Inflation Report January 2012

Inflation Report

January 2012

The Inflation Report is prepared quarterly by staff of the Bank of Thailand with the

approval of the Monetary Policy Committee (MPC). It serves two purposes: (1) to provide

a clear forward-looking framework for economic and inflation forecasting to assist the

MPC in making monetary policy decisions and (2) to give the MPC an opportunity to

present the explanation for their decisions on various policy issues to the public.

Although individual MPC members may have differing opinions regarding the

assumptions on which the forecasts are based, as a group they are in agreement with the

forecasts on the outlook for inflation and output as well as the risk factors involved as

illustrated in the fan charts.

The Monetary Policy Committee:

Mr. Prasarn Trairatvorakul Chairman

Mrs. Suchada Kirakul Vice Chairman

Mr. Sorasit Soontornkes Member

Mr. Ampon Kittiampon Member

Mr. Narongchai Akrasanee Member

Mr. Siri Ganjarerndee Member

Mr. Aswin Kongsiri Member

Thailand Monetary Policy Strategy

Monetary Policy Formulation

ë The Monetary Policy Committee (MPC) sets monetary policy in order to

attain price stability conducive to sustainable economic growth.

The MPC also monitors factors contributing to external stability and

financial imbalances.

The Monetary Policy Instrument

ë The MPC utilizes the 1-day bilateral repurchase transaction rate as the

key policy rate to signal the monetary policy stance.

The Target

ë The MPC uses core inflation (excluding raw food and energy) as its

policy target with the range of 0.5-3.0 percent (quarterly average). In the

event that the target is missed, the MPC is required to explain the

reasons thereof to the public.

Forecasting Tools

ë To assist the MPC in making monetary policy decisions, the Bank of

Thailand has developed a macroeconomic model to forecast economic

conditions and inflation outlook. The model is also employed to

evaluate the impact of various factors on the economy and to offer

guidelines for appropriate monetary policy responses.

Inflation Report January 2012

Contents

1. Growth and Inflation Prospects and Monetary Policy 1

1.1 Growth and inflation prospects 1

1.2 Economic outlook 3

1.3 Inflation pressure 13

1.4 Monetary policy decisions 16

1.5 Appendix 17

2. Recent Economic Developments 21

2.1 The global economy 21

2.2 The domestic economy 27

2.3 Costs and prices 35

3. Monetary and Financial Stability 39

3.1 Financial markets 39

3.2 Financial institutions 42

3.3 Non-financial sectors 45

Inflation Report January 2012

Inflation Report January 2012 1

Economic activity is projected to return to its pre-flood level in 2012 Q3, with domestic

strength helping to cushion some weakness in exports due to weak global growth prospects. Mean-

while, inflation is likely to subside during the first half of this year due to delayed recovery in private

demand and post-flood deceleration in fresh food prices. Given the impact of stimulus measures and

firmer recovery, domestic price pressure is bound to rise in the second half of the year, but will be

largely offset by softer pressure from abroad.

Given limited inflation risks, the MPC judged that monetary policy could lend further support

to domestic recovery. The MPC thus decided to cut the policy interest rate in its last two meetings

by 0.25 percent in each meeting, to the current rate of 3.00 percent.

Inflation Report January 2012

1.1 Growth and inflation prospects

Post-flood recovery has already begun but

amid high uncertainty from abroad, while inflation

pressure is likely to soften.

The impact of the recent floods on the Thai

economy was more severe than previously assessed.

Manufacturing production, in particular, suffered from

activity halt both as a direct result of flood-inflicted

damages on plants and indirectly through disruptions in

supply chain and transportation network. Damage to

agricultural crops, rice in particular, also increased in the

flood-hit areas. The flood impact on production coupled

with a continuing drag on exports due to weak global

demand, are likely to cause a sharp contraction in output in

2011 Q4 (Chart 1.1), bringing down the annual growth for

2011 to 1.0 percent (Table 1.1) from 7.8 percent in the

previous year. The annual growth, however, still remains

in the positive territory thanks to strong momentum in the

first quarter.

Quarterly percentage change (seasonally adjusted)

02

46

8

-10

-8

-6-4

-2

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Outturn

IR Jan 12 forecast

Chart 1.1 Thailandûs GDP growth

Source: Office of the National Economic andSocial Development Boardand calculation by Bank of Thailand

Note: At 1988 prices (seasonally adjusted)

1. Growth and Inflation Prospects and Monetary Policy

Bank of Thailand2

The recovery process has already begun after

the most severe impact was realized in November. The

MPC projects economic activity to return to its pre-flood

level in 2012 Q3 (Chart 1.2) owing mainly to domestic

demand strength that helps cushion some weakness in

exports due to global demand slowdown. This projected

path is 1-2 month delayed from the previous assessment,

mainly due to protracted recovery in investment and

production. Meanwhile, private consumption is likely to

recover in Q1 as previously expected, on the back of

damage replacement and favorable prospects for income

and employment. Looking ahead, contribution from thegovernment, the banking sector, and insurance companies

will be instrumental in providing the initial momentum

needed for recovery.

Going forward, heightened uncertainty from

the global economy will be the key downside risk to

growth. This time, the MPC judges it likely that the euroarea will fall into recession, given the worsening debt

crisis and its ramifications on core countries. Despite some

positive data releases, the U.S. economic recovery remainsfragile with structural problems including the public debt

issue are yet to be resolved fully. The MPC assesses risks

to growth projection to weigh more on the downside mainlydue to risks and uncertainty from abroad. Accordingly, the

fan chart for economic growth is skewed to the downside

and wider throughout the forecast period.

Inflation pressure is likely to subside as

demand pressure softens due to prolonged recovery,

while lower global commodity prices help mitigate cost

pressure to some degree. However, pressure remains from

the government policy on minimum wage hike and energy

Chart 1.2 GDP growth forecast

Annual percentage change20

15

10

5

0

-5

-10 -10

-5

0

5

10

15

20

Q12010

Q12011

Q12012

Q12013

Note: The fan chart covers 90 percent of the probability distribution.

Table 1.1 Forecast summary

Percent 2011 2012 2013

GDP growth 1.0 4.9 5.6

(2.6) (4.1)

Headline inflation 3.8* 3.2 2.9

(3.8) (3.5)

Core inflation 2.4* 2.2 1.7

(2.4) (2.5)

Note: * Outturn( ) Inflation Report October 2011

Source: Office of the National Economic and Social Development Boardand calculation by Bank of Thailand

Inflation Report January 2012 3

price-related measures, especially during the first half of

2012, while heavy public spending is also underway.

Under the baseline scenario, core inflation is projected to

stay within the target range of 0.5-3.0 percent over the

forecast period, gradually trending lower to the mid-point

of the range by late 2013. On the whole, the MPC judges

downside and upside risks to inflation to be broadly equal,

as reflected in balanced fan charts for headline and core

inflation (Chart 1.3 and 1.4).

1.2 Economic outlook

Domestic demand to take the lead in 2012

Economic growth is projected to rebound in

2012 on the back of strong domestic demand that

will help cushion the impact of export slowdown on

the overall economy. The government and the

banking sector will be instrumental in providing the

initial momentum needed for recovery in the

private sector.

Economic activity returning to normal in Q3

The economic impact of the floods was more

severe than previously assessed. Output in 2011 Q4 is

likely to plunge deeper than forecasted this time in 2011 Q4

(Chart 1.5) due to severe damages to manufacturing and

agricultural production. Nevertheless, strong economic

fundamentals and government support will allow economic

activity to finally return to the pre-flood trend in

2012 Q3. On a quarterly basis, growth momentum is

projected to pick up during the first half of this year with

reconstruction efforts, before decelerating to a more normal

level going forward (Chart 1.1). Consumption will serve as

Chart 1.3 Headline inflation forecast

10

2

4

6

8

0

-4

-2

10

2

4

6

8

0

-4

-2

Annual percentage change

Q12010

Q12011

Q12012

Q12013

Note: The fan chart covers 90 percent of the probability distribution.

Chart 1.5 Level of GDP

Billion bahtIR Oct 11 forecast IR Jan 12 forecast

1,350

1,300

1,250

1,200

1,150

1,100

1,050Q12010

Q12011

Q12012

Q12013

Source: Office of the National Economic and Social Development Boardand calculation by Bank of Thailand

Note: At 1988 prices (seasonally adjusted)

2

3

4

5

6

1

0

-1

2

3

4

5

6

1

0

-1

Annual percentage change

Q12010

Q12011

Q12012

Q12013

Chart 1.4 Core inflation forecast

Note: The fan chart covers 90 percent of the probability distribution.

Bank of Thailand4

the main driver of growth in early months of recovery,

while investment and exports are expected to recover fully

in Q3.

Growth projection for 2012 is revised upward

this time (Table 1.1). This partly reflects a lower-than-

expected base in 2011 due to severe flood damage.

However, the positive base effect is offset to some degree

by a 1-2 month delay in recovery due to serious disruption

in supply chains, protracted recovery in investment and

production, and moderated exports given softer global

demand (Details in Table 1.2).

Consumption recovery to outpace investment

Problems in supply and transportation, together

with deteriorated confidence, are likely to weigh heavily

on last yearûs consumption growth. The MPC, however,

anticipates consumption to stage an early pick-up

in 2012 Q1. Key supporting factors include damage

replacement especially for durable goods, and high pent-up

demand particularly for automobiles and electrical

appliances. This is broadly in line with most producersû

priority placed on meeting domestic consumer demand over

demand from abroad.

Looking ahead, consumer spending will be

well supported by favorable income prospects.

Despite some near-term impact of the floods, farm income

should rise with an anticipated increase in farm output this

year. Consumption will also benefit from the increase in

the minimum wage and civil servantsû salary, coupled with

flood relief measures from the government and financial

institutions. Additionally, employment prospects remain

largely unaffected by the flood crisis, as most businesses

Table 1.2 Forecasts for GDP and components

Percent 2011 2012 2013

GDP growth 1.0 4.9 5.6

Domestic demand 2.2 6.9 6.8

Private consumption 2.0 4.0 5.2

Private investment 7.4 11.5 12.9

Government consumption 0.6 8.3 1.5

Public investment -8.3 20.0 12.5

Exports of goods and services 9.8 5.8 12.4

Imports of goods and services 13.0 10.7 14.5

Note: At 1988 prices

Inflation Report January 2012 5

retained their employees in order to resume operation

promptly after the flood receded. Instead of laying off

workers, businesses resorted to other adjustments such as

cutting overtime hours, giving temporary stop-work orders,

and relocating employees to other production facilities.

The MPC also assesses that labor demand from large

corporations unaffected by the floods remains high, and

should more than absorb workers who are laid off by

SMEs.

