Some sectors are doing better on a weaker baht and rising world demand, but necessary structural changes will take longer

Soonruth Bunyamanee

Five years after the economic crisis of 1997, the country's manufacturing sector is showing some signs of recovery in selected areas, but in terms of structural reform, little has been accomplished.

INDUSTRY Some sectors are doing better on a weaker baht and rising world demand, but necessary structural changes will take longer

In the last few years governments have introduced several measures aimed at rehabilitating the so-called real sector _ businesses that produce goods and services through the combined utilisation of raw materials, labour, land and capital.

But a five-year industrial restructuring programme that began in 1999 has made little progress to date.

Only 40% of the total approved budget or 473 million baht has been disbursed and only 196 million baht or 17% was actually spent. The programme was recently put under review.

Finance Minister Somkid Jatusripitak said industrial restructuring required various government agencies and private-sector groups to pool their efforts but currently, the Industry Ministry was handling the task alone. The government has asked the National Economic and Social Development Board (NESDB) to serve as a catalyst for greater co-operation in this regard.

After the crash of July 1997, many local manufacturers were forced to declare insolvency when overseas debts were recalled by foreign creditors ahead of their maturity dates.

As well, the stagnation of domestic consumption as consumers opted to save rather than spend prevented industries from maintaining existing production and utilising their full production capacity.

Commercial banks responded to the tough conditions by ceasing new lending, further exacerbating the plight of manufacturing firms.

Thailand's manufacturing production index, seasonally adjusted, experienced a drastic drop to 95.6 in the third quarter of 1998 from 111.8 in the first quarter 1997.

The capacity utilisation rate in the manufacturing sector, excluding liquor, dropped to its lowest recorded level at 47.6% in the third quarter of 1998 from 71% in early 1997.

Heavy industries such as automobiles, iron and steel, building and construction materials, petrochemicals and electrical and electronic goods were hit hard, and battled to stay afloat under crippling debt.

Light industries, particularly food processing and gems and jewellery, which are export-oriented industries but with more than 80% of their raw materials sourced locally, were able to stay afloat.

Employment in the manufacturing sector registered a sharp drop of 600,000 people, to about 2.9 million, 18 months after the 1997 crisis, according to the Social Security Office.

Fiscal policy, mainly government spending and tax cuts, were key measures adopted by the Democrat administration, which took power in November 1997, to promote economic recovery.

The government also threw enormous resources into stimulating the financial sector, based on the assumption that the recovery of the financial sector would result in the recovery of the real sector as well.

But the problems facing the financial sector were much deeper than the government had anticipated.

But one blessing in disguise has been the weakening of the baht which could help Thai exporters gain a more competitive edge in terms of pricing.

As a result, the value of Thailand's manufactured exports in 1997 increased to US$48.2 billion compared with $45.6 billion in 1996. However, the world economic slowdown in 1998 caused the country's exports of industrial goods to fall to $44.9 billion in that year.

Manufactured goods represented 80% and upward of total exports and accounted for 33% of the country's gross domestic product.

Since the second half of 1999, Thailand's export performance has improved following the economic recovery of trading partners, with manufactured products experiencing high export growth, especially in the high-tech area.

Several manufacturers such as in the auto, cement, and petrochemical industries have turned to overseas markets as a substitute for dwindling demand in the domestic market.

Since 2000, therefore, the rising number of auto sales and the surge in electrical and electronics and petrochemical exports have become the engines of growth driving the revival of Thailand's manufacturing industry.

Exports of industrial goods recovered to $49.3 billion in 1999 and $59.8 billion in 2000. The value declined to $55.5 billion last year, due mainly to the impact of the Sept 11 events.

Between 1998 and 2000, the previous government also introduced various measures to shore up the economy including seeking special loans from international financial institutions to provide to exporters whose businesses had potential but lacked financial support from jittery local commercial banks.

It also earmarked $123 million in structural adjustment loans from the World Bank to restructure 13 key industrial sectors, and to recapitalise the Small Industry Finance Corporation.

The government also set up three special funds aimed at recapitalising firms undergoing restructuring.

The funds are the one-billion-baht SME Venture Capital Fund; the $100-million Thailand Recovery Fund, set up with the Asian Development Bank; and the $500-million Equity Fund set up with the International Finance Corporation.

However, few concrete results have emerged to date.

Jaime Ruiz de Haro (left), country manager of Cemex Thailand, the rebranded operator of Saraburi Cement, which plans to increase its production capacity.

After the Thai Rak Thai-led government took office in early 2001, the funds, particularly the two latter funds, seemed to be neglected.

