Transcript The Economy A brief overview by Graham Catterwell

The Economy
A brief overview
by
Graham Catterwell
Presented to the Joint Chambers of Commerce
13 September 2007
The Economy
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Consumption
Production
Investment
Prices
Trade
External Accounts
Overall GDP
Currency
Summary
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Consumption
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Private consumption, as measured by the Bank of Thailand’s Index…
… has been weak for the past two years and is now contracting.
Retail sales …
… confirm this.
Household savings are slowing.
Home mortgages are slowing.
With the 97 crash, government banks took up the slack.
This means that any mortgage defaults hurt the public sector more than the private
sector.
Bank of Thailand figures suggest an astronomical growth in household debt over the
past two years, especially for vehicles.
The central bank has sounded alarms over the growth in credit card debt…
…but this is not really an issue.
Growth in credit card debt has been very high…
…but only because …
… of the number of new cards.
Average credit card balances remain reasonable…
…and, with slowing consumption, have been on a downtrend so far this year.
However …
Bank lending to individuals is still expanding at an alarming pace…
… especially when compared to the slowing credit to business.
Despite apparent rising debt for vehicle purchase, sales are on a clear downtrend.
Sales of tyres for 6- and 10-wheel trucks are a good short-term lead indictor, as truckers
know their order books well.
Consumption
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So far this year, private consumption growth has been in low
single digits at best.
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Retail sales are contracting by 2-3%.
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Vehicles sales are also contracting; motorbikes at the rate of
more than 20% - the biggest slowdown since 1997.
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Despite lower spending, household debt is rising by over 10%.
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Production
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After picking up last year, business consumption of electricity is slowing.
Whilst having recovered from the 1997 economic Tsunami …
… manufacturing production has been slowing for the past 3-4 years.
Electrical appliances and vehicles led production growth in the five years to 1992.
Electronics took over in the five years before the crash…
… and remained the driver in the next five years, while other sectors struggled to
recover.
In the last five year period, the disk and chip shops have been the mainstay…
…whilst vehicle production has at least moved back into more positive terrain.
Looking from a longer term perspective, starting with the decade before the crash…
Electrical appliances and vehicles were the main engines of manufacturing growth...
…with electronics playing a supporting role.
In the past decade, the picture has changed, leaving only one remaining star industry.
Overall investment, as a proportion of GDP, is half of what it was in the 1980’s and early
1990s.
In particular, domestic Thai investment has been seriously low….
…maybe due to Business Sentiment.
Production
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Production of electronics is now the only engine of growth,
expanding at an annual 20%.
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This is just disks and chips, but the chip shops are now
running close to full capacity.
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Over the past two years, overall manufacturing production
growth has fallen by half to about 5.5% - and is going to
continue slowing.
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Investment
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The Private Investment Index has past its peak…
… and is now heading down sharply.
Growth in Foreign Direct Investment has been negative since the coup…
…but to put this perspective…
Investment was very high in the first three quarters of 2006.
From the lower base in September 2006, year-on-year growth will substantially improve
from September 2007.
Overall, Foreign Direct Investment has been strong…
…with over US$30bn over the past five years…
… mainly from Japan.
The 2006 spike from ASEAN is probably a one-off….
…ask Thaksin.
Investment from the US…
…the EU…
…and Others…
… comes in waves.
Here’s the overall picture.
A two-decade accumulated total of US$69 bn…
…or Bt 2.5 trillion.
While the Thais are not investing much at home, they are investing abroad …
… but not too far abroad.
Modest production growth has not generally pushed capacity utilisation to levels where
investment in capacity expansion is urgent.
The picture varies by industry…
Within the electrical appliances category…
… makers of Washing Machines are running at over 90% capacity…
…but radio manufacturers seem to have gone completely out of business within the past
few months.
The capacity to produce …
… more passenger cars looks comfortable…
… pick up plants are going flat out…
… and motorbike makers are getting more time off.
We don’t need investment in new hard disk plants for the time being...
…but…
Integrated Circuit manufacturers need to invest in new capacity.
Capacity utilisation needs to be high at expensive petroleum and petrochemical plants,
so such high levels do not generally signal a short-term need for new investment.
If production is to be kept in Thailand, then new investment is required from makers of
Washing Machines, Integrated Circuits and Pick-up trucks.
With the domestic market for pick-ups being saturated, capacity expansion is unlikely.
New investment from chip and washing machine makers is more probable.
Investment
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Foreign investment has been strong in recent years.
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Total foreign investment over the past five years is up 50% on
the previous five years, and 3-4 times higher than the pre1997 years.
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Overall investment, as a proportion of GDP, has remained half
of what it was before 1997. The current investment ratio of
23% is much too low for Thailand’s stage of development.