Private investment and the manufacturing

sector were impacted to a much greater extent

compared to private consumption. The flood

disrupted production activity in key areas including the

industrial estates in Phra Nakhon Si Ayutthaya and Pathum

Thani, which serve as major production bases for automo-

biles, electronics products, and electrical appliances. This

inevitably disturbed related production in non-flooded areas

as well through supply chain disruption, thus weighing on

manufacturing exports on a broader scale. The severity of

the production problems was reflected clearly in the plunge

in manufacturing production and capacity utilization in

November 2011 (Details in Chapter 2, Chart 2.10 and 2.11).

The MPC anticipates investment and

production to recover gradually and return to

normal conditions in Q3 as more factories resume

full operation. This projection is delayed by 1-2 months

from the previous assessment due to three major reasons.

(1) Flood damage turned out to be more serious than

businesses had expected. Severe damage to machines and

equipment forces firms to import some of them anew

instead of repairing, causing further delay due to importing

Bank of Thailand6

and installing processes. (2) Businesses delay their

investment in anticipation of the governmentûs comprehen-

sive plan on water management and flood prevention.

In addition, (3) the drawn-out process of damage

assessment in claiming insurance payouts also poses an

additional financial constraint on businesses in the near

term.

Despite some unexpected delays, recovery

momentum in investment and production is

projected to gain sufficient traction. Pending orders

from domestic and abroad, particularly for automobiles and

parts, encourage businesses to resume operation quickly.

The anticipated return in capacity utilization will also, in

turn, support workersû consumption spending as well.

In addition, the ongoing up-cycle of investment that started

in 2009 should continue to support the Thai economy to

return to its full potential over the period ahead.

Thailandûs manufacturing sector will need to

recover fast enough to preserve its place in the global

production network. This is particularly important for the

integrated circuit and semiconductor industries which may

take longer to recover fully. Meanwhile, relocation of

production bases away from Thailand should not be a

serious concern in the near term, as most businesses have

invested substantially in Thailand and built strong

partnerships with other businesses and suppliers. However,

this may become a concern for new investment projects

if the government fails to provide comprehensive water

management plans, which are essential in restoring investor

confidence.

Inflation Report January 2012 7

Roles of the government and the banking sector

The government and the banking sector will

be instrumental in providing the initial momentum

needed for recovery in the private sector. Fiscal

spending and additional measures will provide

stimulus for the economy, while the banking sector

will play a vital role in extending credits to support

householdsû and businessesû restoration.

Robust recovery in private consumption and

investment will hinge on support from the

government. In addition to flood-relief transfer payments,

the government also provides stimulus through measures

including the scheme for first-time car and home buyers,

the raise in the minimum wage and civil servantsû salary,

and other measures to support farm income such as the rice

pledging program. These measures will provide the much-

needed initial boost for consumption. But over the longer

term, sustained recovery momentum will depend greatly on

the governmentûs capability in crafting and implementing

long-term policies. Concrete plans on water management,

in particular, will be essential in restoring investor

confidence, and will likely determine the pace and the

strength of recovery over the period ahead.

Fiscal spending continues to provide stimulus

to the economy throughout the forecast period, as

reflected in high budget deficit as a percentage of GDP

(Chart 1.6). For fiscal year 2012, budget deficit is projected

to be 400 billion baht, up from the previous assumption of

350 billion baht. The deficit will then fall to 350 billion

baht in fiscal year 2013. Consumption spending picks up

Chart 1.6 Budget balance

Fiscal year

0.01998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

-0.5-1.0-1.5

-2.0-2.5-3.0-3.5-4.0

-4.5 Outturn

Percentage of GDP

IR Jan 12 forecast

Source: Bureau of the Budget and calculation by Bank of Thailand

Bank of Thailand8

in both fiscal years with post-flood relief and stimulus,

whereas public investment falls mainly due to lower

investment from state-owned enterprises. This decline owes

to lower investment budget overall and delayed construc-

tion in mass rapid train projects caused by the floods

(Table 1.3). On top of direct spending as outlined

above, the government also plans to invest on long-

term water management projects. These projects

commanding a total investment of 350 billion baht

are scheduled to commence in the second half of

2012 onward.

At the same time, the banking sector will also

play a vital role in extending credits to aid recovery.

Looking ahead, the MPC assesses credit conditions to

remain supportive. Though decelerating somewhat in the

recent months, consumer and corporate loans should

continue to grow firmly, in particular for those extended by

Specialized Financial Institutions (SFIs) in alignment with

governmentûs policies. Meanwhile, overall financial

conditions and liquidity position of the banking system

remain strong, indicating its readiness in supporting

recovery (Details in Chapter 3). Commercial banks also

provide an additional boost by introducing flood-relief credit

support measures, easing debt payment conditions,

reducing interest rates according to special terms and

conditions, and exempting guarantee fees. The MPC will

remain vigilant in monitoring financing accessibility of

businesses, especially for SMEs which were hard-hit by

the floods but might have difficultly accessing to loans due

to low quality of their assets and negotiation power relative

to large corporations.

Table 1.3 Assumptions on public sector expenditure

As of October 2011 As of January 2012

Unit: Billion baht

FY 2012 FY 2013 FY 2012 FY 2013

General government1,504.3 1,644.2 1,534.6 1,661.6consumption

Public investment 704.9 807.0 677.8 756.8

Total 2,209.2 2,451.2 2,212.4 2,418.4

Note: FY denotes fiscal year.

Inflation Report January 2012 9

Flood devastation and weak global demand

weighing on exports

The MPC projects exports to grow in 2012 at

a more moderate pace compared to last year, and to

return to their pre-flood trend in Q3 in line with

delayed recovery in the manufacturing sector. The

effect of the floods on manufacturing exports will likely

remain in the first half of 2012 due to severe damage to

export-oriented factories located in flood-hit industrial

estates. While the impact is likely to be large for the

automobile, electronics, and electrical appliance industries,

continued book orders from domestic and abroad will support

recovery in these industries going forward. At the same

time, agricultural exports are likely to expand. Rice exports

are expected to benefit from the recent expansion to

alternative markets and greater exports within ASEAN.

However, Thai rice exporters may become less competitive

in terms of price as a result of the rice pledging program

that may push up domestic rice prices. Services exports

will be supported by swift recovery in the tourism sector,

as signaled by the rebound in the number of foreign

tourists in December 2011.

On the external front, weak global growth

prospects and high uncertainty continue to weigh

on Thailandûs exports. Concerns over the outlook of the

global economy linger, largely stemmed from the euro areaûs

debt impasse and fragile recovery in the U.S. This results in

a softening of demand from advanced and emerging market

economies. In fact, weakening trading partnersû demand

had been affecting merchandise exports for some time

already before the impact of the floods on exports was

Bank of Thailand10

realized. Weak global demand will remain the key risk

factor that may drive export growth below the baseline

forecast.

With exports, production, and consumption

yet to recover fully, imports are likely to moderate

in most product categories in the near term. But

during the first half of this year, imports should regain

some traction with the need for machinery replacement

as well as other imported items, both consumer and

intermediate goods, to temporarily substitute for disrupted

domestic production.

The MPC expects the trade balance to remain

positive in both 2011 and 2012 but with a much

narrower surplus relative to that in 2010 in light of a

slowdown in exports and recovering imports going forward.

Despite some inflows from foreign insurance

companies due to claim payouts, a current account

deficit is expected in both years. The deficit is

attributable to the negative balance of services, income, and

transfers, owing to the increase in import freight (Table 1.4).

Heightened risks from the global economy

The Thai economy may grow at a rate below

the baseline projection due to the euro areaûs debt

crisis and its repercussion on the global economy.

Thailandûs exports and economic stability may be

affected.

Weak prospects for global growth

Major risks to global growth stem from the

euro areaûs debt concern and its ramifications on

core countries and the global economy at large. This

Table 1.4 Forecasts for the external sector

2011 2012 2013

Growth in value of exports 16.4 7.8 16.4

(F.O.B., percent)

Growth in value of imports 24.6 16.2 16.6

(F.O.B., percent)

Trade balance (billion U.S. dollars) 23.5 8.4 9.2

Balance of payment (billion U.S. dollars) 11.9 -4.9 -3.1

Note: As defined in IMF,s Balance of Payments Manual, 6th edition (BPM6)

Inflation Report January 2012 11

time, the MPC views it likely that the euro area economy

will fall into recession until 2012 Q2 (Chart 1.7) due to two

key reasons. (1) European banks continue their deleveraging

process, as a result of liquidity squeeze due to depressed

sovereign bond prices. The situation forces several banks to

tighten their credit standard for consumer and corporate

loans. (2) Several countries including France, Italy, and

Spain, may need further fiscal consolidation to reduce their

budget deficit, thus limiting room for fiscal stimulus for

their economies. The MPC also considers the worse-case

scenario, with tighter liquidity squeeze and higher financial

market volatility. Under this scenario, the euro areaûs

growth is projected to fall significantly below the baseline

assumption, but not as deep as that observed during the

global financial crisis in 2008.

On the other hand, recovery momentum in

the U.S. is likely to sustain throughout 2012 (Chart

1.8). Recent data releases on U.S. employment, consump-

tion, and confidence signal improvements on structural

problems and a lower possibility of recession. Nevertheless,

some fragility remains in the labor market and the real

estate sector (Details in Chapter 2). Fiscal stimulus in the

U.S. will also be constrained by the promised cuts in

spending that accompany the increase in the debt ceiling

last August. In addition, the U.S. economy may also face

additional risks through financial linkages due to its close

tie with Europeûs financial system.

Softer global demand also leads to weaker exports

in Asia, especially those to European markets. This will

weigh on Asiaûs economic growth, particularly during

the first half of 2012. On top of the weakness in global

Chart 1.7 Growth assumptionsfor the euro area

Annual percentage change Percentage points

Left axis: Right axis:

Q12008

Q12009

Q12010

Q12011

Q12012

Q12013

Oct 11 (baseline)Jan 12 (baseline)Jan 12 (worse case)

Change in baselineassumptions

4

2

0

-2

-4

-6

10

6

8

4

2

0

-2

-4

Chart 1.8 Growth assumptions for the U.S.

Annual percentage change Percentage points

Q12008

Q12009

Q12010

Q12011

Q12012

Q12013

43210-1-2-3-4-5-6

2.01.81.61.41.21.00.80.60.40.20.0

Left axis: Right axis:Oct 11 (baseline)Jan 12 (baseline)Jan 12 (worse case)

Change in baselineassumptions

Bank of Thailand12

demand, Japanûs exports will also suffer from appreciation

in the yen due to its safe-haven attribute.

Implications on exports and stability

Weak global growth prospects will impact the

Thai economy primarily through international trade.

