Relatório inflacao tailandia 0IRE_150811

8/4/2019 Relatrio inflacao tailandia 0IRE_150811

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Inflation ReportJuly 2011

The Inflation Reportis 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. Atchana Waiquamdee Vice Chairman

Mrs. Suchada Kirakul Member

Mr. Ampon Kittiampon Member

Mr. Praipol Koomsup Member

Mr. Siri Ganjarerndee Member

Mr. Krirk-krai Jirapaet Member

Inflation Report July 2011


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Thailand Monetary Policy Strategy

Monetary Policy Formulation

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

The MPC utilizes the 1-day bilateral repurchase transaction rate

as the key policy rate to signal the monetary policy stance.

The Target

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

To assist the MPC in making monetary policy decisions, theBank 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.



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Contents

1. Overview 1

2. Inflation and Economic Conditions 9

Inflation trends 9

Production cost conditions 11

Pass-through from cost to final prices 12

Aggregate demand in 2011 Q1 and the outlook for 2011 Q2 14

Production and supply in 2011 Q1 and the outlook for 2011 Q2 20

BOX: Soaring food prices and its implications on core inflation 26

3. Monetary Conditions and the Exchange Rates 29

Money market conditions 30

Banking system 35

Monetary base and money supply 39

Exchange rates 40

4. Financial Stability Conditions and Outlook 45

Non-financial corporate sector 45 Household sector 48

Real estate sector 49

Financial institutions 51

External Sector 54

5. Economic Growth and Inflation Outlook 57

Forecast assumptions 59

Output and inflation projections 66

Assessment of risks 71 Forecasts by research houses 77

BOX: Greece,s sovereign debt crisis and its impacts

on the global economy 79

6. Conclusion 83

Report: Economic/Business Information Exchange Program

between the Bank of Thailand and the Business Sector 85



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1Inflation Report July 2011

Industrialized economies expanded more slowly

than expected during the first half of 2011. For the U.S.

economy in particular, key downside pressures came

from elevated oil prices as well as supply disruption

especially in the automobile industry due to Japan,s

natural disasters, resulting in dampened growth

momentum. Moreover, the FOMC announced in June

to discontinue its medium- and long-term governmentsecurities purchase of 600 billion U.S. dollars

(Quantitative Easing II: QE II), while still maintaining its

monetary policy stance accommodative to support the

U.S. growth. The euro area economy, on the other

hand, continued to expand led by core countries

especially Germany, but would likely remain plagued

by their sovereign debt concerns over the period ahead.

Meanwhile, the Japanese economy gained a firmerfooting and would likely pick up during the latter half

of this year, thanks to the Japanese government,s fiscal

stimulus that would soon enter into the economy. Asian

countries, growth continued to strengthen thanks

to robust domestic and external demand. With inflation

pressures building up persistently, many Asian coun-

tries would likely tighten their monetary policy, and this

could restrain growth to some extent.

Over the past three months, the Monetary Policy

Committee (MPC) observed that:

1. In the first quarter of 2011, the Thai economy

continued to grow firmly by 3.0 percent over the same

period last year, slightly moderated from 3.8 percent in

the preceding quarter. This translated into a strong 2.0

1. Overview


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2 Bank ofThailand

percent growth on a quarterly basis, up from 1.3

percent in the previous quarter. The momentum owed

largely to accelerated exports for both industrial and

agricultural products, thanks to the global economic

recovery led by emerging market countries. In addition,

strong domestic demand also added to the momentum.

After contracting in the second half of 2011,

private-sector investment rebounded on account of

higher machinery and equipment investment. Private

consumption also continued to edge higher mainly

from spending on durable goods, well-supported by

favorable income and employment conditions despite

the widespread flood that weakened consumer

confidence to some extent. Lastly, public investment

continued to lend further support to growth.

Table 1.1 GDP at 1988 prices (seasonally adjusted)

Change from the previous period

2010 2011

(Percent)2010

Q1 Q2 Q3 Q4 Q1

Domestic demand 1/ 6.1 1.5 2.6 -0.6 0.9 1.9

Private consumption 4.8 0.7 2.3 -0.3 1.2 0.6

Private investment 13.8 4.2 6.2 -0.3 -0.6 7.0

Public expenditure 6.4 1.5 -0.5 -1.3 3.1 -0.3

Net exports of goods and services -2.8 6.4 -0.1 -16.4 21.3 13.3Exports of goods and services 14.7 4.8 2.3 -3.6 6.2 10.9

Imports of goods and services 21.5 4.2 3.2 0.5 2.1 10.1

Gross domestic product 7.8 3.1 -0.1 -0.3 1.3 2.0

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

Recent data in April and May indicated that the

Thai economy continued to expand in 2011 Q2 on the

back of strong domestic demand. Private consumption

grew robustly in line with farm income growth and strong

employment conditions, further supported by credit


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expansion driven by low interest rates. On the other

hand, private investment and exports were likely to

subside owing in part to supply disruption in the

automobile industry due to Japan,s natural disasters. The

adverse impact of the supply disruption, however, should

be temporary.

2. Going forward, the MPC views major risks to

growth to come mainly from the external front as

follows. (1) Trading partners, growth, especially in

developed countries, may be fragile. Significantconcerns remain over the U.S. real estate market and

unemployment, as well as the financial institutions and

sovereign debt problems in the euro area that may spread

out to other countries. (2) Persistently high oil prices in

the global market may drive up domestic retail oil prices,

which will undermine income and private spending and

dampen growth overall. Lastly, (3) international capital

flows may be highly volatile given the uneven global

economic growth, which may lead to higher uncertainty

and volatility in the global economic landscape.

Chart 1.1 GDP growth forecast

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

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Q1

2012

Q1

2013

14

12

10

8

6

4

2

0

-2

-4

-6

-8

14

12

10

8

6

4

2

0

-2

-4

-6

-8

Annual percentage change


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4 Bank ofThailand

Given the assessment of risk factors and the

outlook on the global recovery, the MPC projects the

Thai economy to sustain its growth momentum well

going forward. The MPC keeps its growth forecast for

2011 unrevised at 4.1 percent, driven mainly by robust

exports and domestic demand. Output growth is then

forecast to be 4.2 percent in 2012, also unchanged from

the previous projection. Despite the Thai economy,s

potential to expand at a pace even faster than this,

significant risks remain due to both external factors and

uncertainties surrounding the new government,s

policies.

3. Thailand,s overall financial stability remained

sound and supportive to the ongoing domestic

expansion. Both domestic and global economic

recovery helped strengthen financial positions of

businesses, as reflected in their solid profitability and

debt-servicing ability. But over the period ahead,

businesses will need to cope with heightened pressures

due to rising production costs, partly attributable to the

new government,s plan on minimum wage raise. In

addition, uncertainties in the global economic recovery

may also affect Thailand,s exports in the near future.

On the other hand, strong income and employment

prospects will continue to strengthen households,

financial health, though with some threats from

uncertainties in the global economy that may weigh on

exports, farm income, and households, income. The

MPC will also closely monitor the new government,s

fiscal stimulus, which may affect household spending

and debt accumulation in the longer term. At the same

time, domestic stability remained sound with no signs

of imbalances in the real estate sector, also with


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financial institutions, strong health as reflected in their

performance and balance sheets. External stability also

remained firm thanks to the continued balance of

payments surplus.

Inflation outlook and monetary policy

Headline inflation stood at 4.10 percent in 2011

Q2, picking up from 3.01 percent in the previous quarter

in all components. Prices of fresh food, in particular,

edged higher in line with rising production costs and

unfavorable weather conditions, while energy prices rose

with the global oil prices. Meanwhile, core inflation

also ticked up from the previous quarter to 2.37 percent,

following prices of food and beverages that surged in

line with rising costs of fresh food as well as seasonings

and condiments. Moreover, rising demand from robust

domestic growth also pressured core inflation to the

upside.

Looking ahead, the MPC projects price pressures

to build up strongly with greater pass-through from

soaring production costs to consumers, rising demand

and cost pressures, as well as higher inflation expecta-

tions. In addition, the forthcoming termination of the

30-baht diesel price pegging at the end of 2011 Q3 will

likely boost inflation in energy prices and related

components.


