THE OUTLOOK FOR THAILAND'S BALANCE OF PAYMENTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700050029-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 17
• Document Creation Date: December 20, 2016
• Document Release Date: March 10, 2006
• Sequence Number: 29
• Publication Date: March 1, 1973
• Content Type: IM

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25X1
Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The Outlook for Thailand's Balance of Payments
Confidential
ER IM 73-32
March 1973
Copy No. 79
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Thailand's international payments - an important bellwether of economic policies
and plans in the past - show prospects of renewed deterioration in 1973. Because the
Thais have classically been very sensitive to changes in international reserves in formulating
growth and stabilization programs, this development could have major consequences for
economic events in that strategically important country.
After nearly a decade of rapid economic growth accompanied by balance-of-payments
surpluses, the payments position shifted into defi4;7.t in 1969-71 and i, serves dropped close
to US $172 million. This trend resulted from such factors as a disappointing merchandise
export performance and reductions in the US presence in Thailand with increasing
Vietnamization of the war. As reserves declined, Bangkok cut back on some of its
development programs, and the result was a decline in economic growth after 1969 from
9% to near 6%. In 1972, exceptionally strong export demand returned, causing the
international payments trend to reverse, and exchange reserves rose $200 million.
The payments prospect for 1973, however, is for a return to an overall deficit, for --
despite continued strong world demand - rice and corn shipments will fall from record
levels because of poor weather conditions this past summer. The lack -f export growth
will be accompanied by slight reductions in invisible earnings and capital inflows. Imports,
on the other hand, are expected to grow 10%-15% because of increased import prices
resulting from recent currency realignments, and continued expansion of industrial
production. With these projected patterns of foreign exchange earnings and imports, reserves
probably will not increase and, indeed, could drop as much as $150 million.
A decline in reserves, which are still large, need not by itself be particularly disturbing,
but the Thais will also take a hard look at the longer term economic prospects, which
are not favorable. Faced with a further deterioration in the balance of payments as US
military expenditures and aid decline, the government is likely to impose import
restrictions. Although this action will stem or slow reserve losses, it will also slow economic
growth and development somewhat.
The Outlook for Thailand's
Balance of Payments
March 1973
25X1 Note: Comments and queries regarding this publication are welcomed. They may he
directed to
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DISCUSSION
Payments Trends During 1960-71
1. One of the most striking features of Thai policy is the tenacity
with which the authorities have followed cautious monetary and fiscal
policies, including pursuing a favorable balance-of-payments position even
when doing so was detrimental to growth. Maintaining stable exchange rates
and a high level of reserves was regarded as critical because of the relatively
important position foreign trade occupies in the economy. With large
reserves, the Thai government was able to keep the economy generally free
of restrictions on trade or other current transactions and to sustain an
atmosphere of business confidence. Consequently, the open economy
benefited from the stimulation of international competition and the
corresponding increase in efficiency of private-secior business activities.
2. During the past decade, gross domestic product grew at an average
annual rate of 9% - one of the best performances in the world. A boom
in merchandise exports gave an important impetus to this growth in
1960-66, as world demand for rice surged upward and several new export
crops (corn, kenaf, and tapioca) were developed. In 1967-70, merchandise
export growth slowed to about 1% annually, but the impact on the balance
of payments was masked for a few years because service receipts surged
forward from large inflows of US dollars associated with Vietnam-related
military spending. Because Thailand lacks a substantial capital goods
industry, rapid increases in production were accompanied by growing import
expenditures, but these were sustainable because exchange earnings had
grown apace.
3. The growing reliance of the Thai economic boom on dollar
earnings from US military expenditures, however, was bound to cause
problems eventually. US expenditures in Thailand dropped after 1968, while
merchandise exports continued their slow growth. Consequently, the balance
of payments shifted from surplus to deficit, and foreign exchange reserves
fell $172 million during 1969-70, after rising about $600 million in
1960-68. The drop in reserves in 1969-70 would have been greater if
economic growth had been sustained at the earlier pace. Growth slowed
to 6% a year, however, in response to restrictive monetary and fiscal policies.