The MPC expects trading partnersû demand for Thai

exports in 2012 to decelerate from the previous year, given

the likely recession in the euro area. Growth momentum

will then improve gradually but rather weakly in early 2013

(Chart 1.9). The negative impact will be particularly severe

for high-tech exports including automobiles, electrical

appliances, and electronics products, whose performance

are highly correlated with global demand. Additionally,

the weakness in demand may also lead to lower prices

of manufacturing and agricultural exports. However, the

impact on exports may be cushioned to some degree given

that Thai exporters have been successfully diversifying to

alternative markets and shifting toward more intra-regional

trade within Asia whereby prospect for demand expansion

remains robust.

Greater uncertainty in the global economy

also leads to higher financial market volatility, as

reflected by recent large movements of asset prices, stock

market indices, and exchange rates. In the MPCûs view,

uncertainty will likely remain high over the period ahead

due to two major reasons: (1) There remain risks of major

economic events that may trigger adverse reactions from the

market. These events include Greeceûs sovereign debt

restructuring that may not meet conditions previously agreed

upon, the coming due of a large tranche of Italian and

French government bonds, and a possible further credit-

Chart 1.9 Growth assumptions forThailandûs trading partners

Annual percentage change Percentage points

Q12008

Q12009

Q12010

Q12011

Q12012

Q12013

4

6

8

10

2

0

-2

-4

5

4

3

2

1

0

-1

-2

Left axis: Right axis:Oct 11 (baseline)Jan 12 (baseline)Jan 12 (worse case)

Change in baselineassumptions

Note: Weighted by each countryûs share in Thailandûs total exports

Inflation Report January 2012 13

rating downgrade of core countries that may reduce the

ability of the European Financial Stability Facility (EFSF) to

provide financial assistance to economies in distress. (2)

Monetary policy in the euro area and the U.S. has already

been very accommodative, with the ECBûs policy rate and

the Fed Funds rate at unusually low levels, leaving little

policy space to provide additional boost to the economy.

On the fiscal front, available policy space is limited by the

need to adhere more strictly to fiscal discipline. In the

event that traditional monetary and fiscal policies become

inadequate, unconventional policy actions may be needed,

which are likely to cause unpredictable market reactions

and short-term volatility.

Amid high uncertainty, uneven global growth

may also lead to volatile capital flows. On the whole,

the prospects of global developments and market

expectations will likely determine the direction of capital

movements. The MPC anticipates a net capital inflow into

Asia given the regionûs strong growth prospects compared

to advanced economies. As a result, regional currencies

will likely continue to appreciate against the U.S. dollar, but

at a pace slower than previously assessed due to higher risk

aversion in the global market.

1.3 Inflation pressure

Inflation is projected to moderate during the

first half of this year, with fresh food prices starting

to decelerate after the floods receded and demand

pressure softened with the delayed recovery of the

economy. During the second half of the year,

however, domestic price pressure is bound to rise

Bank of Thailand14

given government stimulus measures and firmer

recovery in private demand, but will be offset by

lower price pressure from abroad.

Inflationary pressure is likely to subside

especially during the first half of 2012. Demand

pressure softens as recovery in the private sector is

projected to be delayed by 1-2 months from the previous

assessment, in line with the widened output gap during the

period (Chart 1.10). As the flood situation improved, prices

of fresh food and other products start to decelerate to more

normal levels. Moreover, the rice pledging program does

not exert as much pressure as expected on overall domestic

rice and food prices, due to the lower-than-expected amount

rice pledged under the program. On the other hand,

energy prices may edge higher with the governmentûs plan

to increase the oil fund levy and the reintroduction of the

excise tax on fuel. Plausible increases of crude oil price due

to the conflict between Iran and Western nations may also

add more pressure temporarily. The pass-through of rising

global oil prices on domestic energy prices, however, should

be limited because of the still widened output gap during

the first half of the year whereby domestic production is yet

to fully recover from the flood damage.

Inflationary pressure may build up to some

degree from the second half of the year onward,

roughly tracking the pre-flood trend. Private demand

will rebound firmly as investment and production gradually

return to normal conditions in Q3. The pick-up in demand,

coupled with the closing of output gap, will allow for

a greater pass-through of cost burdens to consumers.

In addition, production costs are likely to rise, as the impact

Chart 1.10 Output gap

Percent IR Jan 12 forecast

Q12008

Q12009

Q12010

Q12011

Q12012

Q12013

4

6

2

0

-2

-4

-6

-8

Inflation Report January 2012 15

of the minimum wage hike and energy-related measures on

labor and transportation costs becomes more evident. More

pressure may also arise from heavy public spending on

water management projects coming underway.

Rising domestic price pressure will likely be

offset by moderating pressure from abroad. Global

crude oil price is likely to decelerate to the previous

trend in the second half of the year due to continued weak

global demand (Chart 1.11). The MPC expects Iranûs

conflict to resolve by the first half of the year, since many

oil-exporting countries in the Middle East suffer from the

situation and should pressure Iran and Western nations

to end the conflict. Softer global demand will also weigh

down prices of non-fuel commodities as well (Chart

1.12), particularly for manufacturing inputs and agricultural

raw materials. At the same time, weak prospects for oil

and commodity prices will also mitigate price pressure in

many other countries, hence lower imported inflation

overall.

The MPC judges that the downside and

upside risks to inflation projection are broadly equal

over the period ahead. Inflation may rise above the

baseline projection if global commodity prices turn out

higher than expected, supported by persistent demand from

large emerging market economies namely China and

India. Domestic energy prices may also edge higher if the

conflict between Iran and Western countries proves to be

prolonged. In addition, exports may strengthen with early

recovery in trading partnersû demand, which may lead to

higher growth momentum and domestic price pressure overall.

On the contrary, inflation may also turn out lower than

Chart 1.11 Assumptions on Dubai oil price

U.S. dollars per barrel U.S. dollars per barrel

Q12008

Q12009

Q12010

Q12011

Q12012

Q12013

140

120

100

80

60

40

50

40

30

20

10

0

Left axis: Right axis:Oct 11 (baseline)Jan 12 (baseline)Jan 12 (high case)Jan 12 (low case)

Change in baselineassumptions

Chart 1.12 Assumptions onnon-fuel commodity prices

Annual percentage change Percentage points

Q12008

Q12009

Q12010

Q12011

Q12012

Q12013

40

30

20

10

0

-10

-20

-30

-40

80706050403020100-10-20-30

Left axis: Right axis:Oct 11 (baseline)Jan 12 (baseline)

Change in baselineassumptions

Bank of Thailand16

projected in the baseline if the global economy weakens

further or the government implements price control

measures to aid recovery.

1.4 Monetary policy decisions

Accommodative policy stance in the near term

The MPC decided to cut the policy rate in its

last two meetings to support flood recovery.

In its meeting on November 30, 2011, the MPC

assessed that the global economic outlook was set to

deteriorate. The euro area was more likely to fall into

recession, while economic recovery in the U.S. remained

somewhat fragile. On the domestic front, the impact of the

floods on manufacturing production, exports, and private

sector confidence turned out to be more severe than

expected. While inflationary pressure persisted due to the

impact of stimulus measures and the anticipated pick-up

in private demand, upside risks to inflation were assessed

to be limited. The MPC judged that, although the current

monetary policy stance was already accommodative, a

measured policy rate reduction could provide further

support to domestic recovery and bolster confidence.

The MPC, thus, voted 5 to 2 to reduce the policy rate by

0.25 percent, from 3.50 to 3.25 percent per annum, with

2 votes in favor of a 0.50 percent reduction.

In its subsequent meeting on January 25, 2012,

the MPC viewed that the global economic outlook had

weakened further with the euro area facing the risk of a

prolonged recession. Meanwhile, economic growth in the

U.S. remained constrained over the period ahead despite

Inflation Report January 2012 17

some signs of improvements. At the same time, the floodsû

impact on domestic economy turned out greater and broader

than assessed previously, and The recovery process was

projected to be more drawn out than previously anticipated.

With limited risks to inflation and increased downside

risks to growth stemmed mainly from global headwinds,

the MPC thus voted unanimously to reduce the policy rate

by 0.25 percent, from 3.25 to 3.00 percent per annum, with

an aim to help accelerate the return of economic activity to

normal levels.

1.5 Appendix

Table 1.5 Forecast assumptions

2011 2012 2013

Dubai oil price (U.S. dollars per barrel) 106.3 103.3 100.0

Non-fuel commodity prices (%YoY) 17.7 -10.3 3.4

Farm prices (%YoY) 3.4 9.6 2.8

Minimum wage in the Bangkok Metropolitan Region 215 279 300

(baht per day)

Government consumption (%YoY) 5.4 14.7 6.6

Public investment (%YoY)1/ -3.4 29.1 17.9

Fed Funds rate (% at year-end) 0.13 0.13 0.13

Trading partners, economic growth (%YoY)2/ 5.2 4.8 5.5

Regional currencies vis-à-vis the U.S. dollar (Index)3/ 108.7 108.7 107.5

Note: 1/Including spending on water management plans 2/Weighted by each country,s share in Thailand,s total exports 3/Appreciation against the U.S. dollar indicated by a decrease

Bank of Thailand18

Table 1.7 Headline inflation forecasts by research houses

2012 2013

DBS 4.5 n.a.

Kasikorn Research 3.9 4.2

NESDB1/ 3.5-4.0 n.a.

Deutsche Bank 3.7 3.7

HSBC 3.7 3.0

SCB EIC 3.6 3.5

FPO2/ 3.0-4.0 n.a.

TISCO Securities 3.5 n.a.

Credit Suisse 3.3 3.5

BOT 3.2 2.9

Standard Chartered 3.0 3.5

Nomura 2.0 3.4

Note: Compiled and published by Reuters on January 19, 2012, except:1/Published on November 21, 2011, with the release of GDP data for 2011 Q32/Published on December 28, 2011Presented in descending order of 2012,s forecast

Table 1.6 GDP growth forecasts by research houses

2012 2013

DBS 5.0 n.a.

NESDB1/ 4.5-5.5 n.a.

FPO2/ 5.0 n.a.

BOT 4.9 5.6

SCB EIC 4.5 4.5

TISCO Securities 4.5 n.a.