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6 Bank ofThailand

Major upside risks to inflation are still from: (1)

higher-than-expected oil prices because of the global

crude supply shortage due to unrests in the Middle East

and North Africa; and (2) accelerated commodity prices

possibly driven by supply shocks due to natural

disasters and global demand growth resuming back to

its normal trend. On the contrary, downside risks to

inflation include: (1) lower outturns of oil and

commodity prices due to mild impact of natural

disasters, protracted global recovery, or the slowdown

in emerging market economies; (2) early resolution of

political tensions in the Middle East and North Africa,

which will alleviate concerns on crude supply; and (3)

the possibility that the government may extend part of

its subsidy measures beyond the scheduled termination

at the end of December 2011.

In light of assessment of pressures and risks to

inflation above, the MPC projects headline inflation

in 2011 and 2012 to stage at 3.9 and 3.2 percent,

Chart 1.2 Consumer Price Index

Note: 1/Consumer Price Index excluding raw food and energy itemsSource: Trade and Economic Index Bureau, Ministry of Commerce

-6

-4

-2

0

2

4

6

8

10

Apr Jul Oct Apr Apr Apr Jul Jul

Jun

Oct OctJan

2008

Jan

2009

Jan

2010

Jan

2011

Core inflation

target rangeAnnual percentage change

Core inflation1/

Headline inflation 4.06

3.0

0.5

2.55


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respectively, unchanged from the previous projection.

Core inflation in 2011 and 2012 is expected to average

at 2.4 and 2.3 percent, respectively, up from the

previous forecast given the heightened price pressures

from both demand and supply factors. With regard to

the new government,s stimulus plans, the MPC judges

that these plans may threaten domestic economic

stability in the short term during the initial period of

adjustment, especially in case that high growth drives

up inflation well above the baseline scenario.

Chart 1.3 Core inflation forecast

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

With regard to monetary policy, the MPC, in its

meeting on June 1, 2011, assessed the global growth

momentum to sustain despite some drag due to recentdisasters in Japan through regional supply chains. At

the same time, the Thai economy continued to expand

well on the back of robust external and domestic

demand. Domestic price pressures built up persistently

with steepening production costs and would likely

continue to pick up over the period ahead, with

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Q1

2012

Q1

2013

5

6

4

3

2

1

0

-1

5

6

4

3

2

1

0

-1



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8 Bank ofThailand

inflation expectations rising gradually in line with

greater pass-through from costs to retail prices. The

MPC, therefore, decided unanimously to raise the policy

interest rate by 25 basis points, from 2.75 to 3.0 percent.

Then in its subsequent meeting on July 13, 2011, the

MPC judged major industrialized countries to moderate

somewhat during the first half of 2011. The U.S. economy

suffered notably from elevated oil prices and supply

disruption in the automobile sector due to Japan,s

natural disasters. These pressures, however, should ease

during the second half of the year. On the other hand,

the euro area economy continued to grow led by growth

in core countries, although sovereign debt concerns

would likely remain burdensome over the period ahead.

Along with strengthened growth in Asia, the Thai

economy sustained its growth momentum on the back

of domestic demand and exports, with further support

from fiscal stimulus. Meanwhile, inflation pressures

remained elevated along with high prices of oil andprepared food. Over the period ahead, the new

government,s plans on minimum wage raise and

spending boost would likely add more upward

pressures to inflation amid strong domestic growth,

possibly leading to higher inflation expectations as well.

The MPC, accordingly, decided unanimously to raise

the policy interest rate by another 25 basis points, from

3.00 to 3.25 percent.


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2. Inflation and Economic Conditions

Inflation trends

Trading partners, inflation

During the first two months of 2011 Q2, the

inflation in Thailand,s trading partners, economies

accelerated from the previous quarter, owing to

commodity prices that remained elevated, coupled with

continued demand growth supportive of pass-through

of production costs to final prices. Such development

could also be witnessed in Thailand.

Domestic inflation

Headline inflation rose to 4.10 percent in 2011

Q2, accelerating from the previous quarter in all

components including core inflation, raw food, and

energy prices. In the case of raw food, the acceleration

in prices of eggs, dairy products, meats, poultry and

fish was due to higher costs of animal feeds and

Chart 2.1 Inflation in Thailand and other countries

Source: Various official sources and Bloomberg

The acceleration of

Thailand, s trading

partners inflation

resulted from

commodity prices that

remained elevated

coupled with continued

demand growth.

Headline and core

inflation stood at 4.10

and 2.37 percent,

respectively in 2011 Q2,

accelerating from the

previous quarter.

-3

0

3

6

9

-4

-2

0

2

4

6


May May

Malaysia (3.3)

Singapore

(4.5)

Philippines

(4.5)

-5

0

5

10

15

-6

-4

-2

0

2

4

6

8

10

2008 2009 2010 2011

2008 2009 2010 2011

2008 2009 2010 2011

2008 2009 2010 2011

Jun (4.06)Thailand

Indonesia(6.0)

ChinaMay (5.5)South Korea

Jun (4.4)

Taiwan

May (1.7)

US (3.6)

EU-12(2.7)

Japan (0.3)

Trading partners (22)

May (3.5)


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10 Bank ofThailand

unfavorable weather conditions. Meanwhile, higher

domestic retail gasoline prices and the increase in

electricity charge for the period of May to August 2011

contributed to rising energy prices.

Table 2.1 Quarterly inf lation

2010 2011

Unit: Percent 2010

Q2 Q3 Q4 Q1 Q2

Percentage change from the previous year (%YoY)

- Headline Consumer Price Index 3.3 3.3 3.3 2.8 3.01 4.10

Core Consumer Price Index 1.0 0.9 1.2 1.2 1.46 2.37

Raw food 10.3 9.2 13.8 10.2 8.27 9.06

Energy 9.7 10.9 1.5 3.2 5.21 7.92

Percentage change from the previous quarter (%QoQ)

- Headline Consumer Price Index - 1.0 0.6 0.2 1.2 2.1

Core Consumer Price Index - 0.4 0.2 0.2 0.7 1.3

Raw food - 4.0 3.4 -0.8 1.5 4.7

Energy - 0.5 -2.2 2.4 4.6 3.0

Source: Trade and Economic Index Bureau, Ministry of Commerce.

Chart 2.2 Contribution to inflation

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

Core inflation was at 2.37 percent in 2011 Q2,

rising from the previous quarter as a result of the strong

pass-through into prices of food and beverages. This

development was due to the surge in costs of raw food

0

-2

-4

2

4

4

3

2

1

0

-1

-2

6

8Percent Percent

Q12008

Q12008

Q12009

Q12009

Q12010

Q12010

Q12011

Q12011

Core inflation

Energy

Raw food

Non-food and beverages

food and beverages

Headline inflation

Contribution to headline inflation Contribution to core inflation


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and condiments, coupled with strong domestic demand

in line with economic expansion. Meanwhile, the non-

food and beverage inflation edged lower owing to the

base effect i.e. the disappearance of a positive

contribution from last April,s termination of the

government,s subsidy on water charges. As for other

goods and services, prices also began to increase but

only slightly. Going forward, inflation trend will likely

remain high due to the pressures from high production

cost, strong demand, and firm,s cost and inflation

expectations.

Production cost conditions

Raw material cost

In 2011 Q2, global oil prices continued an upward

trend from the previous quarter thanks to the ongoing

expansion in global demand and concerns over supply

disruptions as a result of the unrests in the Middle East

during the beginning of quarter. However, global oil

Overall production

costs accelerated from

the previous quarter,

reflecting in higher

global commodity

prices, manufactured

products in PPI, and

labor cost.

Chart 2.3 Production cost conditions

Source: Bloomberg and Food and

Agriculture Organization of

United Nation.

Source: Trade and Economic Index Bureau,

Ministry of Commerce, and

calculations by Bank of Thailand.

100

80

25

20

15

10

5

0

-5

-10

-15

60

40

20

0

-20

-40

-60

Percent

World food price Dubai oil priceProducer price index : Manufactured products

Producer price index : Products of Agriculture

Producer price index

Producer price index : Mining products


World commodity prices Producer price index

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Q1

2008

Q1

2009

Q1

2010

Q1

2011


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12 Bank ofThailand

prices edged lower during mid-quarter in line with the

depreciating trend in the U.S. dollar and concerns over

the global economic recovery due to the weaker-than-

expected U.S. economic figures and higher risk of a

more prolonged European sovereign debt problem.

