER using relative
inflation rates to reflect the countrys price competitiveness.
43
The average volatility of the baht decreased from the previous quarter.
The average volatility of the baht in 2011 Q2 declined from the previous quarter. The baht was relatively stable early in the quarter, but moved more rapidly in May and June. Accordingly, the average volatility in 2011 Q2 declined from the previous quarter.
Chart 3.19 Baht actual volatility (up to June 30, 2011)

Percent (annualized) 8
6 4.93 4
0 Jan Apr 2008
Jul
Oct Jan Apr 2009
Jul
Oct
Jan Apr 2010
Jul
Oct
Jan Apr 2011
44
Bank of Thailand
4. Financial Stability Conditions and Outlook
Thailand,s solid fundamentals continued to support domestic growth, undeterred by the weakened growth prospects of major industrial economies that remained plagued by structural concerns. Households and corporates, financial well-being and strong income prospects favored financial institutions, and would serve as the funding source for domestic demand expansion over the period ahead, particularly investment growth. Going forward, the MPC considers the following as major risk factors to Thailand,s economic stability. (1) The global economy may suffer a slowdown mainly due to sovereign debt concerns in Europe, the fragility of economic recovery in the U.S. and Japan, as well as high volatility due to sudden capital movements across countries. These factors, altogether, may adversely affect households, income and firms, profitability. (2) Pressures from rising production costs and inflation may heighten with soaring oil and commodity prices. In addition, (3) the government,s stimulus package may have some impacts on households, consumption and debt accumulation, possibly threatening Thailand,s long-term fiscal position as well.
Non-financial corporate sector

Overall corporate stability improved with the recovery of domestic and international economies. Profitability and debt-servicing ability of businesses were strong, as reflected in the improved performance of non-financial companies listed on the Stock Exchange of Thailand in 2011 Q1 in all industries except the real
Corporate sector , s financial conditions continued to improve in 2011 Q1, but with higher risks going forward.
45
estate sector. Particularly, the real estate slowdown was attributable to a decline in demand for housing after a large number of houses sold last year. Moreover, accelerated inflation since the beginning of 2011 and rising interest rates also added to consumer concerns, prompting households to delay their new home purchases.
Chart 4.1 Operating profit margin classified by industry*

Percent 15 10 5 0 -5 -10 -15 2007 Percent 40 30 20 10 0 -10 -20 2007 2008 2009 2010 2011 2008 2009 2010 2011
Production sector
Average** = 5.3
Construction sector
Percent 15 10 5 0 -5 -10 -15 2007 Percent 40 30 20 10 0 -10 -20 2007 2008 2009 2010 2011 2008 2009 2010 2011 Average** = 2.4
Hotel and restaurant sector

Average** = 18.8
Real estate sector

Average** = 13.0
Chart 4.2 Indicators for the corporate sector*

Percent 20 15 10 5 0 -5 -10 2008 2009 2010 2011 0.0 2008 2009 2010 Average** = 1.5 2011
Operating profit margin

Average** = 6.4 2.0 1.5 1.0 0.5
Debt-to-equity ratio
Average** = 0.8
Interest coverage ratio

15 10 5 0 -5 2008 2009 2010 2011 Average** = 3.4 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2008
Current ratio
2009
2010
2011
Note: * Each bar depicts an interquartile range, where the upper and lower bounds represent the 25th and 75th percentiles, respectively. The symbol + indicates the median. **Average over the 2003 Q1 - 2007 Q4 period Source: Stock Exchange of Thailand, calculations by Bank of Thailand
46
Bank of Thailand
Despite their strong performance, businesses still need to cope with risks from both domestic and external fronts. Domestic risks include production costs that will rise inevitably given the lifting of LPG price for industries starting from July 2011 - with the glass, mirror, and ceramic industries most severely affected. Furthermore, the new government,s policy on minimum wage raise may also drive production costs up markedly, with labor costs currently accounting for 13 percent of businesses, average total costs.
Chart 4.3 Wage distribution and ratio of labor cost to total cost
Wage distribution*
Kernel density function
0.0025 Average 0.0020 0.0015 0.0010 0.0005 0 0
Recent minimum wage = 176 baht/day
The ratio of labor cost to total cost

Non-bank Baht/day 437 384 367 Construction 8.9 Manufacturing 7.1 13.3
Median Mode
Real estate
8.2
Hotel and restaurant 1000
10.5
200
400
600
800
Baht/day
0 5 10 15 20 Minimum wage cost per total cost Other costs per total cost
Note: * Private employees only Source: National Statistical Office.
Source: National Statistical Office and calculations by Bank of Thailand.
On the other hand, major external risks are from uncertainties in the global economic recovery, mainly due to sovereign debt issues in Europe and vulnerabilities in the U.S. and Japan,s economic recovery. These factors may weigh on global demand, which in turn will dampen Thai exports to some extent.
47
Household sector
Household,s financial health improved on the back of strong income and employment conditions. However, significant risks remain due to economic slowdown and the impact of fiscal stimulus on household,s financial discipline.
Favorable income and employment conditions continued to support households, financial health. Although mortgage loans declined, auto leasing and credit card loans continued to grow at a solid pace, as consumption spending rose with domestic growth. The debt-to-asset ratio edged up but still remained at an acceptable level, given households, debt-servicing ability as reflected by the low NPL ratio.
Chart 4.4 Income and financial conditions of households

Farm income*
Index (2005 = 100) 300 240 180 120 60 0 2008 Crop price
Household financial assets and liabilities

Percent Trillion baht 40 20 1/ Assets 20 2/ Liabilities 0 Debt-to-asset ratio (RHS) 15 -20 Percent 50
45
2009
2010
-40 2011 10 Percent 30 20 10 0 -10 0 2008 2009 2010 2011 30 5 35 40
Averaged minimum wage*

Index (2005 = 100) 150 120 90 60 30 0 2008 2009 2010
-20 2011
Note: * Seasonally adjusted. Note: 1/ Source: Office of Agricultural Economics, 2/ National Statistical Office, calculations by Bank of Thailand. Source:
, Financial institutions deposits, bonds, equities, and insurances. Total loans from financial institutions and non-banks. Calculations by Bank of Thailand.
48
Bank of Thailand
, Chart 4.5 Households debt burden and debt service ability

NPL ratios of consumer loans
% Total loans (for each category) 5 Personal loans under supervision2/ 4 Mortgage loans1/
, Financial institutions personal loans by purpose

Percent 20 Other Credit cards Auto 15 Mortgage Total
3 Credit card loans 2 5

2/
10
0 Jan 2008 Jul Jan 2009 Jul Jan 2010 Jul Jan 2011
0 Jan 2008
Jul
Jan 2009
Jul
Jan 2010
Jul
Jan 2011
, Commercial banks loans Total loans from commercial banks and non-banks Source: Bank of Thailand Note:
1/ 2/
Going forward, major risks to households , stability arise from the uncertainty in the global economy, with some possibility of weakened global demand that can weigh on Thailand,s manufacturing and exports. Prices of agricultural exports may then drop, thereby negatively affecting household income prospects. The MPC will also closely monitor the impacts of the new government , s stimulus packages on the broader economy - including the plans on minimum wage raise, soft loan, and pledging scheme for farm products. These plans may have significant implications on households, spending and debt accumulation over the period ahead.
Real estate sector

