ThaiEconSHecSH EJP SH8

21st Century Thailand
Facing the Challenge

Economic Policy & Strategy
by
Pansak Vinyaratn
Chief Policy Advisor to
The Prime Minister of Thailand
21st Century Thailand
Facing the Challenge
Economic Policy & Strategy
Coordinated and written by
Pansak Vinyaratn
Chief Policy Advisor to
The Prime Minister of Thailand
FACING THE CHALLENGE PANSAK VINYARATN
Published in August 2004 by

CLSA BOOKS
CLSA Asia-Pacific Markets
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88 Queensway, Hong Kong
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this work. The views contained herein are those of the author and
may or may not be those of CLSA Limited.
The text of this book is set in Goudy, with the display set in
Optima.
Printed in Hong Kong

ISBN: 962-876067-5-1
ii
PANSAK VINYARATN FACING THE CHALLENGE
Contents
Preface ................................................................................. v
Introduction: Crisis and renewal........................................... 1
1 Policy legacy and redesign................................................. 3
2 Policy strategy and implementation ................................. 14
3 Policy outcomes and achievements.................................. 55
4 Public debt & household debt.......................................... 63
5 Puzzles in the recent success story .................................. 86
6 Next steps...................................................................... 100
Appendices ....................................................................... 107
Acknowledgements........................................................... 119
iii
iv
Preface
A
prominent member of the high-flying investment-
banking world asked me: “Will what you are doing be
sustainable?” I told him, “Of course not, there is nothing
permanent in life.” You see, I was not trying to be facetious. I was
deadly serious. I am not sure we have the iron will to stay the
course. I am not certain that we, meaning, the Thai State or the
Thai private sector, have the will or the stamina to complete the
change we have set in motion.
Even if we are able to change and restructure our economy,
there is no global, historical precedent for a permanent solution to
the vagaries of capitalism in any dynamic society. What we have
done since we entered the job of managing this country is to start
a process of recognizing reality. On that basis, we have
implemented what we see as necessary.
The 1997 financial crisis was no sudden attack on Thailand’s
economy by elements unknown. No economic change is sudden.
The pre-1997 world was marked by creeping overproduction
capacity all over the place, both in the agricultural and industrial
sectors. The rise of China in its capacity to produce and reproduce
effectively priced products was well-known among trade
specialists.
In the world of finance, the development of debt instruments
v
and their techniques entered Asia like a Japanese tsunami.

Thailand was both beneficiary and victim of these changes and
developments.
Our policies were dubbed “Thaksinomics” - not by us, but by an
economic analyst. The policies and the name were subjected to
ridicule by elements in the western media and some academics.
The intensity and emotionality of the attacks puzzled me. Are we
really so heretical in our analysis of the situation in the country
and the world that our policies are prejudged as a massive failure
even before they are implemented?
It is now three and a half years since the current government
started to implement its main policies. The results, so far, cannot
be disputed. I must confess that I did not think the positive results
would come so early.
I am a pessimist by nature. This must be due to the fact that my
“previous life” (meaning 20 years ago) was mostly in journalism.
As a result, you tend to be pessimistic at best or downright cynical
at worst. I was more interested in the behavioural response to our
policies by different classes or elements in the Thai economic life,
than the macro figures that came in. I believe that if the response
of the people means a beginning of change of their behaviour in
the direction one hopes they will change, then there is hope for a
structural change in the quality of their economic decisions.
I must remind the readers that our hope for a change in the
Thai economy does not rest solely on good wishes on our part. We
had done our homework before implementation. Most of the
research on the Thai economy was carried out by the Thai Rak
Thai research groups. The important element of the research
comes from two sources: from academic-rural leadership elements
and from the public and private sectors, including financial and
business circles. Some, inevitably, have axes to grind. We
supplemented our research with intellectually brilliant polling in
the rural and urban areas to check the results of our analysis.
vi
Did we believe our research and polling completely? The

answer, at least on my part, is “No”. I am old enough to believe in
the Thai elusiveness. The reality, as readers already know, is far
more chaotic than my measured acceptance of the analysis.
The situation when we entered the government was bad
enough. We designed our policies in such a way that we hoped to
incrementally pick up domestic growth, and change the structural
relationship between the rural economy and the urban economy
slowly at the same time. We were fully aware of the debt burden
the State had to carry in order to sustain the Thai financial and
banking system. There was no way out except to spend carefully in
order to create new income.
“No pyramid structure can survive without a strong base.” This
oft-quoted statement of Prime Minister Thaksin Shinawatra is
basically a summary of current Thai domestic policies. I would like
to add that the base must also be resilient to withstand the push
and pull of the forces in the global political economy.
We knew from the start that we cannot depend on new
investment which directly competes with China for our export
drive. This is because the world market during that time was not
very encouraging and price competition was murderous for non-
Chinese. This does not mean we would ignore exports as one of
the essential elements of our policy. On the contrary, we were
trying to tie our new structure of domestic growth to the new
“niche demand” in the world market.
It is very ironic to me, since I am no professional economist, to
listen to most economists analyzing the world economy as if it
consists of just figures of different categories devoid of what
actually made those figures come about. While, in the world of
consumption behaviour, a lot of literature was coming out on how
consumption is shifting and is more flexible and more demanding
for non mass-produced goods. I should think we must try to link
this type of information to our economic analysis in order to get
vii
some semblance of possible problem-solving options for the

economy.
We are now a few years into the 21st Century. We tend to make
the assumption that, as we go forward in time, life should be less
chaotic. The evidence so far has been less than encouraging. The
oldest element of hope that makes us whole is under dispute.
Meanwhile, the world economy has found no new solutions for so-
called economic failure cycles. We have to face the uncertainty of
random violence, which may hit at the heart of the post-modern
global capitalist system.
Because of these twin dilemmas, Thailand, although it is at the
periphery of the post-modern capitalist system and the other
dispute, is also directly affected by the global situation. Our
policies have thus become more essential for our stability.
In my previous life, I often went to Wall Street to buy long play
records - at a small shop next to the Twin Towers. Of course, you
could not get away from looking at the buildings with a sense of
awe. On the night of 9/11, I was explaining the rationale of our
economic policies to a group of investment bankers and fund
managers from Wall Street at the Regent Hotel Bangkok -
without much success. You could tell from their body language
that they were at best bemused.
The 9/11 incident was the first in a series of unexpected
pressures on our young and, to some, alien policies. My immediate
thought was how would this incident impact on our trade balance?
Will the emotional response to this expression of desperation by a
small element of radicals create negative ripple effects on all
things Asian? We were positioning our products and service
industries in response to the new world demand for “Monsoon
lifestyle” products and services. So far so good. Costs went up, but
the demand continues to expand.
Did we have a lot of problems explaining our policies? Plenty.
We probably took a year and a half explaining the policies to the
viii
Thai bureaucratic milieu. The private sector, if they are truthful,

will admit they also have their puzzles. The international financial
elements continued to express their hostile doubts for well over
two years, moving from doubt to puzzlement. One of the reasons
we published our white paper in the form of this book is to have
on record a systematic description and explanation of the
government’s policies and their results.
The work herein is a group effort. Young economists from the
Finance Ministry, the National Economic and Social
Development Board, and the Bank of Thailand were seconded to
the Office of the Chief Policy Advisor to the Prime Minister once
a week. They joined up with the senior staff of the Advisor who,
five years ago, worked on the policies. They are the first group of
converts. I have provided their details at the end of the book.
I would like to thank all of them for the efforts they made
during the past three and a half years to understand the
phenomenon that is the Thai economy. I hope they have gained
some experience in looking at the macro figures within the
context of human actions and responses. They will need such
experience for the future.
My thanks also go to CLSA for their consideration and effort
in publishing this book. And to those who would prefer to remain
anonymous for their comments and critiques, my deep
appreciation.
Finally, I would like to put on record my appreciation of the
Prime Minister for granting our team the freedom to work on this
paper at our leisurely pace.
Of course, I alone shall be responsible for all mistakes.
Pansak Vinyaratn
Bangkok, July 2004
ix
x
Introduction:
Crisis and renewal
T
hailand's 20th Century pursuit of a traditional export-led
growth strategy provided spectacular economic successes.
Real annual GDP growth averaged around 9.5% during
1988-96, one of the highest rates in the world. But the impressive
accomplishments hid some serious imbalances, and these
culminated in the 1997 financial crisis. Persistent and massive
capital inflows, especially in the form of short-term loans to take
advantage of currency stability, had fuelled years of high economic
growth. This led to rapid expansion in the real estate,
construction and financial sectors, which generated
overinvestment and a high level of external debt.
As growth strained, macroeconomic risks and imbalances
emerged in the forms of rising inflation, a widening current
account deficit, a highly-leveraged corporate and banking sector,
and weakening market confidence. The crisis erupted when
declining export growth and concerns over the health of the
financial sector triggered sudden and massive capital outflows,
which ended in a currency crisis.
The subsequent IMF standby programme initially combined
deflationary policies with forced closure of weak finance
1
companies and banks, in an attempt to raise market confidence.

This created substantial dislocation in the economy: real output
declined, asset prices went into freefall, credit flows collapsed, and
the banking sector was saddled with customers that could not pay.
When the three-year IMF programme expired in June 2000,
the economy had begun to recover and had stabilised significantly.
Nevertheless, the manufacturing economy was operating at only
54.9 percent capacity. Indeed, non-performing loans (NPLs) and
idle assets outside the banking system accounted for more than
30% of GDP.
So much idle capacity made it clear that Thailand’s productive
structure - particularly the modern sector - had been damaged by
the crisis and prospects for recovery were weighed down by weak
balance sheets. The modern sector was consequently unable to
respond to successive rounds of Government stimulus to lead the
recovery. By end-2000, Thailand’s economic recovery remained
uncertain. Prospects rested mainly on the hopeful performance of
exports, the outlook for which was threatened by the imminent
global economic slowdown.
This book describes the economic philosophy and policy action
that Thailand’s Government adopted to resolve its economic
difficulties. It is organised in six parts
1. The first part summarises the key problems facing the
Government when it took office in February 2001 and
discusses its economic thinking and policy redesign
2. Part two describes the key strategies and policy
considerations of the redesign
3. Part three presents the economic outcomes of the redesign
4. Part four looks more closely at public and household debt in
Thailand
5. Part five explores some of the anomalies of the current
growth cycle
6. Part six anticipates future challenges
2
Part 1: Policy legacy and

redesign
W
hen the present Government took office in early
2001, it faced two challenges as it attempted to steer
the convalescent Thai economy through an
unfavourable external environment under many binding
constraints.
1.1. Legacy: Problems inherited

The first was the immediate task of reinvigorating growth and
ensuring a sustained recovery. The second was to prepare the
economy to meet the more difficult longer-term challenges, by
undertaking the necessary investment and reform that would
position Thailand as an efficient and competitive trading nation
in the rapidly changing global environment.
Before tackling these challenges, the Government had to
address a number of economic issues. Some related to the fragile
economy and policy constraints, and had to be quickly and
decisively dealt with to begin the process of recovery. Others were
more structural and had important long-term economic
implications. These structural problems were longstanding, and
3
having been left unattended had become entrenched because of

the crisis. Some of the more pressing problems were:
A fragile recovery
At the peak of the economic dislocation, real GDP decreased by
1.4% in 1997 and 10.5% in 1998. This was led by a collapse in
domestic demand, fuelled partly by a freefall in asset prices. This
decline in output greatly damaged Thailand’s production capacity
and structure, most seriously in sectors that fed the artificial
demand created by increased incomes and wealth during the boom
years. As domestic demand collapsed, widespread excess capacity
ensued.
Although the situation improved, the recovery remained
fragile. This was because the initial growth rebound was only an
internal adjustment in response to the recovery in exports,
improving use of the ongoing capacity left in the system - a large
part of output and domestic demand remained stagnant.
This imbalance meant the early recovery was too narrowly
focused, was mainly attributable to the export sector, and was
dependent on global market cycles. The recovery and its related
benefits were therefore not felt throughout the economy.
Deep structural problems in the financial sector
The economic adjustments triggered by the onset of the crisis
were deep and structural, seriously hitting balance sheets across
the economy. The worst damage was sustained in the financial
sector, the size of which, as approximated by the amount of credit
extended, was reduced by almost one-third following the closure
of certain banks and finance companies.
Because of the sharp output decline and disruption to credit
flows, much of Thailand's weakened economic structure had
become insolvent, and the financial sector was saddled with a
high level of non-performing loans.
Despite facing declining asset quality, a dearth of credible
customers, and a corporate sector focused on deleveraging its
4
balance sheets through cost reduction and debt repayment, the

Thai banking sector made no serious attempts to develop new
customers or new lending opportunities and products, especially to
the corporate and SME sectors.
As a result, banking intermediation almost ground a halt as
these factors combined to limit the banking sector's willingness
and ability to extend credit. Credit levels fell and Thai businesses,
especially SMEs, had to adjust and look elsewhere for financing.
When taking office, the Government was aware that a number
of private banks still faced deep structural challenges and were not
ready to support its planned growth opportunities. The banking
system challenge still loomed large, even discounting the
substantial post-crisis cost of bailing out the financial sector which
sharply increased public debt and seriously constrained fiscal
policy.
Asset price collapse and excess capacity
The economic dislocation was exacerbated by the decline in asset
prices, which deflated the nominal value of wealth and income.
The precipitous falls in asset prices affected all asset classes,
leaving no pricing benchmark:
The Thai baht depreciated by 52% in US dollar terms from Jun
1997 to Jan 1998
Stock prices declined by 59.3% from Jun 1997 to Aug 1998)
Property prices, as approximated by the value of land
transactions, declined by more than 57 percent from Jun 1997 to
Oct 1999.
Such declines substantially damaged the balance sheets of
households, banks and corporates, fuelling the collapse in
domestic demand.
5
CURRENCY AND SET SET TURNOVER

70 Baht/$ 2,000 50,000 (m Baht)
60 Set Index (RHS)
50 1,500 40,000
40
1,000 30,000
30
20 500 20,000
10
0 0 10,000
Jan-94 May-95 Sep-96 Feb-98 Jun-99 Nov-00 Jan-95 Jun-96 Dec-97 Jun-99 Dec-00
Source: Bank of Thailand, Stock Exchange of Thailand
Domestic demand weakness significantly increased excess

capacity. The utilisation rate of manufacturing production fell
from 64.9% in 1997 to 52.8% in 1998, subsequently improving to
55.8% in 2000. Large excess capacity reflected the previous years’
overinvestment and combined with the slow recovery to
discourage new investment. With no significant new investment
and declining foreign direct investment following the crisis,
Thailand’s ability to close the technology gap with its export
competitors was uncertain.
Fragile market sentiment and confidence
However, the biggest challenge was restoring confidence among
local businesses, foreign investors, and the Thai people at large.
The deflated sentiment, reflected in the currency weakening since
mid-2000 and continued capital outflows, had muted business
activities and weakened the spirit of Thai entrepreneurs.
The confidence problem was rooted in two main concerns. The
first was the fragile recovery, which limited the financial markets’
consensus growth expectations for 2001. The second was
uncertainty over Thailand's economic outlook and policy
direction. Because crisis management and structural reform was
perceived to be slower than other countries, such as Korea and
Malaysia, the long-term competitiveness and the comparative
advantage of Thai export sector were not clear. In addition, the
lack of credible means to resolve FIDF losses, uncertainty over
banks’ profitability, and the slow progress on debt restructuring
6
weighed heavily on confidence.

Constraints on fiscal stimulus
The Government’s key policy constraint on taking office was
fiscal, limiting the scope for expenditure expansion to lead off the
recovery. Previous such efforts, combined with the high cost of
bailing out the financial sector, had raised Thailand's public debt
to 56.7% of GDP by end-2000. This was fairly moderate compared
with other nations, but the increased debt left less room for
manoeuvre since a slowed economy limited revenue prospects and
heightened longer-term fiscal concerns.
Meanwhile, the modern sector (banks and corporates) was
handicapped by weak balance sheets, rendering it unresponsive to
Government stimulus through a Keynesian multiplier effect. The
IMF-inspired social safety net programme, which focused more on
cushioning the shortfalls in consumption, also came up short and
would have been further strengthened by including elements
aimed at creating income and earning opportunities.
Inefficient production structure
In the early years after the crisis, exports rebounded strongly due
to significant currency depreciation. However, the sector faced
increased competition from other low-cost powerhouse economies
such as China, India and Vietnam, which had emerged as a source
of low cost manufactured products.
While Thailand’s existing structure could help generate cash
flows and assist short-term economic recovery, its long-standing
comparative advantage based on resource abundance and low cost
production was disappearing fast. Moreover, the existing
production structure could not combine the economy’s underlying
comparative advantage with appropriate modern technology to
address the rapidly changing global economy.
The Government saw this as an urgent problem. While
investment could move some of the existing structure up the
technology ladder to higher value added products, other
7
economies were able to master foreign technology at lower cost

due to their greater technological capabilities. Thailand’s cost
advantage in replicating foreign technology would be challenged
throughout the entire technology curve. The Thai economy
would eventually become uncompetitive, when the level of
technological absorption rose beyond what it could provide at
competitive prices.
At this point, Thailand could choose from two routes. One was
to continue to rely almost solely on low-cost mass production,
largely financed by multinational companies. This strategy may
have helped fuel the early part of the boom years, but eventually
proved unsustainable due to low margins and its adverse impact
on the balance of payments. The alternative, more viable, option
was for Thailand to acquire and eventually develop its own
technology. This would enhance its true comparative advantage in
providing products that respond to global demand dynamics.
Entrepreneurship and national capabilities
Another important long-term problem was the issue of
entrepreneurship and national capabilities. Long-term economic
prosperity rests on the ability to produce quality products
supported by the comparative advantage, high productivity and
strong capabilities of firms and entrepreneurs.
But the extent to which the Thai corporate sector had been
affected by the crisis demonstrated clearly that the economy’s
shock resistance was handicapped by micro-level weaknesses,
which in turn limited the private sector’s ability to adjust.
Thailand therefore had to address these weaknesses by
strengthening national capabilities, developing more knowledge-
based assets and germinating a new generation of Thai
entrepreneurs.
This required a two-point approach. The immediate task was to
manage existing resources more efficiently, extending resources
and productive capabilities and quickening responses to market
8
conditions. This greater efficiency could be achieved relatively

quickly by:
Strengthening the roles of market and competition
Revamping unpractical rules and regulations
Rearranging the long-standing institutional relationship
between banks and clients, bringing Thai entrepreneurs greater
access to capital, market opportunities, and information.
The second, longer-term, measure was to comprehensively
develop high-quality human resources and a new generation of
entrepreneurs, able to adapt to change and help define and
improve Thailand’s future niche in goods manufacturing and
services.
Rising poverty
The crisis and subsequent weak recovery had a major effect on the
poor, especially in urban areas. Unemployment rose to a high of
3.6% in 2000. Rural incomes also suffered due agricultural product
prices declining by 15.3% in 1999 and 3.5% in 2000. During
1996-2000, the number of poor people increased from 6m to 10m,
or from 11% to 14% of the population, further aggravating income
disparity.
1.2 Policy design

The immediate task was to reinvigorate growth and ensure a
sustained recovery. To achieve this, the Government would have
to restore confidence, strengthen domestic demand and diversify
exports. It would also have to implement policies and reforms to
ensure a more balanced distribution of growth benefits.
Given the policy experience of preceding years, it was clear the
Government would need to embrace new methods of policy
formulation and execution.
The Government based its policy on a mixed economy model
where a careful balance is struck between market, Government,
9
and civil society - to create a blend of prosperity, dynamism, and

stability that reflects the nation’s economic capabilities.
Economic prosperity comes from growth in effective output and
income. The Government sees the economy as an interdependent
system, made up of different economic constituencies of varying
endowment, need, opportunity and potential. Sustained economic
well-being comes only from the sustained well-being of all
constituent parts. The Government therefore aims to understand
these differences, solving problems and helping citizens realise
their potential. It sets out to do this by creating opportunities,
expanding growth, maintaining stability, and making less policy
mistakes.
The Government’s policy design is based on a number of core
beliefs:
! That a sustained recovery must be built on a strong domestic
demand revival, in addition to exports
! However, the Thai modern sector is weak while many major
businesses have opted to pursue business opportunities abroad,
mainly due to the perceived poor prospects of domestic economy.
It was therefore clear that reviving domestic demand required
greater participation of Thailand'
Thailand's traditional sector
(agriculture, SMEs, and rural households) in the recovery
process. The Government aimed to enhance their economic
potential and traditional strength with appropriate technology.
The focus on the traditional sector would make the recovery
process more widespread while posing little risk to the external
balance because of the low import content.
! To unleash the momentum of the traditional sector, the
Government
Government must revitalise
revitalise economic activity comprehensively
by creating income, reducing costs, expanding opportunities,
ensuring better access to financing and credit, and clearing
unnecessary regulatory hurdles. This would encourage companies
in these industries to combine their traditional strengths and
assets with modern technology and financing. The Government
had to increase efficiency in its fiscal policy,
policy reflecting a five-
point paradigm shift from old style macro-based spending to
micro-based spending along with conditional lending to enhance
10
consumption and production:

1. To protect the external balance, the Government would
initially reduce spending on big infrastructure projects
2. Spending to stimulate the economy would concentrate on
the grass-roots economy through a series of well-defined
nationwide programmes. These aimed to generate
consumption and demand, reduce costs, and create assets,
income, and future cash flows
3. Only some of these programmes would be supported by
grants, with the rest funded by conditional loans. The loan
conditions would be enforced through group accountability,
helping to build financial discipline in the grassroots
economy. Off-budget activities would be minimised, but used
if necessary
4. Access to credit would be increased, spearheaded by the
expanded role of specialised financial institutions (SFIs), and
reliant on market conditions and banks’ internal risk
management systems
5. The tax base would be widened to increase revenue with
which to support structural reforms. Performance-based and
zero-based budgeting would be used to ensure more efficient
spending.
! The Government believed that the potential in the SMEs and
the traditional sector
sector, given their great flexibility and diversity,
would provide a new source of economic growth and income.
With Government assistance, new product lines would be
developed by combining their traditional assets with modern
management and technology. These would eventually become
the grassroots economy’s main products, and a new tax base for
the Government.
! The Government realised that much of the Thai economy,
especially at the grassroots level, was underdeveloped.
Without access to a formal financial and property system meant
assets held by the poor inadequately capitalised, essentially
deemed ‘dead assets.’ Converting these into active assets would
allow the poor to enjoy the benefits of expanding market and
also receive legal protection of their properties, which could
substantially enhance their standard of living. This, in turn,
would reduce the size of the informal economy and integrate it
11
into the formal economy. To accomplish this, the Government

must carry out the process to transform underutilized assets
into productive capital
capital, and eliminate the hurdles which
preclude the poor from the legal system.
! To jumpstart the parts of the modern sector still in difficulty, the
Government had to focus on addressing the remaining
weaknesses at micro level, by easing the bottlenecks -
regulatory or otherwise - that constrained economic activities.
Moreover, the Government had to rebuild momentum in key
sectors that are strongly linked to employment and income
generation (such as tourism, housing and construction) by
providing greater support and incentives to expand demand.
! To rebuild confidence, the Government had to to set out to
rebuild the private sector,
sector much of which was dislocated by
the crisis. To achieve this, the Government had to encourage
greater private sector efficiency by helping these companies
restructure and identify new business opportunities. Continued
structural reform and a stable and supportive macroeconomic
environment would meanwhile maintain positive market
sentiment on the economy.
1.3. Conclusion
The resulting policy model has dual tracks. The aim is to
strengthen the domestic sector through policies that would
reinvigorate growth and diversify the economy's income
opportunities abroad, while at the same time ensuring a better
balance in the distributions of income and income opportunities
within a macroeconomic policy framework that focuses on
maintaining external balance and economic stability.
The dual-track policy model has three dimensions:
1. Revamping domestic demand and diversifying exports in terms
of markets and products
2. The focus on domestic demand is on jumpstarting the modern
sector and establishing new sources of growth for the grass-roots
economy (traditional industries and SMEs)
12
3. The short-term objective is to reinvigorate growth, while the

long-term objectives are to expand growth, maintain economic
stability, and achieve effective productivity and capabilities.
Following from this model, the Government’s economic policy
has been implemented through a five-pronged strategy:
1. Revitalizing new growth at grass-roots level
2. Jumpstarting key sectors
3. Enhancing economic efficiency and long-term competitiveness
4. Providing a stable and supportive macroeconomic environment
to facilitate growth, while maintaining overall policy discipline
5. Promoting the external sector by expanding markets, and
fostering financial stability through regional and global
cooperation.
13
Part 2: Policy strategy and

implementation
2.1. First strategy:

Revitalising new growth at grassroots levels
G
rassroots industries and small and medium enterprises
(SMEs) previously were largely ignored in the 20th
Century development process. Under the export-led
growth paradigm, almost all capital was invested in large urban
firms. After the crisis, Thailand could not rely on its debt-ridden
corporate sectors to drive the recovery. To restore domestic
demand, the Government turned to grassroots industries and
SMEs as the country’s new growth engine.
To promote growth at this level, the Government
comprehensively strengthened the foundations of both groups.
The idea was to enhance capabilities and deepen latent skills,
while expanding access to financing. In essence, the Government
has empowered the less empowered. However, it does not stop at
simply providing access to finance, with programmes including
credit, capacity building, and technical assistance. The key is to
turn the grassroots economy into a knowledge-based economy.
14
The Government believes that grassroots’ and SMEs’ access to

finance must be conditional. The guiding principle is that for debt
financing to be effective, it must encourage desirable behaviour
from borrowers. This is based on anthropological economics,
which emphasises the incentive structure of human economic
decision making. The Government thus deems that increasing the
grassroots’ access to finance is not ‘debt generating,’ but rather
‘asset creating.’
SMES’ GDP, 1998-2002

Gross Domestic Product (Btm) 2000 2001 2002
Gross Domestic Product for SMEs 1,956,673 2,016,754 2,112,934
Total Gross Domestic Product 4,916,505 5,123,418 5,430,455
Proportion of total GDP (%) 39.80 39.36 38.91
Source: 1998-2000 information is derived from the preliminary studies of the National Accounting Office, Office of
the National Economic and Social Development Board; 2001-2002 information is approximated using the Shift and
Share method.
NUMBER AND THE PROPORTION OF SMES, 1997-2002

1,800 (k) All 1,645.530 1,639.427
SMEs
1,600
Large
1,400
1,200
1,000 803.201 799.033
800
600
400
4.168 6.103
200
0
1997 2002
Source: Office of SMEs Promotion
15
VALUE AND PROPORTION OF SME EXPORTS, 2000-02

35,000 (Btm) All 31,640
SMEs
30,000
Large
25,000 20,110
19,630 19,540
20,000
12,080 12,170 12,090

15,000
7,550 7,940
10,000
5,000
0
2000 2001 2002
TOTAL EMPLOYMENT
8,000 (k) All 7,234.022
SMEs
7,000
Large
6,000 5,313.370 4,990.214
5,000 4,057.595
4,000
3,000 2,243.805
2,000 1,255.775
1,000
0
1997 2002
Ten new programmes to generate grassroots and SME growth

Increasing job and income opportunities
(OTOP):: This project aims to help
One Tambon One Product (OTOP)
villages (‘Tambon’ in Thai) throughout the country develop at
least one product that truly reflects local knowledge and skills.
Each village is encouraged to use local raw materials, and
transform local skills, resources and intellect into products suitable
for the global market. The Government will help provide market
16
access. New job creation is not the main purpose of this initiative
though - producing new, value-added products should instead
provide villagers’ with an alternative source of non-farm income.
SME and entrepreneur promotion: SMEs form the backbone
of the Thai business sector, and the SME Development Bank was
established in 2002 to provide financial services to existing and
fledgling SMEs throughout such firms’ life span. Supporting
schemes include research and development for SMEs and an SME
website.
Farmers’’ debt suspension
Farmers suspension:: The debt suspension and debt
burden reduction programme was an urgent policy issue. It is
designed for individual small farmers, especially those customers of
the Bank of Agriculture and Agricultural Cooperatives (BAAC).
This measure was part of a long-term comprehensive reform of the
traditional farm economy to become more viable and self-
sustained, and immediately granted a three-year grace period for
both interest and principal payments. By suspending debt, farmers
can focus on productive investment. The Government also helped
farmers upgrade production technology, through the occupation
rehabilitation and development programme.
Facilitating access to capital and credit
Village and Urban Community Revolving Fund: This was set
up to strengthen the self-sustainability and stimulate the
grassroots economy. Eighty-thousand villages and urban
communities have each received one million baht through the
programme, with positive impacts including increased household
income, increased employment and upgraded occupations.
Moreover, each village fund has been rated in terms of
performance and management systems - which will determine
their future ability to borrow from state banks. Currently, village
funds are in the process of becoming legal entities.
People’’s Bank of the Government Savings Bank: The
The People
Government Savings Bank established the People’s Bank
17
programme to expand financial opportunities to small

entrepreneurs, and replace local lenders or loan sharks as the main
source of micro credit financing. Incentives such as cross-
guarantees among borrowers and saving conditionality are
designed increase borrowers’ discipline.
SME loans: State banks and specialised financial institutions
(SFIs) have begun extending credit to SMEs. They aim to help
high potential SMEs that lack collateral to receive financing from
commercial banks.
SMES’ LENDING FROM SFIS

(Bt m)
Financial institutions Target Credit approved Targeted Credit approved Targeted Credit approved
(2001) (2001) amount (2002) (2003) (2003)
(2002)
Amount No. of Amount No. of Amount No. of
SMEs SMEs SMEs
BOT 13,000.00 6,207.45 1,553 13,000.00 4,129.95 1,093 13,000.00 49,213.82 6,896
SMEs Development 717.00 6,443.21 717 24,000.00 15,410.00 1,785 30,000.00 27,373.00 6,197
Bank
IFCT 15,000.00 15,039.53 1,420 15,000.00 15,078.59 1,665 15,000.00 17,854.73 1,724
EXIM 7,000.00 5,556.53 532 7,000.00 7,283.21 568 5,000.00 9,082.11 514
GSB 2,000.00 2,275.81 4,965 2,000.00 2,144.85 3,234 5,000.00 4,723.41 65,288
BAAC 6,000.00 5,695.30 81,502 10,000.00 8,935.00 118,490 11,000.00 10,369.40 180,751
Total 50,500.00 41,214.83 90,689 71,000.00 52,981.60 126,490 79,000.00 118,616.47 261,370
Source: Ministry of Finance
Venture capital (VC): The Government provides tax

incentives to Thai venture capital companies that hold stakes in
SMEs and to shareholders in these VC companies. They will be
exempt from corporate income tax on dividends and capital gains
received from SME investment.
capitalissation
A sset capitali ation:: The poor have assets, but have limited
access to capital. Creating access to capital can unleash the poor’s
productive capacity, helping them escape the poverty trap. The
objectives and the mandate of asset capitalisation can be defined
in four broader areas:
1. To formalise and legitimise various types of asset to create
access to capital markets
2. To create value from registered assets
3. To develop a database instrumental in ensuring a
18
transparent framework for transactions

4. To create long-term measures for asset capitalisation.
The capital creation initiative is meant to help capital-
deficient, underprivileged groups create legally pledgible assets,
which can be used to fund existing or new business ventures.
Enhancing skills through technical assistance and access to appropriate
technology
Many Government agencies are involved in enhancing grassroots
and SME skills through technical assistance and access to
appropriate technologies. For example, the Ministry of Finance
extends financial advisory services through its SFIs, while the
Ministry of Industry gives technical assistance to improve SMEs’
production efficiency. The Community Development Department
of the Ministry of Interior is responsible for training at the
grassroots level.
Operational skills and access to appropriate technology: to
improve Thai SMEs’ production standards, the Government
launched a number of industrial process improvement and cost
reduction projects. New production technology has been
introduced and a research and development database was set up to
provide information to SMEs.
Financial and management skills: The Government
established a number of projects to help SMEs revitalise their
businesses. For example, the Government provides training on
business prospect analysis, formulating competitive strategies and
developing practical business plans. Trainees are subsequently
better equipped to address new business opportunities, and also
qualify for financial support from SFIs.
2.2. Second strategy:

Jumpstarting key sectors
After the crisis, key economic sectors such as agriculture,
19
manufacturing, and real estate experienced substantial difficulties

and seemed unresponsive to broad accommodative macro policies.
The Government thus had to address micro level weaknesses by
eliminating hurdles that constrained economic activities.
The Government initially tried to kickstart key segments such
as tourism, housing and construction, which were strongly linked
to employment and income generation. It did this by providing
greater strategic support and incentives to enhance effective
sectoral demand. The Government did not intend to take full
control of the economy, instead aiming to unlock bottlenecks and
prime the private sector to drive the economy forward.
Agriculture Sector
When Thailand focused on a single-track development model,
which emphasized on exports and investment promotion, the
overall economy grew at the expense of the agricultural sector.
Resources shifted from rural to urban areas, starving the
agricultural sector of funds. Most Thai farmers, especially small-
scale ones, were impoverished and heavily in debt due to the
volatility of the world commodity prices, inadequate access to
capital and knowledge, and the lack of alternative sources of
income.
Stabilising income
To alleviate small-scale farmers’ short-term and long-term
problems and prepare them for an increasingly competitive global
economy, the Government implemented a three-year debt
suspension programme to relieve their financial burdens. The
Government also offered retraining programmes to enhance
farmers’ skills, and improved access via the implementation of the
Village Fund and other financial schemes.
Production upgraded
The Government also encouraged farmers to increase production
quality in response to global consumers becoming increasingly
selective. Food safety is the main theme, and the Government has
20
supported environmentally friendly processes and the use of

biodegradable chemicals. It is also promoting 2004 as ‘Food Safety
Year,’ to enhance production efficiency throughout the supply
chain, and help Thai farm products meet international standards.
The Government hopes for Thailand to become the ‘Kitchen of
the World.’ On this theme, CP Rice Mill Co, one of the nation’s
leading agricultural companies, uses advanced technology to
produce pollutant-free, fragrant jasmine rice in Burirum Province
in the north-east.
Looking for opportunities
The Government has also helped identify new demand for Thai
agricultural products. For instance, it approved a project to plant
1m rai (5,000 acres) of new rubber trees during 2004-06, with
0.7m rai in the north-east and 0.3m rai in the north. This was in
response to surging global demand for rubber products, especially
from China. To ensure the price stability of agricultural products,
the Government established a commodity futures market and
initiated the International Tri Parties Rubber Organisation.
Apart from increasing production efficiency and expanding
market opportunities for farm products, the Government also
aimed facilitate non-direct farm activities. The One Tambon One
Product (OTOP) project was thus established to create an
additional source of income to rural farmers. Given the vast
number of labourers in this sector, the project will also broaden
the Government’s tax base.
Manufacturing sector
In response to globalisation, Thailand’s manufacturing sector
previously concentrated on mass production. The idea was to
capitalise on the country’s relatively cheap labour, but this proved
unsustainable as Thai labourers could not compete against the
even lower wage costs of the newly emerged economies or bridge
the labour efficiency gap with developed economies.
The resulting overcapacity increased inventories of goods and
21
services. Thailand lost its competitive edge due to flawed policy

decisions to concentrate manufacturing on products which did not
reflect the nation’s comparative advantages.
Debt burden alleviated
Overcapacity and declining demand substantially weakened Thai
manufacturers’ financial positions, with companies in large-scale
industries suffering particularly from leverage problems after the
crisis. NPLs were a serious hindrance to recovery, and although
some large firms could cope through private corporate
restructuring, others needed temporary support to resume
production. The Government therefore set up the Thai Asset
Management Corporation (TAMC) to help viable debtors
continue operations by promoting corporate and industrial
restructuring. The subsequent recovery in domestic demand, led
by Government measures to boost private expenditure also helped
facilitate corporate restructuring.
Pushing through new entrepreneurs
The Government also supported SMEs, which it deemed as a new
growth and job creation platform. The New Entrepreneurs
Promotion Board was established as part of the Government’s plan
to create 50,000 new SME businesses within the next couple
years.
Tourism sector
Tourism is an important sector of the Thai economy and a
significant source of foreign income. Even so, the Government
launched a number of short- and long-term measures to improve
use of unutilised assets and maximise potential.
To promote value added activities in the tourism sector, the
Government aimed to attract high-income clients to the country.
This effort was hampered by heightened post-9/11 security
concerns increasing flight and fleet insurances. The SARS
outbreak and war in Iraq in early-2003 further dampened the
Southeast Asian tourism industries.
22
Fitting niche demand and adding more value

To secure Thailand’s position as a world-class tourist destination
in this uncertain global geopolitical environment, the
Government launched a number of domestic and international
promotion campaigns, such as Amazing Thailand, Thailand Smile
Plus, and Unseen in Thailand. These emphasised new products
designed in response to shifting customer tastes, aiming to rapidly
transform Thai tourism into a high-touch, high-tech sector.
The Government also helped expand demand by devising
travel programmes for tourists of varying income classes and
nationalities. In particular, it recognised the growing demand for
tourism among the upper medium classes of China and India, and
the increasing number of European tourists to Phuket in recent
years. The Government also identified tourists from the Middle
East as a new niche market, given the recent impressive growth of
this market and high expenditure per person.
ORIGIN OF TOURISTS TO PHUKET

(%) US Europe Oceania Asia Middle East Africa
100
90
80
70
60
50
40
30
20
10
0
1998 2000 2002
Source: Tourism Authority of Thailand
23
INTERNATIONAL TOURIST ARRIVALS

Origin 2001 2002 2003
Number Share Change Number Share Change Number Share Change
(%) (%) (%) (%) (%) (%)
East Asia 5,786,403 57.1 4.3 6,236,246 57.4 7.8 5,776,358 57.3 (7.4)
Europe 2,508,566 24.8 9.0 2,650,992 24.4 5.7 2,517,197 25.0 (5.1)
The Americas 682,995 6.7 3.0 730,402 6.7 6.9 679,210 6.7 (7.0)
South Asia 350,874 3.5 (0.3) 410,206 3.8 16.9 407,041 4.0 (0.8)
Oceania 420,551 4.1 11.0 427,109 3.9 1.6 362,733 3.6 (15.1)
Middle East 215,148 2.1 18.0 245,822 2.2 14.3 187,629 1.9 (23.7)
Egypt 6,371 0.1 1.4 7,719 0.1 21.2 5,264 0.1 (31.8)
Israel 91,543 0.9 20.8 98,691 0.9 7.8 69,837 0.7 (29.2)
Kuwait 20,597 0.2 10.7 25,251 0.2 22.6 19,977 0.2 (20.9)
Saudi Arabia 7,093 0.1 15.3 6,886 0.1 (2.9) 4,849 0.1 (29.6)
U.A.E. 21,369 0.2 2.7 26,565 0.2 24.3 22,914 0.2 (13.7)
Others 68,175 0.7 24.4 80,710 0.7 18.4 64,788 0.6 (19.7)
Africa 97,413 1.0 15.3 98,290 0.9 0.9 74,285 0.7 (24.4)
Sub Total 10,061,950 99.3 5.8 10,799,067 99.3 7.3 10,004,453 99.2 (7.4)
Overseas Thai 70,559 0.7 0.5 73,909 0.7 4.7 77,656 0.8 5.1
Total 10,132,509 100.0 5.8 10,872,976 100.0 7.3 10,082,109 100.0 (7.3)
Source: Tourism Authority of Thailand
The Government changed its flight route policy from ‘quid pro
quo’ to ‘open sky,’ aiming to better utilise existing national assets
and promoting this concept among ASEAN and ACD members.
Large emerging economies such as China and India have signed
the Memorandums of Understanding (MOUs) with Thailand to
open up air routes for passenger and cargo services. Further
extensions in aviation relations between countries are planned.
ROUTES BETWEEN INDIA, CHINA, AND THAILAND

Thailand
Inbound Outbound
India Bangkok, Chieng Mai, Phuket Calcutta, Delhi, Mumbai, Chennai (Madras)
China Any Points in Thailand Any Points in China
Source: Ministry of Transportation
Real estate sector

The bursting of asset price bubbles that built up during the early
1990s, left no effective price benchmark for virtually all asset
classes. The huge decline in prices diminished the value of
corporate assets, reduced the value of assets pledged by the
corporate sector to the banking system, and damaged household
24
balance sheets. This substantially discouraged the expansion of

domestic demand.
To resolve the asset price problem, the Government pursued an
asset reflation strategy. It sought to establish a floor price for real
estate by increasing effective demand. Together with a strong
domestic demand-led recovery, due to the invigorated grassroots
and rural economy, this stopped asset prices from falling further
and secured a benchmark for real estate prices. The asset reflation
strategy also supported domestic demand-led initiatives and made
steady growth possible during economic restructuring.
MEASURES TO REFLATE REAL ESTATE ASSET PRICES

Tax Measures
- Providing tax privileges and lowering real estate transaction fees.
Non-Tax Measures
- Better mortgage deals, with longer instalment plans and lower interest rates, charged to the fixed-income
earners such as the Government and SOEs.
- Using Specialised Financial Institutes (SFIs) to extend loan credit to homebuyers, particularly in mid- and
low-income households.
- Providing 1m low-cost housing units for low-income households.
- Establishing the Thai Asset Management Corporation (TAMC) to resolve real estate NPL problems.
Source: NESDB and Ministry of Finance
With asset prices appearing more pronounced in the previous

few years, concerns over excessive speculation in some real estate
subsectors have emerged. As a precautionary measure, the Bank of
Thailand had issued new housing loan guidelines to prevent asset
price bubbles and promote good practices among financial
institutions. Key recommendations implemented towards end-
2003, included:
Limiting lending to 70% of the agreed purchase price for
transactions of more than BT10m. Assets include land, land with
houses, or units in condominium buildings.
Financial institutions should lend only to real estate projects
conducted in a lawful manner and should exercise caution when
considering lending to those business operators that try to avoid
obtaining the land development permission as stipulated in the
Land Development Law (2000).
25
Financial sector
The 1997 financial crisis left the financial sector weak, unable to
fulfill its intermediary role for the real sector over the past few
years. The enormous amount of NPLs, which required rounds of
provisioning, made financial institutions more conservative in
their lending decisions.
As a result, many creditworthy businesses had to seek
alternative sources of financing for working capital and
investment. The slow progress in corporate debt restructuring also
meant many valuable assets were underutilised. More importantly,
the financial system could not effectively meet the needs of the
new generation of entrepreneurs, especially SMEs, which current
policy deems instrumental for future economic growth.
In response, the Government launched a number of schemes to
address these weaknesses in the financial sector. Most urgently,
efforts have been made to quickly deal with NPLs, a legacy of the
crisis. Second, the Government aims to develop facilities and to
broaden and deepen the scope of financial services to serve SMEs’
needs more effectively while maintaining borrowing discipline.
Tackle the NPL problem aggressively
The Government recognised the NPL problem had to be
addressed immediately as financial institutions’ performances
would be eroded, hampering Thailand's prospects of economic
recovery. The Government first set up the National Asset
Management Corporation or the Central Asset Management
Organisation to resolve the NPL problem while allowing viable
debtors to continue their business operations.
To supplement this, the Thai Asset Management Corporation
(TAMC) was established in June 2001 to enhance the financial
sector’s stability and promote the efficient management of non-
performing assets. This would, in turn, minimise economic losses,
and promote corporate restructuring consistent with the broader
strategy of industrial and economic restructuring.
26
Implemented under special legislation, the TAMC can also

foreclose NPLs to expedite debt restructuring and asset resolution.
With initial funding from the FIDF, the TAMC was set up to
manage NPLs transferred from state-owned banks and asset
management corporations (AMCs), IFCT, and eligible NPLs from
private banks with multiple creditors and full provisioning. The
TAMC’s objectives are to:
1. Maximise recovery from troubled assets
2. Minimise state and taxpayers’ losses
3. Help viable debtors to continue business operations
The TAMC is also committed to operating with good
governance, transparency and efficiency.
By end-2Q03, TAMC found resolutions for 3,057 cases with a
book value of Bt576.2bn, accounting for 73.46 percent of total
acquired book value. From this impaired asset management, the
expected recovery rate from TAMC’s debt/business restructuring
and rehabilitation in the Central Bankruptcy Court stood at 46.28
percent of book value. This calculation does not include risks for
breach of agreement or the depreciation of assets transferred for
payment.
TAMC DEBT RESTRUCTURING PLAN

Unit: Btm 1Q03 2Q03 Increase/(Decrease)
Impaired Asset Transfer 761,247 784,378 23,131
Impaired Asset Management 534,511 576,221 41,710
Expected Recovery Rate (%) 46.28
Source: TAMC
Under the BOT guidance, the Government is also in the

process of transferring NPLs remained within the banking system
to the Government-owned AMC. Currently, this plan is under
negotiation between the AMC and the commercial banks with
regards to the pricing scheme. The success of this scheme would
accelerate the balance sheet restructuring of the financial
institutions which should lead to strong expansion of bank credits
27
in the near future. However, it is important that the pricing

scheme for the transferred assets must be equitable, reflecting fair
market values.
Building financial infrastructure for new growth
In view of existing financial system deficiencies and the fast
changing nature of financial services, the Government designed
and implemented a number of projects and measures to better
serve current financial needs and prepare the financial system for
the dynamic challenges in the future.
In the short-term, the Government decided to utilise public
banks and specialised financial institutions (SFIs) to jumpstart
lending, especially to strategically important sectors. For example,
an SME bank was set up to provide loans and training
management skills to these entrepreneurs. Meanwhile the Bank
for Agriculture and Agricultural Cooperatives was reorganised to
better meet farmers’ financial needs and increase their products’
value added.
In addition the Venture Capital Law was passed, allowing the
establishment of venture capital funds to finance entrepreneurs,
especially start-ups. This should help incubate young companies
with innovative focus more efficiently and effectively.
Essentially, public FIs and SFIs have been prudently used to
jumpstart the financial sector and the economy as a whole. The
decisions to lend must meet the industry standards on credit risk
analysis and risk management. Moreover, once private
counterparts resume normal functions, the role of public financial
institutions is expected to subside.
The Financial Sector Master Plan was drafted to outline
medium-term strategies to modernise and enhance the efficiency
of Thai financial institutions. This market-based reform is
intended to increase financial institution's roles in economic
development. It also aims to provide more accessible and
affordable services to potential financial service users in all market
28
segments, both in urban and rural areas.