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Thai investors, particularly in productive sectors, seem to have
disappeared.
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Prices
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Oil prices have continued to trend up.
The lower base prices from September 2006…
…will feed through to higher year-on-year inflation figures from September 2007.
Consumer price inflation is low, and core inflation very low.
With low inflation, stagnant domestic consumption, and a strong currency….
… there may be room to even further lower interest rates in the near term.
Loan growth to business has turned negative, whist loans to individuals are too high.
The problem is that the banks have to lend the money somewhere!
Since the beginning of the year, the Bank of Thailand has been trying to boost the
money supply…
…but this has not fed through to an expansion of broad money.
Prices
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Inflation is low.
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For five consecutive months, core inflation has been less
than 1.0% YoY.
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Interest rates are low, but may go lower.
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The risk of Thailand entering a dangerous, and difficult-toexit deflationary phase is present.
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Trade
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Looking in Baht terms, the bad news is the export growth has slowed sharply over the
past 12 months, from 14.8% to 5.3% p.a.
The good news is that import growth has slowed slightly more sharply, from plus 5.5% to
minus 4.5%.
But, in Dollar terms the picture is somewhat different…
Exports have slowed only slightly, from 17.0% to 16.2% …
…while imports slowed from 7.5% to 5.2%.
I will be focusing on the Baht numbers because these matter more to companies in
Thailand.
Machinery and chemical products have been accounting for a growing proportion of
exports …
… and of course, the oil import bill has been taking a heavy toll.
The overall trade balance has been positive and growing since late last year.
Net trade in chemicals is steady with a net import of around Bt10bn per month.
Thailand now exports considerably more machinery than it imports.
The net trade in oil is of course negative.
Thailand remains one of few net food exporting countries in the world.
In fact, in the good old days before oil rose above US$30 a barrel…
…net food exports …
… more than paid for total net oil imports.
Since June 2004, that has not been the case…
… that was when the oil price broke US$30.
Just for fun…
Let’s compare the actual picture with what would have happened if the oil price had
stayed at a flat US$30 a barrel throughout the period.
At US$30 per barrel…
… Thailand can pay for all of its oil imports with food alone!
Food for oil… food for thought!
It’s difficult to see the real structure of imports with that expanding oil slick…
…so let’s take it out…
The overall structure of imports is quite healthy…
…with neither the bad part (consumer goods) growing…
…nor the good part (capital goods) shrinking.
The portion of exports going to China is growing rapidly.
ASEAN is growing moderately as an export market.
The portion of exports going to Japan, the EU and particularly the USA is declining.
ASEAN and, more so, China supply a growing proportion of Thai imports.
China is now Thailand’s third largest trading partner…
…after ASEAN and Japan.
Trade
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Aside from a blip last month, exports have remained strong
US$ terms, but the Baht appreciation has meant significantly
less earnings for Thai exporters.
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Despite the stronger Baht, imports have slowed leaving the
trade balance healthy.
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China and ASEAN continue to grow in importance as trading
partners.
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External Accounts
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External Accounts
From here on, I will focus on the dollar numbers, as they
are more important from the external perspective.
Despite the heavy and rising oil bill since mid-2004 and despite the currency
movements…
… the Balance of Payments is in good shape.
After 18 months in deficit, the Current Account Balance has moved back in surplus.
Having steadily fallen since 1999, gross external debt has now leveled out at a
reasonable 30-35% of GDP.
Debt cover has moved well into the comfort zone.
The Debt Service Ratio is comfortable…
…particularly for the public sector where it’s at the lowest level for decades.
Exactly ten years after the crash, the Bank of Thailand is again playing in the currency
swap markets….
…but this time more moderately and trying to push the Baht down, rather than up.
External Accounts
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Despite the appreciating Baht, the Balance of Payments and
Current Account Balance are both in good shape.
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The Debt Service Ratio is also looking good, and has been
helped by the currency movements.
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Overall GDP
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Overall GDP
Back to Baht again!!
Looking at Quarter-on-Quarter growth…
…GDP shrank 0.4% in the first quarter this year and then shrank
4.0% in the second quarter.
But …
… that is perfectly normal!
GDP growth has slowed from 5.0% in the second half of last year, to 4.5% in the first
half of this year.
Manufacturing continues to contribute more to GDP…
…while finance and construction have never fully recovered from the crash.
Overall GDP
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GDP growth is running at 4.5% and slowing.
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Barring substantial stimulus, projections of 4.5% growth for
next year seem optimistic.
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Currency
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The Baht has strengthened significantly against the Dollar, Yen and Yuan, and mildly
against the Euro.
What currencies matter to Thailand?