Housing demand started to normalize after the termination of the government,s real estate stimulus package last year, as reflected in the average number of residential property transfers during the first four months of 10,819 units - a level close to the pre-stimulus average of 10,809 units. At the same time, supply continued to
Risks of oversupply in the real estate market declined.
49
decline. Such reduction in the number of new projects helped reduce current risks of oversupply. Meanwhile, prices continued to edge higher in line with rising construction costs and land prices. Over the period ahead, housing demand will likely continue to be robust. However, the number of outstanding residential units is on the rise, given the high number of new launches during the year-earlier stimulus period. This, together with higher interest rates, soaring inflation pressures, and the increase in residential prices in line with rising costs, may affect housing demand and heighten risks of oversupply over the next year or two.
Chart 4.6 The registration number of transferred residential properties in Bangkok and its vicinity
Units
40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000
Average before government,s measure period*= 10,809 units
The number of residential property transfers
The total number of residential property transfers in the first four months of each year
Units
80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
0 Jan 2007 Jul Jan 2008 Jul Jan 2009 Jul Jan 2010 Jul Jan 2007 2009 2011 2011
Note: Average over the January 2007 to March 2008 period Source: Real Estate Information Center (REIC), calculations by Bank of Thailand
50
Bank of Thailand
Chart 4.7 New residential registered units in Bangkok and its vicinity
Units
20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Jan 2007 Jul Jan 2008 Jul Jan 2009 Jul Jan 2010 Jul Jan 2007 2009 2011 2011
Average before government,s measure period*= 6,133 units
New residential registered units Units in the first four months of each year 50,000
45,000
New residential registered units (3-month moving average)
40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0
Note: Average over the January 2007 to March 2008 period Source: Real Estate Information Center (REIC), calculations by Bank of Thailand
Financial institutions
Financial institutions stability in 2011 Q1 remained sound thanks to their strong performance during the quarter, driven by rising demand for consumer and business loans both for working capital and investment. The situation was also well-supported by the continued economic recovery and high liquidity overall. Despite having accelerated recently, the high credit growth does not suggest any credit bubble being formed yet. Rather, the strong momentum reflects a return toward the longterm trend after some drag during the financial crisis. Another factor that limits the risk of bubble is domestic financial institutions, prudent risk management.
Financial institutions stability r emained sound in 2011 Q1, as reflected in their strong per for mance and balance sheets.
51
Chart 4.8 Private credit per GDP

1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1980 1984 1988 1992 1996 2000 2004 2008
+ 1.75 standard deviation
Trend Private credit/GDP - 1.75 standard deviation
Note:
Employing Hodrick-Prescott (HP) filter, lamda = 400,000 (BIS, Countercyclical Capital Buffer Proposal, 2010) and 1.75 standard deviation to represent 5% probability of credit boom (IMF, World Economic Outlook, 2004) Source: Calculations by Bank of Thailand.
Financial institutions maintained strong balance sheets thanks to their healthy financial conditions, coupled with strong prospects of profitability and household income. These developments contributed to high asset quality overall, as reflected by the continued downtrend in both the ratios of non-performing loans and special mentioned loans (i.e. loans past due for 1-3 months). Furthermore, capital adequacy and liquidity position of the overall financial institution system continued to remain strong, highly supportive of the system,s intermediary function. This will help sustain domestic growth over the period ahead.
52
Bank of Thailand
Chart 4.9 NPL and delinquency ratios

Corporate loans % Total corporate loans 10 NPL ratio Consumer loans % Total consumer loans 6 5 4 3 4 Delinquency ratio (1 to 3 months) 2 1 0 Jul Jan Jul Jan 2010 2011 Jan Jul Jan Jul Jan Jul Jan 2008 2009 2010 2011 NPL ratio Delinquency ratio (1 to 3 months)
8 6
2 0
Jan Jul Jan 2008 2009
Table 4.1 Financial soundness indicators (at the end of 2011 Q11/)
2010 2011 Q3 Q4 Q1
Key indicators (%)

1. Capital adequacy
1.1 Regulatory capital to risk-weighted assets (8.50)2/ 1.2 Regulatory Tier-1 capital to risk-weighted assets (4.25)2/
Q1
Q2
15.7 11.7
16.7 12.3
16.8 12.4
16.0 11.8
15.6 11.4
2. Asset quality
2.1 Non-performing loans to total loans 5.0 4.9 4.6 3.9 3.5
3. Earning and profitability

3.1 Return on assets (ROA) 3.2 Interest margin3/ to gross income4/ 3.3 Non-interest expenses to gross income 1.1 68.5 56.1 1.2 68.7 54.4 1.2 68.8 53.9 1.2 68.3 54.8 1.2 68.0 54.3
4. Liquidity
4.1 Liquid assets5/ to total assets 4.2 Liquid assets to short-term liabilities6/ 18.3 25.3 19.1 26.6 18.7 26.8 18.5 26.6 17.6 26.1
Number of banks
Note:
1/ 2/ 3/ 4/ 5/
14
14
14
14
14
Based on Peer Group data Minimum regulatory capital to risk-weighted assets Interest margin = interest income and dividend - interest expenses Gross income = interest margin + non-interest income Liquid assets = cash and deposits + securities purchased under resale agreements + investment in securities (net) 6/ Short-term liabilities = deposits (liability side) Source: Bank of Thailand
53
Going forward, the MPC will carefully monitor developments in these key issues: (1) credit growth especially in loans that aim to finance public investment and fiscal stimulus over the period ahead, possibly through Specialized Financial Institutions (SFIs) that have been increasingly important after the financial crisis; (2) strong domestic growth, which will improve income prospects of households and businesses; and (3) the volatility in the international financial markets, which may affect financial institutions, debt burden and investment abroad.
External sector
Exter nal stability remained sound despite some incr ease in short-ter m exter nal debt.
Thailand,s external stability remained sound in 2011 Q1 with continued surplus in balance of payments, despite some capital outflows largely due to long-term foreign direct investment. The recent outturns in May indicated a balance of payments deficit, which was primarily due to transient factors - notably, the increase in paid-out returns from domestic investment and capital outflows due to the sales of government bonds by foreign investors in the secondary market. Meanwhile, external debt remained on a slight upward trend for both short and long maturities, contributing to a downtrend in the ratio of reserves to short-term debt. The higher short-term debt, in particular, was mainly attributable to financial institutions , borrowings for liquidity management, largely to accommodate an increase in corporate hedging activities. This is broadly in line with the previous Report,s assessment.
54
Bank of Thailand
Chart 4.10 External debt

Billion U.S. dollars 120 100 80 60 2 40 20 0 2007 2008 2009 Other Q1 2010 Public Q2 Q3 Q4 Q1 2011 1 0
5 4 3
Financial institutions Long-term debt
Reserves to short-term debt (RHS)
Key risk factors that are likely to weaken external stability over the period ahead include the volatility in the international financial markets, which reflects the fragility in major industrial economies, recovery process. In addition, sovereign debt issues in Europe may also lead to higher volatility in capital flows.
55
5. Economic Growth and Inflation Outlook

