Real GDP contracted by a remarkable 8.0% in 1998 following a growth of -0.4% in the prior period. The decline was caused by a sharp contraction in domestic demand. Domestic expenditures represented a 23.5% contraction, following a 7.6% decline in 1997.

Total consumption contracted by 14%, against a growth of -0.5% in the previous year. Private consumption declined by 15.0%, compared with a growth of -0.4% in the previous year, as the economic contraction reduced the purchasing power and employment. Government consumption declined by 4.7%, in comparison with a 0.7% contraction in the previous year, as a result of a budgetary cut due to the government’s emphasis on fiscal discipline and economic stability during the first half of the year.

Total investment also declined by 40.5%, compared to last year’s decline of 19.4%. Private investment experienced a sharp reduction of 51.5%, which continued the decline of 24.8% of the last period, and mainly resulted from a sharp contraction in domestic demand, the Asian crisis and the slowdown of world economy. Public investment declined by 17.9%, against an expansion of 11.3% in the last period. Central and local government investment decreased sharply by 30.9% compared to a growth of 21.7% in prior period.

Gross national savings accelerated from the previous year owing to a rise in private savings, particularly household savings, due to the sharp contraction in consumption.

Export values in US dollar terms declined by 6.8% in 1998, compared to a 3.8% growth in the last period. This was due to: (1) a fall in world commodity prices and the increased price competition in the export market, (2) a shrinking demand from trading partners, and (3) the liquidity problems of exporters, particularly small- and medium- size exporters.

Import values in US dollars terms fell by 33.8% in 1998, compared to a -13.4% reduction in the last period. This was a result of (1) a reduction of 8.8% in rate of price increase, (2) a sharp contraction in domestic demand, both consumption and investment, and (3) a depreciation of the baht resulting in a substitution away from imported goods.

The consumer price index (CPI) rose by 8.1% in 1998 compared to 5.6% in 1997. Inflation accelerated during the first half of the year, averaging 9.7% per annum (p.a.), and decelerated in the second half of the year. The increase in inflationary pressure came from both food and non-food prices. Prices in the food category increased by 9.6%, up from 7% in the last period while prices in the non-food category increased by 7.3%, up from 4.6%.

In the latter half of the year, the inflation rate decelerated sharply owing to the strengthening of the baht and weak demand. The inflation rate in December declined sharply to 4.3%, with the average rate of 6.5% in the second half of the year.

Due to the economic crisis, the labor market saw a reduction in employment in 1998. Total employment recorded at 30.8 million, reflected a decline of 812,000 or 2.6% from the previous year. Within this total, the number of workers outside the agricultural sector fell by 618,000, or 3.6%, while those in the agricultural sector declined by 194,000 or 1.4%.

As a consequence of a seasonal fluctuation, the number of unemployed workers represented at 1.3 million, a 4.0% unemployment rate, increased from 3.5% of the last period. The sector in which there were large layoffs included construction, restaurant, hotel, small retail shops and electrical appliance repair.

The minimum wage rate was raised by approximately 3% from baht 157/day to baht 167/day in 1998, effective since 1 January 1998. However, the rate of growth of real wages was contracted by 4.46%, due to the economic contraction in 1998.

A current account surplus reported at 12.3% of GDP, compared to the deficit 2.0% in the last period. It improved considerably to a surplus of US$14.3 billion from a deficit of -US$3.1 billion in 1997. The balance of trade recorded a large surplus of US$12.2 billion as imports declined more sharply than exports. Along with the increased net surplus from the service and transfer account as a result of increased revenues from tourism, this enabled a surplus to be recorded in the current account this year.

The capital account is estimated to have registered a large deficit of about 16.8% of GDP, compared to a 15.6% deficit in the last period. This mainly resulted from the debt repayments of the private sector and offshore swap settlements.

Since the Thai economy has achieved progressive improvements through implementation of policies supported by the IMF, the confidence of foreign investors has gradually improved. Foreign direct investment (FDI) rose substantially by 27.0% from US$3,751.64 billion to US$4,792.50 billion (4.01% of GDP) in 1998 with increases in both equity participation and direct loans from the parent companies.

