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22 Jun 2005

Thai Economy

Trade and Current Account Deficits: Import Restructuring Needed to Ease Impact from Rising Oil Prices


The Thai economy has been experiencing a slowdown since early this year. However, imports have posted accelerating growth over what was seen last year. Based on our analysis of Thailand's import structure, if each economic sector depends on imports at a ratio unchanged from last year and the economy grows at around 4-5 percent, imports will expand by around 17-18 percent, this year. At this level of imports, Thailand will still retain its current account surplus, this year. As a matter of fact, the Thai economy recorded growth of only 3.3 percent in the first quarter of this year, while imports in Baht terms expanded by 26.5 percent.

Kasikorn Research Center (KRC) has analyzed the structural linkage between Thailand's economic sectors and imports to shed light on ways to manage the country's imports and current account balance. We found that each economic sector was becoming more reliant on imports. This can be seen from the ratio of imports to GDP that rose to 62 percent in the first quarter of this year, an increase over the 58 percent seen last year. This figure was below 40 percent during the pre-crisis period.

From changes in the structure of imports within various economic sectors, i.e., consumption, production, investment and oil imports, it was found that the ratio of consumer goods imports to private consumption value rising by one percentage point would boost import growth in 2005 by 1.2 percentage points. Meanwhile, the ratio of imports of raw materials and components to output value of the Thai industrial sector increases by one percentage point with import growth of 0.7 percent. The ratio of machinery and instrument imports to investment value rising by one percentage point will lift import growth by another half-point. If global oil prices rise by one US Dollar to the barrel, imports will increase by another 0.3 percent.

If the import ratios for consumption, production and investment sectors remain almost unchanged from last year and oil prices average USD50/barrel, import growth will edge up by another 3.7 percent (over the growth of some 17 percent under the existing import structure). Under such circumstances, the current account balance would post a surplus of around USD430 million. However, if import ratio of consumption, production and investment grows higher than the year before, imports for 2005 (including the effect of rising oil prices) may increase by another 7.6 percent to 24.6 percent, while the current account would record a deficit of some USD3.250 billion. The higher crude oil prices surge, the more the current account balance would be adversely affected.
Impact on Imports Based on an Unchanged Structure in Imports from Preceding Year
- Assumption 1 The import ratio of private consumption rises by 0.5 percent, the import ratio of industrial sector rises by 5 percent, and the import ratio of investment activities increase by 1percent, while the average price of Brent crude is 50 US$/Barrel (increasing by 12 US$/Barrel over the average in 2004): - The import value increases by Baht270,000 million.

- Imports increase by 7.6 percent over former import structure (17.0 percent).

- The current account balance in 2005 would post a deficit of around USD3,250 million.
- Assumption 2 If the import ratio for consumption, the industrial and investment sectors do not change from last year, and the average price of Brent crude is around 50US$/Barrel: - The import value rises by Baht 128 billion.

- Imports increase by 3.7 over former import structure (17.0 percent).

- The current account balance in 2005 would post a surplus around USD430 million.

Source : Kasikorn Research Center

While higher oil prices in the global market are an external factor that is beyond our control, we might be able to depend on cooperation from various economic sectors in finding guidelines to reduce imports of each economic sector with the cooperation of consumers, plus the business and state sectors to save energy, increased use of domestic goods, and a reduction in the purchases of imported luxury goods. Moreover, in the state sector's measures, trade measures should be imposed to prevent the inflow of cheap goods from overseas, as well as instituting industrial policies that support Thai industries to use more domestic raw materials.

For Thailand, the current account deficit, at present, is still not too worrying because Thailand's international reserves are still high and overseas debts have dropped dramatically from past levels. Meanwhile, the existing deficit does not evidence excessive consumption, but it is likely a result of investment stimuli whereby the imported goods are being used to create productive yield in the future. In particular, the state sector's investments in infrastructure should lift the economy and society. If these investments are efficient, they will result in further economic growth in the future. Therefore, if the country has high growth potential, at present and in the future, a short-term deficit may not cause much of a problem for economic stability. However, the Thai and the world economies are still facing various risks and the problem of the current account deficit may increase if the country suffers economic slowdown, or if the world economy decelerates, such that the growth of exports will falter, which would mean that the ability to earn income to repay debts would become limited; and, if the country is less attractive to draw capital inflows, then there would occur a weaker exchange rate, etc. We must be aware that the Thai economy is still facing these risks.

Thai Economy