The Thai economy expanded 3.0 percent in 2011 Q1 over the same period last year, slightly slowing down from the previous quarter partly due to the effect of last year,s high base when the economic recovery had just begun. However, on a sequential growth basis, the economy posted a robust 2.0 percent growth over the previous quarter, which is relatively high in Thailand,s historical standard. The momentum owed largely to strong merchandise exports, particularly in industrial goods as well as plastics and electronics products, which gained from the continued global growth. Robust domestic demand also added to economic strength, with private-sector investment staging a comeback after two quarters of contraction. Meanwhile, inventories dropped substantially as businesses delayed their production awaiting new technologies while also depleting their current inventories. This was particularly the case for office equipment as well as computer and electronics parts. The decline in rice stocks late into the harvest season also contributed to the overall rundown in inventory. Growth momentum sustained well into 2011 Q2, despite moderating somewhat from the previous quarter. Preliminary indicators in April and May suggested a likely drag in exports as supply disruption due to natural disasters in Japan continued to weigh on Thailand,s manufacturing sector, especially for the automobile industry. This would inevitably dampen investment to some extent. Nonetheless, private-sector consumption picked up firmly and would serve as this quarter, s growth engine, thanks to favorable farm
57
income and employment conditions as well as strong credit growth thanks to low interest rates. Last quarter,s stock depletion, both in the agricultural and manufacturing sectors, was expected to continue for the same reasons. Going forward, the MPC projects sustained growth for the Thai economy in the second half of 2011. Export growth momentum will likely resume its strong uptrend thanks to robust emerging market demand as well as the gradual recovery in developed economies. The firmer-than-expected rebound of the Japanese economy, in particular, will benefit Thailand,s exports and lend further support to investment. On the other hand, private-sector consumption will continue to edge higher given favorable prospects for both farm income and employment. Growth will then become more balanced in 2012 thanks to robust domestic and external demand, with fiscal impetus stepping up its role in supporting the private sector and domestic growth overall. Inflation pressures built up in 2011 Q2, with core inflation edging higher due to greater pass-through from rising costs of unprocessed food as well as seasonings and condiments. In addition, rising demand following strong domestic growth also pressured core inflation to the upside. Headline readings accelerated as well in all components. The MPC projects inflation to pick up even more during the second half of 2011, in line with greater pass-through of cost burden to consumers and rising demand pressures. The government, however, has extended its cost-of-living subsidy measures beyond the scheduled termination at the end of the second quarter.
58
Bank of Thailand
As a result, core inflation is less likely to rise above the target range and should moderate slightly in 2012. This is broadly consistent with the more normalized pace of growth anticipated for the next year.
Forecast assumptions
In forming economic and inflation forecasts for the next eight quarters, the MPC conditions the projection on the most plausible assumptions on various external factors, including foreign economic activities and financial conditions, world commodity prices, and fiscal conditions. These assumptions are summarized below. International economic and financial conditions The Asian and euro area economies grew faster than anticipated in 2011 Q1, while the U.S. turned out weaker than previously expected and Japan contracted more than expected due to the natural disasters. Despite the softness witnessed in the first half of 2011, major trading partners will likely grow at a stronger pace in the latter half of the year and keep their forward momentum. As a result, the overall pace of expansion of Thailand,s external demand remains unchanged for this year and the next. The U.S. economy turned out to be weaker than anticipated in 2011 Q1, growing at an annual rate of 1.9 percent over the previous quarter. The slowdown was due mainly to the retrenchment in private-sector consumption as a result of a slowdown in consumers, purchasing power in the midst of a surge in oil and commodity prices. The U.S. economy was also affected by the supply disruption in 2011 Q2, especially in the automobile industry, following the natural disasters in Japan. Growth is expected to resume a stronger pace
The U.S. economy is expected to grow at a lower-than-expected rate in the first half due to the impacts from rising oil prices and supply disruption in the manufacturing sector. The MPC revises down the U.S. growth projection throughout the forecast horizon.
59
as the effects of transitory shocks wane. Nonetheless, weakness in the housing sector and labor market has remained a major hindrance to economic recovery. The MPC thus revises down its U.S. growth projection throughout the forecast horizon.
The MPC projects the federal funds rate to rise beginning in 2012 Q2, a quarter delays from the previous Report.
On June 22, 2011, the Federal Open Market Committee (FOMC) decided to keep the federal funds target rate at 0 to 0.25 percent and concluded the 600 billion dollar asset purchase program (Quantitative Easing II) at the end of June 2011 as scheduled. In addition, the FOMC expressed concerns over the delayed recovery and revised down the growth projection for 2011 and 2012. Accordingly, the MPC expects the federal funds rate to remain within the target range of 0-0.25 percent until 2012 Q1 _ a quarter delay from previous Report _ and start rise to 0.5 percent in 2012 Q2 and increase by 25 basis points in each subsequent policy meeting until reaching 2.0 percent in 2013 Q1. The euro area grew at a solid rate of 0.8 percent in 2011 Q1 over the previous quarter, which was higher than expected. In a period ahead, continuation of economic recovery is expected, largely driven by a firm expansion of core countries, particularly Germany where industrial production and merchandise exports continued to expand. The sovereign debt crisis remains a significant risk to growth. The MPC thus revises up its growth projection for 2011 but keep the 2012 forecast close to those in the previous Report. Japan,s output contracted in 2011 Q1 0.9 percent from the previous quarter, a reflection of adverse effects of the natural disasters in March. The impacts weighed heavily on private-sector consumption as well
The MPC r evises up the euro area growth projection for 2011 given the fasterthan-expected growth in the first quarter and a strong forward momentum subsequently.
The MPC r evised down Japan, s growth projection for 2011 but revises up growth in 2012, as the economy r ebounds fr om the natural disasters.
60
Bank of Thailand
as industrial production, ranging from temporary plant shutdowns and constrained production activities because of rolling blackouts and supply disruption. Although a significant slowdown in economic activities during the first half of 2011 was observed, industrial production should resume in the latter half of the year once supply becomes available and the government,s stimulus outlays finally enter the economy. Overall the MPC revises down the growth projection for 2011 but raises its forecast for 2012.
Chart 5.1 Assumptions on trading partners growth

4 3 2 1 0 -1 -2 -3 -4 -5 Q1 2008 Apr 11 estimate

4
U.S.
Jul 11 estimate 2 0 -2 -4 -6 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2008
Euro area
Jul 11 estimate Apr 11 estimate
Q1 2009
Q1 2010
Q1 2011
Q1 2012
Q1 2013

6 4 2 0 -2 -4 -6 -8 -10 -12 Q1 2008

Apr 11 estimate 12 10 8 6 Jul 11 estimate 4 2 0 -2
Japan
Asian region
Q1 2009
Q1 2010
Q1 2011
Q1 2012
Q1 2013
Q1 2008
Q1 2009
Q1 2010
Q1 2011
Q1 2012
Q1 2013

10 8 6 4 2 0 -2 -4 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013
Trading partners
, Source: Bank of Thailand s projection
Asian economies continued to expand strongly in 2011 Q1. Growth in 2011 Q1 was much higher than previously anticipated driven by robust consumption and investment. Exports also continued to expand
The MPC revises up the 2011 growth projection of Asian economies. Growth for 2012 is roughly unchanged.
61
despite some slowdown owing to supply-chained disruption, particularly in electronics and automobile industries, as a result of the natural disasters in Japan. Going forward, Asian economies will continue to expand, mainly from supportive fiscal policies and strong credit growth. The MPC thus revises up the growth projection of Asian economies for 2011, while assuming the same growth path for 2012.
Regional currencies are expected to appreciate against the U.S. dollar faster than previously anticipated.
Given the recent appreciation in the exchange rates and better recovery prospects in Asia relative to industrialized countries, regional currencies are projected to appreciate against the U.S. dollar throughout the forecast horizon faster than previously assessed. World commodity prices
The price of Dubai crude remains largely unchanged throughout the forecast period.
The Dubai oil price outlook remains largely unchanged given recent developments in market fundamentals. Global crude demand continues to rise in line with the global expansion. Despite recent attempts from Saudi Arabia in raising its production, crude supply remains constrained by unresolved tensions in the Middle East and North Africa particularly in the case of Libya which is likely to be prolonged. Accordingly, the MPC projects the Dubai crude price to average at 108.1 U.S. dollars per barrel in 2011, slightly up from the previous assumption of 107.7 dollars due to the second quarter,s high outturns. The projection then stays unchanged in 2012 at 110 dollars a barrel. Non-fuel commodity prices are revised down in 2011 due to the lower-than-expected outturns in April and May, particularly for food and metal prices. Going forward, the MPC expects prices of agricultural raw materials and food to remain elevated. Metal prices
Non-fuel commodity prices are revised down following the low outturns in 2011 Q2.
62
Bank of Thailand
will likely rise with persistently high oil prices and sustained global growth, with further support from the firmer recovery of the Japanese economy expected in the second half of this year. Non-fuel commodity prices will then grow robustly in 2012 in line with the world economic outlook. Domestic farm prices are revised down as the April-May outturns indicated a drop in prices of vegetables and fruits, as fresh produce increased due to favorable weather. Prices are expected to rise in 2012 at a pace faster than previously assumed, which reflects a rebound in prices of vegetables and fruits.
Domestic farm prices for 2011 are revised down on account of vegetable and fruit prices but are expected to be higher in 2012.
Chart 5.2 Assumptions on Dubai oil price