As a consequence, the structure of capital flow and external debt improved. Gross external debt was slightly decreased from US$93.4 billion, or 62.7% of GDP in 1997 to US$ 86.1 billion, or 73.65% of GDP in 1998. Capital in the form of loans was continuously replaced by FDI, while the short-term debt repayment in the private sector was replaced with inflows of long-term borrowing by the public sector. This resulted in the continuous decline in the private sector external debt outstanding and an increase in the proportion of long-term debt.

With size of the current account surplus exceeding outflows on the capital account, the balance of payments recorded a surplus of US$1.7 billion.

In the beginning of 1998, the baht was rather volatile as it sharply depreciated from baht 47.25/ US$1 at the end of 1997, to the weakest level since the announcement of the floating exchange rate system of baht 56.06 per US dollar in January 1998. This was due to the depreciation of regional currencies as well as the continuation of high domestic and overseas demand for US dollars.

Since mid-February, the baht has consolidated. Favorable developments in some economic indicators: improved trade balance and current account; the abolition of the two-tier foreign exchange market; and the strengthening of confidence in Thailand’s economic and financial restructuring policies have contributed to drawing in foreign capital. Moreover, regional currencies such as the Indonesian rupiah and Korean won regained strength in the period February to May. As a result, the baht has been appreciating significantly, fluctuating within a range of baht 38.50 to baht 41.04 to the US dollar between April and May.

In the second half of the year, the baht slightly depreciated in line with the Japanese yen, with the economic crises in Russia and Latin America. However, since September, the baht has appreciated and regained stability owing to signs of improvement regarding the economic crises, and other factors such as the de-leveraging of the short position on Thai baht by hedging funds in the US, the announcements of the Miyazawa financial support and American and Japanese financial support in the APEC meeting for the crisis-affected countries.

In 1998, the movements of the baht exhibited a strengthening trend, especially during the fourth quarter. The baht appreciated, passing the baht 36 per US dollar level for the first time in late November.

The fiscal policy implemented in 1998 can be divided into in two phases. In the earlier period, emphasis was placed on economic stabilization and regaining confidence. However, increasing evidence confirmed that the economy in the second quarter of 1998 was experiencing a more severe contraction.

In fiscal year 1998, the government recorded a cash deficit of baht 115 billion, or 2.4% of GDP, in comparison to a deficit of 1.0% of GDP in the year before. Although, a balanced budget was set for the fiscal year, revenue collection dropped with the weakening economy.

Government revenue fell by 13.8% from the previous year, mainly due to a 43.1% reduction in corporate income tax.

As for government expenditure, the budget was revised several times during the course of 1998, the last revision was reported at baht 830 billion. Of this, actual disbursement amounted to baht 666.4 billion or 82.3%. After including an additional baht 8.0 billion from the treasury reserves and the carry-all expenditure amounting to baht 160.9 billion from the previous fiscal year, total government expenditure was thus baht 835.3 billion, down 6.0% from 1997.

In 1998, businesses faced liquidity problems following the financial crisis that started in1997. Liquidity tightened remarkably as financial institutions became increasingly cautious in lending, for many reasons. First, the lack of public confidence in financial institutions caused large amounts of deposit withdrawals as well as debt recalls by overseas creditors. Secondly, the economic contraction and increased foreign debts burden due to the baht’s depreciation had contributed to private businesses’ inability to service their debts to financial institutions, resulting in the acceleration of the financial institutions’ non-performing loans (NPLs) problem. Lastly, financial institutions could not implement the recapitalization necessary to match the increased NPLs.

Liquidity in the financial system has increased since the second quarter and became very high in the last quarter of 1998. This was the result of the ongoing process to strengthen financial institutions and the officials deposit guarantee scheme which helped restore public confidence in financial institutions.

The money market interest rate and bond repurchase rate were adjusted downward continuously over most of the year in line with increased liquidity. The average inter-bank lending rate gradually declined from 22.9% p.a. at the end of 1997 to 18.0% in the second quarter and to 3.8% in the fourth quarter of 1998. The one-day repurchase rate gradually decreased from 24.0% p.a. at the end of 1997 to 18.2% in the second quarter and to 4.4% in the fourth quarter of 1998.