The plan envisions the future landscape of financial sector to
include two types of financial institutions. First, commercial banks
will be required to have sufficiently large capital base to offer a full
range of financial services, including innovative financial products
to all groups of customers. Second, retail banks will offer financial
services for SMEs and low-income customers.
With intensified competition among fully capitalised banks,
the ensuing financial innovations would create benefits for
borderline customers with economic potential. This in turn
encourages new entrepreneurs as envisioned under the present
policy framework.
Essentially, this approach instigates a qualitative change in the
economic environment which would induce a positive
development within the banking sector. To be implemented over
the next 5-10 years, the Plan should improve efficiency, stability
and competition within the financial system, and broaden
accessibility of financial services to all potential users.
2.3. Third strategy:

Enhancing economic efficiency and long-term
competitiveness
Globalisation and increased competition forced many developing
countries into mass production to remain competitive. Previously,
abundant cheap labour kept Thai wage costs relatively low.
Foreign investors viewed Thailand as a suitable labour-intensive
production for items such as textiles and electronics. However,
this development model distorted the nation’s comparative
advantage towards labour-intensive products. Thailand thus
primarily produced goods that were not based on its true
comparative advantage, but determined by external forces. This
eroded the country’s global competitiveness.
29
Thailand hence suffered from the ‘Nutcracker Effect,’ where it

faced price pressure from low-cost countries like China, India, and
Vietnam, and also IT technology pressure from more advanced
economies. Rising labour costs and sluggish technological
improvement meant Thailand was neither a low-cost country, nor
possessed its own innovations or brands. Thailand’s share of global
exports declined, reflecting its deteriorating competitiveness,
particularly in comparison to neighbouring China and Vietnam.
THAILAND'S SHARE OF WORLD EXPORTS

1.4 (%) Goods Services Total
1.3
1.2
1.1
1.0
0.9
0.8
0.7
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Source: The World Trade Organisation
Thailand therefore needed reposition its production base. It

could not emulate any particular country’s success, but had to
blend its own strengths with outward opportunities. The Thai
Government has identified niche industries aligned with its
comparative advantages and eliminated structural impediments
through bureaucratic, budgetary, and financial reforms.
30
ASIAN COUNTRIES’ SHARES OF WORLD EXPORTS

5.0 China Korea Singapore
4.5 Malaysia Thailand Vietnam
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Source: The World Trade Organisation
Enhancing Thailand's competitiveness: Identifying target industries

The Government employed a clustering concept to identify and
enhance target industries. Nine high potential industries, or
clusters, were consequently earmarked as the main economic
growth drivers. Some, such as the automotive and tourism
industries, have already shown impressive progress. The next step
is to secure existing production bases, advance production
capacity, and increase product variety.
Other industries such as software, food, and fashion are
promising, and likely to succeed if appropriate actions are
implemented. The remaining industries are those Thailand is
traditionally strong in, such as health care services, hospitality,
rubber, and furniture. These could become steady sources of
foreign currency earnings if the natural assets could be modernised
new technology.
Moreover, the export sector has been aimed to restructure in
order to ensure a high proportion of local content, maintain
quality and minimise costs. In addition, raw material and
component tariffs have been reduced to cut Thai industries’ costs
and improve their competitiveness.
31
Other measures to enhance competitiveness

The Government has encouraged the development of: effective
management, information networks, capitalisation of e-commerce,
product design, patent registration, negotiation and cooperation
with foreign countries in establishing trade, investment, opening
markets for products and services and lowering trade barriers to
Thai products.
For instance, the ‘World Kitchen’ campaign was part of an
integrated plan by the BOI to develop Thai cuisine and promote it
globally. The BOI would ensure that raw materials meet
international safety standards, and liaise with farm management
companies familiar with international procedures to provide
advices and suggestions. At the same time, it would coordinate
with local companies that could act as facilitators in the
international arena.
To enhance Thailand’s global competitiveness, the
Government also established the Manufacturing Development to
Improve Competitiveness Programme (MDICP). This provides
consultation for SMEs on: production processes, quality assurance,
R&D, and financial and marketing management.
The Government established closer trade and financial
relationships with foreign countries and opened forums for
strengthening regional partnerships such as Asian Dialogue
Cooperation (ACD). This will provide new business
opportunities, niche markets and investments for Thai businesses.
The Government has set a number of targets for the
competitiveness enhancement programme:
! To increase the Thai exports’ global market share from 1.0%
in 2001 to at least 1.1% in 2006
! To develop strategic industries to be global niches
! To enhance productivity in every sector.
The National Competitiveness Committees (NCC) were also
set up as the central Government body to improve the national
32
competitiveness both in aggregate and sectoral levels.

Implementation of structural reforms: Improving competitiveness
An inefficient public administration can add considerable hidden
costs to the private sector and hinder economic development.
Policy measures to improve the public sector working
environment and procedures are therefore a high priority.
However, the existing civil service may itself pose challenges to
implementing such measures.
The Government introduced a comprehensive and bold reform
programme, including the reorganisation of ministries and
decentralisation to increase work efficiency. Furthermore, the
privatisation of state enterprises is also underway to create a more
efficient working environment.
Public sector reform
Efficient and effective Government service is an important
contributor to a favourable business environment. Administrative
burdens and bureaucratic red tape could hinder a country’s long-
term competitiveness. To reduce hidden costs to the private
sector, the Government implemented a comprehensive reform of
the public sector in 2002. The programme includes public
administration reform and public financial management reform.
Public administration reform
This commenced in October 2002 with the promulgation of the
Ministerial Restructuring Act and the Public Administration Act.
The Public Sector Development Commission, a public sector
reform policymaking and oversight body, was established in 2002.
Its Public Sector Development Strategy (2003-07) aims to:
! Improve ministerial structure
! Reform the civil service and compensation system

! Reform budgetary and public financial management
! Change work culture and values
! Modernise the public sector through the use of ICT
33
! Promote public participation in monitoring and decision

making.
Reorganisation of ministries and agencies
To maximise policymaking effectiveness, each Government task
should be clearly defined, while Government agencies should be
grouped according to each specific task. In this regards, for
example, we saw the creation of a new Ministry of Information
and Communication Technology, and a Ministry of Culture.
CEO Governor Programme
The effort to reduce bureaucracy and decentralise functions and
resources can be seen in the CEO Provincial Governor
Programme, which is designed to promote good governance. Also
known as ‘holistic administration,’ this allows provinces to be run
more efficiently, effectively and strategically. The CEO Governor
is handed more provincial decision-making power but is in turn
accountable for his actions. Provinces are also put into strategic
groups to share information and development planning.
CEO Ambassador Programme
Another well-known effort to promote a holistic and strategy-
based administration is the CEO Ambassador Programme. CEO
Ambassadors are assigned to carry out strategic external policies
such as trade negotiation and regional economic and political
cooperation.
Public financial management reform
To enhance efficiency in spending, there has been a move from
traditional line-item budgeting to performance-based and forward
looking budgeting. Line-item budgeting is an inaccurate method
of determining spending priority and assessment. Moreover,
annual budgeting is unsuited to medium-term fiscal planning.
The new procedure was introduced in the FY03 budget, and
included strategy-based allocation and a medium-term
expenditure framework. Strategies could now be planned at
national level and each Government agency would draw its own
34
strategies and key performance indicators based on these. Budget

allocation would then be based on the quality of strategy and
performance.
Development of accounting, financial manage management and
procurement systems is ongoing. E-procurement has already
been launched while the Government Financial Management
Information Systems (GFMIS), introduced as the back office of
the public administration, are due at the beginning of FY05. The
Chief Financial Officer (CFO) Programme was launched at
provincial level and at various SOEs. CFOs have been trained to
enhance their capacity in financial management and planning.
2.4. Fourth strategy:

Providing a stable and supportive macroeconomic
environment to facilitate growth while maintaining overall
policy discipline
As domestic demand remained relatively weak after the crisis, it
was important to provide a favourable macroeconomic
environment to promote recovery. This involved expansionary
fiscal and monetary policy to support the revival of domestic
demand. At the same time, measures were implemented to
promote exports and tourism to strengthen the balance of
payments position and help maintain exchange rate stability.
Equally important for the Government was to adhere to overall
policy discipline to assure economic stability: crucial for investor
confidence and sustainable growth.
Fiscal policy
Fiscal policy played a crucial role in stabilising the economy after
the crisis. In the wake of the crisis, fiscal policy helped revive the
economy and alleviate the social impact of the crisis. However,
under the current administration, the spending paradigm has
shifted to support the grassroots level.
35
The current Government took office in 2001, when the

aftermath of the financial crisis had left the domestic economy at
a particularly fragile point. Revitalising the Thai economy was the
Government’s main fiscal priority, and during the critical 2001-02
period it used fiscal policy to stimulate domestic demand.
Once the recovery had gained adequate momentum, the
Government moved towards fiscal consolidation. It recognised the
limits of expansionary fiscal policy - public debt sustainability is
crucial for economic stability and investor confidence. Public debt
increased substantially after the 1997 crisis, as had concern over
fiscal sustainability. Therefore, from 2003 the fiscal policy stance
shifted from fiscal stimulus to fiscal consolidation and
sustainability. Budget expenditure, including social sector
expenditure, is now executed in a medium-term fiscal
sustainability framework, which also accounts for losses incurred
from financial sector restructuring.
Fiscal year 2002: Recovery with fiscal and off-budget stimulation
In FY02 (1 October 2001 to 30 September 2002), the
Government maintained an accommodative fiscal stance to
stimulate domestic demand and reinvigorate economic recovery.
At the time of global slowdown, the Government adopted a larger
deficit budget than FY01 to boost demand. The planned FY02
budget deficit was Bt200bn, or 3.7% GDP. Given the high excess
liquidity in the financial system, the Government was not
concerned about crowding out.
The Government also introduced a Bt58bn reserve fund for
economic stimulation in case of unforeseen negative events. This
contingency fund has become a practical feature of subsequent
budgets. The Government also tried to ensure quick stimulation
by accelerating budget disbursement to a record high disbursement
rate of 93.4%, excluding the reserve fund.
In addition to an on-budget fiscal deficit, quasi-fiscal policy was
utilised to boost domestic demand. Off-budget stimulation
36
packages focused on spending at the grassroots level, as this

minimised leaking through imports. The off-budget programme
included the introduction of the Village and Urban Community
Revolving Fund, People’s Bank Project, and Debt Suspension for
Farmers.
FISCAL COSTS OF MAJOR GOVERNMENT PROJECTS

FY 2002 2003 2004 2005 2006 2007 2008 2009 2010
On-Budget Programme (Btbn)
Farmers' Debt Suspension 8.0 5.7 2.6
Universal Health Care 55.6 56.1 61.5 67.0 73.0 79.5 86.6 94.3 N/A
OTOP (for marketing) - 0.8 1.5 2.2 1.9
Off-Budget Programme (Btbn)

Village Fund 11.7 12.8 11.5 12.6 12.3 11.8 11.2 13.1 2.5
Low Income Housing (Phases I-III) - 0.3 0.7 12.3 5.7 13.2 13.2 7.5
Total 75.2 75.7 77.8 94.2 93.0 104.5 111.0 114.9 2.5
These off-budget programmes stimulated the economy, and

better targeted public demand for funding. Under current
Government schemes, public financial institutions provide a
catalyst to the intermediation process. Nevertheless, these
programmes have been closely monitored to minimise the risk of
becoming contingent liabilities to public funds. So far, lending
schemes from public financial institutions have incurred only
small and manageable levels of NPLs.
37
FISCAL BALANCE IN BUDGET AND GFS BASIS

Budgetary Basis FY02 FY03 FY04
Btbn % of GDP Btbn % of GDP Btbn % of GDP
1. Revenue 823.0 14.7 825.0 14.9 928.1 14.8
2. Budget Expenditure 1,023.0 18.2 999.9 18.1 1,163.5 18.6
3. Central Government Balance (200.0) (3.6) 174.9 3.2 (235.4) (3.8)
4. Non-financial SOE Balance (44.4) (0.8) 15.4 0.3 23.9 0.4
5. Overall Public Sector Balance (244.4) (4.4) (159.5) (2.9 (211.5) (3.8)
GFS Basis
1. Revenue 856.6 16.0 1,004.2 17.3 1,072.0 17.0
2. Budget Expenditure 1,023.0 18.2 981.9 16.9 1,205.7 19.1
3. Budgetary Balance (132.9) (2.5) 23.3 0.4 (133.8) (2.1)
4. Expenditure from external loans 19.7 0.4 10.4 0.2 7.4 0.1
5. Extrabudgetary Balance 11.8 0.2 (1.3) 0.0 3.9 0.1
6. Central Government Balance (140.9) (2.6) 10.6 0.2 (137.2) (2.2)
7. Local Government Balance 21.4 0.4 12.0 0.2 29.3 0.5
8. Non-financial SOE Balance 40.0 0.7 22.6 0.4 24.0 0.4
9. Overall Public Sector Balance (79.4) (1.5) 45.2 0.8 (84.0) (1.3)
¹ Includes Bt135.5bn supplementary budget. Source: Ministry of Finance
Fiscal sustainability framework

During FY02, the Government started announcing its fiscal
sustainability targets. The Fiscal Sustainability Framework was
introduced to show commitment in bringing down public debt to
a manageable level, helping improve investor confidence. The
fiscal targets are clear and verifiable: public debt to GDP ratio,
debt service to budget ratio and planned budget balance.
The Government has publicly committed to maintain public
debt at less than 55% of GDP, while debt servicing will be kept
below 16%. The Government aims to balance the budget in FY05.
The Government’s original targets were to keep public debt at
60% of GDP and achieve a balanced budget by 2008, but it
revised these in light of the strengthening fiscal position. The
Government has accounted for social sector spending, such as
Universal Healthcare Programme, in its targets.
38
FISCAL SUSTAINABILITY TARGETS AND PROJECTIONS

70 (%) Public Debt / GDP (FY)
58.04 57.60
60
55.01
50
50.36 47.78 48.10
40 45.67
41.28
30 37.76
33.46
20
10
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
20 (%) Debt Service / Budget
16
12 13.58 13.76 13.05

13.13
12.52 13.12 12.45
12.07
10.69
8
9.04
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
250,000 (million of Baht) Planned Budget Balance

184,151
200,000
128,363
150,000
71,748
100,000 34,660
50,000 0
0
(50,000)
(100,000)
(110,000) (99,900)
(150,000)
(105,000)
(200,000)
(174,900)
(250,000) (200,000)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
39
Fiscal Year 2003: Fiscal consolidation

(October 2002 - September 2003)
With the evident private sector revival leading to strong GDP
growth of 5.8% in 2002, the Government changed its fiscal
strategy for FY03. Fiscal policy was redirected towards allowing
the private sector to be the main force in generating growth.
The FY03 budget was prepared and executed to promote
economic stability, and start the fiscal consolidation process. The
planned budget deficit for FY03 was Bt174.9bn, or 3.2% of GDP,
less than the FY02 deficit of Bt200bn. However, higher than
expected revenue, due to a buoyant economy and improved tax
administration, resulted in a budget surplus of 0.4% of GDP on a
GFS basis.
In addition to fiscal consolidation, expenditure policy shifted to
the promotion of quality-oriented growth. One main 2003 budget
strategy was to restructure the economy to increase Thailand’s
competitiveness. The economic and social restructuring reserve
fund was introduced, amounting to Bt16.6bn, or 1.7% of GDP.
FY04: Long-term development with fiscal sustainability
(October 2003 - September 2004)
A continued positive economic outlook and strong 2003 growth
helped the Government maintain its fiscal sustainability targets.
The FY04 budget aims to strengthen the economy’s long-term
development. The better than expected revenue was allocated in
a Bt135.5bn supplementary budget to fund an advanced pension
scheme, an early retirement program for Government officials,
and a competitiveness programme. The Government continues to
adhere to its fiscal sustainability targets, and new social sector
spending has been incorporated within medium-term fiscal
sustainability projections.
40
Monetary policy
Strategic steps to adopt and implement an appropriate monetary policy
framework
Following the onset of the crisis, Thailand’s fixed exchange rate
had to be abandoned and its foreign exchange policy shifted to a
managed float system. As a result, a new monetary policy
framework consistent with the new exchange rate regime had to
be introduced.
It was not obvious at the time which framework would allow
the economy to effectively cope with the more volatile external
environment, without compromising the economy’s inherent
financial discipline - marked by high domestic saving rates and
sustained fiscal surpluses in the years prior to the crisis.
While the public adjusted its expectations and business
operations to the new exchange rate regime, the authorities set up
the necessary infrastructure and operational framework to support
the new flexible inflation targeting (FIT) monetary policy
framework.
Although the changes did not go through without operational
difficulties, the new system was generally considered a beneficial
development. While the pegged exchanged rate had been
favourable to Thailand’s international trade and investments, it
was felt the financial crisis illustrated the need for a policy
framework that combined long-term responsibility with short-
term flexibility to allow the authority’s scope to handle volatility
and shocks.
As it turned out, in the few years after the crisis, FIT allowed
the authorities to pursue an accommodative monetary policy that
helped revive the national economy while safeguarding
macroeconomic stability. The flexibility gained under FIT also
helped cushion the economy from global deflationary pressure and
various external shocks, such as 9/11, war in Iraq and the SARS
outbreak.
As for the exchange rate, the excessive swings associated with
41
speculative capital flows were limited by the implementation of

capital account measures. These ensured an orderly exchange rate
movement in line with the economy’s underlying fundamentals.
Early monetary policy challenges: Facilitating economic recovery
In 2001, the economy remained fragile. In the apparent absence of
inflation, the main challenge of monetary policy under the
flexible inflation targeting framework was to strengthen domestic
demand and the economic recovery.
Excess liquidity in the financial system and a relatively strong
external position helped make the case for an accommodative
monetary policy a more forceful and prudent one.
Therefore, after a one-time increase in the policy rate in mid-
2001 to correct interest rate distortions in the money market, the
Bank of Thailand has gradually reducing the policy rate since end-
2001.
As a result, the nominal and real interest rates declined steadily
with nominal interest rates in both the money market and
commercial bank system reaching historically low levels.
POLICY RATES AND NOMINAL INTEREST RATES OF COMMERCIAL BANKS (%)

End-month 1-Dec 2-Mar 2-Jun 2-Sep 2-Dec 3-Mar 3-Jun 3-Sep 3-Dec
MLR 7.13 7.06 7.06 7.06 6.69 6.5 6 5.69 5.69
12-m deposit 2.81 2.63 2.63 2.63 2 1.81 1.25 1.06 1
9 RP-14 day MLR 12m deposit

8
0
Jan-00 Oct-00 Jul-01 Apr-02 Jan-03 Nov-03
Source: Bank of Thailand
42
The low interest rate environment played a crucial role in

stimulating domestic demand and corporate debt restructuring
because of lower interest payments. The lower lending rates
increased demand for loans, particularly consumer loans, and
helped revive demand for durable items such as automobiles and
motorcycles. The low interest rates also helped jumpstart demand
and asset price reflation in both the real estate sector and the
equity market. In turn, the positive wealth effect from higher asset
prices added momentum to domestic demand expansion and
growth.
However, bank lending to the corporate sector was slower in
picking up, partly due to the balance sheet problems in both the
banking and the corporate sectors. Nevertheless, many large firms
took advantage of the low interest rate environment to seek direct
financing through the capital market and restructure their balance
sheet and leverage ratios.
Especially important was the fact that strong domestic demand,
supported by low interest rates, had helped ward off deflationary
pressure stemming from the baht appreciation, and the downward
price pressure from the positive supply shocks. Finally, the low rate
also helped mitigate upward pressure on production costs, thus
reducing the possible adverse impact on Thai exports’
performance.
Current challenge: Managing the upturn
With robust GDP growth in 2002-03 and favourable consumer
and investor sentiment, concerns over growth prospect have
subsided and been replaced by concern over the sustainability of
the recovery.
Impressive indicators for growth and economic stability have
drawn huge interest from foreign investors, and attracted capital
inflows that put upward pressure on the exchange rate. Moreover,
concerns over the growing US current account deficit and
weakening US dollar have added further upward pressure on the
value of the Baht vis-à-vis the dollar.
43
BAHT APPRECIATION VS US DOLLAR SINCE END-2002

(% appreciation) ( As of 30 Jan 2004) End2002 End2001
PHP
Korea
SG
Taiwan
Indo
Thailand
Japan
UK
Euro
NZ
Aus
(20) (10) 0 10 20 30 40 50 60 70
The response of the authorities thus far has been consistent

with the principles of a managed float regime with inflation
targeting. Under the managed float regime, the authorities have
allowed the domestic currency to move in line with economic
fundamentals, and only intervened to smooth out excess short-
term volatility.
As a result, the baht has appreciated gradually over the past
year due to the continuing large current account surplus. But
along this appreciation path, there has also been a two-way
movement in the currency. This highlights the benefits of a float
regime that allows the economy to flexibly adjust to external
volatility.
Nevertheless the size of external shocks at times could be
overwhelming, especially for a small open economy like Thailand,
and may justify additional prudential measures to mitigate their
impact.
The authority's decision to introduce capital account measures
in late 2003 to discourage baht speculation was a good example of
this prudent policy framework. The measures were in response to
evidence that a significant portion of capital inflow was meant for
short-term currency speculation.
44
If such flows were left unchecked, they could lead to excessive

currency volatility and fuel domestic asset inflation, laying the
groundwork for macroeconomic overheating.
The authorities recognised this risk, and implemented measures
to discourage short-term speculative flows without hindering other
trade and investment flows. The measures have so far brought
desirable results, as the baht has stabilised while the economy
continues to expand.
Strong external finance position brings greater confidence
While reserve accumulation has no relevance under FIT, the
financial markets still place considerable importance on a
country’s external reserve position. A strong stock of reserves can
help minimise external vulnerability, increase the confidence of
foreign investors in the economy, and help promote a sound and
stable currency.
Previously, a series of current account surpluses presented an
opportunity for the authorities to accumulate reserves without
jeopardising currency stability. Indeed, Thailand’s external
position is extremely sound, with international reserves at
US$42.2bn by the end of January 2004, 3.7x the nation’s short-
term foreign debt obligations.
With a strong reserve position and favourable current account
outlook, the Government decided on 2 January 2003 to repay the
remaining IMF debt ahead of schedule, by 31 July 31 2003. By
end-2002, Thailand had already paid back US$7.1bn, and was
originally scheduled to pay the remaining US$4.8bn within the
next three years. The goals of early repayment were twofold: to
save on future interest payments; and send a strong and
unequivocal signal to financial markets that Thailand had fully
reemerged from the crisis legacy.
The decision was taken after careful consideration of the
balance of payments position. With a significant projected current
account surplus in 2003 driven by strong exports, the Government
45
concluded that early repayment would not compromise Thailand’s

external position. The successful completion of early repayments
in July 2003 played a key role in boosting domestic confidence
and in rebuilding confidence and interest in the Thai economy
among the international community.
2.5. Fifth strategy:

Promoting the external sector by expanding markets,
fostering financial stability through regional and global
cooperation
Under the dual track strategy, external policy is equally as
important as its domestic counterpart. The Government aimed to
assist the private sector in creating linkages and strategically
enhancing Thailand’s international competitiveness. External
policy also includes promoting exports and enhancing regional
cooperation in various areas.
The Government believes it should help boost exports. New
markets have been opened up through bilateral and multilateral
free trade arrangements with strategic trading partners. With
developing economies, the account trade system has been utilised
to facilitate increased trade while reducing exchange rate risks.
Attracting strategic foreign direct investment is another priority
of the Government’s external policy.
To ensure closer regional cooperation in key areas, the
Government has promoted common economic interest among
regional economies. Thailand enjoys an excellent geo-strategic
position at the centre of Southeast Asia. A small open economy
situated in a neutral zone, Thailand is in an ideal position to play
a catalytic role in strengthening economic cooperation among
Asian nations.
46
Enhancing business potential by identifying new markets for Thai exports

and facilitating foreign direct investment
To foster the private sector’s business potential, the Government
has focused on creating more local opportunities. It has focused on
creating links between local enterprises, starting from the
grassroots level to large corporates, and the global trade system.
This is the essence of the dual-track approach, which pursues
the development of a strong domestic economic foundation while
promoting international trade, investment, and financial
cooperation. For example, the OTOP Project is based on the
‘local yet global’ principle, which seeks to upgrade local product
quality to international standards that exemplify traditional Thai
culture and know-how.
Free trade arrangements
Bilateral and multilateral free trade partnerships are essential.
Thailand is committed to negotiating and making progress with
comprehensive bilateral free trade agreements with strategic
trading partners, such as China, Australia, and India. A free trade
regime does not merely create new market opportunities between
partners but should enhance cultural ties and understanding
between peoples of respective partners through greater trade and
investment.
For the ASEAN Free Trade Arrangement (AFTA), Thailand
has committed to lower its tariff rates in the inclusion list to zero
according the agreed timetable. For bilateral agreements, the
Government has signed Framework Agreements with China,
India, Bahrain, Peru and BIMST-EC.
Thailand-China free trade in early harvested fruits and
vegetable has begun. The Government expects to sign a
comprehensive agreement with Australia in May 2004 and has
initiated the Japan-Thailand Economic Partnership Agreement
(JTEPA). An FTA with New Zealand is also in the pipeline.
47
Bilateral payment arrangements

In order to increase international trade volume and promote trade
between Thailand and its new export markets, the Government
has also implemented the Bilateral Payment Arrangement (BPA)
and the account trade system with a number of its trading
partners. So far, Thailand has signed the BPAs with Malaysia,
Indonesia and Russia. Other countries such as Iran, Bangladesh,
Myanmar, North Korea and Zimbabwe have already appointed a
bank for conducting BPAa with Thailand’s EXIM Bank and are
negotiating and drafting the agreements.
Foreign direct investment (FDI)
FDI policy under the current Government has emphasised
strategic FDI, especially in industries where foreign technology
and skills would complement Thailand's comparative advantage.
The Government encourages the development of clusters and
R&D. The Board of Investment, the key agency in FDI policy, has
adopted a new set of strategies.
First, the BOI aims to remove impediments and create an
enabling environment for investors. Measures include BOI
internal reorganisation, establishing an investment facilitation
unit, and removing the location requirement for FDI.
Strategies to improve the quality and quantity of investment by
sector and by region have been pursued. Networking and
marketing schemes have been enhanced by cooperative
agreements with public and private sector organisations abroad.
To create more local linkages, the BOI has implemented a
programme to improve SME productivity by exposing them to
best practices and technology.
48
BOI - NET APPLICATIONS IN 2003

No of Project Annual chg (%) Value (Btm) Annual chg (%) % of total
Japan 316 25.9 106,374 48.0 42.8
USA 43 22.9 47,446 462.16 19.1
Europe 77 (1.3) 39,738 187.9 16.0
Taiwan 67 21.8 7,931 (80.9) 3.2
Others 165 14.6 47,203 17.8 19
Total 668 19.3 248,692 39.2 100
Source: Board of Investment
Ensuring closer regional cooperation to promote national economic

interest
While responding to rapid global changes in trade, financial and
people flow, Thailand also seeks to safeguard national interests.
The Government needs proactive and forward looking external
policy. Its strategy is to strengthen existing international
cooperation while promoting cooperation with new partners.
Thailand’s ‘forward engagement’ policy is designed to
accommodate differences while turning diversity into a new
partnership for peace, stability and prosperity for the nation, the
region and the world.
Cooperation to strengthen regional financial markets
To strengthen regional financial markets, Thailand seeks to
cooperate with its neighbours to develop an Asian Bond market.
The recent crisis reflects the region’s funding mismatch, with
over-reliance on short-term funds. This demonstrates that Asian
nations must work together to overcome deficiencies and create a
deep, liquid and mature Asian bond market. There are adequate
savings, technical know-how and sufficient market participants in
the region to make this happen.
Moreover, to create shock absorbers within the region,
Thailand strongly supported the establishment of Bilateral Swap
Arrangements among ASEAN+3 countries. The BSA acts as a
regional self-help mechanism, providing support for the
maintenance of balance of payments and short-term liquidity of
participating countries.
49
Asian Bond Market Development Initiative (ABMI)

Thailand is one of the leading countries in pushing this initiative
forward. The ultimate goal of ABMI is to attain well-developed
bond markets that provide long-term funds in local currencies for
sovereigns, quasi-sovereigns and corporates.
ABMI is thought to generate deep and liquid bond markets,
functioning as an intermediary whereby funds in the region could
be made available to borrowers while helping to minimise
currency and maturity risks of both issuers and investors.
Many prominent economists and analysts agree that a major
cause of the Asian financial crisis in 1997 was the failure to
establish strong regional bond markets. An immature debt and
capital market led Asian businesses to rely on short-term foreign
exchange debt. Such reliance on external borrowing opens
corporations to huge liquidity and currency risks.
Capital account reversal, subsequently led to the collapse of
Thailand, Indonesia and Korea, adversely affecting the regional
economy. Robust regional bond markets could fill the missing role
of regional financial intermediation.
In addition, Asian bond market development would help the
region maximise its resources’ potential. Asian savings account for
more than 30% of GDP. A number of Asian economies, Japan in
particular, invest these savings in overseas securities, such as US
treasury bonds.
Meanwhile, some Asian economies run current account deficits
and are mostly financed from outside of the region. Many find it
difficult to obtain long-term finance. The lack of a sophisticated
long-term debt market has resulted in substantial official savings
being invested in US and European markets. The flow comes back
to the region in the form of short-term lending, leaving the
recipient economies highly vulnerable to capital flow movements.
Asian bond markets could absorb regional savings while fulfilling
the role of intermediation for long-term funds.
50
So far the ABMI has been implemented in various

international forums. On the demand side, the Asian Bond Fund
was launched in 2003 to invest in US dollar denominated bonds.
On the supply side, Thailand is working closely with countries
such as Japan and China to launch local currency bonds in which
international investors could invest. The Thai Government is
working towards removing impediments in tax and infrastructure.
Bilateral swap arrangements
Thailand strongly supported the establishment of a Bilateral Swap
Arrangement (BSA) among ASEAN+3 member countries aptly
named Chiang Mai Initiative. After the financial crisis, East
Asian Governments recognised the need to strengthen economic
surveillance mechanism and to create a regional self-help
mechanism. Thailand already has BSA agreements with Japan,
China and Korea of US$3bn, US$2bn, and US$1bn, respectively.
Overall, significant progress has been made in the implementing
the Chiang Mai Initiative, where the total amount of BSAs agreed
among ASEAN+3 countries was worth US$31.5bn by July 2003.
The Chiang Mai Initiative is expected to enhance financial
stability and growth in East Asia.
Regional economic cooperation
The Government aims to strengthen its regional relationship
based on mutual trust in the Greater Mekong subregion. Such
opportunities must bring about mutual prosperity and both
support and complement each partner’s further development. The
Government has requested that our former donor countries to
turn their assistance to its sub-regional neighbours.
These sub-regional linkages will narrow the development gap
between old and new members of ASEAN, the latter being
Cambodia, Laos, Myanmar and Vietnam. Thailand is pushing
more integration within the ASEAN and more linkages between
ASEAN and other strategic partners. Moreover, Thailand seeks
strategic cooperation between Malaysia and Indonesia in the
51
rubber market operation.

Greater Mekong subregion
In the Greater Mekong subregion, the Thai Government recently
signed the Bagan Declaration, the Economic Cooperation
Strategy between Cambodia, Laos, Myanmar and Thailand, which
aims mainly to enhance competitiveness and reduce income
disparity among the four countries.
The areas of cooperation include trade and investment
facilitation, agricultural and industrial cooperation, transport
links, tourism cooperation and human resources development.
Moreover, under the Greater Mekong Sub-regional Economic
Cooperation, Thailand’s Neighbouring Countries Economic
Development Cooperation Fund (NECF) gives financial support
to its neighbours by providing concessional loans.
ASEAN
To further improve cooperation between ASEAN members, the
ASEAN Economic Community (AEC) has been initiated. At the
ninth ASEAN Summit in 2003, in Bali, Indonesia, national
leaders declared the Bali Concord II. Under this agreement, the
AEC is realised as the goal of economic integration as outlined in
the ASEAN Vision 2020. It will establish ASEAN as a single
market and production base, in which there is a free flow of goods,
services, and investment.
International Tripartite Rubber Organisation: ITRO (Thailand- Malaysia-
Indonesia)
Thailand, Malaysia and Indonesia are the world’s major producers
of natural rubber, accounting for about 80% of production.
Despite this, the three nations have been unable to effectively
influence prices, ceding this role to rubber-consuming countries,
particularly developed nations.
Thailand, Malaysia and Indonesia signed a Joint Ministerial
Declaration in Bali in December 2001, and the Memorandum of
Understanding on Rubber Cooperation in 2003, to increase their
52
pricing influence.
As a result, the three nations foresee that production and
export reduction targets will be met through the Agreed Export
Tonnage Scheme and Supply Management Scheme without major
difficulties. Moreover, the registration of the Memorandum of
Agreement for the International Rubber Consortium Company
was completed on 31 October 2002.
Rubber prices should be based on fair remuneration, since
overpricing would encourage consumers to use more synthetic
rubber. More importantly, it should improve the incomes of
smallholder rubber planters and the socioeconomic advancement
of the three countries involved.
Asia Cooperation Dialogue (ACD)
Asia Cooperation Dialogue (ACD) was initiated as a venue for
Asian countries to discuss issues of common interest and enhance
mutual cooperation. The Thai Government believes that ACD
could help build Asia’s potentials and strengths through
supplementing and complementing existing cooperative
frameworks, and also become a viable partner for other regions.
ACD is an incremental and evolving process, which maintains a
top-down organisation and emphasises positive thinking and
inclusiveness for all participants.
Thailand introduced the idea of ACD and held the First ACD
Ministerial Meeting on 18-19 June 2002 in Cha-Am, Thailand.
ACD aims to promote interdependence among Asian countries by
identifying common strengths and opportunities to help reduce
poverty and improve the quality of life. It also aims to develop a
knowledge-based society within Asia and enhance community
and people empowerment. Moreover, cooperation within ACD
aims to expand the trade and financial market within Asia,
increase Asian nations’ bargaining power, and in turn enhance
Asia’s global economic competitiveness.
Areas of cooperation include tourism, IT, Asian Bond Market
53
Development. Thailand is a prime mover in financial cooperation,

with the Asian Bond Market Development, and in tourism.
APEC
Thailand’s hosting of the APEC summit in 2003 was an
opportunity for the nation to forge closer regional economic ties.
In the Bangkok Declaration on Partnership for the future, the
leaders put forth their vision on ‘achieving stability, security and
prosperity for our people.’
Twenty-one economies agreed to promote trade and
investment liberalisation by reaffirming the multilateral trading
system, and agreed that the Doha Development Agenda offered
real gains, especially in agricultural reform and improved market
access for goods and services.
54
Part 3: Policy outcomes

and achievements
3.1. Growth performance
I
n 1999 and 2000, Thailand’s GDP increased was 4.4% and
4.6% respectively, benefiting mainly from buoyant exports
that expanded 17.5% in real terms in 2000.
However, domestic demand was only slowly picking up as the
internal economic conditions were undermined by fragile
confidence, large corporate and fiscal debt overhang, negative
credit growth, and very low industrial utilisation. This imbalance
made Thailand’s early economic recovery vulnerable to external
uncertainties, and when exports slumped in 2001, GDP growth
shrank to only 1.9%.
The Dual-Track Policy Model was subsequently successful in
helping restore the economy’s underleveraged and untapped
growth potential. As the policy to strengthen the grassroots
economy began to bear fruit, household incomes and consumption
expanded, especially on durable goods.
Rising consumption led to the increased production, especially
in the manufacturing sector. As a result, private domestic demand
55
steadily accelerated and became an important spur for economic

recovery. The relatively small import content of grassroots
demand magnified the effect that such spending had on the
domestic economy.
High growth in rural incomes, falling interest rates, and greater
access to micro-credit drove private consumption growth from
only 3.9% in 2001 to 4.9% and 6.3% in 2002 and 2003
respectively.
Meanwhile, steady NPL resolution, improving corporate
performance, and rising capacity utilisation bolstered private
investment growth from 4.7% in 2001 to 13.2% and 17.9% in
2002 and 2003 respectively.
Coupled with an export rebound, which was partly driven by
greater access to new export markets and a global economic
upturn, GDP growth has since been boosted by both domestic and
external demand. GDP growth therefore accelerated to 5.4% and
6.7% in 2002 and 2003 respectively.
REAL GDP GROWTH

(% YoY)
2002 2003 2002p 2003p
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
PCE 4.9 6.3 3.3 5.1 5.5 5.8 6.8 5.7 5.4 7.4
GCE 2.5 1.2 12.5 (0.3) 0.0 (1.3) (10.0) 2.8 3.2 9.9
Investment 6.7 12.2 (2.7) 10.2 9.7 11.1 10.3 2.2 15.3 21.2
GFCF 6.5 11.7 3.0 7.4 7.5 8.4 7.5 9.1 10.8 19.8
Private 13.2 17.9 8.4 9.3 19.3 16.3 19.8 16.8 16.5 18.5
Public (5.8) (2.3) (7.3) 3.2 (7.1) (13.0) (20.2) (7.9) 1.7 24.3
Exports 12.1 6.5 6.0 12.6 15.8 13.7 12.1 4.3 3.6 6.2
Imports 13.6 7.3 3.3 15.6 19.1 16.3 12.4 2.0 3.7 11.9
GDP 5.4 6.7 4.3 5.2 5.7 6.5 6.6 5.7 6.9 7.5
Remark: Real GDP growth is calculated from supply-side (production) data. Source: NESDB
The intrinsic strength of Thailand’s economic recovery is

evident in its resilience to external shocks such as the war in Iraq
and the outbreak of SARS in early 2003. During the latter, the
tourism industry was heavily affected but private consumption and
investment activities continued almost unabated. Consumer
56
confidence declined but for only two months before rebounding

strongly and soon rising way above the pre-SARS level.
3.2. Sectoral improvement

Improving overall economic health has been reflected in
numerous encouraging signs at the sectoral level.
Corporate profitability has strengthened remarkably over the
past two years, with average net profit margin for non-financial
listed firms at 10.3% for 3Q03, compared with 7.3% both 3Q02
and 3Q01. In particular, the profitability of listed firms in the
manufacturing and real estate sectors has increased significantly.
Corporate leverage has meanwhile fallen and returns on assets and
equity have risen markedly. (See table on page 58.)
Financial sector restructuring
restructuring has been a key component of
the measures implemented during the crisis to stabilise the
economy, which include:
The closure, merger and recapitalisation of troubled financial
institutions
Tightening supervision of regulatory standards
Implement reforms in bankruptcy and foreclosure laws to push
for resolution of corporate debt.
As a result, Thailand’s banking system health is now in a phase
of recovery. Profitability improved for the whole banking system
in 2001, compared with 2000, due primarily to lower loan loss
reserves and lower operating expenditures.
57
PERFORMANCE OF NON-FINANCIAL LISTED FIRMS

(%) 2001 2002 2003
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
All non-financial listed firms
Net profit margin 1.8 7.5 7.3 2.7 5.2 11.3 7.3 6.2 9.7 7.7 12.2
ROA 1.1 4.7 4.6 1.6 3.5 8.3 5.5 4.7 7.6 5.9 10.3
ROE 1.4 5.8 4.9 1.6 3.4 7.3 4.5 3.7 5.8 4.3 7.3
D/E 4.3 3.8 2.7 3.2 2.5 2.5 2.1 2.2 1.9 1.9 1.8
Commerce
Net profit margin 7.6 0.7 2.3 0.5 2.7 6.4 43.7 3.5 4.2 3.9 3.3
ROA 9.8 0.9 3.1 0.8 3.6 9 59 5.1 5.7 6.1 6
ROE 39.4 2.9 9 2.1 9.2 20.3 50.7 2.9 3.2 3.3 3.2
D/E 11.4 11.7 9.8 9.5 8.7 7.4 1.1 1.4 1.1 1.3 1.1
Manufacturing
Net profit margin (0.8) 9.5 5 1.4 4.8 8.1 3.3 3.9 7.5 5.3 8.2
ROA (0.6) 7.5 4 0.9 4.1 7.5 3.2 3.8 7.8 5.3 8.6
ROE (0.7) 8.2 3.6 0.8 3.6 6.1 2.5 2.9 5.8 3.7 6.1
D/E 3.7 3.1 2.3 2.8 2.2 2.3 2 2.2 1.8 1.8 1.9
Construction
Net profit margin (11.2) (39.5) 26.2 (3) 3.7 56.6 9.1 2.8 2.6 1.5 12.3
ROA (6) (22.1) 20.2 (2.3) 2.6 41.9 6.4 2.1 1.6 1.2 9.2
ROE 6.4 21 (35) (674.1) 46.9 89.6 7.6 2.4 1.8 1.3 9.2
D/E (5.4) 4.3 38.3 (47.4) 19.1 4.5 3.2 3.9 3.1 3.5 2.6
Real Estate
Net profit margin (14.1) (2.2) (4) 56.2 (38.2) 55.3 18.7 15.2 29 33.2 33.6
ROA (1.6) (0.3) (0.6) 8.6 (6.3) 11.8 4.1 3.5 6.8 8.2 9.7
ROE (73.9) (20.8) (2.5) 26.4 (15.5) 18.1 5.4 4 7.4 7.3 7.7
D/E (540.9) 117.8 8.6 15.9 5.9 4.4 4.2 3.1 3.6 1.8 2.5
Source: Stock Exchange of Thailand
The resumption of domestic demand as well as robust export

performance has led to steady improvement in the manufacturing
capacity utilisation rate over the past three years.
CAPACITY UTILISATION RATE¹

1995 1996 1997 1998 1999 2000 2001 2002 2003
77.5 72.5 64.9 52.8 61.2 55.8 53.5 59.3 66.3
¹ Average period. Source: Bank of Thailand
Better business performance has increased employment in all

major non-agricultural sectors, especially trade, hotels and
restaurants, and manufacturing. This, in turn, has contributed to
the reduction in the number of unemployed persons and the
unemployment rate. In 2003, the average unemployment rate fell
to 2.2%.
Farm income also increased markedly due to both price and
quantity effects.
58
FARM INCOME FROM MAJOR CROPS

Chg (%) 1999 2000 2001 2002 2003
Farm Income (12.6) (3.4) 8.4 11.1 25.6
Production 8.0 2.2 5.0 0 7.8
Price (19.1) (5.5) 3.2 11.0 16.5
Tax revenue has far exceeded Government projections due to

higher personal and corporate income and buoyant expansion of
economic activities. FY03 tax revenue increased 14.8%, compared
with a 10.7% rise in FY02. Corporate income tax rose most
strongly at 27.0%, up from a 12.6% increase during the previous
fiscal year.
Given the simultaneous recovery of many sectors, it is clear
that the current economic recovery is broad-
broad-based.
based .
3.3. Economic stability

Along with higher GDP growth, economic stability improved
both on the domestic and external fronts.
Domestically, the most significant improvement over the past
two years was the reduction in public debt relative to GDP. From
the annual peak of 57.3% of GDP in 2000, public debt fell to only
44.7% of GDP by end-Jan 2004. This was due to fiscal discipline
in terms of Government expenditure and higher tax revenue from
buoyant economic activity and better tax administration.
EMPLOYMENT GROWTH
Chg (%) 2002 2003 Improved economic conditions have led to strong
Employed persons 2.9 2.4 performance in the labour market. The number of
employed persons has expanded steadily, while
Agriculture 3.3 (1.1)
the overall unemployment rate gradually
Non-agriculture 2.6 5.0 declined.
Manufacturing 1.6 5.8
Trade 5.8 5.2
Hotel & restaurant 6.1 5.3
Construction 8.4 5.4
Others (2.3) 4.3
Source: National Statistical Office
59
UNEMPLOYMENT RATE
(%) 1999 2000 2001 2002 2003
Unemployment Rate 4.2 3.6 3.3 2.4 2.2
Source: National Statistical Office
At the same time, price pressure remains tame, with headline

inflation averaging 1.8% during the first 11 months of 2003, and
core inflation within the monetary policy target band of 0-3.5%.
INFLATION
3.0 (%) CPI Core CPI
2.5
2.0
1.5
1.0
0.5
0.0
(0.5)
Jan-00 Jul Jan-01 Jul Jan-02 Jul Jan-03 Jul Jan-04
Source: Ministry of Commerce
External stability has been heralded by credit rating agencies

as one of the most remarkable improvements in the Thai economy
over the past couple of years.
Export growth has been buoyant despite keen global
competition, leading to a US$4.2bn trade surplus for 2003,
surpassing the US$3.4bn trade surplus for 2002. The current
account surplus continues to be strong, with the number of
inbound tourists rapidly recovering following the SARS outbreak.
For 2003, the current account balance was US$8.0bn, compared
with US$7.6bn in 2002.
The strong current account position has allowed for a
significant accumulation of interna
international reserves.
reserves Thailand was
able to use this to repay its IMF loan ahead of schedule. Despite
60
the withdrawal of international reserves for loan pre-payment, the

final portion of which was made in July 2003, Thailand’s
international reserves position remains sound at US$42.2bn at
end-Jan 2004, up from US$38.9bn at end-2002. The current level
of international reserves is 3.7x the level of short-term external
obligations, which is considered very secure by international
standards.
FOREIGN RESERVES (US$M)

