Quick Wins to Improve Thailand EconomyBoard of Trade of Thailand Strategy Meeting

30 September 2015

Darren BuckleyVice Chairman, Board of Trade of ThailandCiti Country Officer, Citi Thailand

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AgendaQuick Win to Improve Thailand Economy

● Looking back: What drove Thai economy in the past?

● Recent performance and growth drivers

● What can we do to improve?

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● Strong growth in 80s and early 90s led by Eastern Seaboard, FDI influx from Japan after strong JPY in mid-80s

● Capital inflows from BIBF in 1993-1997 led the buildup into excess and Asian Financial Crisis in 1997-98

● Post crisis recovery in 2000s; Internal struggle since mid-2000s amidst waning global tailwind

● Avg. GDP growth 5.5% during 81-86 surged to 9.9% during 1987-95

● Post crisis - 2000-05 avg. dropped to 5% and just 3.4% after 2006….

Confidential

Looking back: What drove Thailand here?

Source: NESDB, CEIC and Citi Research

1989: Booming of Real estate & securities companies1987-1990: Direct Investment from Japan flew to Thailand due to strong JPY

1997: Asia Financial Crisis

1982: Eastern Seaboard developed

1992: Map Ta Phut developed

1993: BIBF established

2000-2007: Global economic boom2003-2010: Rise of China

Political Struggle2006: Coup2008: PAD protest/shutdown Suvanbhumi airport2009-2010: Red Shirt protested in downtown Bangkok2013-2014: Bangkok Shutdown (Nov13-Apr 14) and Coup (May 14)

2009: Global Financial Crisis

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Investment and Consumption boom in early 1990s

Export-led recovery after 1997

Consumption recovery in 2000-03

Initial private investment was muted post 1997 crisis but began to pick up as excess capacity was utilized. Private investment added growth in 2004-05 but has been muted since.

Domestic drivers tapered off since 2006. Initial weakness was masked by global growth during 2006-07 but weak ‘core’ growth becomes apparent since 2011

Confidential

Growth drivers in different periodsGrowth drivers: External then internal

Source: NESDB

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Thailand GDP growth from 2011 and Citi Forecast

Confidential

Recent Performance of Thai economy

Muted Investment Export Growth Turning Sluggish

Source for all charts: NESDB, Citi Research Estimates and MOC

Average GDP growth since 2011 was merely 3%

Initial boost to growth in 2012 from post-flood reinvestment activities

Consumption (esp first car policy) led growth in 1H13 but domestic politics adversely affect momentum since 4Q13

Exports also face new headwind from global slowdown

We forecast growth to be around 3% +/- in 2015-16E

“Others” include inventory adjustments; negative means de-stocking

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Global GDP growth: ‘new normal’

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Global Context: Moderating GDP and Trade growth

Global Trade growth: Different global recovery cycle

Source: CEIC

Part of the challenges is slowdown in global trade and GDP after 2009 Global Financial Crisis

Avg global growth around 3% in 1990s; rise of China and Emerging markets drove up avg growth to 4% during 2000s

Notable growth moderation of China pushed growth trend back to 3% level

Global trade slowdown will make it difficult for Thailand to hope for export-led recovery

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Major economies: lackluster recovery

Citi GDP Growth Forecasts (%)

Source: Citi Research estimates

China: Official GDP Growth and LKQ Index*

* Li Keqiang (LKQ) index tracks monthly loan growth data, power consumption levels and cargo transport growth

Source: Haver, Citi Research

● Citi economists forecast global GDP growth to be sub-3% in 2015E and just around 3% in 2016E

● China growth adjustment and subsequent ripple effect to commodities and emerging markets could tip global economy towards recession level in late-2016

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Consumption

Confidential

What can we do to improve?

● High household debt limited debt-financed durable spending

● Despite oil price windfall since 4Q14, consumers opted not to spend due to lackluster confidence

● Quick win: Restore sense of growth and income security?

● Given that government’s SFIs also granted Bt3 trillion household loans (29% total), there might be room to provide interest relief to add spending power at the lower end of economy.

Household Debt

Consumer Confidence and Private Consumption

Source: UTCC, BOT

Comm Bank42%

SFI29%

Co-op15%

Card and P-Loan companies

11%

Insurance1%

Broker1%

AMC0%

Pawnshop and Others

1%

Contribution to Household Debt

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Agriculture33%

Trade16%

Manufacturing17%

Hotel& Restaurants

7%

Construction6%

Public Admin& Defence

4%

Education3%

Others14%

Consumption: boost from bottom

Confidential

What can we do to improve?

● Agriculture contribute to just 10% of GDP but involves 1/3 of workforce

● Recent stimulus to help grassroots or lower end of economy should provide near term boost

● Longer term impact could be more meaningful given just 9% of land is current under irrigation – room for future improvement?