U.S. dollars/barrel
125 Jul 11 estimate 100 Apr 11 estimate
75
50
25 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013
63
Chart 5.3 Assumptions on commodity prices

Non-fuel commodity prices
Annual percentage change 40 20 0 -20 -40 Q1 Q1 2008 2009 Jul 11 estimate Apr 11 estimate Q1 2010 Q1 2011 Q1 2012 Q1 2013
Domestic farm prices

Annual percentage change 40 30 20 10 0 -10 -20 Q1 Q1 2008 2009
Jul 11 estimate
Apr 11 estimate Q1 2010 Q1 2011 Q1 2012 Q1 2013
Fiscal expenditure
Government consumption is r evised up for fiscal year 2011 thanks to a higher disbursement projection. Investment spending, however, is projected to fall relative to the previous for ecast because of the low disbursement outturns.
The MPC revises its fiscal assumption throughout the forecast period. For fiscal year 2011, government consumption rises with the upward revision in disbursement, whereas investment drops, reflecting the recent outturn that was lower than expected. Consumption spending subsequently declines in fiscal year 2012 due to lower carry-over from the preceding year, with no significant revision in public investment.
Table 5.1 Detailed assumptions on public sector expenditure

As of April 2011 Unit: Billion baht General government consumption Public investment Total As of July 2011
Fiscal year Fiscal year Fiscal year Fiscal year 2011 2012 2011 2012 1,370.5 644.3 2,014.8 1,469.5 684.1 2,153.7 1,392.6 635.9 2,028.5 1,450.6 688.7 2,139.3
64
Bank of Thailand
Chart 5.4 Assumptions on general government consumption (at current prices)

Billion baht 425 400 375 350 325 300 275 250 225 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Apr 11 estimate Jul 11 estimate
Chart 5.5 Assumptions on public investment (at current prices)

Billion baht 240 220 200 180 160 140 120 100 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Apr 11 estimate Jul 11 estimate
For fiscal year 2012, however, the MPC still projects total government spending to rise from the preceding fiscal year because of the overall budget expansion. This increase is broadly in line with higher government revenue and state-owned enterprises, investment.
65
Minimum wages
The MPC raises its daily minimum wage assumption in 2012 on account of increased r emuneration for workers , social and recreational expenses.
The assumption on the daily minimum wage for the Bangkok Metropolitan Area stays unchanged at 215 baht in 2011 and rises to 240 baht in 2012, up from the previous assumption of 226 baht. The upward revision owes partly to higher remuneration for workers, social and recreational expenses. This assumption does not reflect the new government,s plan to increase minimum wage, as it needs approval from the National Wage Committee and the detail on the implementation has not been finalized. Inventory accumulation The MPC expects inventory accumulation in 2011-2012 to approach its pre-crisis levels, with yearon-year contribution to GDP growth over the forecast horizon close to that in the previous Report.
Output and inflation projections

Output projection
The Thai economy expanded 3.0 percent in 2011 Q1 on the back of strong exports and private-sector investment.
The Thai economy in 2011 Q1 grew 3.0 percent, a slight moderation from the previous quarter, which partly reflected last year,s high base. However, this translated into a 2.0 percent growth from the previous quarter, which was relatively high in Thailand,s historical standard. The growth was mainly driven by merchandise exports, which gained for both agricultural and manufacturing goods, in line with the global growth supported by emerging market demand. Meanwhile, private-sector spending also stepped up its pace, with investment growth returning to the positive territory after contracting in the second half of 2010, attributable in part to machinery imports notably the high-priced oil
66
Bank of Thailand
rigs. Private-sector consumption, on the other hand, continued to grow robustly as farm income benefitted from high crop price despite some adverse impacts of elevated oil prices and the widespread flood on consumer sentiment. Fiscal stimulus remained supportive for growth, while imports continued to rise in line with robust exports and private-sector demand. Overall inventories fell significantly with the seasonal dip in agricultural stocks late in the harvest season. Stocks in the manufacturing sector also dropped as businesses delayed their production and cleared their inventories, in particular computers and electronics parts, in anticipation of new technologies. The Thai economy in 2011 Q2 continued to ride on the previous quarter,s momentum. The April-May indicators pointed toward dampened exports as a result of supply disruption due to Japan,s natural disasters, particularly for the automobile industry. This would, in turn, weaken investment that had gained a firm footing in the previous quarter. However, private-sector consumption accelerated markedly and would provide strong support for this quarter,s growth thanks to rising farm income, high employment, and strong credit growth. In addition, fiscal spending continued to support the economy notably through consumption spending given the higher disbursement. Imports rose in tandem with private-sector consumption, while inventories continued to decline from the previous quarter. Details of the MPC,s projections for the next eight quarters are as follows.
The Thai economy should experience some slowdown in 2011 Q2, as Japan , s natural disasters weighed on exports.
67
The forward momentum for growth will sustain in the second half of 2011 thanks to strong exports and a r ebound in privatesector investment.
Growth outlook for the second half of 2011. The MPC projects growth to sustain as exports resume an uptrend after slacking in the second quarter. Exports will likely benefit from global demand driven by emerging market economies, coupled with the reconstruction demand from Japan. Rising demand will, in turn, prompt businesses to expand their production capacity, resulting in higher investment growth overall. Moreover, accommodative monetary conditions should lend further support to corporate credit growth. This positive outlook on growth is consistent with a measure of three-month-ahead business confidence, which stays persistently above the neutral level. At the same time, private-sector consumption will edge higher with rising farm income following high agricultural prices and low unemployment, while government spending maintains its role in supporting growth. Lastly, imports are expected to rise in line with exports and private-sector demand. With imports growing faster relative to exports, the MPC anticipates a gradual decline in the current account surplus (including reinvested earnings). Growth outlook for 2012. The MPC expects growth momentum to continue from the previous year. Exports are expected to continue to grow thanks to robust emerging market demand and the continued recovery in advanced economies. On the other hand, domestic conditions will remain strong. High employment, in particular, should lead to better income prospects for both farm and non-farm workers, thus higher confidence and sustained consumption growth going forward. Overall, strong demand from both domestic and external fronts will boost investor confidence and spur more investment. Fiscal stimulus will continue to play a key role in supporting growth, and imports will trend up in line with domestic demand and exports.
Bank of Thailand
Economic activities in 2012 owe mainly to strong external and domestic demand, giving rise to a balanced growth.
68
On the whole, the MPC projects economic growth in 2011 and 2012 to be more balanced, with support from both domestic and external demand.
Chart 5.6 Contribution to GDP growth (%YoY)