1997 1998 1999 2000 2001 2002 2003
27.0 29.5 34.8 32.7 33.1 38.9 42.1
End Period Value. Source: Bank of Thailand
The early loan payment for the IMF package

120 (US$bn) Public
along with the steady reduction of external
Nonbank
obligations by the central Government, state 100
Bank
enterprises, and the private sector led to a 80
significant fall in the overall external debt
60
obligations. External debt is now about 44%
of GDP, compared with the peak of 73% in 40
1999. 20
0
Apr
'97
'99
2Q00
4Q00
2Q01
4Q01
2Q02
Oct
4Q02
1Q03
Jul
3Q03
Nov.
Jan-04
Aug
May
3.4. Poverty reduction and living standard improvements

With higher incomes,
incomes the living standards of Thai people have
also improved. According to the World Bank and Thailand’s
National Statistical Office (NSO) statistics, poverty
poverty in Thailand
has fallen far below the 2000 peak. The absolute number of poor
fell from 8.8m in 2000 to 6.2m in 2002, or from 14.2% of the
population to 9.8%. The current poverty levels are also below
1996 levels.
In addition to higher incomes, the poor now enjoy greater non-
non-
monetary benefits,
benefits , such as access to health care and micro-
finance, as well as human security from the declared wars on
narcotics and corruption.
61
3.5. Confidence
With the aforementioned positive outcomes, both international
and domestic confidence in the Thai economy has steadily
increased. All major international credit rating agencies have
raised Thailand's sovereign ratings during the past four months,
mostly citing the balance of payments conditions and fiscal
consolidation as the key factors behind the credit upgrades.
THAI SOVEREIGN CREDIT RATING

Rating Type of Rating Current Rating Date of Last Last Rating Action
Agency Rating Action
Short-term Long-term Outlook
S&P Local Currency A-1 A positive 08-Oct-03 Upgraded
Foreign Currency A-2 BBB positive 08-Oct-03 Upgraded
Moody's Local Currency - Baa1 stable 04-Sep-98 Assigned
Foreign Currency - Baa1 stable 26-Nov-03 Upgraded
Fitch Local Currency - A- stable 03-Sep-03 Upgraded
Foreign Currency F3 BBB positive 03-Mar-04 outlook changed
JCR Foreign Currency - BBB+ positive 18-Nov-03 outlook changed
R&I Foreign Currency a-2 BBB+ stable 07-Aug-03 Upgraded
CI Local Currency A2 BBB+ stable 01-May-03 Assigned
Foreign Currency A2 BBB stable 01-May-03 Upgraded
Source: Respective Rating Agencies
On the domestic front, consumer confidence has steadily

improved, with the Consumer Confidence Index reaching 102.4
in December 2003, compared with the average of only 64.3 in
2002.
With confidence in the Thai economy

strengthening and pressure on the US dollar, 46 Reference Exchange Rate
the baht appreciated throughout 2003. This was 44
particularly rapid in August and September,
partly due to speculative activities. As a result, 42
the Bank of Thailand initiated measures in
September and October to ensure an orderly 40
market adjustment and discourage speculative
38
activities.
36
Jan-02 Aug-02 Apr-03 Dec-03
62
Part 4: Public debt and

household debt
4.1. The current situation
T
hailand has a reputation for prudent public debt
management. Public borrowing from domestic and
external sources was therefore previously considered a
sound instrument for fiscal management, and the issue of public
debt was not considered a serious problem.
After the crisis though, large fiscal costs incurred from the
financial sector’s restructuring efforts as well as Government
spending to boost domestic demand resulted in higher public debt,
raising concerns in investors and the public alike. Nevertheless,
with recent economic growth and the budget balance anticipated
in 2005, Thailand’s public debt has fallen from its 2000 peak and
is expected to be sustainable going forward.
Too high? Think again
The issue of public debt had caught a lot of attention since the
onset of the crisis. Thailand’s public debt rose sharply from
14.70% of GDP in 1996 to 35.46% of GDP in 1997. The ratio
63
continued to rise and reached its peak at 57.3% of GDP in 2000,

before subsequently declining. By January 2004, public debt
accounted for 44.7% of GDP.
PUBLIC DEBT AS A SHARE OF GDP

60 (% GDP)
58.04 57.58
58
56 54.71
53.76
54
52
49.58 49.33 49.62
50 48.87
48
46 44.73
44
42
40
1999 2000 2001 2002 Q1 2003 Q2 Q3 Q4 Jan-04
PUBLIC DEBT BREAKDOWN, 31 JANUARY 2004

Bt bn Jan 2004 % of GDP
1. Central Government Debt 1,651.48 25.50
1.1 External 344.10
US$ bn 8.77
1.2 Domestic 1,307.28
Budget Deficit Financing 462.94
Fiscalization of FIDF Debt 800.28
- FIDF 1 483.28
- FIDF 3 317.00
Statutory Capital Support Bonds 44.07
2. Non-Financial Public Enterprises Debt 844.26 13.03
2.1 Government Guaranteed 667.83
External 293.94
US$ bn 7.49
Domestic 373.89
2.2 Non-Guaranteed 176.43
External 58.12
US$ bn 1.48
Domestic 118.31
3. FIDF Liabilities 401.40 6.20
3.1 Government Guaranteed (FIDF2) 40.00
3.2 Non-Guaranteed 361.40
Total 2,897.04 44.73
Exchange rate at end of Period (Bt/US$) 39.23
Estimated GDP for 2004 6,476.10
Source: Public Debt Management Office, Ministry of Finance
64
The rise of public debt during the crisis was due to the need for
fiscal stimulation and for the Government’s bailout scheme for
failed financial institutions. At the beginning, the Government
drew into its treasury reserves to finance the resulting deficit but
later turned to domestic borrowing as a source of financing.
When the current Government took office in 2001, the ratio of
the public debt to GDP was around 57%. However, with the
growth pick-up and the Government's commitment to a fiscal
sustainability framework, public debt came down to around 50%
of GDP, well below its sustainability target of 55%, released in
2003.
It is important to note that Thailand’s public debt definition is
highly conservative as it includes direct or explicit Government
debt plus implicit debt (contingent liabilities), including non-
financial SOE debts and FIDF liabilities.
If we exclude non-financial state enterprise debt and consider
only direct Government debt, Thailand’s debt level is much lower
than many other regional countries in the region, and was only
27.8% of GDP at the end-FY03.
CENTRAL GOVERNMENT DEBT AND EXPENDITURE, 2002

120 (% GDP) Central Government Debt as % of GDP
Total Government Expenditure as % of GDP
100
80
60
40
20
0
Indonesia Malaysia Philippines Rep of Thailand Singapore China Taiwan Hong Kong
Korea
Source: IMF, ADB and EIU
65
Not only has the level of public debt declined dramatically in

the past three years, but the composition of public debts has also
improved. The proportion of external debts to total public debts
dropped to 25% at end-FY03, compared with 39% in December
1997. External exposure has been reduced due to effective public
debt management through refinancing, prepayment, and other
derivative techniques.
In the medium term, the Government expects the public debt
to GDP ratio to fall gradually due to strong economic growth,
disciplined spending and Government efforts to finance public
spending by other means besides debt creation.
Fiscal sustainability can be ensured by faster revenue growth,
represented by GDP growth outstripping the average cost of
borrowing which implies a strong Government ability to service
debt payments. Given the current growth and public debt profile,
Thailand can be considered as being on a fiscal sustainability path,
since its average cost of borrowing (around 4.4%) is lower than
nominal GDP growth (expected to be around 6.6% in 2003).
Maintaining a history of fiscal prudence
Thailand has a long history of fiscal prudence and discipline.
Fiscal discipline rules such as the borrowing limit have been
instilled in the fiscal institutions of Thailand. Moreover,
Government spending is small compared with the economy and
compared with other regional countries. The current Government
is maintaining with this tradition.
FISCAL PRUDENCE RULES

Fiscal Prudence Rules Details
Budget Deficit Financing Section 9 of Budgetary Procedure Act, B.E. 2502 (1959) states that domestic
borrowing to compensate for the budget deficits must not exceed 20% of the
annual and supplementary budget expenditure and also must not exceed 80%
of budget expenditure earmarked for repayment of the principal amounts of
loans.
External Financing The Act that Authorizes the Ministry of Finance to Borrow Money from
International Sources, B.E. 2519 (1976) clearly describes rules and procedures
that the external borrowings must not exceed 10% of the annual budget
expenditure.
66
Even though Thailand has an excellent reputation in

honouring debt and has never defaulted, recent concerns
regarding the nation’s fiscal management have focused on implicit
debt or contingent liabilities.
It is important to categorise contingent liabilities into two
types. One is implicit debt that has already been included in the
public debt figure - SOE debts and FIDF liabilities. Another is
contingent liabilities that have not yet been recognised as public
debt, but could become a future fiscal burden.
SOEs debts: Generating assets with high returns
One should not overlook the fact that the SOEs’ borrowings are
mainly for the purpose of generating assets such as public
infrastructure, necessary for economic development. This
infrastructure could subsequently generate future income flows for
those borrowing SOEs. For this reason, one should consider both
assets and liabilities simultaneously, as the ratio of debt to non-
current asset reflects the ability to cover probable losses. It would
be misleading to consider SOEs’ liabilities alone without
considering the other side of the balance sheet.
THE FIVE MOST INDEBTED SOES

Bt m
SOEs Total Equity Size of Non- EBIT Debt Service Total Debts/Size of Non-
Debts Current Assets Coverage Ratio Current Assets
EGAT 150,839 165,377 339,512 43,715 4.18 0.44
PTT 94,747 27,972 162,834 13,209 6.59 0.58
ETA 82,635 54,066 152,370 2,867 2.41 0.54
MRTA 92,951 8,023 100,648 (987) - 0.92
PEA 64,323 63,898 151,395 5,967 6.65 0.42
All SOEs 851,049
The five most indebted SOEs (listed above) account for 60% of
total SOE debts. Much of this financed investment in core fixed
assets such as electricity generation plants and distribution
networks, expressway systems and subway systems. Although the
debt is high, these assets should be able to generate revenues and
67
cash flows to service all debt repayment obligations.

For example, the two SOEs with highest debt, EGAT and PTT,
also have high net profit. The ratio of total debt to non-current
assets indicates that all their debts are fully backed and
safeguarded by core fixed assets that generate more than enough
revenue (EBIT) to service all debt repayment obligations.
However, for the Metropolitan Rapid Transit Authority
(MRTA), the project is under construction, and could take years
to complete the whole system. Therefore, it is not unusual for this
type of project to incur a loss at the beginning stage. Once the
project is completed and fully operational, the Government can
expect sufficient revenue to service debt repayments.
It is therefore clear that much of concern over implicit debts is
exaggerated. As long as these SOEs are financially sound, the
Government could be certain that these implicit debts will not
burden the economy. An IMF study1 also confirmed the minimal
risk of SOE debts becoming future fiscal burdens.
FIDF Liabilities: Fiscalisation of total net loss
The Financial Institutions Development Fund (FIDF) administers
measures to resolve the economic and financial crisis and restore
stability and public confidence in financial institutions.
These included the full guarantee of depositors and certain
creditors of financial institutions pursuant to the cabinet
resolution on 5 August 1997, and the Financial Sector
Restructuring Plan pursuant to the cabinet resolution on 14
August 1998 involving bank recapitalisation and other
rehabilitation measures. As a result, the FIDF has been put under
a difficult financial situation, with liquidity shortages and
substantial losses.
The Government recognises that it needs to account for the
losses to ensure market confidence in country’s medium-term
1
IMF(2003), Thailand-Selected Issues
68
economic stability. The Government resolution in 2002 resulted

in a decision to fiscalise FIDF losses, estimated at Bt1.4trn, by
issuing Government bonds. In other words, all net losses would be
transferred to direct Government debt with the bond issuance.
To comply with the resolution principles, the Ministry of
Finance will bear the interest expenses, which will be paid for
from the budget. As for the amortisation of the principal, the
Bank of Thailand will meet this obligation by using annual net
profits from Currency Reserve from 2002 onwards. A separate
account will be set up within the Bank of Thailand's General
Account to keep such profits to ensure transparency and
accountability.
The arrangement was based on the principles that the
resolution must be clear, acceptable to all parties, have a minimal
impact on the Government’s fiscal position and be minimal
burden on taxpayers in both the short- and long-term. The
resolution was transparent, keeping with good governance and
had minimal adverse impact on the bond market, helping resolve
market concerns on the issue.
Other contingent liabilities from Government policy:
Close Government monitoring
Other contingent liabilities that could burden the Government
are mostly from the policy-directed lending at the Specialised
Financial Institutions (SFIs). Many Government-initiated
programmes have been run by the SFIs at their own cost. Though
most programmes are run on a commercially-viable basis, their
losses could jeopardise the financial health of the SFIs. In the
worst case, the Government might have to transfer its budget to
cover the loss.
The Government recognises that its lending programme could
have an adverse effect on SFIs if it is carried out in an imprudent
manner. However, it believes in spending on investment that will
generate high future returns. Lending, coupled with disciplined
69
measures for the borrowers, should enhance economic production,

especially in the grassroots and SMEs. The investment is intended
to create a new tax base from this new class of entrepreneurs.
CONTINGENT LIABILITIES FROM GOV'T LENDING

Bt bn
Programme Financial Institution Execution Status Loan NPLs NPL Ratio
Outstanding (%)
People's Bank Government Savings Started in 2001 5.75 0.4 7.78
Bank
BAAC's SME loans and BAAC Started in 2003 10.3 0.26 2.6
community enterprise lending
Mortgage for Government Government Housing Started and closed 24.6 2.8 11.5¹
officials and SOE employee Bank applications since
Phase I 2002
Mortgage for Government Government Housing Started 2003 14.5 na²
officials and SOE employee Bank
Phase II
Mortgage for Thai People Government Housing Started in 2003 10.0 na
Bank
GSB Houses for the People Government Savings Started in mid 2003 1.1 na
Bank
Low-Income Housing GSB and GHB Started in late 2003 0.04 na
SME Loans SME Development Ongoing 17.5 4.1 23.4
Bank
Loan Guarantee Small Industry Credit Ongoing 9.6 1.1 11.5
Guarantee
Corporation
Total 93.4 8.66
% of GDP 1.58 0.14
¹ NPL ratio of GHB as a whole as GHB is currently working on separating NPLs for each programme.
² These programmes have only started recently and have not incurred bad loans.
Source: Ministry of Finance as of November 2003
The amount of outstanding loans to SFIs, compared with GDP,

is rather small. If all the loans defaulted, the burden to the
Government would only be around 1.6% of GDP. However, given
the current trend of NPLs, the extent of Government burden is
estimated only at 0.14% of GDP.
An IMF study2 confirms the limited contingent liabilities of the
SFIs by showing that, if all SFIs were to be liquidated (under a
highly conservative assumption with loan recovery rate of 50%),
the cost to the Government would be contained at 3.5% of GDP.
2
IMF(2003), Thailand-Selected Issues
70
Moreover, the performance of these off-budget programmes is

closely monitored. To better monitor the SFIs' performance, a
Public Service Account system will soon be introduced.
New way of Government financing: Vayupak Fund
Recently the Government introduced a new way of financing
Government spending. The establishment of the Vayupak Fund
marked the beginning of financing through the Government’s use
of existing assets. The Vayupak Fund, a closed-end mutual fund of
Bt100bn, was set up to manage Government assets. Seventy
billion baht of Government-owned shares in SOEs and various
public companies were purchased by the fund. Retail and
institutional investors made up 70% of shareholders, while the
Government took the remaining 30%.
This way, the cash generated from the sales of Government
assets could be used to finance public investment projects during
the life of the fund, while public debt was therefore not created by
this means of financing. Additional innovative financing schemes,
such as issuance of asset-backed securities, are in the pipeline.
Challenges for the future: Institutional improvement
One of challenges facing the Government is that, under the
existing regulation and procedures, the Government’s fiscal rules
do not provide flexibility to engineer more effective fiscal
management measures. These rules also cause the delay in
disbursement process.
For these reasons, many fiscal policies cannot be employed to
stimulate the economy in a timely fashion. While adhering to the
existing fiscal rules is necessary, the Government does recognise
the problems and is reforming public financial management to
enhance its fiscal management capability.
Nonetheless, Thailand’s spending efficiency has greatly
improved. This can be shown through the budget disbursement
rate. However, there remains some institutional rigidity in
spending that could undermine the effectiveness and timeliness of
71
Government expenditure.
BUDGET DISBURSEMENT RATE, 1997-2003

100 (%)
95
89.8
88.5
90
85
80
75 77.5
70
1997 1998 1999 2000 2001 2002 2003
In general, there is a delay between the time a policy is put

forward, and the time it affects the economy. This lag depends on
the efficiency of spending decision-making and the disbursement
procedure. If the disbursement procedure is slow, intended fiscal
stimulus might not generate the expected boost to the economy.
The Thai Government has long realised its limited
institutional capability in accelerating spending. But disbursement
has improved over time. Within the current rigid structure, the
Government intended to improve the quality of budget spending
and use other off-budget means to supplement the existing
procedures.
The use of a Bt58bn on-budget fiscal stimulus in FY02, for
example, has departed from its original intention, due to spending
inertia. The reserve fund was set up in FY02 to stimulate the
economy during the global economic slowdown.
However, as the budget allocation process started, the
Government realized it could not achieve both quick stimulus and
quality spending, as the project selection for high quality
investment spending is time consuming and the disbursement
72
process is slow. The Government subsequently had to choose one

over the other, and opted to prioritise the quality of spending
programme, taking time to assess and approve proposed projects
from each Government agency. In fact, the Government was able
to disburse only 36.8% of the total amount in FY02. The rest was
carried over into FY03-04.
DISBURSEMENT OF BT58BN RESERVE FUND, FY02-04

Disbursement performance FY02 FY03 Oct03-Jan04
Cumulative disbursed amount (Btbn) 21.35 44.15 45.26
Disbursement rate (% of total) 36.81 76.12 78.03
The less than effective nature of Thai Government spending is

also apparent in the contribution to real GDP growth of
Government expenditure. The figure below shows that after the
crisis, Thailand experienced negative or zero contribution to
growth from Government expenditure, except in 1997 and 1998
when output contracted.
During 1999-2003, even though Thailand has been using
expansionary fiscal policy, the contribution to growth has not
been positive. In other countries, fiscal expansion has resulted in
positive contribution to growth of Government expenditure.
The Government is confident that once public financial
management reform fully implemented, it could help the
Government manage public expenditure more effectively. While
the size of Thailand’s Government spending relative to GDP is
small compared to other countries in the region, this issue should
not be a concern, as long as Government uses it effectively.
After all, the true challenge is not how to increase its size
relative to GDP but how to allocate public expenditure to
effectively expand the country’s comparative advantage so that it
could enhance private sector competitiveness.
Even though concerns over public debt have been largely
mitigated, it should be clearly understood that the Government’s
73
strategy does not simply manage existing debt through

conventional instruments such as refinancing, prepayment, or
derivatives.
CONTRIBUTION TO GDP GROWTH OF PUBLIC EXPENDITURE

5 Malaysia Singapore Japan
4 Thailand USA
(1)
(2)
(3)
(4)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Source: NESDB, CEIC
Rather, the Government will also focus on ways to create

qualitative changes in debt structure so it could mobilise and use
current over-savings to create diversified structure of investment,
which in turn could generate future income streams under a
highly dynamic externality.
In tandem with this strategy, plans to create a skilled labour
force with the skills to utilise this investment capital must be laid
out. In this way, investment financed by debt issuance would
generate not only qualitative physical capital but also human
capital as well.
Challenges ahead
It should be noted that the disbursement rates had been somewhat
lower than anticipated over the past few years, partly due to the
streamlining of the public investment programmes as well as the
public sector reform.
As pointed out earlier, it has been the conditionality attached
74
to those disbursements rather than the disbursements themselves

that serve as a guideline for the private sector to improve its
resource allocation efficiency.
However, the current disbursement rates are among the highest
in the past decade. To ensure fiscal sustainability, these
accelerated disbursements were, however, implemented within the
fiscal consolidation context with step leading to a balanced budget
in 2005.
Fiscal consolidation, on the other hand, does not mean a
shrinking public sector. On the contrary, over the medium term,
the Government is looking to expand the tax base to allow it to
meet increasingly demanding roles in matching, supplementing
and enhancing the efficiency of the private sector in its increasing
sophistication.
4.2. Household debt

During the first few years after the crisis, the expansion of
household debt had been minimal due to sluggish employment
conditions, an unfavourable economic outlook, and limited access
to formal financial services, particularly with regards to a certain
class of income with genuine economic viability.
However, the Socio-Economic Surveys (SES) carried out by
the NSO showed average household debt in 2002 increased
markedly to Bt82,485, or an increase of 20.8% over the previous
year. This jump raised concerns about households’ debt servicing
capacity and the sustainability of the Thai economy. However,
concern should be put into the proper context, as rising household
debt should be expected, given the cyclical as well as structural
factors over the last few years.
Moreover, Thailand’s household debt relative to GDP was still
lower than that of other regional economies. Meanwhile,
although consumption NPLs remain significant as a legacy of the
75
crisis, they have gradually declined over the past few years.
GROWTH RATE OF AVERAGE MONTHLY HOUSEHOLD INCOMES AND

AVERAGE STOCK OF HOUSEHOLD DEBT (%)
Average Monthly Household Incomes Average Stock of Household Debts
1999 2000 2001 2002 1999 2000 2001 2002
1.9 (4.5) 0.3 12.7 2.9 (4.6) (0.2) 20.8
Source: The National Statistical Office
HOUSEHOLD DEBTS
90,000 (Bt) 82,485
80,000 71,713
69,674 68,405 68,279
70,000
60,000 52,001
50,000
40,000
31,387
30,000
20,000
10,000
0
1994 1996 1998 1999 2000 2001 2002
HOUSEHOLD DEBT ACROSS COUNTRIES

90 % of GDP
80 83.2 73.6
72
70 66.3
62.3
60
50
40
27.2
30
20
10
0
Australia US Korea Malaysia Hong Kong Thailand
76
Factors contributing to the rise in household debt