Meanwhile, world food prices continued to accelerate,

owing to the pick-up in cereal prices while prices of

meat and dairy products remained elevated.

Producer Price Index (PPI) inflation dropped

slightly to 5.8 percent in 2011 Q2 as prices of agriculturalproducts decreased, mainly from prices of vegetables.

Meanwhile, the prices of mining and manufactured

products accelerated in line with steepening prices of

food, beverage and tobacco, textiles and textile products,

chemicals and chemical products, and transport

equipments. Such development reflected the higher cost

pressures from the non-food and beverage component.

Labor cost

Labor market data of 2011 Q1 reflected higher

pressure of labor cost as wages rose in line with the

continued economic expansion. As a result, labor market

conditions tightened, contributing to an increase in

average earnings from the same period last year. Unit

labor cost also edged higher, implying that labor

productivity could not catch up with the increase in

wages.

Pass-through from cost to final prices

The strong pass-through in the food and

beverages category in the first half of 2011 is likely to

soften during the remainder of the year as the increases

in world food prices and prices of agricultural products

Going forward, the

pass-through in the

non-food and beverages

group is likely to

increase in line with

pressures from higher

cost, solid demand, and

inflation expectations.


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in PPI begin to slow, reflecting subsiding pressure on

costs of food inputs.

On the other hand, PPI for manufactured products

continued to increase though the pass-through to finalprices in the non-food and beverage category has been

limited. Going forward, cost pressures is likely to

increase due to 1) the decrease in various energy price

subsidies ranging from the lifting of the cap on diesel

price at 30 baht per liter in September 2011, the plan to

gradually float LPG price to the increases in electricity

charge for the industrial sector albeit moderate global

commodity prices, and 2) pressures from higher labor

cost and strong demand growth, supported by the new

government,s policies such as an increase in minimum

wage and civil servants, salary, the agricultural products,

pledging scheme, and other stimulus policies. Moreover,

firms, production cost and inflation expectations will

likely enable the higher pass-through from cost to final

prices in the periods ahead.

Source: National Statistical Office.

Chart 2.4 Labor wage condition

Average earnings Unit labor cost

Note: Unit labor cost = Labor compensation/GDPSource: National Statistical Office and National

Economic and Social DevelopmentBoard, and calculations byBank of Thailand

10,000

9,500

2011 2010 2009

9,000

8,500

8,000

Bath per month20

15

10

5

0

-5

-10

% change from the same period last year

Q12008Ja

n

Fe

b

Mar

Ap

r

Ma

y

Ju

n

Jul

Au

g

Se

p

Oct

No

v

De

c Q12009

Q12010

Q12011


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14 Bank ofThailand

Aggregate demand in 2011 Q1 and the outlook

for 2011 Q21/

The Thai economy in 2011 Q1 continued its

momentum and grew at 2.0 percent over the previous

quarter. The economy was propelled by positive

developments in both domestic and external demand.

Robust expansion of private investment by 7.0 percent

contributed significantly to growth in this quarter. In

addition, exports of goods and services continued to

expand by 10.5 percent, which was the highest quarter-on-quarter growth in ten years.

In 2011 Q2, the exports of goods and services

decelerated from a high growth in the previous quarter,

partly due to the slowdown in automobile production

and exports caused by Japan,s natural disasters.

Nevertheless, this impact is expected to be only

temporary, and improved gradually by the end of this

Table 2.2 GDP growth rate

Change from the previous quarter 2009 2010 2011

(seasonally adjusted, percent) Q3 Q4 Q1 Q2 Q3 Q4 Q1

GDP 2.2 3.7 3.1 -0.1 -0.3 1.3 2.0

Domestic demand 1.5 2.1 1.5 2.6 -0.6 0.9 1.9

Private consumption 1.2 2.1 0.7 2.3 -0.3 1.2 0.6

Private investment 2.8 3.4 4.2 6.2 -0.3 -0.6 7.0

Government consumption 3.9 3.7 1.5 -0.5 -1.3 3.1 -0.3

Public investment -2.4 -4.7 1.6 0.7 -3.0 -2.1 3.0

Exports of goods and services 7.0 6.9 4.5 2.4 -2.3 4.8 10.5

Imports of goods and services 3.6 11.8 4.6 3.1 0.3 2.0 10.1

Source: The National Economic and Social Development Board and calculationsby the Bank of Thailand

1/ Data used in assessing aggregate demand in 2011 Q1 were obtained from the NationalEconomic and Social Development Board. Economic indicators used in assessing the 2011Q1 developments and the outlook for 2011 Q2 were obtained from the Bank of Thailand,except for data on government expenditure, which originated from the Comptroller General

,s

Department and were compiled by the Fiscal Policy Office.

In 2011 Q1, the Thai

economy expanded

from the previous

quarter, thanks to both

domestic and external

demand.


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quarter. Overall, the outlook for the economy in 2011

Q2 is expected to grow from the previous quarter. The

growth momentum would be mainly driven by domestic

demand, particularly from continued expansion of private

consumption.

Total exports in 2010 Q4 accelerated by 10.5

percent from the previous quarter. Merchandise exports

gained in all categories, with exports of agricultural

products driven up by rice exports. Meanwhile, exports

of resourced-based products expanded in line withexports of rubber products and prepared food. High-

technology exports remained robust, particularly for

plastic products and electrical appliances. The exports

of automobiles also expanded, as the impact of Japan,s

disasters was not evident this quarter thanks to

manufacturers, inventory accumulation in earlier periods.

In addition, exports of labor-intensive goods excluding

gold gained in almost all categories. Lastly, exports of

services expanded in line with rising tourism revenue.

Exports of goods and

services continued

to grow in 2011 Q1,

but are likely to slow

down in 2011 Q2 due

to Japan, s natural

disasters.

Source: The Bank of Thailand

Chart 2.5 Export volume index classified by products

(3-month moving average)

anuary 2008 = 100

120

130

110

100

90

80

70

60

Jan2009

Jan2010

Jan2011

Apr Apr Apr Jul Jul

Export volume index (including gold)

Resource-based products

Technological products

Agricultural products

Labour-intensive products (excluding gold)

Oct Oct


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16 Bank ofThailand

However, exports in 2011 Q2 are expected to

decelerate from the previous quarter, partly due to the

slowdown in exports of automobiles caused by Japan,s

supply chain disruption. However, the situation started

to improve by the end of May. Exports of automobiles

and parts were then expected to recover to its normal

level starting from 2011 Q3 onwards. In addition, exports

of services were expected to decline from a high growth

in the previous quarter.

In 2011 Q1, private consumption expanded by3.4 percent over the same period last year, decelerating

from the previous quarter partly due to the impact of

widespread flood on consumers, spending and

confidence. Nevertheless, private consumption still

managed to grow by 0.6 percent over the previous

quarter, mainly due to consumption of durable goods.

This expansion was reflected in commercial car sales

remaining at high level, and rising automobile leasing

provided by financial institutions. Meanwhile,

consumption of non-durable and semi-durable goods

decelerated from the previous quarter.

Private consumption is likely to grow further in

2011 Q2, with support from high income, strong

employment, and expansion of private credits. The

support is partly reflected in rising farm income in line

with agricultural prices, low unemployment, as well asrising credit to household. However, consumption of

durable goods was likely to soften as a result of rising

interest rates, and higher inflationary pressures.

Consumption of automobiles was also anticipated to

moderate due to Japan,s supply chain disruption.

Meanwhile, private investment expanded by 12.6

percent in 2011 Q1 over the same period last year,

Private investment in

2011 Q1 accelerated

from the previous

quarter, but expected tostabilize in 2011 Q2.

Private consumptioncontinued to grow in

2011 Q1, and was

poised to continue into

2011 Q2, supported by

high income, strong

employment and

expansion of private

credits.