Agri to GDP Workforce

Source: BOT

Agriculture10%

Manufacturing28%

Wholesale& Retail Trade

14%

Transport& Communication

7%

Hotel& Restaurant

4%

Electricity,Gas&WaterSupply

3%

RealEstate7%

Construction2%

Mining4%

Public Admin6%

Education4%

Others11%

Source: NESDB

Irrigated 30.22 m rais

9%

Un-Irrigated 290.47 m rais

91%

Irrigated area: only 9% total

Source: Royal Irrigation Dept

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Tourism

Confidential

What can we do to improve?

● Tourism has been key growth contributor in Thai economy (10% of overall GDP, >20% growth pace)

● Volume has been key drivers. Next step might be to improve revenue per capita and improve Thailand positioning to attract upper end tourists while maintaining the mass as well.

Tourism: Resilient across past hiccups

Source: TAT

Source: Citi Research and TAT

Spending per visitor

11 Confidential

What can we do to improve?

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

7M15

ASEAN 9 China and Hong Kong EU Japan US Africa India Others

● China and ASEAN: once growth drivers have now tapering off

● Along with slowdown in manufacturing export

● Shift in competitiveness to add new products / innovation and new target markets for existing products needed?

● Structuring ‘Super Cluster’ to attract top tier global players to create new industries?

Trade

Source: BOT

Export growth: sluggish for three years Export growth: China and ASEAN

Export growth: Manufacturing drag

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Manufacturing – Early sign of recovery fading…

Growth by country: key drag from ASEAN / China

Source: BOTSource: BOT

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

World ASEAN China+HK EU Japan US

FY12

FY13

FY14

6M15

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

50

70

90

110

130

150

170

190

210

J an-03 J ul-04 J an-06 J ul-07 J an-09 J ul-10 J an-12 J ul-13 J an-15

MPI s.a. %YoY

YoY (%)MPI (Seasonally Adj)

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ASEAN26%

China+HK17%

EU 10%

Japan10%

US10%

Others27%

What can we do to improve?Trade

● Weakness in key markets transpired into manufacturing output and job market

● New product / New market seems to be potential solution?

13 Confidential

What can we do to improve?

Thailand Labour Productivity

Productivity and Underemployment

● Thailand is no longer ‘cheapest’ location

● This implies the need to move up value chain

● Productivity hurts in recent downturn as ‘slack’ capacity has been developing in various industries

● We already began to see lower average hours worked. Despite low reported unemployment, ‘underemployment’ indicates inefficiency and income drag.

● Need to improve productivity to sustain cost growth? New products / skill sets / industry champions?

0

50

100

150

200

250

Thai Indonesia China Vietnam Cambodia

$Min Wage: No longer cheap

Source: CEIC, Citi estimates

Source: Citi research; Wage Indicator

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15

Δ in 000 Persons

< 40-49hr workweek 40-49 hr workweek> 40-49hr workweek

Source: NSO

Threat of ‘under-employment’: more people work less hours

14 Confidential

What can we do to improve?

● From the peak of investment to GDP over 50% pre-1997, private and government investments have receded.

● Private sector investment has been consistent and adjustments seem to take out ‘excess’ in properties during the boom. We see stabilizing trend on private investments since 2003-04

● Government seems to underspend post Asian financial crisis (1997)

● A relook at Foreign Business Act to introduce competitiveness and creative destruction?

Source: NESDB

Investment

Investment to GDP: A step down post - 1997

Synopsis: Foreign Business Act•Completely restricted from foreign majority owned. Including national broadcast, newspaper, advertising media, farming, agriculture, forestry, fisheries in Thai Territory, properties, etc.•Industries related to national security, Thai culture and national resources. Foreign majority owned under this category need to be permitted by Cabinet. It includes weapon, hotel & tourism, restaurants, etc. •Industries that Thai companies remain uncompetitive - allowed for more than 50% foreign owned by getting approval from Foreign Business Committee. Mostly are service related industries e.g. media, hotel and tourism, restaurant, retail, etc.• Bank and Insurance companies : have been removed from restricted list of foreign business act in 2014 but still under control and monitor by Bank of

Thailand and Office of Insurance Commission. Mainly require approval from BOT and OIC for significant shareholding.

15 Confidential

What can we do to improve?

● Net FDI has trended lower since the flood

● Partly global slowdown, higher wage, and need to diversify after flood disruption

● A change in BOI in early 2015 also add more difficulties to attract interests given push by some neighboring countries (Samsung recent move to Vietnam)

● Time to rethink about incentives for investments to promote innovation? Also the need to add Intellectual Property Rights protection.

● While SEZ (Special Economic Zone) initiatives should be positive, getting the right players / focus industries at the right depth of supply chain is key to propel growth.