Economic recovery.
recovery. The economic recovery since end-2000 has
reduced the unemployment rate, expanded household income and
lifted consumer confidence. These factors have played a
significant role in increasing household consumption and
household debt. Moreover, the easing monetary policy stance has
encouraged consumer purchasing of durable goods. The
historically low interest rate has also reduced the interest burden,
despite a higher debt level. Therefore, households are able to
accumulate more debt without shouldering a higher monthly debt
repayment.
Role changing of financial institutions.
institutions. After the 1997 crisis,
financial institutions focused more on consumer lending, as they
turned away from corporate lending due to the poor financial
health of the corporate sector. Concurrently, private non-financial
institutions such as G.E. Capital Plc. And AEON Thana Sinsap
(Thailand) Plc. have an increasing role in consumer lending and
credit card services.
Government policies.
policies . The Government has also contributed
to the rise in household consumption and asset/capital
accumulation via tax measures, the Village Fund and credits
channelled through state-owned financial institutions with the
emphasis on low-income earners. Even though new loans created
were relatively small compared to total loans in the system, it
provided an opportunity for households at the grassroots level to
access funds and thus substitute for informal sector borrowing.
The increase in household debt was in part attributable to the
rapid expansion of consumption loans in the formal financial
system. To a great extent, it reflected the fact that households had
gained greater access to formal financial institutions in the past
few years. In addition, one also needs to take into account that a
large part of the borrowing has been used to finance household
businesses and fixed-asset investments such as housing, which
77
should not be viewed as one-period consumption. Thus,

households have concurrently built up their assets over the same
period.
NPLS IN CONSUMPTION LOANS

Btm 2002 2003
Q1 Q2 Q3
Consumption:Loans 657,169 690,564 724,486 762,521
of which NPLs 128,271 127,317 123,083 120,939
(% consumption loans) 19.39 18.48 17.03 15.82
(% total loans) 2.62 2.58 2.50 2.44
Note: Excluding credit foncier companies and IBFs. Source: Bank of Thailand
The profiles of Thai household debt

Given that the recent rise in household debt has seemed to cause
some concern among the public, it is important to note that
income per household has also increased along with the increase
in household debt. Looking into details of Thai household debt
profiles, we found that in 2002, average monthly household
income increased by 12.7 percent, compared to 20.8 percent
expansion in the average stock of household debt. In fact,
different classes of households in the Thai economy experienced
increases in household debt and incomes at different speeds. For
example, agricultural-based household units, such as landowners
and land tenants, saw their incomes grow faster than debt in 2002,
while most of the remaining classes faced the reserve situation.
Moreover, it is imperative to know whether higher household
borrowings were in part spent in productive activities. In
accordance with the SES survey, some household classes, such as
landowners, and clerical, sale and service workers, invested more
as a share of their borrowing in non-direct farm activities
compared to the period before this Government took the office.
This will in turn create an additional source of income to people
in the agricultural sector. Still, household borrowing for
consumption also rose in almost all classes of household units.
Higher household credits for consumption could cause problems
78
in the future if no income stream is generated to pay back

principles and interests. However, household borrowing for
consumption includes loans for purchasing fixed assets, such as
houses, automobiles, and mobile communication devices, as well
as for refinancing previously incurred formal and informal debt.
Purchasing fixed assets can be reclassified as a long-term
investment or capital expenditure, rather than pure consumption
expenditure, since it can potentially raise future productivity, thus
enhancing household capacity to service debt in the future.
CONSUMPTION LOANS (JUNE 2002-2003)

Consumption Loans As of June 2002 As of June 2003 % Change
Btm % of Total Btm % of Total
Cons. Loans Cons. Loans
Bank 535,268 - 606,481 - 13.3
Housing 379,805 71.0 427,949 70.0 12.7
Traveling 2,188 0.4 3,226 0.5 47.0
Others 153,274 28.6 175,306 29.0 14.4
Credit Card 43,968 8.2 63,763 10.0 45.0
Finance 73,109 - 132,360 - 81.0
Housing 6,828 9.3 6,256 4.7 (8.3)
Hire Purchase 60,697 83.0 120,257 91.0 98.0
Other 4,425 6.0 5,091 3.8 15.0
Finance & Securities Business 1,158.4 1.6 755.4 0.5 (34.8)
Credit Foncier
Housing 247 - 217 - (12.1)
Total Consumption Loans¹ 608,624 - 739,058 - 21.4
Total Non-Durable Good 161,045 - 184,378 - 14.5
Consumption Loans²
Total Loans¹ 4,665,835 - 4,829,382 - 3.5
Total Consumption Loans/Total Loans - 13.0 - 15.3 -
Total Non-Durable Consumption - 3.4 - 3.8 -
Loans/Total Loans
¹ Bank + Finance + Credit Fancier. ² Loans not including housing and hire purchase. Source: Bank of Thailand
Evidently, of all the commercial banks' consumption loans

outstanding, housing loans accounted for more than 70 percent,
while credit card loans, representative of purely personal
consumption loans, accounted for only 10 percent. In fact, total
consumption loans to total loans dropped drastically from 24
percent to 6 percent, when we excluded from the coverage loans
for durable goods, such as housing and automobile loans. This
79
evidence reflects that consumption loans for durable goods had a

big share in total consumption loans, and also suggests that Thai
consumer behaviour has maintained a significant share of fixed-
asset investment in household expenditure portfolios.
GROWTH RATE OF AVERAGE MONTHLY HOUSEHOLD INCOMES AND

AVERAGE STOCK OF HOUSEHOLD DEBT BY CLASS IN 2002 (%)
Growth Rate (YoY)
Incomes Debts
Total Number of Households 12.7 20.8
1. Agricultural Households
(23.1 % of total number of households)
1.1 Land Owner 24.8 16.8
1.2 Land Tenant 40.0 20.3
2. Own Account Workers (non-farm employees)
(17.1 % of total number of households) 18.9 31.0
3. Employees
3.1 Professionals, Technicians, Administrative Workers 3.8 22.0
3.2 Farm Workers 6.4 (9.9)
3.3 General Workers (0.4) (9.7)
3.4 Clerical, Sale and Service Workers 10.2 24.6
3.5 Production Workers 1.3 2.9
4. Economically Inactive
(16.4 % of total number of households) 9.2 (5.6)
80
AVERAGE MONTHLY HOUSEHOLD INCOMES AND AVERAGE STOCK OF

HOUSEHOLD DEBTS IN 2000 & 2002
Bt Incomes Debts Profile of Household Debts
2000 2002 2000 2002 Borrowing Objectives 2000 2002
1. Agricultural Households
1.1 Land Owner 7,014 8,827 40,124 54,136 Household Expenses 28.2 24.7
Non Farm Activities 5.0 17.2
Farm Activities 66.0 57.0
Growth (%) 25.8 34.9 Others 0.8 1.1
1.2 Land Tenants 7,678 9,971 54,795 56,899 Household Expenses 20.6 26.6
Growth (%) 29.9 3.8 Others - 0.6
2. Own Account Workers 17,093 18,970 145,135 153,132 Household Expenses 40.2 49.6
(non-farm employees) Non Farm Activities 54.5 43.7
Growth (%) 11.0 5.5 Others 0.1 0.9
3. Employees
3.1 Professionals, Technicians, 31,366 33,963 199,363 249,700 Household Expenses 91.7 89.5
Administrative Workers
Growth (%) 8.3 25.2 Others 0.4 1.4
3.2 Farm Workers 4,796 5,467 16,490 18,786 Household Expenses 54.5 59.2
Growth (%) 14.0 13.9 Others 0.0 0.2
3.3 General Workers 6,869 7,088 19,813 20,291 Household Expenses 67.9 63.2
Growth (%) 3.2 2.4 Others 1.1 0.9
3.4 Clerical, Sale and Service Workers 14,678 15,122 58,086 78,019 Household Expenses 91.6 83.7
Growth (%) 3.0 34.3 Others 0.4 3.0
3.5 Production Workers 10,500 10,499 27,332 27,605 Household Expenses 76.3 75.8
Growth (%) 0.0 1.0 Others 1.3 2.2
4. Economically Inactive 8,169 9,189 32,815 34,263 Household Expenses 64.5 66.2
Growth (%) 12.5 4.4 Others 1.9 5.8
Gradual process towards the formal financial system

By comparing household debt data surveyed by the NSO (which
we treat as estimates for total household debt) to household debt
incurred in the formal sector (as calculated by the Bank of
Thailand), we might take the difference of the two as a rough
81
estimate of the informal sector debt. We found that the 3
proportion of household debt in the formal sector increased

gradually at the expense of lower informal sector debt as Thai
consumers appeared to gain more access to formal financial
services.
To the extent that the NSO household debt figures may
possibly be biased downward due to a lower rate of participation in
the NSO surveys among the higher-income classes of household,
the informal sector debt proportion, shown as the gap between the
two lines, might be underestimated. However, unless there has
been significant change in the pattern of the biases over time, the
narrowing gap between the NSO figures and the formal debt
financing figures still points to a declining role of informal debt
financing over time.
HOUSEHOLD DEBT VS DISPOSABLE INCOME (%)

70 (% of disposable income)
60 Formal HH debt Total HH debt Nonbank credit card co.

(BOT Calculation) (NSO Survey) Leasing and others
50 Village Funds
BAAC
40
Gvt. Housing Bank
30 Gvt. Saving Bank
Credit foncier
20 Finance companies
Commercial banks
10
NSO's survey
0 Total
94 95 96 97 98 99 00 01 02 Q3-
03
Source: Bank of Thailand, National Statistical Office
3
To the extent that the NSO household debt figures may possibly be biased downward
due to lower rate of participations in the NSO surveys among higher-income class of
households, the informal sector debt proportion, shown as the gap between the two
lines, might be underestimated. However, unless there has been a significant change in
the pattern of the biases over time, the narrowing gap between the NSO figures and the
formal debt financing figures still points to a declining role of informal debt financing
over time.
82
Micro credit programs, for example the increased use of credit

cards among Thai consumers, have helped people gain easier
access to formal sources of funds and avoid being charged with
extremely high interest rates from loan sharks or informal sector
lenders. So far, credit card loans in commercial banks as of June
2003 increased rapidly by 45 percent over the same period of the
previous year in tandem with the significant increase in new
credit card issuances.
GROWTH OF CREDIT CARD LOANS AND ISSUANCES

50 (% YoY)
40
30
20
10
(10)
Credit card loans
(20)
Credit card issuances
(30)
00 01 02 03
The Government realises it cannot prevent consumers from

borrowing from the informal sector. But what it can do is to
facilitate the gradual process of greater access to formal financing
vehicles to all people. This involves creating the ladder for
consumers who used to getting financed via the informal sector to
climb up without disrupting the natural process of this parallel
economy. Once these consumers have shown financial discipline
in servicing debt, they can progress into receiving formal
financing for SME businesses. This graduation process of financial
access and sophistication would create a new class of
entrepreneurs, which will be new engines of growth and
absorption for the Thai economy.
83
Key supportive factors to rising household debts

There are several supporting factors contributing to higher
household debt over the past few years. The economic recovery
improved employment conditions, which, in turn, boosted
personal income. These favourable economic conditions built up
consumer confidence levels, encouraging people consumers to
borrow and spend. Accommodative monetary policy, reflected by
a series of reductions in interest rates, played an important role in
stimulating consumption, particularly in durable goods. The low
interest rate level reduced households' interest burden and also
provided incentives for households to borrow more.
Another key factor was the strategic shift in focus of financial
institutions' lending. Since the 1997 crisis, Thai financial
institutions had become more cautious about extending enterprise
loans to the corporate sector. To compensate for loss of income
from conventional sources, the banks naturally needed to find a
new client base. Thus, they turned their focus to lending to the
household sector, including the promotion of the use of credit
cards. In tandem, this process has opened more opportunities for
Thai consumers to access the formal financial sector and has
potentially built a platform to create a new class of entrepreneurs
in the Thai economy.
Thai consumers, especially those in rural areas, had been
underserved by the financial sector for a long time. The
Government's efforts to move financing opportunities closer to
the people through the implementation of the Village Fund and
Specialised Financial Institutions (SFIs) also encouraged
household consumption and investment to a great extent. So far,
the high repayment rate among those who had borrowed from the
Village Fund after finishing a one-year period confirmed that Thai
rural borrowers had honoured and valued Village Fund access,
possibly with the hopes for utilising low lending rates in the next-
round Village Fund.
84
4.3. Crucial next step for Thailand

It appears that the household debt problem is not a threat to
Thailand's economic development at present. So far, the rise in
household debt has still been in a manageable range.
Nevertheless, the high household debt level might pose a threat to
the economy if households do not assess their debt service
prudentially. Thus, debt expansion should be appropriately
monitored. More importantly, a shift in financing sources from
informal to formal channels will be crucial next step for
Thailand’s development because borrowing in formal financial
sector will help equip people with financial discipline. It should be
noted that the Government’s use of SFIs is only the catalyser of
this switching process.
85
Part 5: Puzzles in the

recent success story
5.1. How did Thailand achieve growth with current account

surplus?
O
ver the past decade, Thailand's rapid economic growth
has usually been associated with a large and rising
current account deficit. Many developing countries
have faced similar problems. As Thailand attempts to cope with a
more volatile economic environment, an increasingly large sum of
money is needed to provide modern investments on a continual
basis in order to adapt production in line with the frequent
technological and demand shifts in the world. Companies that
have not been able to keep up with the rapid changes have found
it difficult to survive. As the crisis struck, the economy collapsed
pushing the investment ratio down from around 40 percent of
GDP to less than 15 percent. Domestic savings, on the other
hand, declined only marginally from around 35 percent to just
above 32 percent, as household income was cushioned partly by
Government measures. The savings-investment gap (current
account balance) thus turned from a deficit to a surplus.
86
SAVING AND INVESTMENT IN THAILAND

50 (% GDP)
Domestic saving
45
Investment
Total saving
40
Q3-03
35
32.2
30
25.7
25
25.5
20
15
95 96 97 98 99 00 01 02 03
As existing capital stock became better utilised through

corporate reform and debt restructuring, as well as increased
adoption of Thailand's indigenous ingenuity, the incremental
capital-output ratio (ICOR) (i.e. the amount of capital required to
produce an additional unit of output) allowed more growth given
the existing investment ratio. The improvement in the efficiency
of investment is reflected in the fact that the amount of capital
required to produce one unit of GDP fell from the peak of around
10 in early 2000 to around five at the end of 2003. This ratio is
notably even lower than the 14 pre-crisis average rate (1994-96).
This improvement in efficiency will enhance domestic growth
even further once the level of (private) investment picks up, along
with domestic credit extension and the progress n debt
restructuring expected over the next 1-2 years.
It is likely that private investment will accelerate and thus
cause imported capital goods to rise. This could put downward
pressure on the current account. Nevertheless, the key issue is to
ensure efficient and productive use of capital investment in the
years ahead.
87
GROSS DOMESTIC PRODUCTS AT 1988 PRICES

(75) Trend (% YoY) 30
(50) 20
(25) 10
0 0
25 (10)
50 Trend ICOR (4 period moving) (20)

GDP (RHS)
75 (30)
94 95 96 97 98 99 00 01 02 03
Source: NESDB, Bank of Thailand
5.2. FDI and the current account balance

Thailand's old wisdom, similar to the rest of Asia, tends to rely on
FDI as an engine to drive growth and development. This
phenomenon has, however, been observed to be coincided with
large current account deficit. The question is whether the
relationship between FDI and the current account remains valid.
Is it still applicable under the present circumstance?
FDI, CURRENT ACCOUNT AND GDP GROWTH

20 (%) FDI/GDP CA/GDP GDP Gr
15
10
(5)
(10)
(15)
94 95 96 97 98 99 00 01 02 03
88
Indeed, prior to the crisis, positive FDI appeared to be

associated with high growth and a continued current account
deficit. This relationship, however, appeared to be less
pronounced after the crisis as a current account surplus continued
to persist despite occasional pickups in FDI. This could be partly
attributable to the fact that a significant portion of FDI during the
first few years after the 1997 financial crisis was for mergers and
acquisitions in order to consolidate ownership of the existing
production structure, which did not necessitate a high import of
capital goods. In addition, better utilisation of the existing capital
stock and technology, as well as more economical uses of imported
capital goods, had made the current growth cycle less reliant on
imported capital goods as in the past. Lastly, the fact that GDP
growth was partly driven by domestic demand growth, which does
not cause a heavy burden on the current account, should be one of
the key features of the present phenomena.
In any case, it should not be any doubt that Thailand has and
will always welcome foreign direct investment. The issue is that
there must be more selectivity in FDI that would create more
comfortable margins, both on the net positive value to the overall
balance of payments as well as to the economy. This could be
done by focusing on FDI and associated technology transfers that
could be employed to enhance Thailand’s comparative advantage
effectively.
5.3. How can the capital utilisation rate remain so low with
the present growth rate?
Given that a large number of companies have undergone debt
restructuring, a certain proportion of the national productive
capacity may have been written off in the process. It is thus
legitimate to ask whether the post-crisis estimate of Thailand's
capacity utilisation may have been understated.
89
The capital utilisation that peaked around 84 percent prior to

the crisis dived to 49 percent in April 2001. As economic activity
began to pick up, the capital utilisation rate began to rise
gradually to around 70 percent at the present. Nevertheless, the
overall capacity utilisation was still weighed down significantly by
the sectors that invested substantially prior to the crisis in
anticipation of strong demand, such as passenger cars, steel bars,
televisions, etc. Despite a sharp recovery in these sectors recently,
the new demand was still inadequate in filling all the excess
capacity existing, weighing down the overall capacity utilisation.
Other sectors (e.g. tyres, IC, and hot and cold rolled sheets),
however, have recovered more fully.
CAPACITY UTILIZATION RATE (AVERAGE PERIOD)

1995 1996 1997 1998 1999 2000 2001 2002 2003
CAP U 77.5 72.5 64.9 52.8 61.2 55.8 53.5 59.3 66.3
Tyres 90.8 89.4 76.3 71.7 86.4 93.0 90.3 95.7 106.3
IC 74.8 79.3 95.5 73.7 90.5 101.8 62.7 67.3 87.7
Steel bars 57.7 58.2 45.6 33.7 30.4 34.6 39.2 49.7 54.4
TV 59.3 63.0 48.3 36.5 37.8 50.0 41.1 50.4 51.3
Passenger Car 61.3 54.9 39.4 13.0 23.6 24.7 37.0 40.7 60.5
Hot and Cold Sheet 64.9 63.0 31.5 29.2 52.9 60.5 51.0 77.8 79.7
It should also be noted that the number of firms included in the

BOT's sample of monthly industrial survey have been reduced
from 300 in the pre-crisis period to 265 at the present due to the
closure of 35 firms following the crisis.
5.4. How could banks continue to repay external debt

without expanding their business?
As the economy shrank by 10.5% in 1998, commercial banks also
reduced their loans by as much as 588 billion baht, whereas
deposits still increased by 371 billion baht. The continued cutback
in lending of 224 billion baht in 1999 was much higher than the
fall in deposits of only 21 billion baht in the same year. Deposits
90
expanded continuously thereafter, resulting in the rise in domestic

liquidity of 470 billion baht at the peak this year.
BANKS' EXCESS LIQUIDITY AND NET FOREIGN ASSETS

800 (Btbn) Net foreign assets
Excess liquidity (deposit-credit)
400
(400)
(800)
(1,200)
(1,600)
(2,000)
94 95 96 97 98 99 00 01 02 03
Banks thus simply relied on their excess liquidity (deposits -

credit outstanding), brought about by the recovery in income and
current account surplus, to run down their net foreign liabilities or
build up of their net foreign assets.
5.5. What is the extent and significance of intra-regional

tourism to Thailand?
The Government has successfully boosted tourist activity within
the country in the past couple of years and internal tourism has
played a greater role than in the past. It is expected that there will
be 65.1 million trips (or 5.31 % y-o-y increase) by Thai visitors in
2003, with an average length of stay of about three days and
average spending of 1,750 baht (3.58 % y-o-y rise) per person per
day. The number of trips by domestic tourists exceeded 60 million
for the first time in 2002.
As an open society with a strong, harmonious and cohesive
social system, Thailand is fortunate to receive a diverse range of
tourists. This diversity has cushioned the Thai tourism industry
91
from the effects of the US-Iraq war threat (beginning 2002), as

the number of Asian tourists rose to compensate partly for the fall
western tourists. Thailand, however, was not immune to the
effects of SARS on global tourism, the effects of which were
fortunately only short-lived.
Despite the war in Iraq and the SARS effect, there were nearly
3m foreign tourist arrivals during the 4Q02 and over 2m in
January and February 2003. A majority of tourist arrivals (about
60%) are from Asia, which up to now has been identified as the
new engine of global tourism. At the beginning of 2003, Thailand
and Asia as a whole were regarded as being on course for a post-
war tourism boom. Thailand has experienced high growth in the
number of tourists from South Asia and China (before the spread
of SARS) as well as from European markets.
Moreover, the Thai Government and the Tourism Authority of
Thailand (TAT) have responded by providing additional fiscal
stimulus and tourism promotion in order to compensate for this
potential loss in tourism revenue. Higher receipts from internal
tourism, with expected revenue growth of almost 30%, partly
mitigated the effects of SARS on Thailand’s tourism industry.
5.6. How can economic growth continue without credit?