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accelerating by 7.0 percent from the previous quarter.Investment in machinery and equipment expanded from

imports of machinery related to export-oriented

industries such as electronics, automobiles, and electrical

appliances. Moreover, investment in construction sector

remained robust, partly due to the housing construction

and repairs after the flood. Domestic commercial car

sales also continued to grow, with strong support from

Source: The National Economic and Social Development Board and calculationsby the Bank of Thailand

Chart 2.6 Contribution to private consumption expenditure(PCE) growth (QoQ, seasonally adjusted)

Percent

Q1

2009

Q1

2010

Q1

2011

3

2

1

0

-1

-2

-3

Services

Non-durablesSemi-durablesDurables

PCE

Chart 2.7 Business Sentiment Index and Private Investment Index


Index Index

Private Investment Index (RHS)

Business Sentiment Index

May205.8

50.9

60 215

195

205

185

175

165

155

145

55

50

45

40

35

30

Jan

2009

Jan

2010

Jan

2011

Apr Apr Apr Jul JulOct Oct


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18 Bank ofThailand

higher confidence and expanding commercial bank

credits to the business sector.

However, private investment is expected to

stabilize in 2011 Q2. The Private Investment Index (PII)

levels in April and May were slightly lower than the

average level recorded in 2011 Q1. This was partly

reflected in decelerating commercial car sales caused

by supply chain disruption since mid quarter. Investment

in machinery and equipment is anticipated to grow

moderately from the previous quarter as industriesalready stepped up their machinery imports in order to

expand their production capacity in prior period.

Nevertheless, investment in the construction sector is

likely to grow further, thanks to rising construction areas

permitted in municipal zone especially housing and

commercial investment in Bangkok. Factors critical to

future investment decisions continued to be the rising

costs of production, price adjustment difficulties, and

economic and political uncertainties.

Chart 2.8 Import volume index classified by products

(3-month moving average)


January 2008 = 100

140

130

120

110

10090

80

70

60

50

Jan2009

Jan2010

Jan2011


Import volume index

Capital goods

Raw material goods

Consumer goods

Fuel


22/85


Positive developments in private consumption

and investment led total imports to grow by 10.1 percent

in 2011 Q1 over the previous quarter. Imports of

merchandise goods expanded in almost all categories,

particularly raw materials and intermediate goods such

as metal and metal products, electronic parts, and

industrial machinery. Furthermore, imports of capital

goods expanded in line with imports of drilling platforms,

while imports of fuel and lubricants rose along with

crude oil imports. Meanwhile, imports of services

accelerated from the previous quarter following tourist

expenditure. However, the overall imports of goods

and services in 2011 Q2 were expected to decelerate

from the previous quarter in line with the outlook of

domestic demand.

The overall government spending contracted in

2011 Q1 which was the second quarter of the fiscal

year, by 0.6 percent over the preceding period, partly

due to the speeding up of disbursement in the first

quarter of the fiscal year. However, the overall public

investment expanded from the previous quarter, owing

mainly to the investment made by state enterprises.

Constructions by state enterprises improved from the

previous quarter partly owing to the ongoing projects,

for example: the Purple Line city train (Bang Yai _ Rat

Burana) of Metropolitan Rapid Transit Authority, the Red

Line city train (Bang Sue _ Taling Chan) of the State

Railway of Thailand, Baan-Aue-Ar-Thorn project phases

3 _ 5 of National Housing Authority, and expressway

extension phase 3 of the Expressway Authority of

Thailand. Besides, investment in machinery and

equipment by state enterprises expanded along with

the imports of a commercial aircraft by Thai Airway

Imports gained in

almost all categories

in 2011 Q1, butare anticipated to

decelerate in 2011 Q2.


23/85

20 Bank ofThailand

International Public Company, and imports for system

set-up of the Integrated Billing and Customer by CAT

Telecom Public Company Limited.

3/ Data used in assessing aggregate supply in 2011 Q1 were obtained from the National Economicand Social Development Board. Economic indicators used in assessing the 2011 Q1developments and the outlook for 2011 Q2 were computed by the Bank of Thailand, exceptdata on the number of tourists and the occupancy rate, which were in part compiled by theTourism Authority of Thailand. Data on the labor market were obtained from the NationalStatistical Office.

Production and supply

expanded from the

previous quarter, but

are expected to stabilize

in 2011 Q2.

Note: Excluding principal repayments and replenishments of the treasury reserve.Source: The Comptroller General,s Department, Ministry of Finance

Chart 2.9 Disbursement of government budget

Government spending is expected to increase in

2011 Q2 from the same period last year, in line with

higher disbursement rate and disbursed amount.

Moreover, the disbursement of budget related to

government measures is also anticipated to increase,

particularly the subsidies for civilians affected by floods

in 2010, and financial aids for the elderly.

Production and supply in 2011 Q1 and the

outlook for 2011 Q23/

The overall production and supply grew by 2.0

percent in 2011 Q1 over the previous quarter, accelerating

from 1.3 percent in 2010 Q4. The expansion took place

Billion baht

250

200

150

100

50

0Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

2010 Budget 2011 Budget


24/85


in all sectors, in particular the manufacturing production

which expanded in line with external demand.

Meanwhile, agricultural output also improved from the

previous quarter, which was affected by unfavorable

weather conditions as well as flooding situation.

The production and supply are expected to grow

moderately in 2011 Q2 over the same period last year.

However, the quarter-on-quarter growth is anticipated

to be unchanged, partly due to a contraction of

automobile production caused by Japan

,

s supply chaindisruption as well as a lower agricultural output from

early harvesting in the previous quarter.

M a n u f a c t u r i n g production edged

higher in 2011 Q1, but

is expected to contract

in 2011 Q2, partly due

to the impact of Japan,s

natural disaster.

Chart 2.10 Contribution to GDP growth(QoQ, seasonally adjusted)

Source: The National Economic and Social Development Board

0

-5

-6

-4

-3

-2

-1

1

2

4

3

GDP

Q12008

Q12009

Q12010

Q12011

Agriculture Manufacturing

Trade Services

Others

Percent

Manufacturing production accelerated by 1.6percent in 2011 Q1 over the preceding quarter. Industries

that rely on both domestic and export markets expanded

in line with rising production of automobiles to

accommodate both domestic and external demand.

The production of automobiles was not affected by

Japan,s supply chain disruption this quarter, thanks to

manufacturers, inventory accumulation in earlier periods.


25/85

22 Bank ofThailand

In addition, export-oriented industries expanded from

the previous quarter, following the production in

industries such as electronics and parts, and electrical

appliances. Meanwhile, the production of hard disk

drives declined from the previous quarter, given the

already-high level of inventory, and the downtrend in

demand. Nevertheless, domestic-oriented industries

slightly contracted from the previous quarter in line with

the declining production of petroleum, mainly due to

the temporary shutdown of some petroleum refineries

from February to March.

Source: The Office of Industrial Economics, Ministry of Industry

Chart 2.11 Manufacturing Production Index (MPI)

classified by market (3-month moving average, seasonally adjusted)

January 2008 = 100

120

110

100

90

80

70

60

Jan

2009

Jan

2010

Jan

2011

Apr Apr Apr Jul Jul

MPI growth

Export-oriented industries (export > 60%)

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

Domestic-oriented industries (export < 30%)

Oct Oct

The outlook of manufacturing production in 2011

Q2 is likely to decline from the previous quarter. Thisis partly reflected in the average level of the seasonally-

adjusted Manufacturing Production Index (MPI) in the

first two months of 2011 Q2, which was lower than the

average level recorded in 2011 Q1. In April and May,

the production of automobiles was affected by supply

chain disruption as a result of Japan,s natural disasters.

Nevertheless, major car manufacturers expected to


26/85


gradually increase their production by the end of this

quarter, and resume their normal production in 2011

Q3. Besides, production of hard disk drives is expected

to improve, as inventory level starts to decrease and

demand is likely to pick up gradually in the second half

of the year in order to accommodate the efficiencyimprovement of office computer.

Capacity utilization is likely to decline in 2011

Q2 from the preceding quarter following a drop of

production, particularly in automobile industry.

The services sector continued to expand in 2011

Q1. In this regard, the hotels and restaurants industry

grew by 4.6 percent over the previous quarter in linewith the rising number of tourists. Tourists from Japan

were slightly decelerated after the incident in March,

but the overall tourism sector remained robust.