Kasikorn Research 4.3 5.0

Nomura 4.1 4.3

HSBC 4.0 4.6

Deutsche Bank 3.9 4.8

Standard Chartered 3.5 4.9

Credit Suisse 3.0 4.6

JP Morgan 1.5 3.4

Note: Compiled and published by Reuters on January 19, 2012, except:1/Published on November 21, 2011, with the release of GDP data for 2011 Q32/Published on December 28, 2011Presented in descending order of 2012,s forecast

Inflation Report January 2012 19

Table 1.8 Probability distribution of GDP growth forecast

2012 2013Percent

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

> 16 0 0 0 18 0 0 0 014 - 16 0 0 0 30 3 0 0 012 - 14 0 0 0 28 11 0 0 010 - 12 0 0 1 16 24 3 1 18 - 10 0 1 5 6 29 10 6 46 - 8 0 7 17 1 21 23 17 144 - 6 0 24 30 0 9 29 28 262 - 4 2 36 28 0 3 22 26 280 - 2 15 24 14 0 0 10 15 18(-2) - 0 38 8 4 0 0 3 5 7(-4) - (-2) 33 1 1 0 0 1 1 2(-4) - (-2) 11 0 0 0 0 0 0 0< (-6) 2 0 0 0 0 0 0 0

Table 1.9 Probability distribution of headline inflation forecast

2012 2013Percent

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

> 7 0 0 1 2 2 2 2 2

6 - 7 0 1 4 5 4 5 4 4

5 - 6 3 6 9 10 9 10 9 8

4 - 5 18 17 17 16 15 15 14 13

3 - 4 39 28 22 20 19 19 18 18

2 - 3 30 27 22 20 20 19 19 19

1 - 2 9 15 15 14 15 15 15 16

0 - 1 1 5 7 8 9 9 10 11

(-1) - 0 0 1 3 3 4 4 5 6

< (-1) 0 0 1 1 2 2 3 4

Bank of Thailand20

Table 1.10 Probability distribution of core inflation forecast

2012 2013Percent

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

> 4.5 0 0 0 0 0 0 0 0

4.0 - 4.5 0 0 1 2 1 1 0 0

3.5 - 4.0 2 1 3 5 4 2 1 1

3.0 - 3.5 14 4 9 11 9 6 4 3

2.5 - 3.0 38 14 18 18 16 13 9 8

2.0 - 2.5 35 28 24 22 21 19 16 13

1.5 - 2.0 10 29 22 20 21 22 20 18

1.0 - 1.5 1 17 14 13 15 18 20 20

0.5 - 1.0 0 5 6 7 8 11 15 16

0.0 - 0.5 0 1 2 2 3 5 9 11

< 0.0 0 0 0 1 1 2 6 9

Inflation Report January 2012 21

2.1 The global economy

Euro area: The euro area economy is likely to

enter a recession, as spillovers of the sovereign debt

crisis extended to financial institutions and the real

economy.

Concerns over the impact of sovereign debt crisis

on financial institutions and financial market intensified in

2011 Q4. Commercial banks in the euro area were confronted

with liquidity constraint as well as capital adequacy

problems due to the heightened risk of default by the

government in the PIIGS countries. As a result, bond prices

of such countries declined markedly, while commercial banks

became more cautious in interbank lending. Furthermore,

outlook for commercial banksû deleveraging process became

more pronounced after the EU summitûs decision for

systematically important banks to meet a 9% Core Tier 1

2. Recent Economic Developments

The growing impact of the Europeanûs sovereign debt crisis which deepened into financial

institutions and the real economy had increased the risk of a recession in the euro area and further

affected the Asian economies through financial channel. Nonetheless, such adverse scenario was mildly

uplifted by the positive signs of improvements in the U.S. economy, particularly from the gradual

recovery in the labor market.

The Thai economy in the last quarter of the year suffered a widespread impact of the floods.

Several industries had to suspend production and full recovery is expected to be delayed. The

contraction of the manufacturing sector on the backdrop of global economic slowdown had resulted in

a more-than-expected decline in exports, consumption as well as private investment. The floods,

furthermore, led to acceleration in core inflation from the preceding quarter. Meanwhile, headline

inflation decelerated in line with the lower world oil prices, following the weakening global economy.

Inflation Report January 2012

Bank of Thailand22

capital ratios by June 2012, accounting for market valuations

of their sovereign debt exposure. Signs of further deleveraging

were witnessed from more stringent provision of loans to

business and households as well as tightening of inter-office

credits. Against this adverse backdrop, authorities

introduced the following measures to alleviate the marketûs

anxiety:

1. The Federal Reserve coordinated with five major

central banks, namely the European Central Bank

(ECB), the Bank of England, the Bank of Canada,

the Swiss National Bank and the Bank of Japan

to provide liquidity swap arrangement on 30

November 2011, which to some extent helped

mitigate the marketûs concerns.

2. The ECB supported liquidity to European

commercial banks by conducting the Long-Term

Refinancing Operations (LTROs) with a maturity

of 3 years _ the longest maturity compared to

previous operations which were within 12 months_ at a fixed rate tender with full allotment. So

far, the ECB had allotted as much as 489 billion

euro. In addition to the LTROs, the ECB also

relaxed the eligibility criteria of collateral and

reduced the commercial banks reserve requirement

ratio from 2 to 1 percent.

3. The EU summit, during 8-9 December 2011, also

placed more emphasis on fiscal discipline, by

stating an automatic sanction on a country with

budget deficit higher than a specified threshold (3

percent of total budget deficit and 0.5 percent of

the structural deficit) instead of the current practice

Inflation Report January 2012 23

which requires all membersû full consent. However,

there remains implementation risk given the lack

of details of the fiscal compact.

Given the above scenario, government bond yields,

especially those of PIIGS countries, increased significantly in

the last quarter of 2011 due to investors concerns over

PIIGS ability to pay off their debts. Yield for 10-year Italian

government bonds rose to over 7 percent (Chart 2.1), while

those of Greek bonds were higher as conditions under the

Greek debt restructuring may not be as previously

negotiated, especially with regards to private sector

involvement. The crisis had evidently expanded into the

core countries. On 13 January 2012, Standard and Poorûs,

the credit rating agency, downgraded nine countries in the

euro area and placed them on a negative outlook for a

possible further downgrade. Such actions had worsened

consumer and investor sentiments and are likely to urge

further fiscal consolidation in EU member countries, which

will further hamper the real economy. The downgrading of

the European Financial Stability Facility (EFSF)ûs credit rating

would also limit the regionûs ability to bail out its member

countries.

The impact of the sovereign debt crisis on financial

institutions had noticeably aggravated and spread widely to

the real economy. The preliminary indicators of production

and consumption for October and November suggest that

the euro area economy is likely to contract in 2011 Q4

(Chart 2.2). Additional fiscal consolidation in many countries

would likely pose downside risk to growth going forward.

United States: The U.S. economy recorded

some positive signs of improvements in 2011 Q4 but

Chart 2.2 Industrial productionand volume of retail sales in the euro area

Source: Bloomberg, Eurostat

Oct2010

Jan2011

Apr Jul Oct

10.0

7.5

5.0

2.5

0.0

-2.5

-5.0

6.0

4.5

3.0

1.5

0.0

-1.5

-3.0

Annual percentage change Annual percentage change

Volume of retail sales (RHS)

Industrial production

Chart 2.1 10-year government bond yields

Jan2010

Jul JulJan2011

Jan2012

7.5

6.5

5.5

4.5

3.5

2.5

1.5

Percent

Italy

Spain

France

Germany

Source: Bloomberg

Bank of Thailand24

is expected to to grow at a rate below its potential

growth going forward.

The U.S. economy registered some positive signs of

improvements despite the global slowdown in 2011 Q4.

Private consumption, producer and consumer confidence,

housing sector and, in particular, the labor market observed

modest growth in recent periods (Chart 2.3). Non-farm

payroll employment in December 2011 increased by 200,000

from the previous month, while the corresponding

unemployment rate declined to 8.5 percent, the lowest rate

in the past 3 years. (Chart 2.4)

Nonetheless, the outlook of the U.S. economy is not

as favorable with sub-par growth and prolonged recovery

period. This is attributed to the following factors: (1) low

employment, which remains well below that of the

pre-crisis level; (2) excess supply and continued decline in

housing prices; (3) further fiscal tightening via automatic

spending cuts as agreed in August 2011 to increase room

for public debt, given the lack of congressû agreement on

the long-term deficits reduction plan; and (4) spillovers

from the European sovereign debt crisis through trade and

financial channels.

JAPAN: Japanese economy recovered to its

normal conditions but its export was adversely

affected by the European sovereign debt crisis.

Japanese economy rebounded back to its normal

pace from the impact of the natural disaster in March 2011.

Production, particularly in automobile and parts industries,

began to recover in 2011 Q3. However, in late 2011,

manufacturing production especially in automobile and parts

production was once again disrupted, though temporarily,

Chart 2.3 U.S. consumer and producer confidence

Jan2007

Jan2009

Jan2011

Index (1964 = 100) IndexDec 2011

ISM manufacturing (RHS)100

90

80

70

60

50

70

6053.9

52.6

69.9

50

40

30

20

ISM non-manufacturing(RHS)

1/

1/

Consumer sentiment index 2/

Note: Shaded area referred to the recession period, as announcedby National Bureau of Economic Research, covering from2007 Q4 to 2009 Q21/ par value for ISM index is 502/ rebased for 1964 = 100

Source: Bloomberg

Chart 2.4 U.S. labor market condition

Note: Shaded area referred to the recession period, as announcedby National Bureau of Economic Research, covering from2007 Q4 to 2009 Q2

Source: Bureau of Labor Statistics, U.S. Department of Labor

Percent

Change in non-farm payrolls

(from the previous month)

Unemployment rate(RHS)

000 persons ,

12

8

4

0

2

6

10

500

0

-500

-1000Jan2008

Jan2009

Jan2010

Jan2011

Inflation Report January 2012 25

from the floods in Thailand. Meanwhile, exports were

negatively affected from the slowdown in global demand

due to the sovereign debt problem in the euro area, as well

as the appreciation of the yen due to investorsû flight to

safe-haven currencies in times of uncertain global

environment (Chart 2.5).

Going forward, Japanese economy is expected to

continue to recover, albeit at a slow rate of growth.

Domestic demand, especially reconstruction demand, is likely

the main driver of this recovery. Nonetheless, global

economic slowdown and further appreciation of the yen

would continue to pose downside risks to the Japanese

economy.

Asian economies: The impact of the European

sovereign debt crisis through trade and financial

channels became more apparent.

In 2011 Q4, most Asian economies grew at a slower

pace compared to the previous quarter. Although the

domestic demand grew at a satisfactory rate, exports started

to soften since 2011 Q3 (Chart 2.6) owing to weak global

demand, especially from the euro area. This, coupled with

a temporary impact from the devastating floods in Thailand,

led to a sharp slowdown in exports, especially in electronics

and auto parts industries.

The impact of intensified European sovereign debt

crisis on Asian economies through the financial channel

became more apparent during the last two months of 2011.

The risk-off sentiments had driven substantial capital

outflow from the region, resulting in weakening of regional

currencies. Regional stock market indices and net foreign

holdings of Asian government bonds also declined as a

Chart 2.5 Japanese Yen

140

125

110

95

Yen/U.S. dollars

Yen/U.S. dollars

Yen/Euro

Yen/Euro (RHS)

115

100

85

70Apr2009

Apr2010

Apr2011

Oct Oct Oct

Source: Bloomberg

Chart 2.6 Regional exports growth rate*

% Change from the previous year

China (Dec)

Asia** (Nov)

Jan2007

Jan2008

Jan2009

Jan2010

Jan2011

60

40

20

0

-20

-40

Note: *3-month moving average**Hong Kong, Indonesia, Singapore, South Korea, Taiwan

Source: CEIC

Bank of Thailand26

result of investorsû curtailing their security holdings in the

region, the reduction of European banksû exposure to Asia,

notably in credit card, trade financing and syndicated loans

portfolios, and the periodic dollar liquidity squeeze in the

regional markets.