Percent 20 15 10 5 0 -5 -10 -15 -20 2000
Private consumption Government consumption Exports of goods and services Others Private investment Public investment Imports of goods and services GDP
estimate
2003
2006
2009
2012
, Source: National Economic and Social Development Board and Bank of Thailand s projection
Inflation projection Inflation pressures in 2011 Q2 picked up as the MPC had anticipated. Core inflation edged higher from prices of food and beverages, which surged in line with rising prices of unprocessed food as well as seasonings and condiments. In addition, rising demand from robust domestic growth also pressured core inflation to the upside. Headline readings accelerated as well in all components, with unprocessed food prices surging due to increasing production costs and unfavorable weather, and energy prices edging higher in line with global oil prices.
Core inflation picked up in 2011 Q2 on account of a greater pass-through from production costs to consumer prices, together with rising demand pressur es. Headline readings edged higher in all components.
69
Inflation will continue to accelerate in the second half of 2011 driven by rising costs and demand. However, core inflation will moderate as the gover nment subsidy measures have been extended to the end of this year.
Inflation pressures will likely build up throughout the second half of 2011 driven by rising costs and demand, as businesses are anticipated to pass on their cost burden to consumers to a greater extent. The Bank of Thailand Business Sentiment Survey indicated that production cost and consumer price expectations would remain elevated over the next 12 months. In addition, the forthcoming termination of the 30-baht diesel price pegging scheduled at the end of the third quarter will boost inflation in energy prices and related components. At the same time, robust private-sector demand will allow greater pass-through of rising production costs to consumers. The government, however, has extended its cost-of-living subsidy measures beyond the end of the second quarter. This extension will help lower the probability of core inflation exceeding the target range throughout the forecast period, improving from the previous Report,s assessment that pointed to a high probability of core inflation rising above the target range in late 2011. Inflation outlook for 2012. Core inflation is projected to soften slightly from the previous year in line with the more normalized pace of growth. Headline readings will edge lower in line with core inflation.
Inflation will soften in 2012 in line with the more normalized pace of growth.
70
Bank of Thailand
Chart 5.7 Contribution to headline and core inflation

Headline inflation
Tobacco and alcoholic beverages (1.7%) Recreation and education (5.2%) Transportation and communication (26.8%) Medical and personal care (6.9%) Housing and furnishing (23.5%) Apparel and footwear (3.0%) Food and beverages (33.0%) ( ) Weight in headline CPI
Core inflation
Tobacco and alcoholic beverages (2.2%) Recreation and education (6.9%) Transportation and communication (27.4%) Medical and personal care (9.1%) Housing and furnishing (26.0%) Apparel and footwear (3.9%) Food and beverages (24.4%) ( ) Weight in core CPI
Percent
10 8 6 4
Percent
4 3 2 1
2 0 0 -1 -2 -4 -6 -2 -3
Jan 2008
Jul
Jan 2009
Jul
Jan 2010
Jul
Jan 2011
Jan 2008
Jul
Jan 2009
Jul
Jan 2010
Jul
Jan 2011
Source: Trade and Economic Index Bureau, Ministry of Commerce, and calculations by Bank of Thailand
Chart 5.8 Month-on-month seasonally-adjusted headline and core inflation

Percent
2
Headline inflation
Percent
2
Core inflation
-1
-1
-2
-2
-3 Jan 2008
-3 Jul Jan 2009 Jul Jan 2010 Jul Jan 2011 Jan 2008 Jul Jan 2009 Jul Jan 2010 Jul Jan 2011
Source: Calculations by Bank of Thailand
Assessment of risks
The above projection for output and inflation is conditioned on the most likely forecast assumptions, which are used under the baseline scenario. Nevertheless, the following external and domestic risks can potentially bring about deviations from the baseline projection.
71
Risk to growth Downside risks to growth come from both the external and domestic fronts as follows. First, trading partners , growth may be weaker than expected, especially due to the fragile recovery in advanced economies. The U.S. still faces a great deal of structural concerns including high unemployment and the sluggish real estate market. On the other hand, several countries in Europe remain plagued by sovereign debt and the health of their financial system, which can spread to the rest in the region and beyond. Altogether, these factors may weigh on Thailand,s exports. Second, elevated oil prices in the global market, together with the resulting increase in domestic retail oil prices, may restrain consumers and businesses, spending and soften growth momentum. Third, international capital flows remain highly volatile mainly due to the unbalanced economic recovery across countries. This may lead to higher uncertainty and exchange rate volatility, further undermining Thailand,s economic growth. Upside risks to economic growth include stronger-than-assessed growth in trading partners, economies, likely to be driven by early resolution of structural concerns in both the U.S. and the euro area, as well as a firmer recovery in Japan. These factors can help bolster the global growth on top of already-strong emerging market demand, thus giving a boost to Thailand,s exports. Risk to inflation Upside risks that may drive inflation higher than assessed in the baseline come from: (1) surging global oil prices pressured by supply constraints, due to tensions
72
Bank of Thailand
in the Middle East and North Africa that may last longer than expected, and rising global demand for oil; and (2) high non-fuel commodity prices, because of supply shortage following natural disasters and also because of acceleration in global demand. Downside risks to inflation projection are mainly due to the following factors. First, oil prices may subside if some advanced economies fail to resolve their structural economic problems or emerging market economies, notably China and India, experience a slowdown. Second, non-fuel commodity prices may turn out lower than assessed in the baseline scenario, as the adverse effects of natural disasters on supply may ease and sluggish global growth may dampen demand pressures. Third, the government may extend part of its subsidy measures beyond the scheduled termination at the end of December 2011. Given much uncertainty surrounding the new government,s stimulus plans, their implications on output and inflation remain difficult to assess at the moment. Approvals from relevant authorities still need to be obtained, and several projects may be subject to revision along the way. Over the longer term, these stimulus programs may prove beneficial, provided that they do not introduce drastic changes to the economy and the authority adheres to fiscal discipline. Furthermore, the authority should allow for gradual and sustainable adjustments in the private sector _ for instance, designing a minimum wage raise scheme that truly reflects rising labor productivity growth. The authority should also prioritize its investment projects, targeting strategically at enhancing Thailand,s potential and competitiveness. In any case, these stimulus
73
measures have the potential to threaten macroeconomic stability, particularly if accelerated economic growth drives up inflation considerably above the baseline scenario. Overall, the MPC views economic growth likely to turn out higher than in the baseline scenario, but also with higher uncertainty mainly due to external conditions and government policies. Reflecting these risks, the fan chart for economic growth is wider and skewed more to the upside compared with the previous one. With regard to inflation, the MPC views upside risks to dominate. The fan charts for both headline and core inflation, therefore, are also skewed more to the upside throughout the projection period.
Chart 5.9 GDP growth forecast

14 12 10 14 12 10 8 6 4 2 0 -2 -4 -6 -8 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013
The fan chart for GDP growth is wider and skewed more to the upside throughout the projection period.
8 6 4 2 0 -2 -4 -6 -8 Q1 2008
74
Bank of Thailand
Chart 5.10 Headline inflation forecast

10 8 6 4 2 0 -2 -4 Q1 2008 10 8 6 4 2 0 -2 -4
Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013
Chart 5.11 Core inflation forecast

6 5 4 3 2 1 0 -1 Q1 2008 6 5 4 3 2 1 0 -1
Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013
The fan charts for headline and core inflation are skewed more to the upside throughout the projection period.
Note: The fan charts cover 90 percent of the probability distribution.
Table 5.2 Summary of forecasts

Percent GDP growth Domestic demand Private consumption Private investment Government consumption Public investment Exports of goods and services Imports of goods and services Core inflation Headline inflation 2011 4.1 4.8 3.8 10.0 4.1 0.4 15.4 18.8 2.4 3.9 2012 4.2 4.8 3.8 9.7 2.2 2.9 7.6 9.3 2.3 3.2
75
Under the baseline scenario, output growth is pr ojected to be 4.1 and 4.2 percent for 2011 and 2012, respectively.
Accordingly, the MPC keeps its economic growth projection unchanged at 4.1 percent for 2011 and 4.2 percent for 2012, respectively, under the baseline scenario.
Table 5.3 Probability distribution of GDP forecast