4. The deterioration in the balance of payments moderated in 1971
as earnings from merchandise exports grew 16% because of increased
international demand for a number of commodities, particularly rice. Rising
concern over the growing trade imbalance and reserve losses had prompted
the Thais to increase import duties in irid-1970, and this action was
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important in cutting import growth to less than 1% in 1971. Consequently,
the overall payments deficit was reduced to $16 million, compared with
$127 million the year before. Reserves, however, fell less than $1 million
because Thailand's Japanese yen (and some other foreign currency) holdings
appreciated in the December 1971 monetary realignment.
5. Underlying this pattern of ups and downs was the Thai rice export
performance and the comparatively slow effect of efforts to diversify
exports (see Figure 1). Although other export categories increased rapidly,
Thai trade fortunes were still most influenced by the world market for
rice, which accounted for about one-fourth of total export earnings during
the 1960s. Rice sales dropped from a peak 1.9 million metric tons in 1965
to 1.0 million tons annually during 1968-70, although earnings from rice
did not drop until 1968 because of high world market prices. By 1971,
however, rice prices had fallen 50% from the peak of early 1968 to less
than $100 per ton (see Figure 2). The market turned around toward the
end of 1971 as a number of producers - particularly the Philippines, South
Korea, and Indonesia -- experienced production difficulties and resumed
buying large quantities of rice in the world marketplace.
The Balance of Payments in 1972
6. The resurgence of merchandise export growth that began in the
latter part of 1971 accelerated in 1972 (see Table 1) and was an important
element in the $200 million increase of exchange reserves to a total level
close to $970 million. Favorable world market developments contributed
much to this performance, but other factors also were important. Thailand
had a good agricultural harvest in 1971 and, because exports had been
abnormally low in the prior few years, had accumulated record rice stocks
that enabled it to meet the unexpected spurt in rice demand. Increased
government activism in the export market also helped boost sales. Finally,
US in-country military spending increased in response to the stepped-up
pace of activities in Indochina, thereby causing invisibles receipts to rise
unexpectedly.
Merchandise Trade
7. An unprecedented gain in agricultural exports - accompanied by
a more modest increase in imports - caused Thailand's perennial trade
deficit to drop by nearly $100 million in 1972 to only about $400 million.
Merchandise exports increased more than 30% to $1 billion. Except for
rubber earnings, which were affected by soft world prices, the gain in export
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Thailand: Composition of Merchandise Exports
Kenaf
and Jute
Tapioca
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Thailand: Prices and Rice Exports
Prices
Average US $ Per Metric Ton
200 r
1965 1966 1967 1968 1969 1970 1971
I I I I I I I I I I I i 1 1 1 1 1 1 1
Rice Exports
Thousand Metric Tons
earnings was fairly evenly distributed throughout the commodity categories,
although rice was the largest gainer, with sales volume up about 25% to
a level of 2.0 million tons and earnings up nearly 45% to close to $200
million. Most of the rice earnings increase was attributable to greater volume,
but toward the end of the year, price increases also pushed earnings higher.
Kenaf and jute sales also rose rapidly as raw-fiber producers in Bangladesh
were forced, by the initiation of hostilities with Pakistan, to withdraw from
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Table I
Thailand: Summary Payments Positiona
Million US $
1970
1971
1972b
Trade balance
-584
-483
-400
Merchandise exports
685
796
1,050
Rice
121
140
200
Kenaf and jute,
corn, and sugar
128
170
250
Other commodities
436
486
600
Merchandise imports
1,270
1,279
1,450
Receipts from US
military spending
214
198
220
Other net service
receipts
74
68
100
Official assistance
46
37
30
Net capital inflow
123
164
250
Ov hall balance
-127
-16
200
a. Because of rounding components may not a tote totals shown.
b. Estimated. All 1972 data - except year-end reserves - are
preliminary estimates based on partial returns. For example, complete
trade data are available for only the first six months of 1972. Aggregate
balance-of-payments data are available through the third quarter. The
data for 1972 are particularly sensitive to revisions because errors and
omissions (consisting mostly of unidentified capital inflows) were
particularly large - some $50 million through the third quarter.
the world market, and buyers turned to Thailand as an alternative supplier.
