Higher food and fuel prices: What is the impact on the Thai economy and what to do about it?

2

higher food and fuel pricesAre high prices temporary or permanent?

Feb-10

Mar-10

Apr-10

May-10

Jun-1

0Ju

l-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-1

1

Feb-11

70

75

80

85

90

95

100

105

90

100

110

120

130

140

150Dubai Crude $US /Barrel

Agriculture Raw Materials Index (RHS)

Commodity Metals Price Index (RHS)

Food Price Index (RHS)

USD per barrel Index (Feb 2010 = 100)

Source: World Bank Economic Prospects Group and staff calculations

3

higher food and fuel pricesAre high prices temporary or permanent?

Jan-

85

Jan-

87

Jan-

89

Jan-

91

Jan-

93

Jan-

95

Jan-

97

Jan-

99

Jan-

01

Jan-

03

Jan-

05

Jan-

07

Jan-

09

Jan-

11

0

5

10

15

20

25

2010

US$

per

mill

ion

Btu

Oil

Natural gas

LPG

Coal

Crude oil = average of Brent, WTI, and Dubai; coal = Australia, spot; natural gas = Japan; LPG = Saudi Aramco contract price for propane Source: World Bank

4

higher food and fuel pricesAre high prices temporary or permanent?

19811982

19841986

19881990

19921994

19961998

20002002

20042005

20072009

0

50

100

150

200

250

300

350

400

EnergyAgriculture

+160 pct

+36 pct

Source: World Bank Economic Prospects Group and staff calculations

Nominal Indices (2000 = 100)

5

higher food and fuel pricesAre high prices temporary or permanent?

Source: IMF (April 2011 WEO)

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Rest of world ChinaFormer Soviet Union World1981-1999 average 2000-2008 average

Growth rate of primary energy consumption (percent)

20 20 20 20 20 20 20 20 20 20 20 20 20350

400

450

500

550

600

650

700

900

950

1,000

1,050

1,100

1,150

1,200

1,250Domestic Demand External DemandGDP (right axis)

6

impact on the Thai economy: growthHealthy growth projected for 2012, mostly helped by domestic demand.

+5.8 pct

-9.3 pct

+12.0 pct

+0.7 pct+4.9 pct

“Domestic” and “External” demand represent estimated contributions of each to absorbing domestic value-added.Source: NESDB and World Bank staff calculations.

Gross domestic product adjusted for inflation and seasonal fluctuations(THB billion)

7

impact on the Thai economy: growthFarm income has risen faster than rural prices despite weak output.

Sources: Bank of Thailand, Ministry of Commerce and World Bank staff calculations

2008Jan

2008Apr

2008Jul

2008Oct

2009Jan

2009Apr

2009Jul

2009Oct

2010Jan

2010Apr

2010Jul

2010Oct-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0Crop Prices

Crop Production

Farm Income

Rural Prices

Annual rate of growth, 12-month MA (percent)

8

impact on the Thai economy: growthHigher prices of agricultural commodities a net positive for growth because of the link to higher incomes for farmers…

Sources: Bank of Thailand and World Bank staff calculations

2009Jan

2009Mar

2009May2009Jul

2009Sep

2009Nov

2010Jan

2010Mar

2010May2010Jul

2010Sep

2010Nov135.0

140.0

145.0

150.0

155.0

160.0

165.0

105.0

107.5

110.0

112.5

115.0

117.5Farm Income IndexPrivate Consumption Index

Indices, 12-month moving averages

9

impact on the Thai economy: growth… as well as unskilled workers in general, as higher agricultural prices lift agricultural wages, which tends to boost all wages.

Year-on-Year Growth Rates in Real Wages

Overall wages deflated by the consumer price index; agricultural wages deflated by the rural consumer price index.Sources: National Statistical Office, Ministry of Commerce and World Bank staff calculations

2008

Q2

2008

Q3

2008

Q4

2009

Q1

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

2010

Q4-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

overall Agriculture (right axis)

10

impact on the Thai economy: growthWhen crop prices go up, agriculture draws workers from sectors with relatively low wages, which must be increased to stem the outflow.

Sources: National Statistical Office and World Bank staff calculations

-5 -4 -3 -2 -1 0 1 2 3 4

-5

0

5

10

15

20

25

Change in Employment Q4 2009 to Q4 2010 (percent)

Agriculture

Manufacturing

Retail

Construction

Tourism Oriented

Bubble sizes representaverage wages relative toAgriculture (=100)

Change in Average Wages Q4 2009 to Q4 2010 (percent)

11

impact on the Thai economy: growthAlthough export volume growth has lagged other countries, export value growth has been solid…

Source: World Bank.

Changes in export value and volume from 9/2008 to 1/2011 (percent)

East Asia & Pacific

China

Hong Kong SAR, China

Indonesia

Malaysia

Philippines

Singapore

South Korea

Thailand

0 10 20 30 40 50 60 70

ValueVolume

impact on the Thai economy: growth

12

… because Thailand is now exporting more of products that saw price increases (agriculture, autos, petrochemicals vs. textiles, E&E).

These productsincreased theirshare in Thailand’sexport basket.

Average export growth rate 2010 vs. 2007.

Sources: Bank of Thailand, Ministry of Commerce and World Bank staff calculations.