Unit: % Q2 >9 8-9 7-8 6-7 5-6 4-5 3-4 2-3 1-2 0-1 < (-1) 0 0 0 2 9 23 33 24 7 1 0 2011 Q3 2 5 11 19 24 21 12 4 1 0 0 Q4 3 5 9 15 20 21 16 8 3 1 0 Q1 2 3 6 10 15 18 18 14 9 4 2 2012 Q2 5 5 9 12 15 17 15 11 6 3 1 Q3 4 5 8 12 15 17 16 12 7 3 2 Q4 5 6 9 13 16 17 15 10 6 2 1 2013 Q1 5 5 8 12 15 17 15 11 7 3 1 Q2 5 6 9 13 16 17 15 10 6 2 1
Headline inflation for 2011 and 2012 is projected to be 3.9 and 3.2 percent, respectively.
Headline inflation is forecast to be 3.9 and 3.2 in 2011 and 2012, respectively, also unchanged from the previous projection.
Table 5.4 Probability distribution of headline inflation forecast

Unit: % Q3 >7 6-7 5-6 4-5 3-4 2-3 1-2 0-1 (-1) - 0 < (-1) 1 7 20 35 30 7 0 0 0 0 2011 Q4 11 14 21 24 19 9 2 0 0 0 Q1 8 10 16 20 21 16 7 2 0 0 Q2 7 9 13 17 19 17 11 5 1 0 2012 Q3 8 9 14 17 19 17 10 4 1 0 Q4 6 7 11 15 18 18 14 8 3 1 Q1 5 6 10 14 17 18 15 9 4 2 2013 Q2 7 7 11 15 17 17 14 8 3 1
76
Bank of Thailand
Core inflation, on the other hand, is projected to be 2.4 and 2.3 percent in 2011 and 2012, slightly up from the previous forecast of 2.3 and 2.1 percent, respectively.
Core inflation is projected to be 2.4 percent in 2011 and 2.3 percent in 2012.
Table 5.5 Probability distribution of core inflation forecast

Unit: % Q3 > 5.0 4.5 - 5.0 4.0 - 4.5 3.5 - 4.0 3.0 - 3.5 2.5 - 3.0 2.0 - 2.5 1.5 - 2.0 1.0 - 1.5 0.5 - 1.0 < 0.5 0 1 4 13 27 35 18 2 0 0 0 2011 Q4 4 6 11 17 22 22 13 4 1 0 0 Q1 5 7 12 18 21 20 12 4 1 0 0 Q2 1 2 4 8 14 19 22 19 9 3 0 2012 Q3 1 2 5 9 15 19 21 17 8 2 0 Q4 1 1 3 7 12 17 21 20 12 4 1 Q1 0 1 2 5 8 13 17 20 18 11 6 2013 Q2 1 2 3 6 10 14 17 18 15 9 5
Forecasts by research houses

Projections of output growth for 2011 from various research houses, as polled by Reuters (Thailand) and compiled by the Bank of Thailand, remained largely unchanged compared with the previous poll. Most research houses expect stronger growth for 2012.
77
Table 5.6 GDP growth forecasts by various research houses

(Apr 11, 2011)1/ 2011 Capital Nomura Credit-Suisse DBS Standard Chartered Kasikorn Research Phatra Securities SCB Economic TISCO Securities Average NESDB
1/ 2/ 3/
(Jul 12, 2011)1/ 2011 4.1 4.4 5.0 4.4 4.0 3.8 4.2 4.7 4.3 3.5 - 4.5
3/
2012 5.2 4.8 5.0 5.8 5.0 4.5 4.5 5.5 5.0
2/
2012 5.0 4.8 5.0 5.8 5.0 4.5 4.5 5.5 5.0 n.a.
4.8 4.6 5.0 4.4 3.6 3.8 4.3 4.7 4.4 3.5 - 4.5
n.a.
Data by Reuters and calculation of average figures by Bank of Thailand. Estimated on February 21, 2011, when GDP figures for 2010 Q4 were released. Estimated on May 23, 2011, when GDP figures for 2011 Q1 were released.
Averages of inflation forecasts for both 2011 and 2012 are largely unchanged from the previous survey.
Table 5.7 Headline inflation forecasts by various research houses