In the first half of 1972, for instance, kenaf and jute earnings were close
to 50% above the comparable period of 1971. Corn sales were also strong
in the first half of the year, but then slipped somewhat because of supply
constraints caused by a poor summer harvest. Nevertheless, the strong sales
effort in the first half, coupled with price increases beginning in the fall,
was sufficient to raise earnings for corn about 10% over the 1971 earnings
level. Sugar had a banner year as Bangkok - which had withdrawn from
the International Sugar Agreement (ISA) in 1971 - sold 426,000 tons
(much of it under long-term contract) to earn $60 million, compared with
$16 million from 145,000 tons in 1971.
8. Favorable external developments accounted for the largest share
of the improvement in trade, but Thai government measures were at least
partly responsible. Some of these policies were implemented initially in
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1971, but their full impact was not felt until 1972. Most important were
government efforts to bolster rice export volume, which had stagnated at
about 1.0 million tons annually during 1968-70. Credit sales and
government-to-government rice sales were initiated, and the rice premium
(an export tax) was eliminated for most grades of Thai rice, although it
was reimposed in the latter part of 1972. Bangkok also began to promote
exports directly by approving the establishment of trade offices overseas
and sending out annual trade missions to solicit new orders. As noted, a
decision to withdraw from the ISA opened a new and substantial sugar
market to Thai exporters. On the domestic side, tax credits and other
incentives were extended to manufacturers producing goods primarily for
export, and interest rates on letters of credit for exports were reduced.
9. Although imports increased in 1972, the growth was slower than
that for exports. Through the first six months of the year, imports totaled
nearly $700 million, an 11 %a increase over the comparable period in 1971;
and, for the full year, import growth is estimated at close to 13%.
Preliminary evidence indicates that the 1971 yen revaluation was a primary
factor in pushing up Thailand's import bill. Japan is Thailand's major trade
partner, accounting for 35%-40% of total imports in recent years. Increases
in the price of Japanese goods apparently had little negative effect on the
volume of these imports. The dollar value of imports from Japan during
the first half rose I I% over the comparable period of 1971, while the volume
of shipments remained largely unchanged. The greatest growth in total
imports occurred in the consumer goods categories, where the supply of
Japanese goods is highest.
10. Consumer goods, including intermediate as well as finished items,
were the fastest growing import category in 1972, registering a 21% rise
in the first half of the year, compared with the same period of 1971. Greater
spending by US military personnel based in-country and increased demands
of the tourist industry were factors in this growth. Industrial production
rose somewhat in 1972, but continuing excess capacity in the manufacturing
and construction sectors apparently precluded much increase in investment
goods imports, which rose only 8% in the first half.
11. Net services receipts grew last year to about $320 million from
$266 million in 1971. Most of the increase came from greater US military
spending in Thailand and from tourism. In the spring, the United States
augmented its Thailand-based air capability in response to the North
Vietnamese offensive; US force levels, which had dropped to 32,000 in
early 1972, rose sharply to 44,000 men. Earnings from US military spending
and tourism alone totaled $220 million during the first nine months of
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the year, compared with $180 million for the same period of 1971. The
increase in services, coupled with the reduced trade deficit, resulted in a
reduction of the current account deficit to about $80 million.
