THAILAND by absences


									                                                                                          QUARTERLY GLOBAL OUTLOOK - Q3 2006

                   UOB Economics Projections

                                  2004    2005 2006F 2007F
   GDP                             6.1     4.5   4.5   4.2
   CPI (average, y/y)              2.7     4.5   5.0   3.0
   Current account (% of GDP)      5.6    -2.1  -2.6  -1.0
   Fiscal balance (% of GDP)       0.3     0.6   1.0   1.0

n  THB weakened in line with the other Asian currencies and mirrored losses on the Thai equity market, but USD/THB
   looks to have found resistance at 38.5 for now. We expect USD/THB to keep above 38.0 and head towards 40.0
   towards year-end.
n  With politics clouding the economic picture, we expect growth for the rest of the year to be affected and have
   downgraded our 2006 full-year growth forecast to 4.5% from 5.1%.
n  BoT provided clearest signal yet that it is done with rate hikes and we expect rates to stay at 5.0%.

Thailand's equity market was not spared the sell-down seen across Asian bourses with the SET index falling by close to
18 per cent in a month from its peak of about 785 seen in early May. The baht, which typically tracks the stock market
also weakened from its high reached in early May, but interestingly, even as the SETI went into virtual free-fall to touch
a low of 646, THB held up relatively well against the USD.

USD/THB touched a low of 37.4 at the end of April, but
                                                                       THB Fairly Supported Despite SETI's Sharp Losses
with the sell-off in the Asian equity markets, THB retraced
some of the gains made since early this year. USD/THB
                                                                         USD/THB (inverse scale, LHS)
crept back up above the 38.0 level, weakening by up to                   SETI (RHS)
2.8% at 38.47 in mid-June. However, USD/THB seems to                                                Source: Reuters, UOB
have found a resistance at about 38.5 level. On a trade-         37                                                        840
weighted nominal effective exchange rate basis, our in-          38                                                        800
house model, which measures the value of the baht against        39                                                        760
the currencies of Thailand's trading partners, shows that
                                                                 40                                                        720
THB has weakened by some 1.7% in June from the
                                                                 41                                                        680
average rate in April.
                                                                 42                                                        640
The capital inflows propping up THB earlier this year has        43                                                        600
now reversed. While foreign investors have been net              Oct 04 Dec 04 Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06
buyers of Thai equity since October last year, with net
purchases by foreign investors hitting a high of THB 74.8bn
in January alone, they have now turned net-sellers. Foreign       Foreign Investors have Turned Net-sellers of Thai Equity
investors disposed of THB 34.4bn worth of Thai stocks in
May alone, with net-selling continuing in June. This partly        TH SET turnover value foreign investors net buy (THB bn)
explains the retreat in THB.
                                                                                                            Source: CEIC
Although the baht's weakening mirrors the fall on the Thai       60
bourse, the extent of THB's losses lags the losses on the
SETI by a wide berth. We believe this is in part the result of
the Bank of Thailand managing the currency to ensure a
measure of stability. Our suspicion is borne out by the           0

reserve numbers dipping by US$900m in the week ending            -20
June 9 from the previous week, though the latest numbers         -40
for week of June 16 vs June 9 showed reserve numbers              Jan 98        Jan 00     Jan 02        Jan 04      Jan 06
popping back up by US$300m.

                                                                                  UOB Economic-Treasury Research              1

Besides the fact that Thailand is being impacted by the retreat of global investors from the emerging Asia region as a
whole, the increase in its country-specific risks provides little impetus that could spur THB stronger for the rest of the year.
The continued political uncertainty in the country has started to crimp growth expectations with growth downgrades by
government agencies. We have also revised our GDP forecast for 2006 full-growth to 4.5% from 5.1%. With the reversal
of capital flows and growing risks on the economic front, we expect USD/THB to keep well above 38.0 for the rest of the
year and perhaps move back up to the 40.0 level that was seen at the start of the year.

Growth Crimped by Politics
While the Q106 headline GDP figure came in at a respectable 6.0% y/y, the headline rebound largely reflects the
recovery from a low base in 2005. In particular, there was the recovery in tourism from the aftermath of Dec 2004's
tsunami and an improvement in the agriculture sector from the drought seen in 2005. Strong electronic exports provided
a further boost to the Q106 number, with total exports growing a robust 13.4% y/y.