(Apr 11, 2011)1/ 2011 Capital Nomura Credit-Suisse DBS Standard Chartered Kasikorn Research Phatra Securities SCB Economic TISCO Securities Average NESDB
1/ 2/ 3/
(Jul 12, 2011)1/ 2011 4.3 3.9 4.0 3.7 4.0 3.8 3.8 3.9 3.9 3.0 - 3.8
3/
2012 4.8 3.1 3.5 3.8 3.5 3.2 3.7 3.3 3.6
2/
2012 4.4 3.7 4.0 3.8 3.7 3.2 3.7 3.3 3.7 n.a.
4.7 3.8 3.5 3.7 4.0 3.7 3.7 3.9 3.9 2.8 - 3.8
n.a.
Data by Reuters and calculation of average figures by Bank of Thailand. Estimated on February 21, 2011, when GDP figures for 2010 Q4 were released. Estimated on May 23, 2011, when GDP figures for 2011 Q1 were released.
78
Bank of Thailand
Greece,s sovereign debt crisis and its impacts on the global economy
The sovereign debt crisis in Greece has been an issue in world financial markets since the end of 2009. In May 2010 Greece became the first euro-area country requesting a financial rescue from the European Union and International Monetary Fund (EU/IMF) worth 110 billion. Although it has been more than a year since the bailout, the public , debt problem remained unresolved as attested by (1) the rise in Greece s two-year government bond yields of more than 300 basis points; (2) the continuous downgrade of Greek sovereign rating to below investment grade even under the EU/IMF program; and (3) the rise in Greece,s credit default swaps (CDS) to a steep 23.5 percent (as of 14 July 2011), reflecting around 87 percent probability that Greece may default within the next five years. Most important, the Greece crisis has spread to other peripheral countries, namely Ireland and Portugal, which have also requested financial assistance from the EU and IMF in November 2010 and April 2011, respectively. This sovereign debt problem has become a significant risk to the world financial market and economic recovery. Causes of the Greek debt crisis Greece,s public debt has been at an elevated level since 1989 and as of the end of 2010 amounted to 329 billion or 148.2 percent of GDP. Such a high public debt to GDP ratio is almost three times larger than the threshold set by the Maastricht Treaty that stipulates member countries, public debt not exceeding 60 percent of output. Greece has also experienced large fiscal deficit, which registered at 10.5 percent of GDP at the end of 2010 higher than the euro area average of 6.0 percent and one of the highest in the world. The sovereign debt crisis in Greece is primarily caused by four factors. The first is the lack of fiscal Public debt and fiscal deficits to GDP discipline due to populist welfare policies, e.g., three-times-a-year % to GDP % to GDP Public debt to GDP 150 35 142.8 32.4 bonuses as well as a minimum Fiscal deficits to GDP (RHS) 30 119.0 retirement age of 50, which is below 25 the international average, and the 96.2 100 93.0 20 attendant entitlement for pension 60.1 EU criteria on Public debt to GDP not exceeding 60% 15 benefits that is inconsistent with the 50 9.1 9.2 10 average lifespan. Such policies led 10.5 4.6 5 EU criteria on fiscal deficits to GDP not exceeding 3% to increases in public spending, 0 0 particularly on wages, pensions, Greece Ireland Portugal Spain Italy elderly aids, and unemployment benefits, which accounted for more Source: Eurostat than 75 percent of Greece,s public expenditures. The second factor is the mismatch between government revenues and expenditures. Greece,s public spending excluding interest payments accounted for 32 percent of GDP, while public revenues excluding social security contributions amounted to only 20 percent. This discrepancy is due partly to inefficient tax collection, as well as tax invasion particularly among high-income bracket individuals, resulting in ongoing fiscal deficits. Greece also needed to make substantial interest payments due to a large amount of borrowings from financial markets during the past ten years. Being a member of the European Union was also a factor that helped Greece to borrow cheaply. Greece,s long-term interest rates and long-term government bond yields significantly declined after it became a member of the European Union.
79
Third, Greece,s competitiveness is declining relative to its peers in the European Union. A measure of Greece,s competitiveness has decreased by more than 25 percent since becoming an EU member in 2000. The average wage and unit labor cost in Greece were higher than the counterparts in the euro area. These were the main obstacle to economic growth that will also adversely affect tax revenues. Finally, during the global financial crisis in 2008, the Greek government spent extensively to stimulate the economy, contributing to the large fiscal burden and loss of investor confidence in the government,s debt repayment ability. Since the end of 2009 , Greek sovereign bonds ratings were continuously downgraded to below investment grade, driving up financing costs and reducing the likelihood of paying back their debts. Solutions to the sovereign debt crisis The EU/IMF solution to the Greek problem has been mainly focused on liquidity risks in the medium term. Between now and 2014, after which it would need to raise funds from the financial markets again, Greece is expected to restructure economy under the bailout conditionality by implementing fiscal austerity measures, including decreasing public expenditures and raising revenues to curtail fiscal deficit. Nonetheless, the credibility of the program has been questioned, particularly at the end of last year when Greece failed to achieve EU/IMF conditionality as the economy unexpectedly contracted by 4.5 percent owing to weak domestic demand. The financial package, initially expected to end in 2013, has thus been extended to end a year later. In addition, given two-year government bond yields rose significantly, Greece inevitably requested for the second bailout. Being a euro area member precludes the possibility of currency devaluation as generally practiced by countries that receive aid from the IMF. As a result, Greece,s foreign currency earnings, which came mainly from tourism and maritime transportation, did not increase much. Investors also questioned Greece,s ability to repay debts given the delayed fiscal consolidation. Recently, there is a proposal for involvement of the private sector in sharing some burden through a rollover of Greek bonds. Nonetheless, many analysts view such a move only to buy Greece more time and not constitute the solution. Furthermore, this proposal could be regarded as a technical default by credit ratings agencies and potentially trigger credit event.
Table 1 Commercial banks foreign claims as of December 2010
Creditors countries Billions USD Greece Portugal Ireland Spain Italy PIIGS
Source: BIS
Germany 34.0 36.4 118.2 181.9 36.4 532.7
France 56.7 26.9 29.6 140.6 26.9 646.5
United Kingdom 14.1 24.3 135.2 107.2 66.4 347.2
Netherland 5.0 6.5 16.7 76.9 45.3 150.5
US 7.3 5.2 50.9 47.2 36.7 147.5
Belgium 1.9 3.5 25.4 21.5 25.8 78.2
Total 119.0 103.0 376.1 575.3 729.1 1,902.6
80
Bank Bank of Thailand of Thailand
Potential impacts on global economy Greece,s sovereign debt crisis directly affects its citizens, especially through fiscal-tightening measures. Despite many ongoing efforts from various institutions to find an appropriate solution, if comprehensive and sustainable solutions could not be reached, the crisis could have large impacts in global financial markets and could ultimately affect the world economy through the following channels: Investor confidence. Credit default swaps of PIIGS rose significantly during the past two months, resulting in higher financing costs of those peripheral countries.1/ Rising borrowing costs adversely affect ability to repay, potentially leading to default. Financial markets. Exposures to Greek debts by commercial banks in France and Germany, in terms of ultimate foreign claims to public and private assets, total approximately $57 billion and $34 billion, which are equivalent to 1.8 and 1.2 percent of total foreign claims, respectively.2/ If Greece defaults, those commercial banks will unavoidably face capital losses. If the problem spreads to other PIIGS countries, it can lead to credit crunch. Moreover, the majority of Greek bonds are issued under Greek law, which can make claims by foreign investors difficult. Trade. If the problem is contained within PIIGS, the impact on the global economy is expected Exporting countries to be limited as exports to the (% to total exports) EA-16 EU-27 US Japan China Asia-7 World periphery countries account for Greece 0.9 0.9 0.1 0.2 0.3 0.3 0.6 only 8 percent of world exports, Portugal 1.3 1.1 0.2 0.1 0.2 0.1 0.6 although EU intra-regional trade Spain 4.7 4.3 0.9 0.6 1.5 0.9 2.6 would be more affected as exports PIIGS 13.0 12.9 3.2 1.9 4.1 2.5 7.8 to PIIGS account for 13 percent of EA-16 57.9 51.4 16.0 10.8 15.6 9.0 29.3 total EU exports. If core countries EU-27 66.5 66.8 21.2 14.1 20.5 12.6 38.1 become affected, impacts on the world economy would be severe Note: Asia-7 consists of Taiwan, Thailand, South Korea, Indonesia, Philippines, Hong Kong and Singapore because the European market , calculation based on database from Trademap Source: BOT staffs accounts for one-third of world exports. The sovereign debt crisis in Greece thus poses a significant risk to the global economy and world financial markets if there is no concrete solution.
Table 2 Share of export
(By countries)
With regard to Thailand, the impact on the Thai economy is judged to be limited, as financial claims by Thai investors, including financial institutions, on European economies are minimal. The impact through trade is also marginal as Thai exports to PIIGS accounts for 1.8 percent of total Thai exports. Nonetheless, the Thai economy will be indirectly affected from volatilities in foreign exchange and stock markets worldwide. As the crisis is unfolding, future impacts will largely depend on the severity and the degree of contagion of the problem.
1/ PIIGS comprises Portugal Ireland, Italy, Greece and Spain. 2/ Includes direct loans, investments in government bonds, and corporate bonds.
81
6. Conclusion
The Thai economy continued to expand well in 2011 Q1. Although the growth rate over the same period last year appeared to have slightly moderated, the slowdown was particularly attributable to the high base last year. In any case, sequential growth was robust this quarter, driven by a significant expansion of merchandise exports, especially in the plastic and electronic industries, in line with continuous recovery of the global economy. Private investment turned to a positive quarter-on-quarter growth after the contraction during the previous two quarters. Meanwhile, private consumption grew at a slower rate owing importantly to the widespread floods that diminished consumer confidence. Finally, inventory depleted this quarter, as the inventory of rice declined toward the end of growing season and as manufacturers restrained production to cope with existing inventory. Going forward, the MPC projects the Thai economy to continue to expand. Output growth in 2011 is unchanged from the forecast in the previous Inflation Report. Exports in 2011 Q2 is likely to slow down from the previous quarter due to manufacturing supply disruption, especially in the automobile industry, as a result of Japan,s natural disasters. However, a global economic expansion importantly led by emerging markets, together with the expected Japan,s economic recovery over the latter half of the year, will revitalize Thai exports in conjunction with growth in consumption and investment at home. Meanwhile, government
83
expenditure is likely to have an increasing role in the expansion of the Thai economy. The MPC forecasts inflationary pressures to remain high in 2011, following pressures from both the supply and demand sides, but inflation readings are likely to edge down as a result of the government extension of part of subsidy measures until the end of December 2011. With regard to recent monetary policy decisions, the MPC judged on 1 June 2011 that the global economy continued to grow robustly. Meanwhile, the Thai economy was expected to expand steadily, fuelled by both domestic and foreign demand, albeit held down somewhat by Japan,s natural disasters. Inflationary pressures increased more than expected, and inflation expectations edged up following robust demand. The MPC therefore decided unanimously to raise the policy rate by 0.25 percent, from 2.75 to 3.0 percent. In a subsequent meeting on 13 July 2011, the MPC judged that, although major industrialized economies grew at a rate slower than previously predicted, Asian economies continued to well expand. The Thai economy was expected to grow further, driven by exports, privatesector domestic demand, and the fiscal stimulus. Inflation was expected to remain high due to elevated oil and commodity prices. In addition, a potential increase in the minimum wage and fiscal stimulus, especially in a robust economy, might accelerate inflation further. The MPC therefore decided unanimously to raise the policy rate by 0.25 percent from 3.0 percent to 3.25 percent.
84
Bank of Thailand
Report: Economic/Business Information Exchange Program between the Bank of Thailand and the Business Sector
As of June 30, 2011
Overall summary
According to the Economic/Business Information Exchange Program between the Bank of Thailand and 319 firms nationwide in 2011 Q21/, overall activity remained strong despite rising costs. Domestic and foreign demand was steady. As a result, firms raised prices in line with increasing production costs. However, some firms could not adjust prices owing to intense competition. Vehicle production dropped between April and May but resumed its normal level at the end of this quarter as the supply disruption problem ameliorated. Looking ahead, businesses expected economic expansion to continue, driven by both public and private investment. Nonetheless, there were concerns about labor shortage, political instability, , and the new government s economic policies.
Consumption expanded from the previous quarter due to elevated farm income thanks to high crop prices and increased output. In addition, increasing loans availability, sales promotion schemes, and improved consumer confidence also helped bolster consumption. Real estate activity was little changed from the previous quarter, with developers cautiously launching new residential projects. Prices edged up somewhat due to rising costs. Despite the ongoing demand for low-rise units, overall demand moderated due to a slowdown in demand for condominiums. Mortgage loans continued to expand well. Consumers were reported to obtain easier mortgage thanks to competition between financial institutions. Tourism activity remained strong following economic expansion in emerging economies (e.g., China, India, and ASEAN) and as a result of effective internet marketing. Accommodation rates remained unchanged on average, especially in middle and low segments, due to intense competition from service apartments and non-registered hotels. However, food and beverage prices increased to some extent. Production and exports expanded robustly in most industries given strong domestic and foreign demand. The agricultural sector benefited from high crop prices and increased output. Manufacturing also expanded due to the increased production of electrical appliances, electronic parts, and plastic and petroleum products. Although auto production dropped during April-May, normal production levels resumed at the end of the second quarter as the supply disruption problem abated. In the meantime, hard disk drive production started to rise as global inventory fell. Regarding the textile and garment industry, the recent sharp decline in cotton prices prompted manufacturers to resort to the make-to-order strategy to respond to volatile raw material costs. Investment expanded from the previous quarter. To accommodate growing demand, firms continued to invest to expand production capacity, replace existing equipment, or substitute for labor. In particular, the wholesale and retail trade industry planned to open new branches. Going forward, investment was expected to expand strongly, driven by private-sector investment (e.g., alternative energy power plants and auto parts factories) and publicsector investment (e.g., the mass transit system and the dual-rail track system). Employment remained strong in line with economic expansion. Businesses continued to experience shortage labor in every position owing to labor migration to agricultural and service industries as well as labor qualification mismatch. Thus, both wages and turnover rates tended to increase. Although businesses expressed more concerns over availability of labor than increasing wages, the general election campaign promise on the minimum wage hike was reported to be a major business risk and had the potential to deteriorate Thai competitiveness in many industries. Production costs. Certain commodity prices showed some decline. For example, cotton prices dropped following , harvest and China s decision to clear cotton inventory. Rubber and steel prices also registered a declining trend. However, raw material prices and overall production costs remained high. Consequently, firms, especially in food and beverage sectors, raised their prices. Looking forward, businesses anticipated that price pressures would remain over the remainder of the year, as energy and raw material prices were still volatile and there remained some goods that awaited approval for price hike. However, any price increases were expected to be smaller compared with the previous period. Loans continued to grow. Loans extended to large firms and SMEs expanded well, including fixed-investment loans and working capital. Household loans also expanded in line with growing consumption. Auto loans slowed , down due to Japanese carmakers delivery delay. However, motorcycle loans continued to expand given rising farm income. Business constraints and risks. Difficulties in price adjustment, given rising costs and labor shortage, continued to be the top concern. Firms were reported to be less worried about the increase in interest rates than the difficulty , in obtaining loans. Political instability, the new government s policies after the general election, global economic conditions, and inflation pressures were deemed to increase production costs and affect consumer purchasing power going forward.
1/
Including responses from the Business Sentiment Survey (about 700 firms per month).
Inflation Report JulyReport July 2011 Inflation 2011
85