Capital Movements
12. A sharp rise in private foreign investment underlies the increase
in net capital inflows to an estimated $280 million in 1972. In the first
three quarters of the year, net private investment increased two-thirds over
the 1971 pace to $110 million, and public investment and official assistance
provided $55 million, as shown in Table 2. A lack of private investment
growth and (as noted earlier) continuing excess industrial capacity suggest
that, although private foreign investment inflows increased to $110 million,
the funds were used to increase working capital and other liquid balances
rather than building up the productive base. Most of the gain in direct
private investment, for example, was attributed to foreign firms adding to
their balances in Thai banks. A rise in portfolio and short-term capital
inflows reportedly occurred in response to lower interest rates in Europe
and increased demand for financing the record level of trade.
Table 2
Thailand: Capital Movements
Million US $
January-September
Total
163
217
Private capital
66
119
Direct investment
29
55
Other long-term
33
42
Short-term
4
13
Public capital
32
30
Official transfers
32
25
Errors and omissions
33
52
Foreign Exchange Reserves
13. Buoyed by the strong export performance and improvement in
the other accounts, foreign exchange reserves rose $200 million in 1972
(see Figure 3), with $155 million of the gain occurring in the first six
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Thailand: International Payments
Million US $
2000
Merchandise Imports
Total Foreign Exchange Deficit
Earnings
Capital Inflows
Service Exports
S~rp UC OOW
Merchandise Exports
months of the year. In December alone, more than $50 million was added
to reserve holdings, largely on the strength of record rice sales. The
December increase was nearly double that accumulated during the last
month of 1971 and compares with declines for the same month in the
previous two years. Currently, reserves are the equivalent of eight months
of imports at the 1972 rate; this is above the record low seven months'
level recorded in 1970 but still well below the 1968 peak of 10 months
of imports.
The Payments Outlook for 1973
14. Thailand's international payments position this year will be
strongly influenced both by development,- in the v,orld rice market and
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by the declining US military presence in Southeast Asia. Agricultural output
is down because of poor weather this past summer. Although world demand
for rice and several other major crops is expected to remain high, Bangkok
will be hard pressed to equal the level of merchandise exports reached in
1972. Other foreign exchange earnings should drop - but only
moderately - because of planned reductions in the US presence. The import
bill, on the other hand, is likely to continue expanding rapidly owing both
to sustained growth of the Thai non-agricultural sector and to the higher
import prices due to the devaluation of the dollar and the upward float
of the Japanese yen. Reflecting these developments, foreign exchange
reserves are projected to drop.
Merchandise Exports
15. Export performance will be disappointing this year because poor
weather in the sumtt;zr has constrained the amounts of rice and corn
available for export. Particularly crucial is the size of the rice harvest
currently under way. Unfavorable weather disrupted planting schedules,
particularly in major drylard areas in the North and Northeast. Preliminary
official estimates place the rice harvest at only 11.7 million tons of paddy,
a drop of about 1.5 million tons from last year's harvest.
16. If the harvest is as poor as indicated, Thailand will be hard pressed
to supply its traditional rice markets and will be unable to supply newer
markets developed in the past few years. Past consumption patterns suggest
that a paddy total of somewhat less than 12 million tons from the current.
harvest will permit 1 million tons or so of rice exports. With a second
rice crop in late spring of about 400,000 tons and the availability of rice
in November and December from the next major crop, Thailand is likely
to export 1.0 million tons to 1.3 million tons of rice in 1973. Drawing
down rice stocks to capitalize on high prevailing rice prices offers the
possibility of slightly exceeding this range.1 Because prices are expected
to remain 1' jh throughout the year, Thailand probably will earn between
$140 million and $200 million (compared with $200 million in 1972).
17. The outlook for corn, kenaf and jute, and sugar exports, which
account for about 25% of the total, is not as good. The drought affected
the corn crop, which totaled only 1.3 million tons, compared with
2.3 million tons in 1971, and substantial drops in foreign exchange earnings
from this commodity are thus forecast for 1973. Thailand had contracted
to sell 1.4 million tons to Japan and Taiwan last fall, but has since had
to renegotiate the contracts and will supply a total of only 780,000 tons
1. Some sale of stocks has already occurred. Rice exports during January, for instance, were 50%
larger than in the preceding January; this sort of increase could only have come from stock
drewdowns.