However, the impact of the European sovereign

debt crisis is expected to be limited and less severe, compared

to those during the global financial crisis in 2008 due to

(1) Asian economiesû limited reliance on credits from

European banks (with exception to Hong Kong and Singapore)

as reflected from low level of European bank claims on

Asian economies relative to total domestic bank credits;

(2) Asian banksû strong capital adequacy ratios and potential

purchase of prime loans from the European banks; and

(3) Asian central banksû high level of international reserves

buffer and implementation of preventive measures to

strengthen confidence in the regionûs financial markets,

including the extension of Bank of Japan swap line.

Nonetheless, worsening European debt crisis may

inevitably impair the stability of the Asian financial market.

Going forward, Asian economies are expected to

grow at a slower pace, especially in the first half of 2012,

from adverse external factors, particularly the European

sovereign debt crisis. Countries that are more exposed to

external environment, including Hong Kong, Singapore, South

Korea, and Philippines, are expected to experience a sharp

economic slowdown, while countries with large domestic

demand, notably Indonesia and China, are projected to

maintain their robust growth rates (Chart 2.7).

Chart 2.7 Regional economic growth projection

Percent

Chin

a

Hon

g Ko

ng

Indo

nesia

Mala

ysia

Phili

ppin

es

Sing

apor

e

Sout

h Ko

rea

Taiw

an

10

8

6

4

2

2011 2012

0

Source: Consensus Forecast

Inflation Report January 2012 27

2.2 The domestic economy

The Thai economy in 2011 Q3 grew from the

previous quarter with support from rising exports

after Japanûs supply disruption had subsided.

However, the economy in Q4 was likely to contract

as the widespread floods caused production of

several industries to drop markedly from the previous

quarter.

Economic conditions in 2011 Q3

The Thai economy in 2011 Q3 expanded by

0.5 percent over the preceding quarter (Table 2.1) owing

to an improvement in exports of goods and services, which

resumed growth after the supply disruption in the auto

mobile industry from Japanûs natural disaster had abated.

In addition, the expanding global economy also contributed

to a boost in exports of agricultural and manufacturing

goods, especially rice, rubber, electrical appliances, automobiles

and plastic products.

Private investment continued to grow by 1.3

percent from the previous quarter following an expansion

of machinery and equipment investments, especially in

the automobile and parts industry to accommodate continuous

order books. Meanwhile, increased residential, commercial

and factory constructions contributed to growth in construction

investment.

Sustained growth in external demand and private

investment had induced imports of goods and services

to grow by 4.5 percent from the previous quarter.

Notably, imports of capital goods and crude oil surged to

accommodate increased production in the export-oriented

Table 2.1 GDP growth rate

Change from the previous quarter 2010 2011

(seasonally adjusted, percent) Q1 Q2 Q3

GDP 7.8 1.8 0.0 0.5Domestic demand1/ 6.1 2.2 -0.3 -0.1Private consumption 4.8 0.8 0.0 0.0Private investment 13.8 7.5 1.7 1.3Government consumption 6.4 0.6 -0.8 -1.1Public investment -2.2 2.5 -7.8 -3.7

Exports of goods and services 14.7 11.2 -1.1 2.8Imports of goods and services 21.5 9.6 2.7 4.5

Note: 1/Domestic demand excluding changes in stocksSource: National Economic and Social Development Board

and calculations by Bank of Thailand.

Bank of Thailand28

manufacturing industries. In addition, the rise in imports

of crude oil was also, in part, attributed to oil refineriesû

preparation for commissioning and production enhancement

periods to meet the European Emission standards

(EURO 4).

Private consumption remained unchanged

from 2011 Q2 despite sound employment condition and

consumer confidence. This was partly due to consumersû

wait-and-see attitude regarding the governmentûs stimulus

packages, such as the schemes for first-time car and home

buyers, which also led to postponed spending on furniture

and electrical appliances. Household spending was also

affected by the floods towards the end of the quarter.

Government spending contracted from the

previous quarter. Government consumption decreased by

1.1 percent due to accelerated disbursement in the first half

of the fiscal year. Public investment in both central and

local governments also declined by 3.7 percent partly because

a large proportion of budget for public investment under

the Thai Khemkheng project was already disbursed.

Almost all production sectors expanded from

the previous quarter as supply chain disruption

caused by Japanûs natural disaster had been resolved

(Chart 2.8).

Manufacturing production expanded by 0.7

percent over the preceding quarter (Chart 2.9), stemming

chiefly from an increase in automobile and parts production

to make up for lost production from supply chain disruption

in the earlier period. Recovery of hard disk drive production,

which had previously slowed down for several consecutive

quarters, also expanded in line with its export growth to

China, particularly in office computers.

Chart 2.8 Contribution to GDP growth(QoQ, seasonally adjusted)

Percent3

2

1

0

-1

Agriculture Trade ServicesManufacturing

Others GDP

Q12010

Q12011

Source: National Economic and Social Development Board

Chart 2.9 Change in Manufacturing ProductionIndex (MPI)

(QoQ, seasonally adjusted)

Q12009

Q12010

Q12011

-15

-10

-5

0

5

10

15

Source: Bank of Thailand

Inflation Report January 2012 29

Agricultural production contracted by 0.8 percent

from the previous quarter. Such contraction was mainly

attributed to a decline in the second-crop rice output as

public campaign dissuaded the second cultivation as a

result of water shortage earlier in the year. The floods also

damaged part of the rice output, particularly that from the

Northern and Central regions. However, output of oil palm

and rubber rose from the previous quarter in line with an

earlier expansion of cultivated areas. Output of cassava

also edged up as the tightened supply problem improved.

Thailandûs services sector in 2011 Q3

continued to register growth of 0.4 percent from the

previous quarter. In this regard, the hotel and restaurant

industry grew along with the rising number of tourists,

particularly from Asian region. Meanwhile, financial services

continue to expand in tandem with growth in credits to

business and household sectors and revenues from services

and fees collected by financial institutions.

The Outlook of domestic economy in 2011 Q41/

The overall economy in the fourth quarter is

poised to contract more than expected given the

widespread impact of the floods. Manufacturing

production is most severely affected, and its recovery may

take longer than anticipated. Agricultural output is likely to

be more damaged in comparison to the previous quarter,

1/ Economic indicators used in assessing the outlook for 2011 Q4 werecomputed by the Bank of Thailand, except data on the ManufacturingProduction Index and capacity utilization rate, which were computed bythe Office of Industrial Economics. The number of tourists and the occu-pancy rate were, in part, compiled by the Tourism Authority of Thailand.Data on the labor market were obtained from the National Statistical Office.Economic outlook were obtained from the Economic/Business InformationExchange Program between the Bank of Thailand and the business sector.

Bank of Thailand30

while impact on trade and tourism sectors are expected to

be realized. A contraction in manufacturing production is

expected to dampen the domestic demand, including exports,

consumption, and investment. Moreover, the slowdown of

the world economy would further weigh down production

and exports in many industries.

Manufacturing production was more

disrupted than expected. Many important industries in

the flooded areas particularly in the Central region temporarily

suspended their production due to supply chain disruption

and breakdown of transportation network for both

product delivery and labor commute. Hence, recovery of

manufacturing production is expected to postpone. Such

scenario was partly reflected in the average level of the

seasonally-adjusted Manufacturing Production Index (MPI)

in the first two months of 2011 Q4 which contracted by

39 percent from the average level recorded in the previous

quarter (Chart 2.10). Contraction is likely to be evident in

almost all industries particularly for hard disk drives,

automobiles, electronics and parts, and electrical appliances.

The slowdown of the world economy is likely to further

impair production and exports in various industries,

especially computers, integrated circuits, and chemical

products.

Weaker economic activities and delayed recovery of

the manufacturing sector would also lead to a lower capacity

utilization rate from the previous quarter (Chart 2.11),

particularly for production of automobiles and parts,

electronics, rubber products, and electrical appliances which

were directly affected by the floods.

Chart 2.11 Capacity utilization rate(seasonally adjusted)

65

70Percent

Nov 40.4

60

55

50

45

40

35Jan2010

Jan2011

Apr AprJul JulOct Oct

Source: Office of Industrial Economics, Ministry of Industry

Chart 2.10 Manufacturing Production Index (MPI)classified by market

(3-month moving average, seasonally adjusted)

110

120January 2008 = 100

MPI growth

Domestic-oriented industries (export < 30%)

Both domestic and export industries (export 30% - 60%)

Export-oriented industries (export > 60%)

100

90

80

70

60Jan2010

Jan2011

Apr AprJul JulOct Oct

Source: Office of Industrial Economics, Ministry of Industry

Inflation Report January 2012 31

Recovery in manufacturing production is expected

to be more prolonged than previously assessed. This delay

is due to (1) the business sector waiting for government

master plan for water management; (2) the drawn-out damage

assessment process in claiming insurance payouts, and

(3) time lag for machinery imports to repair or replace the

damages. Manufacturing production is projected to resume

its normal level by 2012 Q3.

Services sector is expected to slow in tandem

with tourism and transportation sectors. The

seasonally-adjusted average number of tourists from

October to November decreased by 20 percent from the

average level recorded in the previous quarter. Nonetheless,

tourism sector appeared to be recovering from the floods

better than expected as reflected in the number of foreign

tourists in December which neared its normal level.

Hotel occupancy rate is likely to decelerate from the

previous quarter (Chart 2.12). The seasonally-adjusted

average occupancy rate in the first two months of this

quarter registered at 54.5 percent, a rate below the average

level of 59.0 of 2011 Q3. However, occupancy rate in

October and November were not lower than the rate at

the same period last year due to temporary residential

evacuation from the floods.

Agricultural output would continue to expand

from the previous quarter. Although rice output in the

Central region is expected to be more damaged by the

floods compared to the previous quarter, other major

agricultural outputs are likely to expand more than expected.

Production of oil palm would expand well due to higher

level of rainfall, while rubber production would rise

Chart 2.12 Number of foreign touristsand hotel occupancy rate

(seasonally adjusted)

Source: Tourism Authority of Thailand and Bank of Thailand

2,000

1,500

500

1,000

0

Thousand persons Hotel occupancy rate (RHS)

Number of foreign tourists 80

60

40

20

0

Percent

Jan2010

Jan2011

Apr AprJul JulOct Oct

Bank of Thailand32

significantly from an expansion of planting areas over the

past several years. Moreover, production of cassava is

projected to rise substantially due to an improvement in the

pest problem.

Employment is forecasted to slow down partly

owing to declining employment in the manufacturing sector

following the slowdown of production in almost all sectors.