Another puzzle from the observation that banks have not lent
much to the corporate sector is the robust growth in theThai
economy. The explanation for this puzzle involves two separate
developments: one is the increased role of capital markets as an
alternative funding source for the corporate sector; the other has
to do with the flow of the savings pool from the non-observed
economy4, legitimised by Government policy initiatives.
4
OECD characterises the non-observed economy (NOE) as the groups of activities that
are underground, illegal, informal, or pursued by households for their own final use.
92
GROWTH OF GDP AND LOANS FROM THE BANKS

30 (%) Loans expansion from the Banks (%) 15
GDP growth
25
10
20
15 5
10
0
5
0 (5)
(5)
(10)
(10)
(15) (15)
1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: NESDB and Bank of Thailand
Following the crisis, several large corporations turned to the

capital markets to raise necessary funding, both by issuing
debentures and new equities. In addition, most corporations have
relied more on their own retained earning to fund capital
expenditure. On the savings side, increasing numbers of investors
have switched from saving accounts to investing in debentures
and equities based on their superior risk adjusted return.
BUSINESS SOURCES OF FUNDS (FLOW DATA)

Unit: Btbn 1997 1998 1999 2000 2001 2002 2003
Bank loans 879.8 (194.8) (202.5) (655.5) (377.9) 192.6 119.8
New Issuance of Debentures 0.0 37.3 269.4 151.2 106.7 98.6 193.2
New Issuance of Equities 63.3 330.0 465.7 119.8 102.7 77.0 184.1
FDI 117.7 209.9 134.6 115.3 167.7 42.6 63.9
Operating Profit (96.9) 103.7 (120.5) (96.9) 65.9 184.2 209.7²
Total 963.9 486.1 546.7 (366.1) 65.1 533.7 770.7
NGDP 4,732.6 4,626.4 4,637.1 4,923.3 5,133.8 5,451.8 5,939.1
% of NGDP 20.4 10.5 11.8 (7.4) 1.3 9.9 13.0
Note: (1) Without the loan increase due to reclassification of AMC into business sector of the amount approximately
Bt280bn baht of loans extended to AMC, the flows of bank credit to business sector still increased. (2) In 1998
operating profits increased mainly due to the increase in sales of non-core business and revaluation surplus of land and
other fixed assets. ¹ Operating profits of companies listed in the Stock Exchange of Thailand. ² Only for Q1-Q3.
93
NEW ISSUANCE OF CORPORATE DEBENTURES VS TIME DEPOSIT GROWTH

70 (Btbn) Corporate debentures (YoY %) 30
Time deposit growth (RHS)
60 25
20
50
15
40
10
30
5
20
0
10 (5)
0 (10)
Jan-98 Nov-98 Sep-99 Jul-00 May-01 Mar-02 Jan-03 Nov-03
The fact that the Government placed importance on SMEs as

an engine to revive the Thai economy could explain the puzzle.
The SME sector represented a significant share of the Thai
economy, accounting for 38.9% of GDP and 69% of total
employment as of year 2002. Moreover, the contribution of the
SME sector to Thai exports has been rising steadily, with a 38.2%
share of products produced by small and medium-sized enterprises
for the export market in 2002. With the commercial bank being
reluctant to lend to the corporate and SME sector, the
Government has utilised the Specialised Financial Institutions
(SFIs) to extend credit to creditworthy SMEs. As a result, the
expansion in the SME sector has not been matched with a
corresponding increase in commercial lending in recent years. In
fact, SFI credit expansion has grown steadily above the target,
except for the past few months, reflecting the hardship of finding
a new class of entrepreneurs to receive credit at present.
94
NEW LENDINGS OF SFIS

80,000.00 (Btm)
70,000.00 Actual
Target
60,000.00
50,000.00
40,000.00
30,000.00
20,000.00
10,000.00
0.00
Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03
Moreover, given the size of the informal sector, which was an

important part of the non-observed economy and generally
referring to unincorporated household units engaging in the
production of goods and services with the primary objective of
generating employment and income to the persons concerned5, it
was measured with three different criteria to be around 74.9% of
the labour force.
The large size of the informal sector is reflected in terms of the
number of labourers employed and implies that there are a lot of
economic activities in the informal sector, including the pool of
saving there.
Furthermore, according to the NESDB’s study, the magnitude
of the informal sector’s income was approximately 45.6 and 43.8%
of GDP in 2001 and 2002 respectively. Since income generated in
the informal sector each year was estimated to be around 45% of
GDP, it suggests that accumulated saving in the informal sector
must be sizeable.
The economic agents in the economy can potentially utilise
5
OECD (2002), Measuring the Non-Observed Economy.
95
this accumulated saving in the informal sector to run their

businesses, and drive the economy forward, especially with
sluggish credit expansion in the banking system.
LABOUR IN THE INFORMAL SECTOR IN 2001

Measurement Criterion % of Labour Force
1. Employment Condition 69.8
2. Personal Income Tax Filings 81.6
3. Access to Social Security System 73.3
Average 74.9
Remark: See Appendix for compilation details of each measurement criterion. Source: NESDB
INCOME FROM THE INFORMAL SECTOR

Percent 2001 2002
% of GDP % of GDP
The Whole Kingdom 100.0 45.6 100.0 43.8
Agriculture 16.3 7.5 17.0 7.5
Non-Agriculture 83.7 38.1 83.0 36.3
Coverage
Recorded in GDP 73.2 33.3 71.8 31.4
Unrecorded in GDP 26.8 12.2 28.2 12.4
Source: NESDB
In fact, as a very large - if not the largest - source of

employment absorption and income generation to the Thai
economy, the informal sector has a potential to play a critical role
in determining the level of domestic activities. The Government’s
attempt to tap into these forces may in fact have paid off in terms
of rising tax revenue well beyond targets.
These efforts, however, complement rather than substitute for
the formal sector as represented by high growth sectors such as
electronics, automobiles, and construction materials as well as
corporate profit, which has become a significant tax revenue base
for the Government.
Activating unused savings in the informal sector to serve the market
There are two factors which explain how saving in the informal
sector has been a potentially important source of finance for
economic growth in the past recent years. Firstly, the drastic
96
changes in macroeconomic environment associated with recent

recovery of the Thai economy have made local producers more
willing to rely on their own internal saving in financing their
business operations. While confidence in the economy has
increased, commercial banks have been rather cautious in new
lending because of the existing burden of bad loans caused by the
1997 crisis. In many cases, the demand for funds by businesses was
mainly for working capital, which could easily be met by their
own savings.
Secondly, a number of government initiatives have also
encouraged the use of idle saving in the informal sector for market
activities. A new strategy has been introduced to unleash
indigenous skills, promote entrepreneurial ability, and stimulate
spending through various governmental programmes, such as asset
capitalisation, “one village, one product”, the village fund, and
SME promotion. These measures not only enhance local skills and
capability, but also act as a catalyst for better utilisation of idle
hoarding in the informal sector. They have started the process of
converting the informal economy into the formal economy.
Classification of workers in the informal sector by workplace
Of the entire Thai labour force, 69.8% were estimated to be in the
informal sector. As one can anticipate, the majority of
employment in this unrecorded production fell into agricultural
sector. The rest were in the non-agricultural sector especially
retail and wholesale trade, service, and manufacturing, which was
amounted to 15.3, 11.0, and 10.1% of total employed workers in
the informal sector respectively.
97
SHARE OF EMPLOYED WORKERS IN THE INFORMAL SECTOR CLASSIFIED BY

SECTOR IN 2001
(%) Share
Agriculture 56.4
Non-Agriculture 43.6
Mining 0.1
Manufacturing 10.1
Construction 4.2
Electricity & Water < 0.1
Retail and Wholesale Trade 15.3
Transportation 2.9
Services 11.0
Others < 0.1
Total 100.0
Source: NESDB
In term of working status, of all employed workers in the

informal sector, we found that 44.9% were own account workers,
31.0% were unpaid family workers, and 10.0% were private
employees in small enterprises.
LABOUR FORCE IN THE INFORMAL SECTOR CLASSIFIED BY WORKING

STATUS IN 2001
Working Status Share (%)
1. Entrepreneurs with fewer than 5 employed workers 2.1
2. Entrepreneurs with 5 to 10 employed workers 1.3
3. Private enterprises with fewer than 5 employed workers 10.1
4. Private enterprises with 5 to 10 employed workers 10.3
5. Own account workers 44.9
6. Unpaid family workers 31.0
7. Co-operative groups 0.2
Total 100.0
Source: NESDB
5.7. The role of rural areas in driving current growth

The astonishing growth Thailand registered in the past two years
has puzzled many. While credit growth to the modern sector of the
economy has been minimal, the economy was able to register
impressive growth of 6.7% in 2003. The modern sector has sought
other channels of funding, namely retained income or capital
98
markets, to finance their activities. However, the modern sector

has not been the only engine of growth. In the past two years, the
rural economy has improved significantly and strongly contributed
to boost ongoing Thai economic growth.
Rural incomes have increased at an accelerated rate, higher
than that in Bangkok. Personal income tax collection outside of
Bangkok rose by 10.1% and 11.1% for 2002 and 2003, compared
to 5.8 and 6.9% growth in Bangkok. Moreover, spending in rural
areas soared. VAT collected outside of Bangkok grew 10.9% and
22.9% in 2002 and 2003 respectively, compared to 3.4% and 9.8%
in Bangkok.
The improvement in the rural economy partly reflected the
success of Government's programmes such as the Village Fund and
the People's Bank, which allowed the population in rural areas
access to credit. However, the improvement in the rural economy
is also a result of higher price of agricultural goods, especially in
2003.
TAX COLLECTION IN BANGKOK AND OTHER PROVINCES

Unit: Bangkok Other Provinces Country
Percent
Proportion to Growth Proportion to Growth % of GDP Growth
country's total country's total
2001 2002 2003 2002 2003 2001 2002 2003 2002 2003 2001 2002 2003 2002 2003
Personal 68.3 67.4 66.5 5.8 6.9 31.7 32.6 33.5 10.1 11.1 1.9 2.0 2.0 7.2 8.2
Income Tax
Corporate 73.0 73.0 74.2 13.9 24.6 27.0 27.0 25.8 13.9 17.0 2.9 3.2 3.6 13.9 22.5
Income Tax
VAT 65.6 64.0 61.4 3.4 9.8 34.4 36.0 38.6 10.9 22.9 4.2 4.3 4.5 6.0 14.5
PROPORTION OF TAX REVENUE IN DIFFERENT REGIONS TO THE WHOLE

COUNTRY
Unit: Percent Central Northern North Eastern Southern
2002 2003 Growth 2002 2003 Growth 2002 2003 Growth 2002 2003 Growth
Personal Income Tax 21.9 22.6 13.5 3.8 3.9 5.0 3.5 3.6 7.7 3.3 3.4 9.1
Corporate Income Tax 23.1 22.3 19.4 1.3 1.2 19.5 1.1 0.9 6.6 1.6 1.4 12.2
VAT 30.7 33.6 14.9 1.6 1.4 8.6 1.6 1.5 11.2 2.1 2.1 12.6
99
Part 6: Next steps
O
ver the past three years, the Thai Government has
overcome a legacy of problems from the 1997 financial
crisis, and revitalised the economy. Thailand registered
impressive economic growth of 6.7% in 2003 - one of the fastest
growing countries in Asia - and is now expected to grow about 7%
in 2004. But, more importantly, the Government has been
strategically laying down the necessary foundations and preparing
the economy for the coming challenges of the 21st Century.
The global consumption shift, price deflation and overcapacity,
advances in life-science technology (such as genetic engineering,
genome project), the coming revolution in molecular
manufacturing with nanotechnology, and the emergence of new
powerhouses in the world economy such as China and India - all
force Thailand to find new ways to position herself. For the next
steps, the critical questions are not only how to carry the
momentum of the current economic expansion forward, but to
create new engines that will generate growth for the longer-term
and are able to compete effectively in world markets.
In meeting these challenges, the Thai Government has to be
proactive and forward-looking in its policy making. This will
involve investing in the intermediate infrastructure that will raise
the productivity of the existing production structure. The focus is
100
to enhance our natural comparative advantages for the economy

to be competitive vis-à-vis other countries. Furthermore, as the
economy recovers fully, investment will pick up strongly, and a
trade account that has been in surplus over the past six years will
inevitably turn into deficits. Therefore, measures to strengthen
the service sectors are needed so as to provide additional cushions
that will help alleviate downward pressure on the current account,
thereby preserving external stability.
6.1. Government as a catalyst to private sector activities

As the economy moves toward the new horizon, it is important
that Thailand's economic strategy should not merely replicate the
economic models that might have proven successful in other
countries. Instead, an alternative model that is more suitable to
our conditions should be employed.
So far, the Government has been selectively intervening in the
market when it could not function well. The initiatives include
micro credit in rural areas, micro credit to small borrowers and
SMEs. With the NPL problem weighing down heavily on the
commercial banking sector, lending from Specialised Financial
Institutions has been used to reinvigorate various sectors of the
economy and as a catalyst to commercial banks' lending. Samples
of these strategic lendings include the People's Bank Programme,
the acceleration of mortgages by the Government Housing Bank
as well as consumer loans by the Krungthai Bank. The role of the
Specialised Financial Institutions will steadily subside as the
financial sector regains its health and strength. In another key
policy agenda, the Government is currently negotiating for Free
Trade Agreements with several countries on both a bilateral and
multilateral basis (for instance, Thailand-Australia, Thailand-
United States of America, ASEAN-China, ASEAN-India, etc).
These FTAs will be employed as important policy instruments to
101
force the Thai private sector to adjust and further upgrade their
production capabilities.
6.2. Investment and enhancement of natural comparative

advantages
In the coming decades, the Government will invest more in
public infrastructure to avoid the bottleneck in our basic
infrastructure and enhance the productivity of our existing
production structure. Currently, investment plans for a new
airport, a new public transportation system, as well as the
establishment of new cities has been drawn up. With appropriate
choices of public investment, the Government could help build
an infrastructure conducive for new investment in the private
sector. New entrepreneurs will be created, leading to more jobs
and growth that lengthens economic expansion.
Another critical question is how to identify and breed the new
industries out of Thailand's comparative advantage and to provide
necessary support on research and development that will deepen
our scientific knowledge in those specific industries. Here, the
Government has launched the Thailand Competitiveness Study
that will help articulate clear strategic directions that Thailand
should take into the future. So far, the project has already led to
several initiatives such as the establishment of the Design Centre
as well as programmes to incubate new entrepreneurs. In addition,
the public already has greater access to capital under the
Government's initiatives. When capital is combined with
innovative ideas from a new class of entrepreneurs, then there will
be opportunities for the development of new products.
The key to Thailand's economic success is to enhance our
natural strength in order to respond effectively to the new shifting
global demand. For instance, it is interesting to note that some
industries in Thai service sectors such as tourism and health care
102
have emerged with high potential. With the shifting of consumer

trends towards Asian ways of life, towards uniqueness, and towards
the so-called ‘poly-culture,’ Thailand has become one of the
choice destinations among tourists around the world. The main
policy question is how to create an environment that will further
foster our natural comparative advantages in these industries by
deepening our skills and knowledge in each component of the
process, thereby leading to our own intellectual property rights
that are both “High-Touch” and “High- Tech” and create
sustained income expansion for the nation as a whole.
While the need to identify and build the new industries based
on true comparative advantage is crucial for the long-term
competitiveness of the Thai economy, it does not mean that the
traditional manufacturing sectors such as integrated circuits, TV,
and other electrical appliances should be neglected. These sectors
have contributed significantly to recent high export growth and
will remain important items in Thailand's export base for at least
for the next few years. Therefore, it is important that the Thai
economy effectively utilises the existing production structure to
generate cash flows over the next few years to finance the
necessary investment in the industries of the future.
CONTRIBUTION TO EXPORT GROWTH

Rank 2000 2001 2002 2003
1 Vehicle parts and accessories 1.0 0.3 0.4 1.6
2 Integrated circuits and parts 2.6 (1.4) (0.1) 1.5
3 Rubber 0.6 (0.3) 0.6 1.4
4 Electrical appliances 2.2 (0.6) 1.1 1.0
5 Computer and parts 1.0 (1.1) (0.7) 0.9
6 Plastic products 1.3 (0.3) 0.4 0.8
7 Base metal products 1.2 (0.6) 0.4 0.7
8 Chemical products 0.5 (0.3) 0.2 0.6
9 Rubber products 0.3 0.1 0.2 0.3
10 Sugar 0.2 0.0 0.0 0.3
Summation 10.9 (4.2) 2.5 9.1
Others 8.4 (2.1) 2.8 6.4
Total Exports (Customs basis) 19.3 (6.3) 5.3 15.5
103
6.3. Creating clever cushioning for the Thai economy

Another important challenge is for the Government to adopt
multi-dimensional policies to build an economic system that is
resilient to both external and internal changes.
Services sectors such as tourism and health care will be one of
the key sectors that will provide Thailand with the needed
cushion for external shocks and help alleviate pressure on the
current account. As the economy recovers and strong growth
brings about the rise in imports both for consumption and capital
investment, strong service sectors will keep the current account
deficit in check. Internally, the Government policy to strengthen
the masses at the grass root and develop small and medium-sized
enterprises through various policy initiatives such as Village Fund,
One-Tambon-One Product, Asset Capitalisation, and incubation
programmes as well as the better financing of SMEs through loans
and venture capital funds will create another layer of new players
in the economy.
These will make Thailand’s economic structure more
diversified and help reduce our reliance on large corporations that
once use to be very prominent.
6.4. Strengthening macroeconomic foundations

The Government continues to provide a stable macroeconomic
environment to support growth and development. On the fiscal
side, fiscal consolidation will be carried on. On a budgetary basis,
a budget balance is expected in 2005. An initiative to prepay
external debt has been pursued to reduce the external exposure
and public debt outstanding. The Government maintains its
commitment to the fiscal sustainability framework, while working
to further improve its efficiency in spending and revenue
collection. Off-budget initiatives will be closely monitored.
104
On macroeconomic risk management, the Government will

continue to exercise prudence, particularly in monitoring
household debt and asset prices.
6.5. Facing the future

With innovative and forward-looking policies as well as clear
strategic directions building on its dual-track policy framework,
which put emphasis on both domestic and external sectors, on
both modern sectors and rural areas, and on both the resolution of
the current problems and the laying down of the foundation for
the future, the Thai Government is building a more balanced and
more resilient system that will allow Thailand to move forward
with confidence in facing the coming challenges of the 21st
Century.
105
106
Appendices
1: Thailand's socio-economic indicators
2: Key macroeconomic indicators
3: Definition of Small to Medium Enterprises (SMEs)
4: Explanation of government initiatives and performance review
5: Progress of FTAs
6: Measuring Thailand's informal sector
107
Appendix 1: Thailand's socio-economic indicators

Geography:
Geography: Centre of Southeast Asia. Government:
Government Constitutional monarchy
Demographic indicators (2002)
! Population 63m – expected to reach 67m in 2010.
! Population by age:
age
0-14 years, 15.1m – expected to reach 14.2m in 2010.
15-59 years, 41.9m – expected to reach 45m in 2010.
60 and above, 6.2m – expected to reach 7.8 million in 2010.
! Labour Force,
Force 34.3m, or about 71% of the population aged 15 and above.
! Literacy:
Male 97.1% of the population aged 15 and above.
Female 93.9% of the population aged 15 and above.
! Labour force by education:
Primary and lower, 64%. Tertiary, 8%. Secondary, 28%.
! Employment: 33.1m.
Agriculture, 14m. Hotels and restaurants, 2m.
Manufacturing, 5.1m. Construction, 1.8m.
Trade, 4.9m. Others, 5.3m.
! Unemployment,
Unemployment 0.8m, or 2.4% of the labour force.
! line 6.2m, or 9.8 % of total in 2002.
Population below poverty line,
Economic Indicators
! GDP per capita
capita, US$2,015, compared with Malaysia (US$3,450), South
Korea (US$9,930), Singapore (US$20,690) and Hong Kong (US$24,750).
Sector GDP by Sector (%) Labour Force by Occupation (%)
Agriculture 10 42
Manufacturing 36 15
Wholesale and retail trade 16 15
Other Services1 38 28
¹ Other services include the financial sector, education, hotels and restaurants, etc.
! Openness to Trade
Trade, 125.9 % of GDP.
MAJOR EXPORT ITEMS

Computers and parts Electrical appliances
Integrated circuits and parts Vehicles, parts and accessories
Plastic products Garments
Electrical machinery and parts Fuel and lubricant
Non-electrical machinery and parts Chemicals
Base metals
108
Appendix 2: Key macroeconomic indicators
109
VALUE OF IMPORTS 1993 - 2003
(USD$m) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
1. Consumer Goods 4,511 5,747 7,291 7,596 6,698 4,836 5,511 6,616 6,234 6,797 7,676
2. Intermediate products and raw materials 13,776 15,658 20,439 18,672 16,379 11,610 13,933 16,829 15,821 17,014 20,003
2.1 Chiefly for consumer goods 9,123 10,545 13,318 12,333 11,060 8,664 9,948 12,254 11,500 11,972 14,027
2.2 Chiefly for capital goods 4,653 5,113 7,122 6,339 5,319 2,946 3,985 4,575 4,321 5,042 5,976
3. Captial Goods 19,646 24,665 32,049 33,493 30,054 20,749 22,555 29,941 29,068 29,546 33,948
4. Other Imports 4,699 5,167 7,125 6,804 4,537 1,572 2,481 3,019 3,230 3,568 4,589
FACING THE CHALLENGE
5. Fuel and Lubricant 3,408 3,636 4,622 6,201 5,481 3,134 4,272 6,834 7,130 7,422 8,898
Total (Custom basis) 46,040 54,873 71,527 72,767 63,149 41,901 48,752 63,239 61,483 64,347 75,114
Total (BOP basis) 45,070 53,379 70,383 70,816 61,349 40,643 47,529 62,423 60,576 63,353 74,214
110
Share of Imports (custom basis) 1993 - 2003
(%) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
1. Consumer Goods 9.8 10.5 10.2 10.4 10.6 11.5 11.3 10.5 10.1 10.6 10.2
2. Intermediate products and raw materials 29.9 28.5 28.6 25.7 25.9 27.7 28.6 26.6 25.7 26.4 26.6
2.1 Chiefly for consumer goods 19.8 19.2 18.6 16.9 17.5 20.7 20.4 19.4 18.7 18.6 18.7
2.2 Chiefly for capital goods 10.1 9.3 10.0 8.7 8.4 7.0 8.2 7.2 7.0 7.8 8.0
3. Capital Goods 42.7 44.9 44.8 46.0 47.6 49.5 46.3 47.3 47.3 45.9 45.2
4. Other Imports 10.2 9.4 10.0 9.4 7.2 3.8 5.1 4.8 5.3 5.5 6.1
5. Fuel and Lubricant 7.4 6.6 6.5 8.5 8.7 7.5 8.8 10.8 11.6 11.5 11.8
Total (Custom basis) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
PANSAK VINYARATN
THAILAND: KEY INDICATORS

