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31 May 2006

Thai Economy

Thailand's Industrial Outlook, Remainder 2006: Exports Remain the Key

In Q1/2006, the industrial sector experienced high growth despite the overall economic slowdown. The upbeat exports contributed greatly to the accelerating growth in the industrial sector. However, exports over the remainder of this year are likely to exhibit slowing growth, while domestic demand may remain plagued by numerous negative factors. KASIKORN RESEARCH CENTER (KResearch) has analyzed the outlook of the industrial sector over the remainder of this year and come to some key conclusions, i.e. ?

- Accelerating growth in the industrial sector during Q1/2006: During the earlier months of this year, industrial indicators recorded higher growth over the preceding quarter. The Manufacturing Production Index (MPI) released by the Bank of Thailand grew 8.8 percent, over-year, rising over the growth of 7.2 percent in the final quarter of last year, thanks mainly to external demand. Capacity Utilization in Q1/2006 increased to 75.2 percent, beating the 72.5 percent posted in the preceding quarter, in line with continued expansion in production. KResearch expects that the GDP of the industrial sector may have grown around 6.5 percent in Q1/2006, up from the 6 percent in Q4/2005. On average, industrial growth should outperform other economic sectors. As far as estimates go, we expect that economic growth, gauged by the GDP, may post growth of 5.3 percent in Q1/2006.

- Looking ahead, domestic demand may be confronted with several negative factors over the remainder of this year. Consumer spending is expected to remain pressured by steep oil prices, thus widely affecting prices of consumer goods, while the upward trend of commercial banks' interest rates may dampen sales of consumer goods that are reliant on consumer financing. Investment of business sector: Investment in real estate will likely decelerate along with slower demand. Meanwhile, investments in the industrial sector are showing signs of decline, probably due to political conflicts. Investments of the state sector have also been delayed due to the effect from the present government's status as only a caretaker government, which restricts them from making decisions on proceeding with investment plans that would require long-term budgetary commitments. The absence of a permanent government and Parliament will also cause delays to the approval of the Fiscal Budget Act for 2007. Moreover, risk factors imposed by natural disasters such as flooding may also affect agricultural produce and damage the household sector.

- Exports may remain a major drive: Though exports seem to be showing a decelerating trend for the remainder of this year, external demand is likely to outpace domestic demand, which will make exports a major driving force for the Thai industrial sector. Exports will also get a boost from previous foreign investments that entered Thailand to expand manufacturing bases in many key industries, which will be helpful in increasing the exports of Thai industrial goods. KResearch forecasts that in 2006, industrial product exports will be valued at around USD111 billion, growing around 14 percent, if compared to the export value of USD97,330 million in 2005.

- Direction of Industry over the remainder of 2006: KResearch forecasts that output from the industrial sector over the remainder of 2006 may grow 6.7 percent, decelerating from 8.8 percent in the first quarter. This will result in industrial production growing 7.1 percent in 2006, decelerating from the 9.2 percent growth in 2005. The gross domestic product, GDP, of the industrial sector in 2006 is expected to be worth around THB2.71 trillion, against THB2.47 trillion in 2005, representing a growth rate, at fixed prices, of 5.4 percent, which would be slightly lower than the 5.5 percent growth in 2005. Industrial sectors with good growth projected are the automotive industry (incl. auto parts), hard disk drives and parts, integrated circuit boards and electronic components, petrochemicals and the food industry. By contrast, exporting sectors that may slow would especially include textiles and apparels, whose competitiveness in the world market is being weakened by strengthening Baht. In the meantime, industries that largely rely on domestic demand are likely to be pressured by declining purchasing power, in particular, building materials, automotive vehicles, electrical appliances, petrochemical products and alcoholic drinks.

Looking forward, entrepreneurs are likely to face a number of pressing factors that include:

1. Foreign Exchange: It is unlikely that the Baht will ease to more than THB40/USD. Therefore, exporters cannot pin their hopes on the advantage of weaker Baht any longer.

2. Production Costs: There is presently an upward cycle in production costs occurring in line with rising oil and commodity prices, which are necessary industrial production factors.

3. Stiff Competition: Domestic markets are threatened by the massive inflow of cheaper foreign goods and more intense competition over the next 3-4 years, when the import duties will be reduced to duty-free status in 2010 per several free trade agreements, as well as further talks with trade partners. In addition, competition will be increasingly tense as Thailand's key competitors in developing countries constantly develop the quality of their products.

Given the world economy and the abovementioned pressuring factors, Thai businesses must try to fine-tune themselves ? beefing up their competitiveness by boosting efficiency and reducing production costs ? along side better product design and quality, avoiding price wars and improving production processes to maximize the utilization of their resources.

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