Source: CEIC

FDI

Source: CEIC

Gross and Net FDI trend

FDI to GDP trend

-200

-100

0

100

200

300

400Btbn

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%Net FDI % to GDP

Net FDI % to GDP

Btbn

16 Confidential

What can we do to improve?

● Thailand public debt to GDP around 40% is very manageable and arguably the best sector to boost leverage to create near term growth

● Productive investment is key – a right investment to help improve private sector productivity will be easiest ‘quick win’

● Another room to improve is also the tendency of rising short term expenses and muted CapEx budget

● Productivity can take place at both private and public sectors…

Source: MoF

Government

Public debt to GDP

Source: MoF

Gov’t spending: room to shift?

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32

44

54 55 55 51

46 45 43

38 35 35

41 39

39 40

42 43 43

0

10

20

30

40

50

60

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Jun-

15

Public Debt (Bt tn) % of GDP (RHS)

Bt tn %FIDF Bond 1.0 trn, 8% GDPSOE debt 1.1 trn, 8% GDP

SFI guarantee 0.6 trn, 4% GDP

0

200

400

600

800

1,000

1,200

1,400

1,600

Billion

s

Current Expenditure (salary and subisidies) Capital Expenditure

17

0

30

60

90

120

150

180

210

240

Jan-

03Ju

n-03

Nov

-03

Apr

-04

Sep

-04

Feb

-05

Jul-0

5D

ec-0

5M

ay-0

6O

ct-0

6M

ar-0

7A

ug-0

7Ja

n-08

Jun-

08N

ov-0

8A

pr-0

9S

ep-0

9Feb

-10

Jul-1

0D

ec-1

0M

ay-1

1O

ct-1

1M

ar-1

2A

ug-1

2Ja

n-13

Jun-

13N

ov-1

3A

pr-1

4S

ep-1

4Feb

-15

International Reserves plus Net Forward Positon (US$ bn) (RHS)

US$ bn

Jun-2015:International Reserves + Net Forward Positon US$179bn (Peak $215bn in 2011)

Confidential

What can we do to improve?

● Bank of Thailand prudential policy and build up of country balance sheet helped to ensure relative stability in light of external volatility

● FX reserves stood at comfortable level and adequate to withstand risk from portfolio flows

● Prudent supervision of banking sector also ensures stability of the system with Tier I capital of key banks in double digits

Source: BOT

Monetary Policy and Financial Stability

Source: Company Data

FX Reserves: Ample cushion

Bank Capitalization

15.6 13.8 13.1 13.1 12.1 11.4 11.3 11.0

2.2 3.2 3.7 4.4

1.7 5.8 5.7

3.4

0

2

4

6

8

10

12

14

16

18

BBL SCB KBANK TISCO BAY TCAP TMB KTB

Tier 1 (%) Tier 2 (%)

-10

-5

0

5

10

15

20

25

30

Business Loans (%YoY) Consumer Loans (% YoY)

% YoY

Credit growth moderation

Source: BOT

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-2.4

-2.1-2.2

0.60.3 0.2 0.1

-1.1

-0.3

-4.7

-2.0

-1.4

-2.4

-1.6

-2.5

-3.5

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E

Confidential

What can we do to improve?

● Stimulus packages Bt136bn to add Village Fund size (Bt60bn) and small scale local projects at local authorities level will provide much needed near term lift to economy

● SME financing (soft loans and loss sharing scheme for banks to lend to struggling SMEs) should also help curbing the risk on asset quality and spillover into spending

● However, to have a meaningful long term effect, large scale ‘game changing’ infrastructure projects are still required.

● Bt1.9 trillion over 7 years could add meaningful GDP growth momentum, especially once confidence improves creating ‘crowding in’ private investments

Source: BOT, Citi estimates

Fiscal Policy and Infrastructure spending

Source: MoF

Budget deficit to GDP

Infrastructure project: Disbursements

0

100

200

300

400

500

2015 2016 2017 2018 2019 2020 2021 2022

Bt bn

26%

39%

27%

5%

3%

Dual track and Intercityrail*

Mass transit - Bangkokand Vinicities

Road expansion

Seaport expansion

Airport expansion /upgrading**

Infrastructure project: Disbursements

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● Thailand has enjoyed great growth since 1980s supported by both domestic policies and favorable global trends (trade boom, rise of China, strong JPY to force re-location)

● Early ‘quick wins’ from FDI and manufacturing…

● However, with economy graduating into middle level of per capita income, different drivers may be needed

● Global growth and China slowdown will remain a drag in coming years

● Internally, consumption and investment will be key near term drivers

● Productivity and new market will be key on external side. This may involve continued push for FDI to build new industry capabilities

Confidential

Conclusion

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Thank you

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