Meanwhile, the seasonally-adjusted occupancy rate rose

to 56.5 percent in this quarter from 53.1 percent in 2010

Q4. Moreover, the expansion of the tourism sector led

to a modest growth in logistics and transportation services

of 1.2 percent over the previous quarter.

Chart 2.12 Capacity utilization rate (seasonally adjusted)

Source: The Office of Industrial Economics, Ministry of Industry

The services sector,

particularly tourism

and transportation,

continued to expand from the previous

quarter, but it is

expected to slow down

in 2011 Q2.

Percent

May

58.0

70

65

60

55

50

45

Jan

2009

Jan

2010

Jan

2011



27/85

24 Bank ofThailand

The services sector is expected to slow down in

2011 Q2. The seasonally-adjusted number of tourists in

April and May rose by 3.8 and 0.4 percent, respectively,

over the previous months. The occupancy rate was

also lower, with a seasonally-adjusted rate of 57.5 in

May. Nevertheless, the number of tourists is expected

to grow largely over the same period last year, as tourism

sector was affected by political turmoil in May 2010.

Chart 2.13 Number of foreign tourists and hotel occupancy rate(seasonally adjusted)

Source: The Tourism Authority of Thailand and the Bank of Thailand

Agricultural output grew by 10.1 percent in 2011

Q1 over the previous period, after contracting by 0.2

percent in 2010 Q4. The expansion contributed mainly

from second-crop rice output which was early cultivated

to make up for the damaged output caused by floods in

the previous quarter. Meanwhile, the output of sugar

cane reached the record-high, due to last year,s heavy

rain and encouraging price for growers to expand their

cultivated areas. Meanwhile, tightened supply in both

global and domestic markets, rising demand for bio-

fuels, as well as steady growth in the automobile industry

drove agricultural prices up significantly particularly

prices of rubber and oil palm.

Thousand persons

Hotel occupancy rate (RHS)

Number of foreign tourists

Percent

1,685

1,485

1,285

1,085

885

685

60

65

55

50

45

40

35

30

Jan

2009

Jan

2010

Jan

2011


In 2011 Q1,

agricultural output

expanded well from the

previous quarter, but is

expected to contract in

2011 Q2.


28/85


In 2011 Q2, agricultural output was expected to

contract from the previous quarter, owing mainly to the

decline in rice output from early harvesting in 2011 Q1.

Moreover, last year public campaign dissuaded second

cultivation of second-crop rice due to low level of water

in the dam. Major crop prices tended upward steadily

due to lowering supply, particularly for oil palm, shrimp,

and livestock. Nevertheless, price of rubber was

anticipated to slow down as Japan,s disasters led to the

global decline in automobile production, and, as a result,

lower demand for rubber.

4/ National Statistical Office started to collect monthly employment data since 2001.

Tight labor market

conditions will add toinflation pressures

going forward.

Chart 2.14 Unemployment rate (seasonally adjusted)

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

Employment conditions continued to improve in

2011 Q1 from the previous quarter. In this regard, the

seasonally-adjusted unemployment rate was 0.6 percent

in April, the lowest since 20014/. Moreover, the

recruitment difficulty index in May stood at 38.3, still

reflecting labor shortage that will likely add to inflation

pressures over the periods ahead.

Percent

0.6

1.8

2.0

1.6

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0

Jan

2009

Jan

2010

Jan

2011



29/85

26 Bank ofThailandBank ofThailand

Over the recent period, food prices, including both raw food and seasonings andcondiments rose substantially, causing higher pass-through to prices of prepared food. Theeffect was most notable during 2011 Q2, where prices of many prepared food items weremarked up. In April 2011, prepared food price rose by 2.6 percent over the previous month_ a new high record. This rate is considered high compared to its long-run average (since2000) of approximately 0.2 percent. Such a strong pass-through in turn resulted in anacceleration of core inflation from 1.5 percent in 2011 Q1 to 2.4 percent in 2011 Q2, partlyowing to a large share of food and beverages, totaling 24.4 percent in the Core ConsumerPrice Index basket. This scenario thus motivates the following questions: (1) what are themain factors affecting prepared food prices in Thailand?; (2) how can we explain the dynamicof food inflation; and (3) what are the implications on core inflation?

Factors affecting prices of prepared food in Thailand

Two steps can be taken inorder to find determinants ofprepared food prices. The first stepis to find an underlying factor thatexplains the costs of food preparation

via constructing the Common FactorIndex. This Index is calculated byextracting the Common Factorunderpinning the costs of variousprepared food inputs, including rawfood; namely meat, eggs and dairyproducts, rice, vegetables and fruits;and seasonings and condiments. Thestatistical method employed in thiscalculation is Principle Component

Analysis (PCA). The PCA-extractedcommon trend will then reflect thegeneral factor affecting the costs offood preparation and thus can bestexplain their variations.

The second step then is tofind the correlation between theCommon Factor Index and potentialfactors underlying the costs of foodpreparation. It is found that worldfood prices significantly affectThailand

,s prepared food prices

through their impact on the costs offood preparation. This relationship isreflected by the high correlationcoefficients between world foodprices and the Common Factor, the Common Factor and prepared food prices, and worldfood prices and prepared food prices during 2006-2011 of 0.46, 0.57 and 0.70, respectively(Chart 1).

Dynamic of food inflation

The speed at which food inflation will subsequently taper off depends on itspersistence. In other words, in the case of high persistence, when food inflation spikes upfrom a supply shock, it will take longer to adjust downwards relative to the case of lowpersistence. (Chart 2)

Soaring food prices and its implications on core inflation

Chart 1 Determinants of food inflation

Chart 2 Impact of a supply shock on inflationunder different degrees of persistence

Correlation 1995 - 2011 2000 - 2011 2006 - 2011

0.46 0.51 0.57

0.32 0.41 0.46

0.45 0.59 0.70

Common factor*

Common factor

Common factor and prepared food

Common factor and world food (1 quarter lag)**

Prepared food and world food (1 quarter lag)**

Prepared food price World food price

Thailand,s cost of food preparation is correlated with world food price

Principle Component Analysis

10 20

0

-20

-40

5

0

-5

% QoQ sa % QoQ sa

Meat RiceVegetables

and fruits

Seasoningsand

condiments

Eggs and

dairy

Q11995

Q11997

Q11999

Q12001

Q12003

Q12005

Q12007

Q12009

Q12011

Note: * The constructed common factor is able to explain approximately42.7 percent of the variation in the 5 variables** World food is proxied by the International Monetary Fund,s Food

IndexSource: Ministry of Commerce and calculations by Bank of Thailand

40

30

20

10

0Shock

Inflation

Low persistence

High persistence

Time


30/85

27Inflation Report July 2011Inflation Report July 2011

Chart 3 Thailand,s inflation persistence

Chart 4 Impulse response of non-food inflation to a 1standard deviation innovation in food inflation

i=1

p

i=1

p

-2.0

Food

Food

Thailand (1995 - present)

Thailand (2000 - present)

World mean

World median

Food and non-food inflation persistence in 91 countries*

0.43 0.42

(Sum of Auto Regressive Coefficients)

0.37 0.33

0.182 0.021

0.243 0.000

Non-food

Non-food

Thailand = 0.33

Thailand = 0.37

30

25

20

15

10

5

0

-1.4 -0.7 -0.1 0.6 1.2

Note: * Walsh James, Reconsidering the role of food prices in inflation, IMFWorking paper (2011) whereby persistence is measured by the Sum

of Auto Regressive Coefficients

0.015

0.010

0.005

0.000

-0.005

-0.0102 4 6 8 10 12 14 16 18 2220 24

Percent

Quarters

1/ Using quarterly CPI data for food and non-food during 2000 - 2011 and employing 2 lags.2/ Using the equation where Dummy = 1 when there is high demand

pressure, i.e. the capacity utilization rate is higher than its average value since 2000, and Dummy = 0 otherwise.core,t= C +core,t-1+

3i=1 t-i+ Dummy

3i=1 t-i

A popular method in calculating

inflation persistence is to findthe Sum of AutoregressiveCoefficients (SARC) from the

equation t= +it-i+ ut, where

is the inflation rate and SARC=i. In the case of Thailand,inflation generally has a relativelyhigh persistence level compared toother countries, although it hasedged down since 2000 after theadoption of the Flexible InflationTargeting regime. In addition, thereis higher persistence in foodinflation compared to non-foodinflation (Chart 3). Upondisaggregating the overall food category into raw food and other food including preparedfood and seasonings and condiments, it is found that the persistence in food inflation ismainly caused by such other food. This fact may well reflect the gradual price adjustmentprocess of prepared food outlets/restaurants.