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to the two countries. An additional 280,000 tons is to be shipped to Hong
Kong, Malaysia, and Singapore. At current prices, therefore, a decline of
about 40% in corn earnings from 1972 to $70 million is likely. Kenaf
exports will also probably drop as world purchases continue to be redirected
toward the traditional South Asian suppliers. In addition, Thailand will be
hard pressed to maintain sugar earnings at the 1972 level because of
domestic processing and grinding constraints.
18. Most other export items should rise moderately in 1973, but not
to the degree witne3sed last year. Rubber and tin earnings, for example,
should rise slightly as world prices continue to firm. Tapioca exports should
grow as quality standards are improved and tapioca gains greater acceptance
among European buyers. Lesser agricultural export items -- tobacco,
sorghum, kapok fibers, and the like -- should benefit from government
promotional efforts in new markets as well as continued expansion in
established markets and therefore are projected to rise 5% or more on
average. Exports of manufactures -- now less than 10% of the total - will
probably add little to earnings. Even if a substantial share of orders for
Indochina reconstruction is received by Thai businessmen, the value of
goods that Thailand could supply (cement and other construction materials)
would be small.2
19. In summing these rough indications of 1973 export levels (see
Table 3), earnings could be off as much as $1 JO million (10%) and will
probably not be any better than last year under the most optimistic
assumptions.
Other Sources of Foreign Exchange Earnings
20. Projection of other elements of Thailand's current account
indicates little opportunity for expansion this year. Net receipts for services
and other invisibles are expected to decline in 1973 on the order of
$20 million. This decline will come about as slow reductions in US military
expenditures in Thailand3 are only partly offset by continued growth of
earnings from tourism and investment income.
21. Official assistance and capital inflows are also projected to fall
this year, about 10%, with half of the decline coming from lower economic
aid levels. US assistance to Thailand in fiscal year (FY) 1974 will be roughly
2. Even under the most optimistic assumptions, for example, South Vietnam's cement requirement
related to reconstruction probably would not increase more than $10 million this you.
3. US force levels are currently being augmented somewhat because some air units and command
responsibilities are being phased out of Vietnam and set up in Thailand. Over the course of the
full year, however, a sustained low level of hostilities in Indochina would reduce the demand for
US presence 9nd the amounts of in-country expenditures.
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Thailand: Merchandise Exports
1972
1973 Pro/ecttons
Total exports
1,050
950.1,050
Major commodities
685
565-635
Rice
200
140-200
Rubber and tin
165
170
Corn
115
70
Kenaf and jute
75
55
Sugar
60
50-60
Tapioca
70
80
Lesser commodities
365
385-415
one-half that funded in F)( 1973. The promulgation of new foreign
investment laws and incentives, lower interest rates, and other government
measures should help sustain capital inflows close to 1972 levels. The
Indochina settlement could stimulate investment throughout the region,
with part of the gain accruing to Bangkok, but there is not likely to be
an immediate rise over 1972 levels. Foreign investors probably will move
cautiously until prospects for peace are more fully known. Moreover, they
will continue to be concerned over new restrictions on foreign national
employment decreed by the Thai government in late 1972, and will be
somewhat discouraged by the fact that there is excess capacity in a number
of industries.
Import Patterns and Financing
22. Imports probably will grow some 10%-15% in t 973. The floating
of the Japanese yen and the 10% Thai currency devaluation - undertaken
in step with the change of the US price of gold - undoubtedly will add
significantly to import costs because the Thai demand for Japanese goods,
as suggested by the 1971 yen revaluation, seems to be relatively insensitive
to price increases. In the ^:.:sumer goods categories, Japanese imports are
often the only goods available in local markets. The Japanese also constitute
the largest source of private investment and the largest foreign business
contingent working in Thailand, and their influence is reflected in orders
placed almost exclusively in Japan. In many instances, Japanese businessmen
provide not only goods but also the managerial expertise and financing
needed to merchandise goods successfully in Thailand.