2000 2001 2002 2003 Q1 Q2 Q3 Q4
(% change from the same period of last year, unless specified otherwise)
GDP
Nominal GDP (btbn) 4,923 5,134 5,452 5,939 1,465 1,437 1,470 1,567
Nominal GDP per capita ('000 baht)1 78.9 81.6 85.9 92.8 91.9 89.9 91.8 97.6
Nominal GDP per capita ('000 US$)2 2.0 1.8 2.0 2.2 2.1 2.1 2.2 2.5
Real GDP 4.8 2.1 5.4 6.8 6.7 5.8 6.6 7.8
Supply Side
Agriculture 7.2 3.5 3.0 6.9 10.0 4.2 6.6 6.5
Non-agriculture 4.5 2.0 5.7 6.7 6.3 6.0 6.6 8.0
Manufacturing 6.1 1.4 6.8 10.3 10.3 11.1 8.9 10.9
Demand Side
Private sector
Consumption 5.0 3.9 4.9 6.3 6.8 5.7 5.4 7.1
Investment 16.8 4.9 13.2 17.9 19.8 16.8 16.5 18.5
Public sector
Consumption 2.2 2.8 2.5 1.1 (10.0) 2.8 3.2 9.5
Investment (9.6) (5.2) (5.8) (2.3) (20.2) (7.9) 1.7 24.3
Domestic Demand3 6.1 3.5 5.1 7.3 5.8 4.5 7.5 11.1
Export of goods and services 17.5 (4.1) 12.1 6.6 12.1 4.3 3.7 6.6
Import of goods and services 27.3 (5.5) 13.6 7.5 12.4 2.0 3.7 12.5
Unemployment (%) 3.6 3.3 2.4 2.2 2.8 2.5 1.5 1.8
Inflation (%)
Headline CPI 1.6 1.6 0.7 1.8 1.8 1.7 1.9 1.6
Core CPI 0.7 1.3 0.4 0.2 0.2 0.2 0.0 0.1
Fiscal Position
Government cash balance (% of GDP) (2.2) (2.4) (2.1) 0.5 0.8 2.5 1.0 (2.4)
Public sector balance (% of GDP) n.a. (4.1) (3.2) 1.7 2.0 3.6 2.0 (0.3)
Public debt (% of GDP) (end-period)4 56.7 57.4 54.3 49.2 49.1 49.3 49.6 49.2
External Position
Current account balance (% of GDP) 7.6 5.4 5.5 5.6 7.4 3.5 5.2 6.1
5
External debt (% of GDP) 66.8 56.1 48.9 40.7 44.0 43.4 41.0 40.2
Reserves (USD$bn) 32.7 33.1 38.9 42.1 37.6 39.3 40.3 42.1
Reserves (% of short-term debt) 222.0 247.0 327.0 388.4 311.4 314.7 353.5 388.4
Reserves (months of imports) 6.3 6.5 7.4 6.8 6.8 6.9 6.9 6.8
Debt service ratio 15.5 20.8 19.6 15.8 23.1 12.3 18.8 9.9
Terms of Trade (1995 = 100) 85.5 77.4 76.2 76.7 74.6 76.0 77.6 78.5
Exchange Rate
Baht/USD (period average) 40.2 44.5 43.0 41.5 42.8 42.2 41.3 39.8
REER, trade-weighted (1994 = 100) 83.4 79.5 81.7 80.4 79.2 79.6 81.2 81.7
Interest Rates
14-day repurchase, avg closing rate (%) 1.53 2.06 1.98 1.49 1.74 1.73 1.25 1.25
6
3-month deposit (%) 3.00 2.25 1.75 1.00 1.50 1.25 1.05 1.00
6
MLR (%) 7.85 7.20 6.75 5.70 6.55 6.10 5.70 5.70
Stock Market Index 269.2 303.9 356.5 772.2 364.6 461.8 579.0 772.2
1
Number of population from NSO Survey
2
Using average reference rate
3
Including change in inventories
4
Data from Public Debt Management Office
5
Average of 3 years. Since 1995 external debt has included non-bank debt based on BOT's external debt survey result.
6
Average of 5 largest banks, end of period
Sources: NESDB, BOT
111
Appendix 3: Definition of Small to Medium Enterprises

(SMEs)
Ministry of Industry regulations issued on 11 September 2002
define SMEs according to their number of employees and the
value of their total fixed assets excluding land. The definitions
differ depending on which business category the SME is classified
under:
Manufacturing Sector: Businesses with no more than 50
employees, and fixed assets excluding land not exceeding Bt50m,
are considered small enterprises. Businesses with no more than
200 employees, or fixed assets not exceeding Bt200m, are
considered medium enterprises.
The Wholesale Sector: Businesses with no more than 25
are considered small enterprises. Businesses with no more than 50
employees, or fixed assets not exceeding Bt100m, are considered
medium enterprises.
The Retail Sector: Businesses with no more than 15
are considered small enterprises. Businesses with no more than 30
employees, or fixed assets not exceeding Bt60m, are considered
medium enterprises.
The Service Se Sector:
ctor: Businesses with no more than 50
are considered small enterprises. Businesses with no more than
200 employees, or fixed assets not exceeding Bt200m, are
considered medium enterprises.
112
Appendix 4: Explanation of government initiatives and

performance review
Initiative How it works/Detailed plan Performance updates
1) One The government has adopted the OTOP policy ! Since the launch of the OTOP
Tambon One on a number of tangible plans. These include: policy, sales of local products have
Product establishing special agencies to help develop increased remarkably, from
(OTOP) products that meet quality standards and Bt215.5m in 2001 to Bt22,286m in
marketing requirements; arranging finance; 2002
business advisory; marketing promotion; and the
promotional website www.Thaitambon.com.
2) The Village The government's National Village Fund Office At the end of Feb 2004:
Fund borrowed Bt80bn from the Government Savings
! 74,722 village funds have received
Bank (GSB), distributing Bt1m to each village in
funds.
the country. The government will bear the
principal and interest payments, with ! Total lending to villages has reached
reimbursement from the budget taking place over Bt200.47bn.
eight years. The borrowing from the GSB is
Members have repaid Bt109.23bn of
included in public debt figures as SOE debt.
principal and Bt7.2bt of interest.
Based on management quality, the National Village Fund has categorised village funds into
three types: AAA, AA and A. Those with high ratings may borrow from SFIs and Krungthai
Bank. Village funds with the AAA rating will receive a further Bt100,000 of funding.
3) Farmers' Farmers eligible for this programme can choose At the end of Feb 2004:
Debt to either reduce their interest payments or to
! 1.98m farmers have joined the
Suspension suspend debt servicing. Once enrolled, they are
programme.
also eligible for a rehabilitation programme. The
government states explicitly that it will pay the ! Their outstanding debt is Bt77.8bn.
total cost of this project from the budget.
The total cost to the budget is Bt16.3bn, with three payments of Bt8bn, Bt5.7bn and Bt2.6bn
spread across three fiscal years. FY04 is the last year of reimbursement.
4) People's The Government Savings Bank operates this At the end of Feb 2004:
Bank project independently without government
! Accumulated lending was Bt16.2bn.
assistance. Small loans are granted to street
vendors and the like, using a cross guarantee ! NPLs accounted for Bt507.33m, or
between a group of borrowers as collateral. 8.48%, of outstanding loans.
5) Venture There are two government VC funds: At the end of Feb 2004:
Capital (VC) 1) The SME Venture Capital Fund (SME VC) was ! The SME VC had invested Bt300.9m
set up in August 2000 with a Bt1bn baht Ministry into SMEs, of which Bt248.38m was
of Finance investment, as part of the in SME common stock, Bt28.2m
Government's 10 August 1999 Financial was in preferred stock and Bt24.3m
Package. It is a closed-end mutual fund with a was in promissory notes.
10-year maturity.
2) The Venture Capital Fund under the Scheme to Promote Competitiveness was
established in July 2003 with Bt5bn. The objective is to improve access to financing and
help SMEs in terms of developing marketing strategy and enhancing competitiveness. The
fund targets SMEs producing exports, automobiles, software and other innovative products.
6) Asset The Asset Capitalisation Bureau was set up to Asset capitalisation progress in 2003:
capitalisation convert assets into capital, and will do this in ! New documents issued: Land titles
scheme association with other government agencies.
for 263,784 pieces of land. SK1 and
Two main types of assets can be capitalised:
Bai Chong forms for 736,744 pieces
1) Assets with established or operational of land, across 7,255 tambons, 795
channels for capitalisation, incl. land with amphurs, 81 sub-amphurs and 76
legitimate claims in form of documents such as provinces.
SK1 and Bai Chong.
! 7,559 registered credit applicants.
2) Assets with limited operational channels or
access to capital markets, such as occupancy ! Memorandums of understanding
rights which fall short of freehold status, with: Krung Thai Bank, Gov’t
intellectual property, leasing and hire-purchasing Savings Bank, Bank of Agriculture
contracts, permits and operational licenses. and Agricultural Cooperatives
113
Appendix 5: Progress of FTAs

Trade Agreement Progress Plans
ASEAN Free Trade 60% of tariff lines for non-sensitive products must be To reduce 80% of tariff lines by 2007 and
Agreement (AFTA) reduced to zero-5% by 2003. eliminate tariffs for seven sensitive products.
Established in 1995 The Common Effect Preferential Tariffs' (CEPT) Rules of Tariffs for all these products are to be
eliminated by 2010.
to eliminate tariffs Origin (ROO) were strengthened by specifying cost
by 2010 within elements in the formula. To adopt ST as a general alternative rule for
ASEAN-6 and 2015 CEPT ROO, applying to products that
The Operational Certification Procedures for the CEPT
for CLMV, with cannot comply with the 40% local/ASEAN
ROO were revised and Substantial Transformation (ST) was
flexibility on tariffs content requirement. Priority will be given
adopted as an alternative criterion for products that cannot
for certain sensitive meet the current 40% value-added rule. to industries specified by the private sector
products up to and to product groups identified by the
2018 ASEAN leaders also signed the Framework Agreement on ASEAN Economic Ministers (AEM) for
Comprehensive Economic Cooperation with China, India, priority integration (electronics, wood-
and Japan. Negotiation will begin in 2004-05. based products, automobiles, agro-based
products and fisheries, rubber-based
products, textiles/apparel, e-ASEAN, health
care products, tourism and open sky).
To eliminate non-tariff barriers for all trade,
prioritising sectors identified by the AEM for
priority integration.
Thailand-China A bilateral agreement has been signed to accelerate tariff To begin negotiations for the other products
Fresh vegetables reduction in the Framework Agreement on Comprehensive after June 2004.
and fruits Economic Cooperation between ASEAN and China. This
has been effective since 1 October 2003, when all tariffs
for these products were eliminated.
ASEAN-China The Framework Agreement on Comprehensive Economic To continue negotiating tariff reductions for
Cooperation between the ASEAN and China was signed on Normal Track goods, where tariff reduction
4 November 2002. will begin on 1 January 2005 and be mostly
eliminated by 1 January 2010, as well as
Goods are divided into three groups: Early Harvest,
tariff reductions for Sensitive products.
Normal Track and Sensitive Track.
The tariff reduction process for fresh fruits, vegetables and
meat in the Early Harvest Package started on 1 January
2004 and should be complete by 1 January 2006.
Thailand-India The Framework Agreement for Establishing a Free Trade Negotiations on trade in goods will take
Area between India and Thailand was signed on 9 October place from January 2004 to March 2005.
2003. Tariff reductions for the Early Harvest Programme Tariffs will be reduced for Normal Track
(EHP) will include 84 products. products from 1 January 2006 and be
eliminated by 31 December 2011.
ASEAN-India The Framework Agreement on Comprehensive Economic To negotiate details for other products.
Cooperation between ASEAN and India was signed on 8
October 2003.
Tariffs will be reduced for 105 products from 1 November
2004 and be eliminated by 31 October 2007.
BIMST-EC The Framework Agreement on the BIMST-EC Free Trade Negotiations on trade in goods are expected
Agreement was signed on 8 February 2004. to begin in July 2004 and conclude by
December 2005.
Member countries include: Bangladesh (not a signatory
party at present), India, Myanmar, Sri Lanka, Thailand, Negotiations on trade in services are
Nepal and Bhutan. expected to begin in 2005 and conclude by
2007.
Thailand-Japan The first negotiating session was on 16-17 February 2004 The next negotiating session will take place
in Thailand. in Japan on 7-10 April 2004.
ASEAN-Japan The Framework Agreement for Comprehensive Economic To continue tariff reductions and rules of
Partnership between ASEAN and Japan was signed on 8 origin negotiations.
October 2003.
Discussions on tariff reduction and rules of origin started in
February 2004
Thailand-Australia The Agreement on Closer Economic Relations between Thailand is submitting the agreement draft
Thailand and Australia (CER) has concluded. for cabinet approval, and the agreement is
expected to be signed by both parties in
Ten negotiating sessions took place.
May 2004.
Thailand-Bahrain Both parties signed the Framework Agreement on Bahrain- To continue negotiations for the remaining
Thailand Closer Economic Partnership (CEP) on 29 products and other areas.
December 2002.
114
Trade Agreement Progress Plans

The Early Harvest stipulated in the Framework Agreement
includes:
! Immediate tariff elimination for 419 products.
! Immediate tariff reduction to 3% for 207 products,
before eliminating tariffs on 1 Jun 2005.
! Five negotiating sessions have occurred so far, with the
latest between 31 March 2004 and 2 April 2005.
Thailand-US Both parties agreed to negotiate the establishment of free The first negotiating session is scheduled for
trade area between two. 28 June 2004 in Hawaii.
The US Congress was notified of its President's intention to
initiate an FTA with Thailand on 11 February 2004. The
negotiations can begin 90 days after notification if it is not
blocked by Congress.
Thailand-Peru Both parties signed the Framework Agreement on Closer The next negotiating session is scheduled
Economic Relations between Thailand and Peru on 19 for May 2004 in Peru.
October 2003. The negotiations are expected to be
The first negotiating session took place on 29 January 2004 finalised in June 2005.
in Thailand. Both countries agreed to include all items in
the tariff reduction package in the FTA. All tariffs should be
eliminated by 2015, in accordance with the Framework
Agreement.
Appendix 6: Measuring Thailand's informal sector

OECD characterises the non-observed economy (NOE) as
activities that are underground, illegal, informal, or pursued by
households for their own final use:
Underground activities are the legal production of goods and
services where producers or employers intentionally underreport
their performance or employment conditions. The objectives are
often to evade tax, reduce social security fund contributions, or
break rules and standards set by the authorities.
Illegal activities are the production, distribution, or possession
of illegal goods and services, or the productions of goods and
services unauthorised by the state. Underground and illegal
activities are ostensibly similar, but underground activities tend to
be investigated by the authorities to a much lesser degree
compared with illegal activities.
Informal sector activities are the production of goods and
services initiated by unincorporated enterprises or household units
to generate employment or income. The financial performance (in
terms of capital, assets, liabilities, revenues, expenditures etc) of
115
these businesses is thus indistinguishable from individual or

household accounts.
Moreover, businesses in the informal sector tend to be small
scale and not registered with the authorities. However, the
informal sector is an important part of economy and labour
market. This is particularly so in developing countries, because
most labourers in these countries are self-employed or unpaid
family workers. Activities in the informal sector are also
associated with the poor and less-empowered persons, such as
public sideway and stall vendors, general repairers, daily-employed
workers etc.
Household activities for their own final use include crop and
livestock production, own house constructions, the imputed rent
of owner-occupiers, etc. However, they do not include household
activities such as raising children and cleaning.
TOTAL ECONOMY
Underground
Observed Illegal
Non-
economy Informal sector observed
economy
Household own final use
Observed economy
The NESDB has focused on informal sector production since

this has a potentially important role in the Thai economy. It
estimates the size of the informal sector in terms of labourers
employed and income generated according to various indirect
116
measurement criteria.
Criteria to measure the size of informal sector labour force
To estimate the significance of the informal sector in terms of
labourers employed, the NESDB utilised three different criteria to
balance the result of each approach: employment conditions,
personal income tax filing, and access to the social security
system.
The employment condition condition criterion uses National
Statistical Office labour-force surveys to capture the size of the
informal sector labour force. Since informal sector activities tend
to be small scale, the number of the employed workers engaged in
these activities is minimal. The NESDB’s therefore includes the
following in its definition of the informal sector:
! Entrepreneurs employing less than 10 workers.
! Private enterprises employing less than 10 workers.
! Own account workers.
! Unpaid family workers.

! Members of producers’ co-operatives.
The personal income tax filing criterion classifies labourers

in the informal sector as those not filing income tax forms to the
authority. The Revenue Code (Article 56) stipulates that every
Thai citizen, except for the young and disabled, must report their
accessible incomes. Those failing to do so are thus classified under
this criterion as informal sector labourers.
The access to social security system criterion classifies
informal sector labourers as the private labour force excluded from
the social security system. The Thai government administers three
social security funds for private sector employees: the Social
Security Fund, the Workmen’s Compensation Fund, and the
Private Teacher Fund.
Private enterprises must register employees with the authorities
for them to gain access to these service schemes. Government and
117
SOE officials are not eligible for these services as public sector
employees are entitled to specialised health service schemes.
To estimate the size of the informal sector labour force under
this framework, the NESDB subtracts the total number of
employed labourers in the social security system from the entire
private sector labour force.
Measuring informal sector income
The NESDB estimates income generated by the informal sector by
analysing social security payments and other data collected by
social security agencies. It estimates per capita income for the
observed economy and then scales this to the size of the informal
economy defined by the number of employed labourers not in the
social security system.
118
Acknowledgements
The White Paper team
1. PICHIT PATRAWIMOLPON
! Senior Advisor (Southeast Asian Executive Director Office of the IMF)
May 2004-Present
! Senior Executive (Macroeconomic) 2000-2004 April
Present responsibilities:
Macroeconomics and Central Banking, Exchange Rates; Paris Club and Official
Financing; Agriculture and Economic Development; Quantitative Analysis,
Computing and Operational Research; International Trade and Balance of
Payments, Flow of Funds Analysis.
Professional experience
! International Monetary Fund, Washington D.C., 1992-94
Education
! B. Agr.Ec (Hon I), Agricultural Economics and Business Management
Department, University of New England, Armidale, Australia, 1984.
! Ph.D. (Economics), Economics Department, University of New England,
Armidale, 1990.
119
2. YUNYONG THAICHAROEN
! Senior Economist in the Macroeconomics Team, Monetary Policy Group
at Bank of Thailand
Present responsibilities:
Monitor and assess Thailand’s current macroeconomic condition and outlook,
prepare presentations on macroeconomic issues for the Monetary Policy
Committee’s meetings, draft economic reports for monthly press release.
Professional experience
! Research Assistant at Bangkok Bank Consulting Group, Bangkok,
Thailand in 1993
! Research Assistant at Sloan School of Management, MIT, Cambridge, MA
in 1995-1996
! Research Intern at the South Asia Department, the World Bank,
Washington, DC in 1997
! Summer Intern, Research Department, The World Bank, Washington, DC
in 2000
Education
! Received the Bank of Thailand scholarship to further studies abroad for
Doctoral degree in Economics from the Massachusetts Institute of
Technology (MIT), Cambridge, USA. in 1995-2001
! Bachelor of Science in Economics, Massachusetts Institute of Technology
(MIT) in 1989-1993
3. Kobsak Pootrakool
! Team Executive at Trade and Capital Account Policy Team, Balance of
Payments Division, Domestic Economy Department, Monetary Policy
Group at Bank of Thailand.
Present responsibilities
Has been working in various areas such as monetary policy, financial
institutions policy, risk management, and balance of payments.
Education
! Graduated Ph.D. in Economics with majors in Macroeconomics and
International Economics from MIT in 1996
120
4. Athipong Hirunraengchok, PH.D.

! Policy and Planning Analyst at Economic Modeling and Forecasting
Section, Department of Macroeconomic Policy, the National Economic
and Social Development Board (NESDB)
Monitoring and assessing the movement of the world economy,
drafting economic reports for quarterly press release, and
developing new macroeconomic projection model for Thai
economy.
Education
! B.A. (Economics), Thammasat University (1993)
! M.A. (Economics), Boston University (1996)
! Ph.D. (Economics), University of Oregon (2000)
5. Mali Chivakul
! Economist at the Fiscal Policy Office, Ministry of Finance.
Macroeconomic analysis and forecasts.
Work Experience
! Summer Associate, MCKINSEY& COMPANY, Bangkok, Thailand
Education
! MPA in International Development in 2001, John F. Kennedy School of
Government, Harvard University.
! BA in Economics from Harvard University
6. Thitithep Sitthiyot
! Economist at Risk Management Division, International Finance Bureau,
Public Debt Management Office, Ministry of Finance.
Work experience
! Recipient of the Royal Thai Government Scholarship.
121
! Teaches in both public and private universities as a part-time lecturer. In

addition, he has published a number of articles in academic journals and
newspapers.
Education
! B.Sc. (Economics with First Class Honors), Kasetsart University in 1991
! M.A. (Economics), Michigan State University in 1995
! Ph.D. (Economics), Claremont Graduate University in 2000.
7. Nattaporn Triratanasirikul
! Economist at the Bureau of International and Macroeconomic Policy,
Fiscal Policy Office, Ministry of Finance.
Monitoring macroeconomic condition
Education
! Master’s Degree in Economics from San Francisco State University in 2001
8. Kamolrat Wattanawongkeeree
! Economist at Risk Management Division, International Finance Bureau,
Public Debt Management Office
Work experience
! Assistant Manager and Coordinator, marketing department at GE Capital
(Thailand)
Education
! M.A. in Economics in 2003 from University of Colorado at Boulder,
U.S.A.
! Bachelor’s Degree in Business Administration (Advertising), Assumption
University, Bangkok, Thailand
122
123
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21st Century Thailand

Facing the Challenge

Coordinated and written by

Published in August 2004 by

All rights reserved. No part of this publication may be reproduced,

© 2004 CLSA BOOKS

The author asserts his moral right to be identified as the author of

Printed in Hong Kong

Introduction: Crisis and renewal........................................... 1

1 Policy legacy and redesign................................................. 3

2 Policy strategy and implementation ................................. 14

3 Policy outcomes and achievements.................................. 55

4 Public debt & household debt.......................................... 63

5 Puzzles in the recent success story .................................. 86

6 Next steps...................................................................... 100

Appendices ....................................................................... 107

and their techniques entered Asia like a Japanese tsunami.

Did we believe our research and polling completely? The

some semblance of possible problem-solving options for the

Thai bureaucratic milieu. The private sector, if they are truthful,

companies and banks, in an attempt to raise market confidence.

Part 1: Policy legacy and

1.1. Legacy: Problems inherited

having been left unattended had become entrenched because of

balance sheets through cost reduction and debt repayment, the

CURRENCY AND SET SET TURNOVER

Source: Bank of Thailand, Stock Exchange of Thailand

Domestic demand weakness significantly increased excess

weighed heavily on confidence.

economies were able to master foreign technology at lower cost

conditions. This greater efficiency could be achieved relatively

1.2 Policy design

and civil society - to create a blend of prosperity, dynamism, and

consumption and production:

into the formal economy. To accomplish this, the Government

3. The short-term objective is to reinvigorate growth, while the

Part 2: Policy strategy and

2.1. First strategy:

The Government believes that grassroots’ and SMEs’ access to

SMES’ GDP, 1998-2002

NUMBER AND THE PROPORTION OF SMES, 1997-2002

Source: Office of SMEs Promotion

VALUE AND PROPORTION OF SME EXPORTS, 2000-02

12,080 12,170 12,090

Source: Office of SMEs Promotion

Source: Office of SMEs Promotion

Ten new programmes to generate grassroots and SME growth

programme to expand financial opportunities to small

SMES’ LENDING FROM SFIS

Venture capital (VC): The Government provides tax

transparent framework for transactions

2.2. Second strategy:

manufacturing, and real estate experienced substantial difficulties

supported environmentally friendly processes and the use of

services. Thailand lost its competitive edge due to flawed policy

Fitting niche demand and adding more value

ORIGIN OF TOURISTS TO PHUKET

Source: Tourism Authority of Thailand

INTERNATIONAL TOURIST ARRIVALS

ROUTES BETWEEN INDIA, CHINA, AND THAILAND

Real estate sector

balance sheets. This substantially discouraged the expansion of