The pass-through of food to core inflation

Despite the fact that food priceshave a relatively high portion in theCore Consumer Price Index basketand food inflation itself is highlypersistent, the pass-through of foodto non-food inflation, evident from theimpulse response function of a typical

Vector Autoregressive Model (VAR)1/is not particularly obvious (Chart 4).This suggests that in the past, althoughincreases in food prices would speedup core inflation, the risk that coreinflation would increase continuouslyas a result of the pass-through of food

to non-food inflation was minimal. In other words, the second round effect of food inflationhas been quite low. However, during the present setting where the economy is expanding ata solid pace and demand pressure is strong, as reflected by the higher-than-average capacityutilization rate, a 1 percent increase in food inflation will pass-through to core inflation by0.05 percentage point more than when demand pressure is tame.2/

In summary, the large proportion of food in the Core Consumer Price Index basket implies

that food inflation dynamic is an important determinant of the overall inflation dynamic. Thisis reflected in the acceleration of core inflation during the previous periods. Moreover, althoughfood inflation has a rather high persistence level, past data indicates that the pass-through tonon-food inflation has not been obvious. In other words, the magnitude of the second roundeffect of food inflation is not large enough to sustain a continuous rise in core inflation.Nevertheless, when the economy is strong and demand pressure is high, the likelihood of alarger second round effect is estimated to be higher, potentially altering the inflation expectation.The BOT, therefore, places great emphasis on assessing developments and risks that canpotentially affect economic growth, inflation and inflation expectation in the periods ahead.


31/85


3. Monetary Conditions and

the Exchange Rates

Following the release of the previous report, the

MPC judged in the meeting on June 1, 2011, that the

global economy moderated somewhat in the first

quarter of 2011 but still maintained its overall growth

momentum. The US economy showed signs that

rising inflationary pressure had begun to weigh on

consumption. The euro area was expected to maintain

its expansion but sovereign debt problems remained a

key risk to the economy. Meanwhile, the Asian economy

expanded well on account of both internal and

domestic demand. However, risks to global inflation

were expected to remain going forward. The Thai

economy grew well in the first quarter supported by

agricultural production and exports. Inflationary

pressure increased more than expected following hikesin the prices of prepared foods. As a result, there is a

risk that core inflation may breach the upper end of the

target that band in the future periods. The MPC

therefore decided unanimously to raise the policy

interest rate by 0.25 percentage points, from 2.75 to

3.00 percent per annum.

In the following meeting on July 13, 2011, the

MPC noted that the advanced economies expanded

more slowly than expected in the first half of the year.

The U.S. economy was particularly affected by the surge

in oil prices and supply disruption in the automobile

sector stemming from the Japan crisis which was

anticipated to abate in the latter half of the year. The

euro area continued to expand from growth in the core

member countries while sovereign debt problems


32/85

30 Bank ofThailand

remained a key risk to the economy. The Asian economy

continued to grow from both internal demand and

exports. However, going forward, growth may slow

slightly due to monetary policy tightening to contain

inflation in many countries. The Thai economy

continued to expand in the second quarter primarily

from both internal and external demand as well as

continued fiscal stimulus. Inflationary pressure remained

high. In light of the continued risks to inflation amid

robust domestic demand, the MPC deemed it necessary

to continue increasing the policy rate and therefore

decided unanimously to raise the policy interest rate by

0.25 percentage points, from 3.0 to 3.25 per cent per

annum.

Money market conditions

Money market

Short-term money market interest rates forcollateralized lending in Thai baht edged higher in

2011 Q2 in line with the policy interest rate. The 1-day

repurchase rate and the overnight interbank rate

(quarterly average) increased to 2.79 and 2.67 percent

in this quarter, respectively.

The overnight swap rate that represents the cost

of borrowing in Thai baht using the U.S. dollar as

collateral also increased to 2.36 percent in line with theincrease in the policy interest rate.

At the end of 2011 Q2, the difference between the

Thai and the U.S. policy rates widened to 2.75

percent due to the total increase in the Thai policy rate

by 50 basis points during the second quarter.

Meanwhile, the Federal Open Market Committee (FOMC)

Short-term moneymarket rates rose in line

with the policy interest

rate.


33/85


decided to maintain the federal funds rate at 0-0.25

percent in order to support the slow-than-expected

economic recovery.

Chart 3.1 Money market interest rates

Source: Bank of Thailand


Chart 3.2 LIBOR, Fed funds rate, and Thai repurchase rate

Overnight swap rate(onshore)

1-day repurchase rate

3-month T-bill rate

Overnight interbank rate(mode)

Jul 12

Jan

2008

Apr Jul Oct Jan

2009

Apr Apr AprJul Jul JulOct OctJan

2010

Jan

2011

Percent

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

3.12

3.093.002.90

0

-1

-2

1

2

3

4

5Percent

Jan

2008

Apr Jul Oct Jan

2009

Apr Apr Apr Jul Jul JulOct OctJan

2010

Jan

2011

7-day LIBOR

1-day repurchase rate

Interest rate differential between

1-day repurchase rate and Fed funds rate

Jul 12

3.00

2.75

Fed funds rate

0.250.16


34/85

32 Bank ofThailand

Bond market

Government bond yields for short- and medium-term maturity edged higher compared to the previous

quarter following the policy rate increase. In addition,

long-term government bond yields decreased due to

continued demand.

At the end of 2011 Q2, the short end of the

implied forward curve, which reflects market

expectations of the future policy rate, shifted up from

its level at the end of 2011 Q1. The expected short- and

medium-term interest rate (1 - 3 years ahead) increased

in line with the policy rate, reflecting marketexpectations that the policy rate would continue to rise

in the periods ahead, while inflationary pressure, as

reflected by expected interest rates over the next ten

years, started to decline.

Chart 3.3 Government bond yields


5

4

3

2

1

0

Percent

May 31, 2011

1 2 3 5 7 10 12 14

Apr 29, 2011

Jun 30, 2011

Maturity (years)3 months

Jul 12, 2011

Short-term governmentbond yields edged

higher due to policy rate

increases.


35/85


Equity market

Risks of a global economic slowdown stemming

from sovereign debt problems in the euro area, fragilities

in the recovery process of the U.S and Japan, as well as

Thai political uncertainty weighed on foreign investors

,

sentiments and therefore resulted in a net sale of 43.6

billion baht during May - June 2011. Consequently, the

SET index fell to 1,041.48 points at the end of 2011 Q2

after previous rising to 1,093.56 points in April 2011.

Looking ahead, more concrete sovereign debt

resolution measures for European countries as well as

an improved domestic political climate following

general elections on 3 July 2011 will likely lift foreigninvestors, sentiments and attract the return of foreign

investment to the market. As such, the actual volatility

and the 3-month implied volatility of the SET index,

which reflects investors, concerns regarding volatility

in the financial market, have both remained low.


Chart 3.4 Government bond implied forward curves

5

4

3

2

Percent

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Year (s) from now

May 31, 2011

Apr 29, 2011

Jun 30, 2011

Jul 12, 2011

The SET index dropped

in 2011 Q2 due to both

domestic and global

uncertainties.


36/85

34 Bank ofThailand

Source: The Stock Exchange of Thailand

Chart 3.5 The Stock Exchange of Thailand (SET)

and net buy value of foreign investors

Source: Stock Exchange of Thailand and Bloomberg

Chart 3.6 Volatility of the Stock Exchange of Thailand (SET)

(up to July 12, 2011)

SET Index (RHS)

Net buy value of foreign investors

IndexBillion baht

Jan2010

Jan2011

Jan2009

Jan2008

Jul Jul Jul

0

100

200

300

500

400

600

700

800

900

1,000

1,200

1,10040

50

30

20

10

0

-10

-20

-30

-40

-50

-60

-70

120

100

80

60

40

20

0

1,200

1,100

1,000

900

800

700

600

500

400

300

Percent (annualized) Index

Jan

2008

Jul Jan

2009

Jan

2010

Jan

2011

Jul Jul Jul

Actual volatility

Implied volatility of SET50(3 months)

SET Index (RHS)


37/85


Banking system

At the end of 2011 Q2, the reference lending rates(MLR) and the 12-month time deposit rate of the four

largest commercial banks edged up to 6.87 and 2.35

percent respectively, in line with the policy rate increase.