Meanwhile, employment in the agricultural sector is also

expected to recess as a result of damage from the floods in

some cultivation areas. In this regard, the seasonally-

adjusted unemployment rate in October registered at 0.6

percent (Chart 2.13). In addition, the Recruitment Difficulty

Index in November rose to 43.7 from the average of 35.8

in the previous quarter, indicating labor shortage in the

Thai economy.

On the demand side, the greater-than-

expected impact of the deluge on manufacturing

production combined with the slowdown of the

global economy would further depress exports,

private consumption, and private investment in 2011

Q4.

Exports of goods and services are anticipated

to drop from the previous quarter as the floods severely

affected production across most industries while weakening

global economy had caused exports of certain goods to

decline (Chart 2.14). In particular, exports of high-tech

goods decreased mainly from automobile, electrical appliances

and electronics exports whereas resource-based exports

decreased as a result of a decline of exports of garment and

textile. Agricultural exports also moderated mainly due to

a slowdown in rice exports. Meanwhile, exports of services

Chart 2.14 Export volume indexclassified by products

(seasonally adjusted, 3-month moving average)

Source: Bank of Thailand

110

120

130

140Index (January 2008 = 100)

Export volume index (including gold)

Agricultural products

Technological products

Resource-based products

Labor-intensive products (excluding gold)

100

9080

70

60Jan2010

Jan2011

Apr AprJul JulOct Oct

Chart 2.13 Unemployment rate(seasonally adjusted)

Source: National Statistical Office, and calculations by Bank of Thailand

1.61.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0

Percent

0.6

Jan2010

Jan2011

Apr AprJul JulOct Oct

Inflation Report January 2012 33

are also likely to become lower in the fourth quarter as

reflected by tourism revenue that dropped markedly

following the Thai flood warnings by several countries.

Nonetheless, the overall export performance should begin to

rebound in tandem with recovery in manufacturing

production, especially the automobile and parts industries,

which still have a pent-up demand.

Private consumption is likely to contract from

the previous quarter as reflected by the fall in Private

Consumption Index in the first two months of 2011 Q4

(Chart 2.15) as the floods caused a shortfall of domestic

goods, a disruption in transportation network, a

deterioration in income of affected workers and firms, and

a decline in consumer confidence. Nonetheless, household

spending is anticipated to gradually return to its pre-flood

level towards the end of 2012 Q1, boosted by replacement

spending and pent-up demand, particularly for automobiles.

Other supporting factors for private consumption include

favorable farm and non-farm income prospects in 2012,

the government stimulus packages including the schemes

for first-time car and home buyers, minimum-wage and

civil servants, salary increase, as well as accommodative

monetary environment and low interest rates.

Private investment is expected to decline from

the previous quarter as the Private Investment Index

plunged for two consecutive months in 2011 Q4. (Chart

2.16) Imports of capital goods markedly declined across

almost all product categories as the floods wiped away

investor confidence and hampered production of several

industries in the Central region, especially electronics and

electrical appliances. Moreover, disrupted production also

Chart 2.15 Private Consumption Index (PCI)(Seasonally adjusted)

145140135130125120115110

Index (2000=100)

Jan2010

Jan2011

Apr AprJul JulOct Oct

Source: Bank of Thailand

Chart 2.16 Private Investment Index (PII)(Seasonally adjusted, 3-month moving average)

215205195185175165155145

Index (2000=100)

Jan2010

Jan2011

Apr AprJul JulOct Oct

Source: Bank of Thailand

Bank of Thailand34

led to commercial car shortages. Construction investment

slowed down notably in the flood-affected areas. Private

investment is expected to pick up in 2012 Q1 and return to

normal in 2012 Q3, driven by an increase in construction

and machinery investment for repair work in the aftermath

of the floods. Furthermore, results from the Business

Liaison Program (BLP) survey suggested that, in the near

term, foreign investors expressed intention to continue to

use Thailand as their production hub for exports due to the

large amount of investment already spent for the long-term

plan, topped with solid and complicated production

network already established in the country. Nonetheless,

the prospect for new investment still largely depends on the

clarity of governmentûs water management plan.

Imports of goods and services are likely to

plummet from the prior quarter (Chart 2.17) as thefloods and global economic slowdown decreased the demand

for capital and raw material imports, especially electronic

and computer parts, raw materials for chemical and plastic,electrical machinery as well as durable consumer goods

such as household goods and electrical appliances.

Government spending in 2011 Q4, the first

quarter of the fiscal year 2012, is also likely to recede

as the Budget Act for Fiscal Year 2012 has not yet been

enacted. In addition, disbursements on both current and

capital expenditures decreased significantly in the aftermathof the floods.

On the whole, economy in Q4 is likely to

contract from the previous quarter by a larger-than-

anticipated magnitude compared to the previous

forecast. This is largely attributed to the increased severity

Chart 2.17 Import volume indexclassified by products

(Seasonally adjusted, 3-month moving average)

Source: Bank of Thailand

130

150Index (January 2008 = 100)

Import volume index

Consumer goodsRaw material goods

Capital goods

Fuel

110

90

70

50Jan2010

Jan2011

Apr AprJul JulOct Oct

Inflation Report January 2012 35

of the floods. The prolonged supply disruption problem

caused by delayed recovery in the production sector, together

with flood-damaged transportation network, eventually caused

exports, private consumption, and private investment to

plunge deeper than anticipated. In this regard, the recovery

pace of the economic activities would be a crucial factor

determining the growth momentum of the Thai economy

going forward.

2.3 Costs and prices

Inflation

Headline inflation in 2011 Q4 registered at

3.97 percent, decelerating from the previous quarter

thanks chiefly to the decline in energy prices in line

with global oil prices. Meanwhile, prices of fresh

food and core inflation temporarily accelerated from

the previous quarter due to the severe floods.

The recent slowdown in headline inflation was due

to energy prices (Chart 2.18) which significantly decelerated

from 8.67 percent in the previous quarter to 0.66 percent

this quarter, owing to (1) the decrease in domestic retail oil

prices in line with lower global oil prices following the

weakening global economy, and (2) the reduction in the Oil

Fund levy, starting in August 2011.

Prices of fresh food rose to 10.55 percent,

steepening from 7.08 percent in the previous quarter

mainly due to the floods, which destroyed agricultural

yields and caused disruptions in supply chain and

transportation. Consequently, prices of fruits and vegetables,

and eggs and dairy products increased while prices of

meats, poultry and fish continued to decelerate after the

Chart 2.18 Contribution to headline inflation

Source: Trade and Economic Index Bureau,Ministry of Commerce and calculations by Bank of Thailand.

PercentEnergy

Core inflation

Raw food

Headline inflation

-4

-2

0

2

4

6

8

Q12008

Q12009

Q12010

Q12011

Bank of Thailand36

swine disease abated. Meanwhile, although the rice pledging

scheme had started, prices of rice, flour and cereal products

decelerated following the global rice price due to the

anticipation of an increase in the supply from India and

Vietnam. Going forward, the effects of the floods on prices

of fresh food are expected to return to normal conditions by

2012 Q1.

The floods, furthermore, affected core inflation

in 2011 Q4, slightly accelerating from the previous

quarter to stand at 2.82 percent but remaining within the

target range (the quarterly core inflation of 0.5-3.0 percent

per annum) (Chart 2.19). The acceleration of core inflation

stemmed from the increase in prices of food and beverages

in the core consumer price index basket, including prices of

seasonings and condiments, non-alcoholic beverages, and

prepared food, resulting from higher food production costs

and higher demand during the flood period. Meanwhile,

prices of non-food and beverages slightly edged higher.

Production cost pressures

Cost pressures from both domestic and

external factors lessened in 2011 Q4, as reflected by

the decelerations in prices of global commodities

and Producer Price Index (PPI) inflation, compared

to the previous quarter.

Heightened risks to the global economy

contributed to the softening of world commodity

prices, including both fuel and food. In terms of

world food, prices of dairy products and meats declined

while prices of cereals decelerated compared to the previous

quarter, reflecting the weaker cost pressures from external

factors.

Source: Trade and Economic Index Bureau,Ministry of Commerce and calculations by Bank of Thailand.

Chart 2.19 Contribution to core inflation

PercentNon-food and beverages

Food and beverages

Core inflation

-2

-1

0

1

2

3

4

Q12008

Q12009

Q12010

Q12011

Inflation Report January 2012 37

On the domestic front, cost pressures lessened

mainly owing to the decrease in domestic retail oil prices

from the previous quarter. Moreover, Producer Price Index

(PPI) inflation continued to slow down from the previous

quarter to stand at 4.1 percent. In particular, prices of

mining products decelerated from the previous quarter of

10.1 percent to 8.5 percent in line with global commodity

prices while manufactured product prices, declined from

the previous quarter of 9.1 percent to 6.5 percent, resulting

from the decline in prices of rubber and plastic products.

Nevertheless, prices of agricultural products reduced by less

than the rate observed in the previous quarter as prices of

vegetables and fruits increased in response to the floods

(Chart 2.20).

Inflationary pressures in the periods ahead

The pass-through from costs to prices is likely

to continue, mainly supported by cost pressures and

inflation expectations.

Going forward, although cost pressures from

external factors will likely weaken in line with the

downward trend of the global economy, the pass-through

to prices will likely continue, mainly driven by government

policies including (1) higher raw material costs as a result

of the gradual lift in energy price subsidies starting from

mid-January 2012 onwards and the rice pledging

scheme which may contribute to higher production costs

of packaged rice and prepared food, and (2) higher labor

costs resulting from the increase in civil servants, salary

starting in January 2012, and the minimum wage hike set

to be implemented in April 2012. In addition, inflation

expectations are expected to accelerate the cost pass-through

(Chart 2.21).

Source: Trade and Economic Index Bureau,Ministry of Commerce, and calculations by Bank of Thailand.

Chart 2.20 Producer Price Index

Percent Producer Price Index : Manufactured productsProducer Price Index : Mining products

Producer Price Index : Products of AgricultureProducer Price Index

30

20

10

0

-10

-20

Q12008

Q12009

Q12010

Q12011

Source: Bank of Thailandûs Business Sentiment Survey

Chart 2.21 12-month ahead inflation(November 2011)

Share Percent

> 6%

Median (RHS)

< 2%4-6% 2-4%

20%

40%

60%

80%

100% 8

6

4

2

00%2007 2008 2009 2010 2011

Inflation Report January 2012 39

3.1 Financial markets

Money market and bond market interest rates

adjusted in line with the recent monetary policy

stance which has given higher weight to downside

risks to economic growth as inflationary pressure

became subdued. The Thai stock market and foreign

exchange market were affected by the weakening

global economic outlook.

Money market

Short-term money market interest rates, both

overnight interbank rate and 1-month government

bond yield, adjusted in tandem with the policy rate.