-4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.00.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Automotive

Petro-chemicals

Agriculture Products

E&E

Textiles, Garments, Leatherware,

Footware, Furni-ture

Cement and Base Metal Products

Change in weight of product group in export basket (percentage points)

13

impact on the Thai economy: growthRecently, higher export prices have been helped by higher prices for agricultural commodities...

Sources: MoC, Bank of Thailand and World Bank staff calculations.

Index of monthly export value adjusted for seasonal fluctuations.

t=-6t=-4t=-2t=0 t=2 t=4 t=6 t=8

t=10t=12t=14

t=16t=18t=20t=22t=24

80

90

10 0

11 0

12 0

13 0

14 0

15 0

t=0 denot es the be-ginni ng of the global recession and is set

to 100

Gl obal r ecessi on ( Nov 08)

Gl obal R ece ssi on ( Nov 08) Ag P ri ces defl ated

Move men t of se as o na lly -ad ju st ed , mon th ly e xp or t v al ue , t =0 d en ot es th e be gin ni ng o f e xp o rt t ur mo il ep is od es , a nd a re s et to eq u al to 10 0

14

impact on the Thai economy: growth… but in the case of autos, higher prices also reflect rising share of higher value-added passenger cars in the export mix.

Sources: Bank of Thailand and World Bank staff calculations.

Janu

ary-08 Mar

May JulSep Nov

Janu

ary-09 Mar

May JulSep Nov

Janu

ary-10 Mar

May JulSep Nov

Janu

ary-11

-60

-40

-20

0

20

40

60

80

100

120Automotive Export Volume %YoYAutomotive Export Price %YoYAutomotive Export Value %YoY

%YoY

15

impact on the Thai economy: inflationInflation has been low because demand-pull factors are still subdued and administrative measures have contained cost-push pressures.

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11-5.0

0.0

5.0

10.0

15.0

20.0

25.0

-40

-20

0

20

40

60

80

100

Average of Thailand, Malaysia and IndonesiaAverage of Singapore, Korea and the PhilippinesCrude Oil Prices (Dubai; right axis)

Transport and fuel inflation (3m/3m growth, annualized) USD per barrel

Source: CEIC, US Energy Information Administration.

16

impact on the Thai economy: inflationBut expectations are increasing.

07 Q

1 Q308

Q1 Q3

09 Q

1 Q310

Q1 Q3

90

95

100

105

110

115

120

Thailand: GDP level without the crisis (sa)Thailand: Ac-tual GDP level (sa)

17

impact on the Thai economy: risksContinued increases in oil prices could derail the global recovery. Possible impact of Tohoku earthquake on oil demand:

Crisis in the Fukushima power plant will lead Japan to switch to fossil fuel sources for 10 – 12 mnKW, which will require about 0.3 percent of the world’s oil supply.

The crisis also led to a reconsideration of nuclear power in a number of countries.

Thailand’s recovery still dependent on the outlook for advanced economies most of this gap is driven by incomplete

recovery in external demand, reflectingimportance of continued G3 growth

Actual and simulated GDP levels (sa) based on “no-crisis” assumption. Q1 2008=100

Note: No-crisis scenario shows output levels that would have been had quarterly growth been sustained at the mean rate during 2002-07.Source: Haver and World Bank staff calculations.

18

impact on the Thai economy: risksHigher food prices can potentially harm the poorest in society.

2006 2007 2008 2009-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

Number of Poor

Consumption Growth

Poverty Line

Food Prices

Year-on-Year Growth Rate (percent)

Source: NSO, NESDB, MoC and World Bank staff calculations.

FY 09 FY 10 (budget) FY 10 (actual) FY 11 (budget)0.0

5.0

10.0

15.0

20.0

25.0

21.1 20.3 19.5

20.5

15.9 14.4

17.1 16.7

3.7

6.0

2.5 3.8

Expenditures Revenues Balance

19

impact on the Thai economy: risksFiscal risks still contained despite decrease in diesel excise tax.

Expenditures include both on and off-budget items.Sources: Fiscal Policy Office and World Bank staff calculations.

Percent of GDP

likely to be exceeded

20

what to do about it?

Scale issues: increase vertical integration with agribusiness to get: Investment capital, advanced technology, market access, risk

management tools Increase R&D in agriculture to address climate change

Boost productivity in agriculture

Source: Bank of Thailand and World Bank staff calculations.1997Jan 1999Jan 2001Jan 2003Jan 2005Jan 2007Jan 2009Jan-8

-6

-4

-2

0

2

4

6

8

10

2005-2010 Average: 1.0 pct

1997 - 2005 Av-erage: 3.1 pct

Annual rate of growth of production of food crops, 12-month MA (percent)

21

what to do about it?

Thailand is one of the most oil-intensive countries in the region

Improve energy efficiency

Source: CEIC, BP Oil and World Bank staff calculations.

7 7.5 8 8.5 9 9.5 10 10.5 110

50

100

150

200

250

300

350

400

Korea

Japan

Australia

Bangladesh

China

India

Indonesia

Malaysia

Pakistan

Philippines

Singapore

Thailand

Oil Intensity (consumption tons per $1 million of real GDP in 2005 USD)

(log of ) GDP per capita

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