The real MLR and the real 12-month time deposit

rate1/ of the four largest commercial banks at the end of

2011 Q2 rose from the previous quarter to 2.93

and -1.42 percent, respectively, due to the increase in

the lending and deposit rates that exceeded inflation

expectations.

1/ Minimum lending rate (MLR) and 12-month deposit rate adjusted by expected headlineinflation 12 months ahead with the use of compound interest formula.

Note: 1/Average rate of the 4 largest commercial banks end-period. When a range isposted by a commercial bank, the average of the minimum and maximum rates isused for calculation.


Chart 3.7 Policy rate and commercial banks,reference retail rates1/

0

1

2

3

4

5

6

7

8

Percent

Jun

6.87

Policy rate

12-month time deposit rate



3.00

MLR

Jan

2008

Apr Jul Oct Jan

2009

Jan

2010

Jan

2011


2.352.111.76

Retail interest ratesincreased in tandem

with the policy rate.


38/85

36 Bank ofThailand

Deposits in Other Depository Corporations

(ODCs)2/ expanded by 14.4 and 12.9 percent in April

and May 2011, from the same period of last year. The

mobilization of deposits and bills of exchange served

to support credit demand that expanded with the

economy as well as manage the cost of funds amid

the upward interest rate cycle. In recent periods,

specialized financial institutions (SFIs) have become

more active in mobilizing deposits through lottery-linked

saving products that provide higher returns than

commercial bank deposit covered by the government,s

blanket deposit guarantee. As a result, deposits at SFIs

in April and May 2011 rose by 21.3 and 22.8 percent,

respectively.

Note: 1/Average rate of the 4 largest commercial banks 2/ Real interest rates are calculated from the compound interest rate formulaSource: Bank of Thailand

Chart 3.8 Commercial banks,interest rates1/

2/ODCs consist of domestically registered commercial banks, branches of foreign banks, inter-national banking facilities, finance companies, Specialized Financial Institutions (includingGovernment Savings Bank, Government Housing Bank, Bank for Agriculture and AgriculturalCooperatives, Export-Import Bank of Thailand, Small and Medium Enterprise DevelopmentBank of Thailand, and Islamic Bank of Thailand), saving cooperatives, and money marketmutual funds.

8

6

4

2

0

-2

-4

10

Real MLR2/


MLR

2.932.35

-1.42

Jun

6.87

2/Real 12-month time deposit rate

Jan

2008

Jan

2009

Jan

2010

Jan

2011

Apr Apr Apr Apr Jul Jul JulOct Oct Oct

Percent

Deposits of ODCs

continued to grow.


39/85


Private credits extended by ODCs continued

to grow by 15.3 and 15.6 percent in April and May

2011, respectively, from the same period of last year.

This credit expansion was driven mainly by economic

growth and the resulting need for working capital

loans3/. Meanwhile, loans extended to the household

sector remained elevated.

Chart 3.9 Other Depository Corporations,deposits

and private credits


Chart 3.10 Other Depository Corporations,

private credits

by types of debtors


12

18

16

14

10

8

6

4

2

0

-2


Deposits and bills of exchange

Private credits

Deposits

15.6

8.4

12.9

May

Jan

2008

Jan

2009

Jan

2010

Jan

2011


16

14

12

10

8

6

4

2

0

-2

-4

-6

Annual percentage changeMay

15.6Credits to the household sector

Credits to the business sector

Other Depository Corporations,private credits

Jan

2008

Jan

2009

Jan

2010

Jan

2011


3/ Credit data from Commercial Banking System

Private credits still

expanded mainly due

to household andbusiness loans.


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38 Bank ofThailand

Private credit extended by commercial banks in

April and May 2011 grew by 12.3 and 13.6 percent,

respectively, over the same period of last year.

Outstanding loans in the real estate sector started to

edge up but remained below its pre-Lehman crisis level.

Mortgage loans continued to expand albeit at a lower

rate. Furthermore, loans extended to the auto leasing

sector continued to grow despite some impact from the

supply shortage during the quarter.

Chart 3.11 Corporate loans extended by commercial banks


Chart 3.12 Consumer loans extended by commercial banks


120

110

100

90

80

70

Index (December 2008)

May 2011Corporate

Construction

Finance

Commerce

Real estate

Production

Total corporate loans

Dec2008

Mar2009

Mar2010

Mar2011

Jun JunSep SepDec Dec

160

150

100

110

120

130

140

90

Index (December 2008)

May 2011

Consumer loans

Private consumption

Mortgage

Auto leasing

Credit cards

Total consumer loans

Dec2008

Mar2009

Mar2010

Mar2011

Jun JunSep SepDec Dec


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According to the Senior Loan Officer Survey

conducted end-June 2011, private credit demand for both

household and corporate sectors in the third quarter

continued to increase from the previous quarter in line

with economic expansion.

Chart 3.13 Expected demand for corporate and consumer loans

in 2011 Q3

Source: Senior Loan Officer Survey conducted at the end of June 2011

Monetary base and money supply

In April and May 2011, the monetary base

expanded by 9.3 and 9.6 percent, respectively, over the

same period last year. This development was due to

robust demand for cash as a result of the expanding

economy.

Broad money also grew at a rate of 15.1 and 14.2percent in April and May, respectively, over the same

period last year. The expansion was a result of deposit

mobilization by financial institutions, especially SFIs.

0

50

-50

100

-100

0

50

-50

100

-100

0

50

-50

100

-100

0

50

-50

100

-100

OverallSMEs

Expected demand forcorporate loansin the next 3 months

Expected credit standard forcorporate loansin the next 3 months

Expected credit standard forconsumer loansin the next 3 months

Expected demand forconsumer loansin the next 3 months

+ Increased + Increased

- Tightened

- Decreased - Decreased

2010 Q4

2011 Q2 2011 Q3

2011 Q1 2010 Q4

2011 Q2 2011 Q3

2011 Q1

H ous ing Cre di t ca rd Ot he r

H ous ing Cre di t ca rd Ot he r

+ Eased

- Tightened

+ Eased

Large corporate

OverallSMEsLarge corporate

Demand for loans by

both households and

firms grew fromthe previous quarter in

line with economic

expansion.

The monetary base

expanded in line with

robust demand for

cash, while broad

money picked up as

a result of deposit

mobilization.


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40 Bank ofThailand

Exchange rates

The Thai currency averaged at 30.29 baht per

U.S. dollar in 2011 Q2, appreciating by 0.8 percent from

the previous quarter. Factors underpinning the baht

appreciation in the first month of the quarter included:

(1) strong economic fundamentals; (2) expectations that

the Bank of Thailand would continue to raise the policy

Chart 3.14 Growth rate of money supply



Chart 3.15 Contribution to broad money growth


15

20

10

5

Jan2007

Jan2008

Jan2009

Jan2010

Jan2011

Jan2007

Jan2008

Jan2009

Jan2010

Jan2011

May

May

Currency in circulation

Broad money

Narrow money

Monetary base

9.69.2

10.7

14.2

0

-5


15

20

10

5

0

-5

16

14

12

108

6

4

2

0

-2

-4

Securities other than sharesMoney market mutual fundsOther deposits at cooperativesOther deposits at specialized banksDeposits at finance companiesOther deposits at commercial banksDemand deposits at Other Depository CorporationsCurrency in circulation

Broad money growth

May

14.2


Jan

2008

Apr Jul Oct Jan

2009

Apr Jul Oct OctJan

2010

Jan

2011

Apr Apr Jul

On average, the Thai

baht appreciated

against the U.S. dollar

in 2011 Q2 due to

strengthening in April

despite depreciation

over the May-June

period.


43/85


rate so as to ease inflation pressures; and (3) expectations

that the FOMC would maintain an expansionary

monetary policy in order to sustain the economic

recovery. As a result, more foreign capital flowed into

the Thai stock and bond markets.