As a result of the progress made in resolving economic and financial problems, the Thai economy is projected to recover gradually, with a growth rate of 1.0% in 1999. The recovery would become more apparent in the second half of the year. Economic stability is expected to improve further. Inflation is expected to average at -0.5 to 1.0%. External stability is projected to remain satisfactory.

The current account surplus is estimated to reach US$11.8 billion, slightly smaller than the previous year. The capital account will record a smaller deficit than the year before, and is expected to be US$8.3 billion, as a result of the prior completion of the unwinding of offshore swap obligations. Private debt repayments are expected to slowdown, in line with a decline in outstanding short-term debts. Thus balance of payments in 1999 is projected to register a surplus of US$3.5 billion.

Monetary conditions in 1999 are projected to improve. Liquidity in the money market remained high following the end of 1998. Capital inflows are estimated to increase which will further enhance the stability of the baht while a lower inflation rate will allow the authorities to maintain stimulative monetary and fiscal policy stance. Problems concerning financial institutions are expected to recede, in particular, as a result of progress in the recapitalization of financial institutions and debt restructuring in the business/private sector, which will help to regain the smooth functioning of the business sector. These efforts will further contribute to the reviving of the economy.

On the fiscal side, the policy objective of the government for fiscal year 1998/99 continues to be stimulating the economic recovery. The government has set a budget deficit policy with budgetary expenditure of baht 825 billion. The disbursement rate is expected to increase from the last period. Such a fiscal deficit is the policy stance appropriate for an economic condition in which financial market mechanisms are unable to operate efficiently. The stimulus from the fiscal policy will help accelerate economic recovery.

Government expenditure and loans from abroad will be targeted to relieve the adverse social effects of economic crisis, particularly through programs related to employment, health care, education, and rural development. In 1999, the unemployment rate is projected to be lower, falling from 4.0% to 3.1%.

• Intervened in the operations of banks: Liquidation, Merger.
• Restructure of Krung Thai Bank, the state-owned bank.
• Consolidation of Finance Company Sector - Implementation of Tier 1 and Tier 2 Capital Support Facilities.
• Associated Legal Measures: amend by emergency decree the Commercial Banking Law.

• Signing of new MOUs with all banks and all finance companies on recapitalization.
• Specialized State Financial Institutions (SFIs).
• Regulatory and Supervisory Framework.
• Comprehensive Deposit Guarantee.

• Remove impediments to corporate debt restructuring.
• Establish Corporate Debt Restructuring Advisory Committee (CDRAC) to monitor restructuring process.
• Improve corporate disclosure and governance; bring accounting standards to international best practices.
• To date, a total amount of completed debt restructuring has increased by 19% from baht 156.9 billion in December 1998 to baht 187.4 billion in January 1999, corresponding to 12,004 debtors.

• Enact amendments to the Bankruptcy Act. (Parliament passed these amendments at the beginning of 1999.)

• Establish Office of State Enterprises and Government portfolio in MOF.
• Cabinet approved the Master Plan for State Enterprises Reform by establishing an overall strategy, principles for regulatory bodies, and the sequencing of divestitures.
• Approved a legal framework to enable privatization of public enterprises.

• Foreign Ownership of Business Activities: amend the Alien Business Law to enhance competitiveness; increase transparency of criteria; contribute to increased liquidity in key sectors, and be consistent with international obligations.
• Foreign Ownership of Real Property (Land Code and Condominium Act); liberalize existing restrictions on foreign ownership of property.

• Infrastructure spending was increased to support priority areas in rural and urban sectors in order to augment broader agricultural production and industrial restructuring.
• The authorities accelerated the social investment program targeted at addressing many dimensions of unemployment.

Sources: Ministry of Finance (1) Bank of Thailand

Notes: (1) Budget balance is on a Government Finance Statistic (GFS) basis.

(2) Short-term interest rate is the 1-day R/P rate for December of the given year.

Table 2. Forecasting Summary (% change from previous year)

Note: The IMF forecast is from the World Economic Outlook (IMF, April 1999). The ADB forecast is from the Asian Development Outlook (1999). The OECD forecast is from the OECD Economic Outlook (OECD, June 1999).