Government bond yields for short-term maturities started to

stabilize before the MPC meeting on 19 October 2011 as the

The Thai stock market and foreign exchange market were affected by a surge in the global

financial market volatility as the euro areaûs sovereign debt problem proliferated into its banking sector.

The conjunction of the weakening global economic outlook, the widespread impact of the floods in

2011 Q4, and the softening trend of inflationary pressure prompted the MPC to move towards a more

accommodative monetary policy stance. The interest rates in the money market and the bond market

adjusted in tandem with the policy rate. As for the banking sector, competition in deposit mobilization

has become more intense, while the floods resulted in deceleration in private credit growth and a slight

increase in delinquency rate of the household loans.

Nevertheless, the overall stability of financial institutions remained sound with strong balance

sheets. Meanwhile, non-financial corporate sector, including household, business, and real estate sectors,

was temporarily affected during the floods. Going forward, the weakening of the global economic

outlook remains a key risk factor for the overall economic and financial conditions, which, if further

worsen, could adversely affect the corporate sector, employment and hence income of households and

businesses.

Chart 3.1 Money market short-term interest rates

3.60

3.40

3.50

3.20

3.10

3.30

3.00

18-A

ug

25-A

ug

1-Sep

8-Sep

15-Se

p

22-Se

p

29-Se

p

6-Oct

13-O

ct

20-O

ct

27-O

ct

3-Nov

10-N

ov

17-N

ov

24-N

ov

1-Dec

8-Dec

15-D

ec

22-D

ec

29-D

ec

Percent

1-day repurchase rate Overnight interbank rateGovernment bond yields

MPC, Aug 24 MPC, Oct 19 MPC, Nov 30

Source: Bank of Thailand and The Thai Bond Market Association (ThaiBMA)

Inflation Report January 2012

3. Monetary and Financial Stability

Bank of Thailand40

market expected the MPC to maintain the policy rate. In

the last MPC meeting in November, the further weakening

of global economic outlook and the severe impact of the

floods on the Thai economy led the market to anticipate

that the MPC would reduce the policy rate in order to

support economic recovery in the periods ahead.

Consequently, short-term government bond yields declined

before the MPC meeting and continued to fall through the

rest of the year (Chart 3.1).

Bond market

Short-term government bond yields decreased

partly due to market expectation of a policy rate reduction,

as well as the increase in foreign holdings of Thai bonds

especially at short-term maturities as a result of increased

uncertainty of the sovereign debt problem in the euro zone.

The spread between short-term (2-year maturity) and long-

term (10-year maturity) government bond yields remained

high through the last quarter (Chart 3.2), while the implied

forward curve of government bond yields continued to

adjust downward (Chart 3.3), reflecting the market anticipation

of policy rate reductions during this last quarter of the year.

Meanwhile, inflationary pressure, as reflected by implied

interest rates over the next ten years, remained elevated.

This could be attributable to an anticipated increase in the

cost pressure due to government stimulus measures such as

the minimum wage hike.

Equity market

Thailandûs stock exchange index fluctuated

with higher volatility on the back of heightened risks

to the global economy, but the market outlook started

to improve.

Chart 3.2 Government bond spread

Aug2011

Sep Oct Nov Dec

5.00

4.00

3.00

2.00

1.00

0.00

0.30

0.25

0.20

0.15

0.10

0.00

0.05

Percent Percent

Spread (RHS) 2Y 10Y

Source: Bank of Thailand

Chart 3.3 Government bond impliedforward curves

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

5

4

3

2

Percent

Sep 30, 2011

Oct 31, 2011

Nov 30, 2011

Dec 30, 2011

Year(s) from nowSource: Bank of Thailand

Inflation Report January 2012 41

Higher risks pertaining to the global economic

outlook resulted in volatile movements in the Thai stock

market in 2011 Q4. This high volatility is likely to continue

in 2012 Q1 as reflected by 3-month implied volatility of the

SET index (Chart 3.4). Nevertheless, the market started to

pick up (Chart 3.5) with the SET index closing at 1,025.32

at year-end, compared to the yearûs lowest level at 855.45

on 4 October 2011. This was mainly due to the return of

foreign investments to the Thai and other stock markets in

the region after a series of selloffs in the previous quarter.

A net foreign purchase of Thai stocks in 2011 Q4 registered

at 30.2 billion baht, while domestic purchases also increased

markedly due to acceleration in investments in long-term

equity funds (LTF) and retirement mutual funds (RMF)

towards the year end.

Foreign exchange market

On average, the Thai baht depreciated against

the U.S. dollar in 2011 Q4. The depreciation was due to

the impasse over the resolution of the euro areaûs sovereign

debt problem and the credit rating downgrade of certain

countries in Europe as well as a negative outlook on U.S.

fiscal sustainability that led foreign investors to curtail their

holdings of risky assets. In addition, concerns over the

widespread impact of the floods on the Thai economy also

contributed to the baht depreciation. Consequently, the

Thai currency averaged at 31.0 baht per U.S. dollar in 2011

Q4, depreciating by 2.8 percent from the previous quarter

(Chart 3.6). Average volatility of the baht in 2011 Q4

increased from the previous quarter (Chart 3.7) owing

importantly to the two-way movements of the baht in

October and December resulting from news and higher

Chart 3.4 Volatility of the Stock Exchange ofThailand (SET)

(up to January 23, 2011)

100

80

60

40

20

0

Percent (annualized)Actual volatility

Implied volatility of SET50 (3 months)

Jan2008

Jan2009

Jan2010

Jan2011

Jan2012

Jul Jul Jul Jul

Source: Bloomberg

Chart 3.5 The Stock Exchange of Thailand (SET)and net buy value of foreign investors

40

20

0

-20

-40

-60

-80

60Billion baht

1,200

1,000

800

600

400

200

0

Index

Jan2009

Jan2008

Jan2010

Jan2011

Jul Jul Jul Jul

Net buy value of foreign investors

Set index (RHS)

Source: The Stock Exchange of Thailand

Chart 3.6 Exchange rate and trade-weighteddollar index

34

33

32

31

30

29

82

80

78

76

74

72

70

68

66

Baht/U.S. dollar Index

Jan2010

Jan2011

Apr Apr

Dec 30

73.33

31.55

Jul JulOct Oct

Baht/USD1/

Dollar index 2/

Source: 1/Bank of Thailand2/Bloomberg

Bank of Thailand42

uncertainty in the resolution of the sovereign debt problem

in the euro area.

The increased holdings of safe haven

currencies including the U.S. dollar and the Japanese

yen resulted in the baht depreciation against major

trading partnersû currencies. Consequently, the

Nominal Effective Exchange Rate (NEER) in 2011 Q4

depreciated by 0.49 percent from the previous quarter. The

Real Effective Exchange Rate (REER) over the October-

November period fell by 0.71 percent from the previous

quarterûs average level (Chart 3.8). Given the depreciation

of the NEER during 2011 Q4, the average REER for the

same quarter is also expected to weaken.

3.2 Financial institutions

Commercial bank interest rates remained

unchanged from the previous quarter, partly reflected

a wait-and-see attitude for the monetary policy

direction in the periods ahead. Meanwhile, deposits

and credits continued to expand in line with the

current accommodative monetary conditions.

Demand for credits declined slightly in 2011 Q4.

Overall financial institutions stability remained sound

despite the short-term effect of the flood crisis on

asset quality.

Interest rates, deposits, and credits

Deposit and lending rates of the four largest

commercial banks at the end of 2011 Q4 remained

unchanged from the previous quarter, partly as a

result of a pause in the policy rate up-cycle and the reduction

of the policy rate in the last MPC meeting in 2011. Majority

Chart 3.7 Baht actual volatility(up to December 30, 2011)

8

6

4

2

0

Percent (annualized)

Jan2010

Jan2011

Apr Apr

5.81

Jul JulOct Oct

Source: Bank of Thailand

Chart 3.8 Nominal effective exchange rateof the Thai baht (NEER) (Trade-weighted, 2007 = 100)

110

105

100

95

90

Index

Jan2010

Jan2011

Apr Apr

NEER

REER Nov(101.58)

Dec(101.24)

Jul JulOct Oct

Source: Bank of Thailand

Inflation Report January 2012 43

of commercial banks maintained the interest rates partly

to wait and see the direction of the policy rate in the

upcoming MPC meeting on 25 January 2012. As a result,

by the end of 2011 Q4 the 12-month time deposit rate and

the MLR were maintained at 2.87 and 7.25 percent per

annum, respectively (Chart 3.9). The real deposit rate and

the real lending rate edged up from the previous quarter as

inflation expectations slightly declined, while the real policy

rate decreased in line with the nominal policy interest rate.

In December 2011, deposits at Other

Depository Corporations (ODCs) and bills of

exchange expanded by 14.0 percent over the same period

last year (Chart 3.10), owing mainly to intensified deposit

mobilization, especially through bills of exchange, to support

an anticipated credit expansion in the post-flood restoration

period. Money supply thus remained at a relatively high

level. Intense competition in deposit mobilization between

commercial banks and specialized financial institutions (SFIs)

is expected to continue due to the low funding cost of

deposits relatively to other funding channels such as through

money markets. The acceleration in deposit mobilization

was also aimed at maintaining the market share to safeguard

liquidity when the reduction in deposit protection coverage

comes to effect in August 2012 which may drive some

deposits out of commercial banks

Private credits at Other Depository

Corporations (ODCs) continued to expand in 2011

Q4, though at a slower pace in face of the flood

crisis. Demand for credits in both corporate and household

sectors decelerated from the previous quarter. In December

2011, private credits expanded by 16.2 percent over the

same period last year (Chart 3.11). Household credits,

Chart 3.10 Other DepositoryCorporationsû deposits

Source: Bank of Thailand

20

16

12

14.0

9.7

0

8

4

-4

Annual percentage change Dec2011

Deposits and bills of exchange

Deposits

Jan2008

Jul Jul Jul JulJan2009

Jan2010

Jan2011

Chart 3.11 Other DepositoryCorporationsû private credits

20

15

10

5

0

-5

16.2

Annual percentage change

Credits to the household sectorCredits to the business sectorPrivate credits

Jan2008

Jan2009

Jan2010

Jan2011

Dec2011

Source: Bank of Thailand

Chart 3.9 Commercial banksû referenceand real interest rates

10

7.25

3.642.87

-0.23-0.60

8

6

4

2

0

-2

-4

Percent

MLRReal MLR12-month time deposit rate

Policy rateReal 12-month time deposit rate

Dec2011

Jan2008

Jan2009

Jan2010

Jan2011

Source: Bank of Thailand

Bank of Thailand44

especially mortgage loans and auto leasing, slowed down

significantly. Corporate credits exhibited a similar trend as

businesses suffered from flood-induced production halt.

Private credits are expected to pick up within the next two

quarters due to demand increase by businesses and

householdses for post-flood restoration.