Source: 1/ Bank of Thailand2/

Bloomberg

Chart 3.16 Exchange rate and trade-weighted dollar index

37 88

86

84

82

80

78

30.74

69.36

76

74

72

70

68

66

36

35

34

33

32

31

29

30

Baht/U.S. dollar

Baht/USD1/

Index

30 Jun

Dollar index2/

Jan

2008

Apr Jul Oct Jan

2009

Jan

2010

Jan

2011


During the last two months of the quarter, the baht

resumed a depreciating trend against the U.S. dollar.

This was attributable to increasing risks in the global

financial market due to the sovereign debt problem in

Greece and uncertainty over the United States, economic

recovery. Moreover, foreign investors adopted a wait-

and-see attitude pending Thailand,s election results.

Consequently, capital outflows from the stock market

were particularly high during the period.

Regional currencies strengthened against the U.S.

dollar from the previous quarter. The appreciation was

primarily due to inflows of capital into both the stock

and bond markets, as markets became more confident

Both major and

regional currencies

appreciated against the

U.S. dollar.


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42 Bank ofThailand

Source: Reuters

Chart 3.17 Change in the values of foreign currencies againstthe U.S. dollar in 2011 Q2

(compared with the previous quarter,s average)

in economic fundamentals and expected regional

central banks to further hike policy rates to curb

inflation pressures. Nevertheless, the appreciation trend

of many regional currencies slowed during the end of

the quarter, after foreign investors decreased their

holding of risky assets from concerns over the

sovereign debt problem in Greece and uncertain global

economic recovery, as reflected in the economic data

of many countries including China, the United States

and the euro area, which came in below expectations.

0.8

0.9

1.0

1.2

1.2

1.6

1.7

2.93.3

3.6

5.0

5.9

0 1 2 3 4 5 6 7Percent

Philippines

China

UK

Australia

Singapore

Indonesia

South Korea

Thailand

apan

Taiwan

Malaysia

Euro

Meanwhile, major currencies such as the yen, the

pound sterling and the euro appreciated, on average,

against the U.S. dollars. In the beginning of the quarter,the euro appreciated primarily due a policy rate increase

by the ECB while the FOMC maintained the same policy

rate. This widened the interest rate differential,

encouraged markets to invest in the currency, and led

to a devaluation of the yen and increased yen carry

trade. However, growing concerns over the problem of


45/85


sovereign debt in Greece in the last two months of the

quarter partially contributed to a slowing of the euro,s

strengthening whereas the yen appreciated, on

average, in the quarter.


Chart 3.18 Nominal effective exchange rate of the Thai baht (NEER)

(Trade-weighted, 2007 = 100)

110

100

105

95

90

85

Index

May

(102.49)

Jun

(100.63)

REER

NEER

Jan

2006

Jul Jan

2007

Jul Jan

2008

Jul Jan

2009

Jul JulJan

2010

Jan

2011

Overall, the baht appreciated slightly against the

U.S. dollar while most major and regional currencies

strengthened substantially. Consequently, the Nominal

Effective Exchange Rate (NEER)4/ depreciated by 1.09

percent from the previous quarter. In addition, the Real

Effective Exchange Rate (REER)5/ appreciated by 0.68

percent over the April-May period from the previous

quarter,s average level primarily due to an increase in

the prices of Thai products relative to those of trading

partner countries in April. Nonetheless, the average REER

in 2011 Q2 may weaken in line with the average NEER.

4/ The Thai baht NEER is calculated as a weighted average of bilateral exchange rate betweenthe baht and major trading partners currencies (trade-weighted, 2007 = 100)

5/ The real effective exchange rate (REER) is calculated by deflating the NEER using relativeinflation rates to reflect the countrys price competitiveness.


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44 Bank ofThailand


Chart 3.19 Baht actual volatility

(up to June 30, 2011)

The average volatility of the baht in 2011 Q2

declined from the previous quarter. The baht was

relatively stable early in the quarter, but moved more

rapidly in May and June. Accordingly, the average

volatility in 2011 Q2 declined from the previous

quarter.

Percent (annualized)

8

6

4

2

0

4.93

Jan

2008

Jan

2009

Jan

2010

Jan

2011

Jul Jul JulOct Oct OctApr Apr Apr Apr

The average volatility of

the baht decreased from

the previous quarter.


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4. Financial Stability Conditions and Outlook

Thailand,s solid fundamentals continued to support

domestic growth, undeterred by the weakened growth

prospects of major industrial economies that remained

plagued by structural concerns. Households and

corporates, financial well-being and strong income

prospects favored financial institutions, and would serve

as the funding source for domestic demand expansion

over the period ahead, particularly investment growth.

Going forward, the MPC considers the following

as major risk factors to Thailand,s economic stability.

(1) The global economy may suffer a slowdown mainly

due to sovereign debt concerns in Europe, the fragility

of economic recovery in the U.S. and Japan, as well as

high volatility due to sudden capital movements across

countries. These factors, altogether, may adverselyaffect households, income and firms, profitability. (2)

Pressures from rising production costs and inflation may

heighten with soaring oil and commodity prices. In

addition, (3) the government,s stimulus package may

have some impacts on households, consumption and

debt accumulation, possibly threatening Thailand,s

long-term fiscal position as well.

Non-financial corporate sector

Overall corporate stability improved with the

recovery of domestic and international economies.

Profitability and debt-servicing ability of businesses

were strong, as reflected in the improved performance

of non-financial companies listed on the Stock Exchange

of Thailand in 2011 Q1 in all industries except the real

Corporate sector,s

financial conditions

continued to improve

in 2011 Q1, but with

higher risks going

forward.


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46 Bank ofThailand

estate sector. Particularly, the real estate slowdown was

attributable to a decline in demand for housing after a

large number of houses sold last year. Moreover,

accelerated inflation since the beginning of 2011 and

rising interest rates also added to consumer concerns,

prompting households to delay their new home

purchases.

Chart 4.1 Operating profit margin classified by industry*

Chart 4.2 Indicators for the corporate sector*

Note: * Each bar depicts an interquartile range, where the upper and lower bounds representthe 25th and 75th percentiles, respectively. The symbol + indicates the median.

**Average over the 2003 Q1 - 2007 Q4 periodSource: Stock Exchange of Thailand, calculations by Bank of Thailand

10

20

30

40

10

15

2007 20072008 20082009 20092010 2010 2011

2007 20072008 20082009 20092010

2011

2011 2010 2011

5

0

0

-5

-10

-10

-15

10

15

5

0

-5

-10

-15

-20

20

30

40

10

0

-10

-20

Production sector

Hotel and restaurant sector

Percent Percent

Percent Percent

Construction sector

Real estate sector

Average** = 5.3 Average** = 2.4


2008 20082009 20092010 2011 2010 2011

2008 20082009 20092010 2011 2010 2011

Operating profit marginPercent

Debt-to-equity ratio

Interest coverage ratio Current ratio

0

0

5

5

-5

-5

-10

10

10

20 2.0

3.0

2.5

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

15

15


Average** = 1.5Average** = 3.4


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Despite their strong performance, businesses still

need to cope with risks from both domestic and

external fronts. Domestic risks include production costs

that will rise inevitably given the lifting of LPG price for

industries starting from July 2011 - with the glass,

mirror, and ceramic industries most severely affected.

Furthermore, the new government,s policy on minimum

wage raise may also drive production costs up

markedly, with labor costs currently accounting for 13

percent of businesses, average total costs.

Chart 4.3 Wage distribution and ratio of labor cost to total cost

Note: * Private employees onlySource: National Statistical Office.

Source: National Statistical Office andcalculations by Bank of Thailand.

Kernel density function

Baht/day

Recent minimum wage = 176 baht/day

0.0025

0.0020

0.0015

0.0010

0.0005

0

0 200 400 600 800 1000

Average 437

13.3

10.5

7.1

0 5 10 15 20

8.9

8.2

Non-bank

Minimum wage cost per total cost

Other costs per total cost

Manufacturing

Construction

Real estate

Hotel andrestaurant

Baht/day

384

367

Median

Mode

Wage distribution* The ratio of labor cost to total cost

On the other hand, major external risks are f

Relatório inflacao tailandia 0IRE_150811

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