                                                     GDP by Expenditure

                                                                              %   y/y change       2006
                                                          Weight 2005      2003     2004 2005       Q1
                       Private Consumption                  54.6            6.4      5.9   4.4      4.1
                       Government Consumption                 8.3           2.3      4.7 12.2      -0.7
                       Investment                           22.3           12.1    13.8 11.3        6.6
                          Private                           16.6           17.7    16.3 11.2        7.2
                          Public                              5.7          -0.7      6.8 11.7       4.7
                       Exports                              66.6            7.0      9.6   4.4     13.4
                          Goods                             54.1            9.5      8.4   4.3     14.1
                          Services                          12.5           -2.9    15.5    4.6     10.9
                       Imports                              53.9            8.5    13.5    9.3      0.6
                          Goods                             45.5           10.7     12.3   8.9     -3.3
                          Services                            8.3          -3.0    20.4 11.6       22.8
                       GDP                                 100.0            7.0      6.2   4.5      6.0
                       Source: NESDB, UOB

However, as the Q106 numbers show, a key weakness arose from the government sector - both from consumption (fell
0.7% y/y) and investment (up 4.7% y/y). Private investment was also weak (up 7.2% y/y) compared with double-digit
growth in the previous three years. The latter is likely the result of businesses holding back from making major investment
decisions as a result of the political uncertainty that has plagued Thailand since the beginning of the year when street
protestors calling for Thaksin's resignation culminated in the Prime Minister calling snap elections and the ensuing
debacle of election results being annulled. While before we only had anecdotal evidence suggesting caution among
businesses, this has now translated into concrete data.

The continued political uncertainty which is dragging on for far longer than we had initially expected, with fresh elections
only expected some four months from now on Oct 15, has started to crimp expectations on the growth front. The
economic fallout from the political stalemate includes the suspension of the Thaksin government's planned THB1.8tr
mega infrastructure projects such as the Metropolitan Rapid Transit, highway extensions and housing projects. Besides
boosting government expenditure, the infrastructure projects were to have had spillover effects on private investment as

Besides the direct impact of losing a booster to the economy from government expenditure, the political uncertainty has
also taken its toll on consumer and investor confidence. April data shows that weakness in domestic demand is more
pronounced. With our expectation of a slowing in global growth in the later half of this year, the export sector that has
lent a third leg to prop up Thailand's economy will likely show signs of deterioration as well. As a result, we have lowered
our estimate for 2006 full-year growth from 5.1% to 4.5% y/y. This puts us at the lower end of the Bank of Thailand's
forecast range of 4.25-5.25% (revised down from 4.75-5.75%).

                                                                                    UOB Economic-Treasury Research         2
                                                                                          QUARTERLY GLOBAL OUTLOOK - Q3 2006


Rates Likely Reached a Peak
Growth concerns were clearly on the minds of Bank of Thailand (BoT) policy makers when they met to raise benchmark
14-day repo rates by 25 bps on June 7. In its policy statement, the monetary policy committee viewed that "there is a
probability that the economy could slow down going forward".

However, the BoT clearly had to balance growth concerns with the need to make doubly sure that inflation is under
control. With oil prices surging more than expected and causing inflation to exceed its previous forecasts, the central
bank chose to hike rates by another 25 bps to 5.0% - against market consensus view that it would hold rates steady at
4.75% - to ensure it meets its mandate of keeping core inflation between 0-3.5%.

The BoT's decision was likely swayed in part by the latest
                                                                             Inflation Should Peak by Mid-Year
May headline inflation, which continued to increase to
6.2% from 6.0% in April, largely due to continued increase              Headline Inflation (% y/y)
in transportation costs (14.2% y/y). Core inflation (strip out          Core inflation (% y/y)
energy and food), however, crept down to 2.75% from                                                      Source: CEIC
2.87%, to keep well within the BoT's target range. We             12
expect that headline inflation could stay above 6% y/y for        10
another month in June, but project that inflation will make        8
a step-wise drop in July to below 5% y/y as a result of the        6
high base in July last year (from the complete removal of          4
diesel subsidies).                                                 2
With inflation likely to come off and fresh concerns over           -2
the fragile growth, we expect that the BoT is now done               Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05
with its tightening. The central bank also provided its
clearest signal thus far in its June 7 statement: "the MPC
viewed that today's increase has brought the policy interest rate to the level which is appropriate for achieving economic
stability and supporting sustainable growth in the long run". Hence we expect that the BoT will keep its policy rate, the
14-day repo rate at 5.0% for the rest of the year.

                                                                                 UOB Economic-Treasury Research         3

To top