Here is the picture from the trade perspective.
However…Not all trade is in currency of country concerned and…
…financial and capital flows are another story, or another part of the same story.
These are the recent movements of the Baht.
“Up” means the Baht has strengthened against the currency.
The black line is the trade-weighted average.
Since the beginning of this year, the Baht has appreciated 9.3% against the Yen, 5.9%
against the Dollar, 2.8% against the Yuan, 2.2% against the Euro and 4.0% overall.
Since the beginning of last year, it has gained 17.9% against the Dollar, 5.1% against
the Euro and 12.5% overall.
Looking from an longer perspective: since 1992 the Baht has risen 23.2% against the
Dollar, fallen 18.0% against the Euro and risen 10.3% overall.
So the Baht itself has been appreciating, while the major currencies have been moving
relative to each other.
The Yen has been wobbling around, but is likely to strengthen against the Dollar from
here on.
The Yuan has also been strengthening against the Dollar but, with more Chinese
exports now going to Europe than to the USA, the Bank of China can afford to let it
appreciate against the Dollar - providing they can manage to depreciate it, or at least
hold it steady against the Euro. Watch this chart!
The Euro has shown a long-term trend of strengthening against the Dollar.
What is driving this?
One factor is that there has been a substantial accumulation of official foreign exchange
reserves, especially from developing countries.
The Euro has already become well established as a reserve currency.
Industrial countries have increased their portfolio of Euro holdings…
…and…
… the developing countries even more so.
The developing countries’ reserves are more diversified, with 41% in currencies other
than the Dollar…
.. compared with 28% for industrial countries.
Overall, the Euro comprises 26% of global reserves, against 64% in Dollars.
The growing importance of the Euro as a reserve currency has been an important factor
in the currency’s strengthening against the Dollar.
But something else is also going on…
The Investment ratio in America is very high, while the Savings ratio has been falling to
appallingly low levels: America doesn’t have enough savings to fund its investment.
The investment-savings gap is in deficit and the debt has been rising.
Contrast this with the rest of the world…
For the rest of the world, investment has been rising, but has been outpaced by a rise in
savings.
The rest of the world has been pouring its surplus savings into the United States.
This has made it difficult for the Fed to manage long-term dollar interest rates.
The weight of long-term money has pushed long-term interest rates down.
This has led to seriously excessive borrowing within the US, with one consequence seen
in the sub-prime mortgage collapse – the waves from which will be swirling around the
world’s financial markets for quite some time to come.
But this will not be the only consequence.
In the old days, the US deficit was funded almost solely by Japan.
Now it is funded by Japan, China and oil exporting countries.
The United States is not the world’s only debtor country, but it is by far the largest.
This is unsustainable and the imbalance will inevitably unravel, perhaps sooner rather
than later, with very dramatic consequences not only for global financial markets, but
also for the global economy.
The creditor countries now realise that the US economy cannot properly be managed
without their participation.
Having seen the long-term damaging effects on the Japanese economy from managing
the Yen to suit domestic US economic requirements, the creditors - and China in
particular- are not going to repeat that experience.
When central bankers talk about massive uncertainty and the likelihood of substantial
turbulence in global financial markets and global economies, this is what they are talking
about.
Currency
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The Euro is likely to continue to appreciate against the Dollar
over the long term.
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Expect appreciation of the Chinese Yuan against the Dollar.
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The Baht appreciation, both overall and against the Dollar, will
continue for the foreseeable future.
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Being more liquid the other ASEAN currencies, the Baht will
experience relatively more volatility and will remain a
preferred hedge for currency investors with an Asian portfolio.
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Dramatic turbulence in financial markets and the global
economy lies ahead.
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Summary
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Summary
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Consumption: Very weak and slowing.
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Production:
No future growth-drivers in sight.
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Investment:
Foreign strong so far, Thai very weak.
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Prices:
Inflation low; risk of deflation.
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Trade:
Exports firm, but worth less Baht.
Summary
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External Accounts:
In good shape.
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Overall GDP:
Max 4.0-4.5% this year and next.
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Currency:
Baht appreciation will continue,
expect global turbulence.
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Thank you
Also thanks to:
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Bank of Thailand
NESDB
Ministry of Commerce
Ministry of Industry
• IMF
• WEO
• British Chamber of Commerce
• Australian Chamber of Commerce
• American Chamber of Commerce
• Also the participating Canadian, New
Zealand, Danish, French, Swedish
and Swiss Chambers of Commerce in
Thailand.
• Tim Beevor
• Aon Consulting (Thailand) Ltd
• Paul Mason
• Management & Executive
Recruitment Consultants Ltd
Questions to:
[email protected]
Graham Catterwell