The government shifted its focus toward its populist policies, encouraging small and community-based businesses, and promoting a greater reliance on the use of local content.

It came up with ambitious projects, including the One Tambon, One Product programme; village funds; Thailand Plaza, an SME product venue; and the People's bank.

However, after one year in office, Finance Minister Somkid Jatusripitak conceded recently that efforts to strengthen local SMEs seemed to have failed.

To overcome obstacles, he has beefed up the role of the Office of SME Promotion, which was set up last year as the centre of all SME activities for state agencies.

Thailand's economic recovery lost momentum last year mainly due to the impact of the Sept 11 events and the global economic slowdown.

GDP growth dropped to 1.8% last year after two consecutive years of turnaround. After the economy hit rock-bottom in 1998, when GDP shrank 10.5%, growth has picked up, to 4.4% in 1999 and 4.6% in 2000.

Today, the manufacturing sector looks much better than in the first three years following the 1997 crisis. The manufacturing production index, for example, increased to 117.9 in the first quarter of this year compared to its record low of 95.6 in the third quarter of 1998.

Total capacity utilisation in the sector was 59.5% in the first quarter this year, compared with 47.6% in the third quarter of 1998.

Manufacturers say the improvement is due to mainly structural adjustments. Several industrial sectors have been consolidated and those players that lacked competitiveness have fallen by the wayside.

The following is a brief overview of how some key manufacturing sectors have fared:

ELECTRONIC GOODS

Electronics goods, mainly integrated circuits, are among the few sectors that led manufacturing recovery during the crisis. Given the weakening of the baht and the resurgent global IT industry between 1997 and 2000, Thai electronics exports picked up since 1999 after the valued dropped to $2.28 billion in 1998 from $2.45 billion the previous year.

The value of electronics good rose to $2.94 billion in 1999 and jumped to $4.48 billion in 2000.

However, the industry was hit hard in the last year by the shrinking global IT industry and the impact of Sept 11. The value of its exports fell by $970 million, to $3.51 billion.

But there are also warning signs for the industry. The growth in the value of electrical appliances and electronic imports is higher than that of exports.

The surplus in the trade accounts for electronics and electrical appliances has been shrinking indicating an urgent need for structural reform.

PETROCHEMICALS

Thailand's petrochemical firms have faced a severe financial crunch since 1997 as a result of huge debt burdens. Still, the industry gained high earnings during 1999 and 2000 due to an increase in the price of ethylene, the upstream material used to produce plastic pellets.

The industry turned down again last year when ethylene prices fell from US$535 per tonne at the beginning of last year to $300 a tonne in the first quarter of this year.

Industry analysts estimate that a strong recovery in the international petrochemical market would be delayed from 2003 to 2004 due to the worse-than-expected global economic slowdown.

But most of the key players in the local petrochemical industry had completed debottlenecking upgrades at thir plants, which had been planned before the crisis hit. As a result, once petrochemical prices pick up, local producers will be ready to catch up with the market turnaround.

STEEL

The local steel industry has been in a slump since 1998. With the sharp fall in construction activity and the overall economy, several steelmakers had been operating at only 30 to 40% of their capacity.

Not only have most producers suffered from a sharp drop in local demand, they have also faced dumping of steel by foreign producers, particularly from Eastern Europe and former Soviet republics, and subsidies and trade barriers imposed in key steel-producing countries.

Steel-rod makers appear to have borne the brunt of the slump as the number of producers nationwide has dropped to about 20 from just over 100.

The manufacturing production index for iron and steel products improved markedly in the first quarter this year when the index broke the 100 level, to 109.5, for the first time since the third quarter of 1997.

Capacity utilisation, which hit a record low of 33.1% in the third quarter of 1998, gradually increased to 56.6% in the first quarter of this year.

And the outlook for the steel industry is better than in the past as most of the NPLs in the industry have been transferred to the Thai Asset Management Corporation.

CEMENT

Cement producers, facing a sharp slump in local demand due to the collapse of the property and construction sectors in 1997, have stayed afloat by tapping export markets.

Last year, domestic demand for cement was 20.5 million tonnes while exports totalled 16.6 million tonnes. The country's cement production capacity is 52 million tonnes.

However, almost all local cement firms had been acquired by multinational cement makers. Among six key players in the industry, only Siam Cement Plc and TPI Polene Plc remain in Thai hands.
The latter, however, is expected to soon become part of the Swiss-based Holcim group.

The manufacturing index for the cement industry hit 102.6 in the first quarter this year, the first time that the sector index had broken the 100 level since the third quarter of 1997.

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