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23. Intermediate and capital goods imports are also expected to rise
faster than in 1972, as industry continues to recover from the recession
of 1970 and development spending picks up. After two consecutive years
of cuts in development spending, Bangkok has approved a modest expansion
of public investment in the FY 1973 budget.
24. Import growth within the range of 10%-15% would probably lead
to a foreign exchange reserve drawdown. With foreign exchange earnings
running at some $1,500 million to $1,600 million in 1973 (see Table 4)
and imports running at $1,600 million to $1,650 million, reserves could
drop as much as $1 sn million.
Thailand: Exchange Earnings and Imports
1972
1973 Projections
Total foreign exchange
earnings
1,650
1,500.1,600
Merchandise exports
1,050
950.1,050
Net services and transfers
320
300
Capital movements and
assistance (including
errors and omissions)
280
250
Imports
1,450
1,600.1,650
Change in foreign exchange
reserve holdings
200
-ISO-0
Impact on Economic Policies
25. Thus it appears that the balance of payments will deteriorate this
year and foreign exchange reserves will erode somewhat. A reserve
drawdown of up to $150 million by itself would not be particularly
unsettling to Bangkok, as the level of exchange holdings would still total
more than $800 million. Moreover, the reserve accumulation last year was
greater than the anticipated 1973 drawdown.
26. The Thais, however, atiach great importance to maintenance of
their reserve position, and a large exchange loss is likely to elicit a strong
policy reaction that could slow growth and development. Such a reaction
will be especially likely if Thai expectations of another banner year do
not materialize. Recent statements by Thai officials suggest they expect
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to maintain export earnings close to the 1972 level and are counting heavily
on peace in Indochina and associated reconstruction orders to stimulate
domestic production. By the same token, although they acknowledge rising
demand for imports, they have not publicly addressed the question of rapid
import growth and the possibility of reserve drawdowns.
27. Thai economic policy decisions also depend on longer term
prospects, which are not especially favor. ble. As noted earlier, Thailand's
export performance remains tied to a relatively limited group of agricultural
products, demand for which is largely set by external factors. In the longer
term, the outlook for these commodities is for modest growth ar best; yet
export promotion continues to be most heavily directed toward these
products. Perhaps the upsurge in world demand for some of these products
in the last two years diverted the Thais from concentrating on developing
industrial exports. Export-oriented manufacturing based on locally provided
ra:v materials has a Urge potential, particularly in such lines as seafood
processing and fruit canning. Thailand also has an abundant supply of
relatively well-trained low-cost labor to process imported raw materials for
export, as Korea and Taiwan have been doing. Government activity to
encourage industrial exports has been increasing, but results are few.
Development of the country's only industrial estate, for example, has been
slow, and the gcvernment has yet to establish any manufacturing facilities
outside the customs barriers. Even if government policies shifted more
toward developing these kinds of exports, the impact on export earnings
would not be felt for a few years.
29. Faced with these trends ir exports and assistance, the Thais are
unlikely to allow their reserves to fall very far before restricting imports.
Although this could be accomplished in a number of ways (such as increasing
import taxes, rationing imports, or restricting private spe;:ding by means
of credit controls), they probably would prefer to increase tariffs on
consumer goods selectively as they did in mid-1970 or perhaps impose
quantitative limits on Japanese imports. The latter action would reduce Thai
dependence on Japanese suppliers, a change the leadership would certainly
look on favorably. Regardless of the method used, however, a substantial
cut in imports would soon hit producers' goods and probably would not
be achieved without slowing the rate of economic growth.
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