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1 Feb 2006

Financial Markets

Domestic Spending Picked up, Production and Exports Slowed, and the Government Remained in Cash Deficit


Overall, economic indicators for December 2005 still pointed to an unclear picture. Despite an improvement in private consumption, exports and industrial production decelerated. Key economic variables for December 2005 are summarized in the following:
  1. Exports grew 11.6 percent, down from the 13.8 percent recorded in November, while imports rose by 26.0 percent over the growth of 13.7 percent in the preceding month. However, the reduction in import value from the month before (to USD9.5 billion, from USD9.9 billion in November) resulted in a decline in the December trade deficit to USD176 million, from USD201 million in November. Even so, the ebbing surplus in the services, income and transfer account from the prior month, in line with profit repatriations induced the current account to drop to USD401 million, from USD441 million in November.
  2. Slowing exports primarily came from the volume. The export volume grew 6.7 percent, against 7.3 percent in November. In the final quarter of last year, the export volume expanded 4.6 percent, much lower than the growth of 12.2 percent in the third quarter.
  3. Meanwhile, increasing imports were also derived from the quantity. The import volume rose by 13.5 percent, against the growth of 1.0 percent in the preceding month. The data for the fourth quarter of last year showed expansion of 6.3 percent, up from 4.6 percent of the previous quarter.
  4. Rising import volumes were evident in key sectors, i.e., consumer goods (growing 15.6 percent, up from 4.0 percent in November), raw materials (expanding 20.0 percent, up from 1.0 percent in the month before) and capital goods (rising by 34.7 percent, up from 2.9 percent in the preceding month).
  5. Major export items that saw accelerating growth over the month before were integrated circuits (rising by 55.5 percent, compared to the 26.9 percent in November) and petroleum products (growing 26.2 percent, compared to the contraction of 10.3 percent in the month before). Meanwhile, key export items that exhibited decelerating growth included computers (rising by 46.6 percent, compared to the 57.7 percent previously), rubber (growing 9.7 percent, compared to the 27.3 percent previously) and garments (shrinking 1.5 percent, from 9.6 percent growth previously). Exports of passenger cars still posted high growth, albeit at a slower rate (growing 129.3 percent, down from 165.5 percent in November).
  6. Despite decelerating exports, private spending picked up both in consumption and investment. The Private Consumption Index grew 2.3 percent in December against the contraction of 0.2 percent for November. The improvement in the Private Consumption Index could be attributed to growth in key items, i.e., value-added tax collections on consumer goods (increasing 9.1 percent, against the contraction of 1.2 percent in November), imports of consumer goods (rising 15.6 percent, compared to the 4.0 percent in the month before) and passenger cars (growing 6.1 percent, compared to the 4.3 percent in the preceding month). Meanwhile, the Private Investment Index grew by 5.4 percent, against 1.7 percent growth in the month before thanks to imports of capital goods that grew as high as 36.8 percent, compared to the 5.3 percent in November.

However, notably, other major components of the Private Investment Index were still slowing, including cement sales (contracting 8.2 percent, after growing 3.7 percent in the preceding month), and sales of commercial vehicles (contracting 6.5 percent, after growing 9.8 percent in November).
  • For industrial manufacturing, growth in the Manufacturing Production Index dropped, following that of exports by growing 6.1 percent, compared to the 7.8 percent in November. In the last quarter of the year, this index grew only 7.3 percent, dropping from 11.7 percent in the preceding quarter. The deceleration of the industrial sector in December was a result of the slow down in the food industry (contracting 12.3 percent, against the growth of 11.4 percent in the preceding month), which is a result of the problem of sugar production. This also includes garments (contracting 0.1 percent, against the growth of 9.0 percent in the preceding month), which was in line with the exports of this group in that month. However, the over-month increase in the production level due to seasonal factors, resulted in industrial capacity utilization rising to 74.3 percent, from 71.1 percent in November.
  • Concerning the fiscal status in December, the government cash balance still posted a deficit of THB30 billion steadily, against a THB25 billion deficit in November. This deficit was the result of the government expediting budgetary disbursements, while the growth of revenue collections also decelerated. However, compensating for the budget deficit by borrowing domestically resulted in the Treasury balance rising to THB17 billion, from THB12 billion in the preceding month, but it was still lower than the THB37 billion in October, and the THB105 billion at the end of fiscal year 2005 (September 2005).
  • Meanwhile, the growth of the government's total revenue still decelerated compared to the preceding month, or growing only 0.1 percent in December, which was a drop from the 2.4 percent in November, and 14.3 percent for fiscal year 2005. Tax revenue grew 2.7 percent, dropping from 3.2 percent in November, and 15.0 percent for fiscal year 2005, while other revenues shrank 25.6 percent, from the contraction of 4.8 percent in November, and the growth of 8.7 percent for fiscal year 2005. Though the government's tax revenue collections from consumption-based taxes and foreign trade-based taxes grew better than the preceding month ? which was in line with the growth of private consumption and imports in December ? income-based taxes for individuals and corporate income tax decelerated against the preceding month, which may have been the result of a comparison to the high base in 2005.

From the above fiscal condition, it is projected that, amid the expediting of budgetary disbursements by the government (in order to reach the disbursement target set at 93.0 percent of the approved budget) and the slow down in tax revenues, the government may face fiscal situations that are more challenging and more complex in fiscal year 2006. Though the government will be able to manage the Treasury balance by incurring more debt, the important point is still the slow down in tax revenue. It is projected that the trend in interest rate increases in the system and for oil prices is still toward increase, and this may cause the growth of private consumption and tax collections of the government to face further pressure. Meanwhile, the trend of falling import growth in 2006, and a gradual reduction of excise tax revenue due to FTAs, including the tariff tax restructuring measures of the government to strengthen competitiveness in the industrial sector will still likely affect foreign trade-based taxes. Income-based taxes may grow slower, compared to the high base of the preceding year. These fiscal constraints may affect spending on the government's mega-projects and the growth of Thai economy in 2006.

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