Relatório Inflacao Tailandia 0IRE - 150811

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Relatório Inflacao Tailandia 0IRE - 150811

Uploaded by

Copyright:

Available Formats

Inflation Report

The Monetary Policy Committee:

Inflation Report July 2011

Thailand Monetary Policy Strategy

The Monetary Policy Instrument

Inflation Report July 2011

Inflation Report July 2011

Inflation Report July 2011

Table 1.1 GDP at 1988 prices (seasonally adjusted)

2010 6.1 4.8 13.8 6.4 -2.8 14.7 21.5 7.8

2011 Q1 1.9 0.6 7.0 -0.3 13.3 10.9 10.1 2.0

Chart 1.1 GDP growth forecast

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

Inflation Report July 2011

Inflation outlook and monetary policy

Inflation Report July 2011

Chart 1.2 Consumer Price Index

Annual percentage change 10 8 6 4 2 0 -2 -4 Core inflation1/ Headline inflation

Chart 1.3 Core inflation forecast

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

Inflation Report July 2011

2. Inflation and Economic Conditions

Chart 2.1 Inflation in Thailand and other countries

Source: Various official sources and Bloomberg

Inflation Report July 2011

Table 2.1 Quarterly inflation

Source: Trade and Economic Index Bureau, Ministry of Commerce.

Chart 2.2 Contribution to inflation

Contribution to core inflation

-4 Q1 2008 Q1 2009 Q1 2010 Q1 2011

-2 Q1 2008 Q1 2009 Q1 2010 Q1 2011

Production cost conditions

Chart 2.3 Production cost conditions

Producer price index

Dubai oil price 20 15 10 5 0 -5 -10 -15

Producer price index : Products of Agriculture Producer price index

Source: Bloomberg and Food and Agriculture Organization of United Nation.

Inflation Report July 2011

Pass-through from cost to final prices

Chart 2.4 Labor wage condition

Unit labor cost

Source: National Statistical Office.

Inflation Report July 2011

Aggregate demand in 2011 Q1 and the outlook for 2011 Q21/

Table 2.2 GDP growth rate

Chart 2.5 Export volume index classified by products

Source: The Bank of Thailand

Inflation Report July 2011

Chart 2.7 Business Sentiment Index and Private Investment Index

Index 215 205 195 185

Source: The Bank of Thailand

Inflation Report July 2011

Chart 2.8 Import volume index classified by products

Source: The Bank of Thailand

Inflation Report July 2011

Chart 2.9 Disbursement of government budget

Chart 2.10 Contribution to GDP growth (QoQ, seasonally adjusted)

Source: The National Economic and Social Development Board

Inflation Report July 2011

Source: The Office of Industrial Economics, Ministry of Industry

Chart 2.12 Capacity utilization rate (seasonally adjusted)

Source: The Office of Industrial Economics, Ministry of Industry