Loan-to-deposit ratio of the banking system

declined slightly in the last quarter of 2011 owing to

a slowdown in credit demand during the floods. Deposit

mobilization was accelerated, especially through bills of

exchange, to support an expected pick-up in credit demand

after the floods.

Financial institutions stability

Financial institutions stability continued to

be sound despite some negative impact during 2011

Q4, whereby the recent floods led to some

deterioration in householdsû debt-servicing ability.

However, the situation is expected to improve in

2012 Q1.

Balance sheets of financial institutions in 2011 Q3

remained strong. However, the widespread floods in the

last quarter of the year led to some deterioration in the

asset quality. In this regard, householdsû debt-servicing

ability declined notably, as reflected by the acceleration

of the special mentioned loans (i.e. loans past due for 1-3

months) during this period (Chart 3.12). Nevertheless, such

development is expected to be temporary as the overall

income and employment were unaffected by the floods.

It is anticipated that householdsû debt-servicing ability would

return to its normal trend during the first part of 2012.

Corporate loans, however, remained intact. Meanwhile,

Chart 3.12 NPL and delinquency ratios

% Total corporate loansCorporate loans Consumer loans

% Total consumer loans

Jan2010

Jan2010

Jan2011

Jan2011

Jul Jul JulJul

NPL ratio

NPL ratio

Delinquency ratio(1 to 3 months)

Delinquency ratio(1 to 3 months)

0

2

4

6

8

0

1

2

3

4

Source: Bank of Thailand

Inflation Report January 2012 45

capital adequacy and overall liquidity positions of the financial

institutions system continued to be strong. As a result, the

overall financial institutions stability is not a concern at this

point (Table 3.1).

Looking ahead, important risks to financial institutionsû

stablity could stem from (1) the severe and protracted

global economic problems that could negatively affect the

export and manufacturing sectors as well as loan quality to

a greater extent than expected; (2) the volatile capital flows

that could affect liquidity and investment positions of

commercial banks; (3) the rising short-term external debt

which could affect funding stability of banks; and (4) the

higher cost of deposit mobilization owing to more intense

competition among banks as a result of a reduction in

deposit insurance coverage to 1 million baht per depositor

per bank which will be effective in August 2012, as well as

a possible rise in the contribution rate to the Financial

Institutions Development Fund (FIDF) to pay off FIDF debt

according to the governmentûs policy.

3.3 Non-financial sectors

Financical conditions and stability of the

non-financial sectors remained sound. The recent

floods led to some weakening in the financial strength

of the household and business sectors. However,

since employment and productivity were not

significantly affected, a timely recovery is expected.

On the other hand, flood damage on the real estate

sector was rather severe, but the underlying financial

strength of the sector together with the authoritiesû

remedial measures would contribute to a full

recovery by the second half of 2012.

Table 3.1 Financial soundness indicators(at the end of 2011 Q31/)

2010 2011Key indicators (%)

Q4 Q1 Q2 Q3

1. Capital adequacy1.1 Regulatory capital to risk-weighted 16.0 15.5 15.2 15.5

assets (8.50)2/

1.2 Regulatory Tier-1 capital to 11.8 11.4 11.3 11.7risk-weighted assets (4.25)2/

2. Asset quality2.1 Non-performing loans to total loans 3.9 3.5 3.3 3.0

3. Earning and profitability3.1 Return on assets (ROA) 1.2 1.2 1.4 0.93.2 Interest margin3/to gross income4/ 68.3 62.9 61.7 62.23.3 Non-interest expenses to gross income 54.8 51.4 49.3 49.2

4. Liquidity4.1 Liquid assets5/ to total assets 18.5 17.6 17.3 19.04.2 Liquid assets to short-term liabilities6/ 26.6 26.1 25.9 29.0

Number of banks 14 14 14 14

Note: 1/ Based on çPeer Groupé data2/ Minimum regulatory capital to risk-weighted assets3/ Interest margin = interest income and dividend - interest expenses4/ Gross income = interest margin + non-interest income5/ Liquid assets = cash and deposits + securities purchased under resale agreements + investment in securities (Net)6/ Short-term liabilities = deposits (liability side)

Source: Bank of Thailand

Bank of Thailand46

Household sector

Risks to householdsû stability increased

slightly as a result of a decline in income and

employment, while the debt-to-asset ratio continued

its upward trend. The debt-servicing ability was also

slightly affected from the recent floods.

Income and employment fell slightly from previous

periods, especially farm income which declined steadily in

October and November (Chart 3.13). Such a trend could

potentially affect future financial conditions of households.

Meanwhile, the debt-to-asset ratio of households continued

an upward trend whereby a sharp increase was witnessed

in 2011 Q3 (Chart 3.14). Householdsû debt-servicing ability

deteriorated following the impact of the floods, The ratio

of special mentioned loans (i.e. loans past due for 1-3

months) increased in both October and November, especially

that of credit cards, which rose from 2.1 percent in September

to 2.8 percent in October and 3.2 percent in November

(Chart 3.15). However, a closer examination revealed that

such deterioration in householdsû debt-servicing ability was

not concentrated in any particular income groups; thus, the

overall householdsû stability is not yet a concern. Besides,

the impact of the floods has already largely abated.

Going forward, important risks which could affect

householdsû stability would likely stem from (1) the

weakening of in the global economy, which could adversely

affect Thailandûs economic growth and its employment as

well as a recovery of the agricultural sector; (2) the

post-flood increase in household debt burden, spurred by

government policies and some relaxation of prudential

measures and (3) the effect of fiscal stimulus measures on

Chart 3.13 Farm income*

300

240

180

120

60

0 -40-30-20-10010203040

Index (2005 = 100) % change from the previous month

2010 2011 Nov

Note:* Seasonally adjusted

Source: Office of Agricultural Economics, National Statistical Office,

calculations by Bank of Thailand

Chart 3.14 Household financial assetsand liabilities

Note: 1/Financial institutionsû deposits, bonds, equities, and insurances.2/Total loans from financial institutions and non-banks.

Source: Calculations by Bank of Thailand.

Chart 3.15 Credit card loanûs delinquency ratiosclassified by income group

6

4

2

0

Percent < = 15,000 baht 15,000.01 - 25,000.00 baht

25,000.01 - 50,000.00 baht More than 50,000.01

Total

Jan2010

Jul Jan2011

Jul Nov

Source: Calculations by Bank of Thailand.

20

15

10

5

0

35

30

40

4550

Trillion baht Percent

2010 Q32011

Assets1/ Liabilities 2/

Debt-to-asset ratio (RHS)

Inflation Report January 2012 47

the financial discipline of households, especially the

promotion of low-interest household credits.

Corporate sector

Corporate stability remained sound, reflected

by the net profit of non-financial companies listed

on the Stock Exchange of Thailand during the first

three quarters of 2011, which registered at 427 billion

baht, compared to the level recorded during the same

period last year of 356 billion baht.

The recent floods had some effects on the corporate

sector, especially in manufacturing, in terms of damaged

plants and shortage of parts. However, the impact would

likely be temporary since overall productivity remained

intact. Moreover, corporate performance and debt-servicing

ability remained strong (Charts 3.16 and 3.17) which could

help cushion the impact to some extent. According to the

Security Analyst Association (SAA) Consensus as of

December 2011, the net profit forecast of non-financial listed

companies in 2011 was revised upward from the previous

forecast in September 2011 (Chart 3.18), reflecting robust

confidence in the health of the corporate sector. However,

it is assessed that the negative impact of the floods on

Small and Medium Enterprises (SMEs) would be more

severe and protracted compared to that of larger firms. A

close monitoring of the SMEs is thus warranted going

forward.

Furthermore, the deteriorating global economic

outlook from the sovereign debt problem in the euro area

continues to pose a major threat to the Thai economy and

stability of the corporate sector in the periods ahead.

Chart 3.16 Operating profit margin

20

15

10

5

-5

0

Percent

Average* = 6.0

2010 2011

6.9 6.7 6.1 6.9 7.9 6.8 7.2

Note: Each bar depicts an interquartile range, where the upper and lowerbounds represent the 25th and 75th percentiles, respectively.The symbol + indicates the median*Average over the 2000 Q1 - 2011 Q3 period

Source: Stock Exchange of Thailand, calculations by Bank of Thailand

Chart 3.17 Interest coverage ratio

15

10

5

-5

0

Average* = 3.0

2010 2011

4.7 4.0 3.8 4.1 5.9 4.7 4.8

Note: Each bar depicts an interquartile range, where the upper and lowerbounds represent the 25th and 75th percentiles, respectively.The symbol + indicates the median*Average over the 2000 Q1 - 2011 Q3 period

Source: Stock Exchange of Thailand, calculations by Bank of Thailand

Chart 3.18 Net profit forecast

600

400

200

230351

486548 554

0

Billion baht(12.8)* (14.0)*

2008 2009 2010 2011(Sep 11)

2011(Dec 11)

Note: *Annual percentage changeSource: Stock Exchange of Thailand and Securities Analysis Association,

calculations by Bank of Thailand

Bank of Thailand48

Real estate sector

The real estate sector in 2011 Q4 contracted

as a result of the floods, though the impact is

expected to be temporary.

The floods directly affected real estate activities in

2011 Q4 and caused delays in the building and launching

of new projects towards the end of the year. The number of

new housing launches and the number of home sales in

Bangkok and its vicinity in 2011 Q4 declined by 68 percent

and 65 percent, respectively, over the same period last year.

To alleviate the impact of the floods on the real

estate market, the BOT, through the Financial Institutions

Policy Committee (FIPC), decided to delay, by one year, the

enforcement of the loan-to-value (LTV) rule for low-rise

residential purchases with property prices below 10

million. The rule will thus take effect on 1 January 2013

instead of 1 Jan 2012. Moreover, the BOT has also relaxed

the risk weight requirement of loans for post-flood home

restorations and repairs by assigning the risk weight of 35

percent until 31 December 2012.

The outlook for the real estate market in early 2012

is expected to continue its moderating trend from the end

of 2011 as developers postponed new project launches.

This weakening outlook is reflected by the 6-month ahead

Housing Developerûs Sentiment Index (HDSI) as of 2011 Q4

which registered at 60.8, decreasing from the previous quarterûs

level of 68.6 (Chart 3.19). However, the healthy household

and corporate balance sheets, along with the underlying

strength of Thailandûs economic fundamentals would help

the real estate market to return to its normal level by

mid-2012, provided that the global economic problems do

not deteriorate further.

Chart 3.19 Housing developerûs sentiment index

100

50

0

IndexExpectations index (6 months ahead)

63.4 68.9 65.6 68.7 65.8 68.1 68.6 60.8

Q12010

Q12011

Note: Index more than 50 indicates that business sentiment has improved

Index equal 50 indicates that business sentiment remains stable

Index less than 50 indicates that business sentiment has worsened

Source: Real Estate Information Center (REIC)