• Modest/uneven economic growth• Dilemma in financial system• Globalization to impact investment flows• Increasing industry consolidation• Selective investment opportunities• Stockmarket Outlook

Thailand : Economy and Stockmarket

13 2000November

2

Thailand Economy : Modest growth ahead

•As the Bank of Thailand sees it :-

•GDP Growth of 4.5-5.0% in 2000 and 4.0-5.5% in 2001•Core inflation of 1.5-2.0% in 2000 and 2.0-3.0% in 2001•Export growth of 15-20% in 2000 and 6.0-12% in 2001•Import growth of 28-32% in 2000 and 10-15% in 2001•A CA surplus of US$9-10bn in 2000 and US$6-8bn in 2001

3

Quarterly Economic Performance

Q1 Q2 Q3 * Jan-Sep *Real sectorManufacturing production index without seasonal adjustment 9.6 3.4 -0.5 4.1Manufacturing production index without seasonal adjustment 15.4 11.9 7.8 11.7Industrial capacity utilisation (%) 57.3 54.1 55.7 55.7Private consumption - Passenger car sales 97.3 36.2 1.6 35Private investment - Cement sales (tonnes) 2 0.9 -11.2 -3Consumer price index 0.9 1.6 2.2 1.6Core inflation (excluding fresh food and energy) 0.2 1 0.8 0.7External accounts ($ billion)Exports 16.2 15.7 18.0 50.0 % change 27.8 15 22.5 21.6Imports 14.3 14.8 16.5 45.6 % change 42.7 28 33.8 34.4Trade balance 1.9 0.9 1.5 4.4Current account balance 3.3 1.6 2.2 6.7Balance of payment -2.2 -0.4 0.4 -2.2Monetary AggregatesCommercial Bank Credit (ex BIBF) -0.1 -4.5 -9.4 0Bank Deposits -0.8 0 1.5 0* Preliminary

Source: Bank of Thailand

(% change from the same period of last year)

4

Economy : Reasons to be cautions on growth

• There are several reasons why economic growth could disappoint :-

• Nominal growth rates are very low by historic comparison (no chance to “grow” out of trouble)

• Deflationary pressures• FDI flows are sluggish• Limited room for the government to borrow further• Continued weakness in the banking sector• Corporate loan demand is constrained

(leverage/int.rates)• Government has talked reform, but implementation

weak • US economic landing may not be soft• High oil prices• Weak Euro has hit purchasing power in Euro-land

• On this basis, we are more comfortable with 4% rather than 5.5% growth in 2001

5

Economy : Growth is patchy ……...

• There are undoubtedly bright spots :-• Exports are strong (+22% ytd)• Vehicles sales have jumped (+30% ytd)• Mobile phone sales are buoyant (+35% ytd)• Electricity consumption is rising• SET earnings are improving• Significant refinancing of US$debt with Baht debt

• But look at :- • Industrial Capacity Utilisation (58% in September)• Manufacturing production fell 0.5% YoY in 3Q• Cement sales fell 11% YoY in 3Q• Commercial Bank credit (ex-BIBF) fell 9.4% YoY to September• Passenger car sales rose 2% YoY in 3Q

6

Economy : …. And likely to stay that way

• The scope for the current economic recovery to broaden appears limited

• Government borrowing levels are high (and an election is imminent)

• Consumer confidence is still lacking (dampened by low agricultural prices and limited job creation in manufacturing/construction)

• Bank deposit rates are low• Investment is subdued, though there is scope for a

modest acceleration in 2001

• For the foreseeable future, growth drivers will remain :-• Manufactured exports• Tourism• Vehicle (manufacturing)• Telecommunications• Petrochemicals

7

The Financial System : A major dilemma

• Still high levels of NPLs• Domestic banks under-capitalised to clear bad debts

(encourages delaying tactics)• Restructuring focused on large companies.• Infrastructure for delivery of loans to SMEs is (to say the

least) inadequate• Bankruptcy laws still weak• Democrat government opposed to national AMC, yet few

alternatives• Scope to revive bank lending (an engine for economic

growth) is limited • High bank spreads have failed to restore shareholders

equity (and borrowers have suffered) • Limited scope to lower deposit rates (politically

sensitive) • Tax regime discourages M&A activity

8

- Non Performing Loans : Bank SectorNPL inflow/outflow (THBbn)

May June July Aug SepNPLs 1908 1616 1597 1593 1115% q Total Loans 35.5% 32.0% 31.3% 31.2% 22.8%Net change in NPL -46 -292 -18 -4 -478Total NPL inflow 43 34 42 42 33From new NPL 27 21 24 17 19From relapsed NPL 15 14 18 25 14Total NPL outflow -89 -327 -60 -46 -511From restructuring -60 -94 -46 -35 -40From other reasons -29 -234 -15 -11 -470

Estimated relapse rate

THBbn May June July Aug SepReentry NPL 104 118 136 161 175Restructured loans 1450 1589 1657 1707 1769Relapse rate (%) 8% 8% 9% 10% 10%

Restructuring progress (THBbn)

May June July Aug SepTotal-restructured loans 1450 1589 1657 1707 1769Monthly restructured loans 81 139 67 51 61

9

Globalization to Impact Investment Flows

• Capital allocation to follow “Western” norms• Profile of emerging markets in portfolio flows is also

changing • IT revolution changing nature of competition• Increasing importance of (western) standards of corporate

governance• International standards of fiscal/monetary management• Thailand scores badly on corporate governance (but is not

alone in this regard in Asia)• Thailand scores well on monetary management (shift to

inflation targeting), but less well in fiscal management• Thailand is a proven destination for outsourcing

assembly/manufacturing, but scope to attract services seems limited

• Continuing concerns over education, corruption, politics• Investors will focus on core competencies (such as export

assemble, tourism)

10

Industry Consolidation : Making the strong stronger

• Thai industry needs to consolidate if it is to be competitive in a globalised / liberalised market

• There is evidence of consolidation in the Thai market place :-

• The string of collapses in the banking and finance sectors

• Superstores gaining market share in the retail sector• However, Thai tax laws stand in the way of M&A activity• Foreign ownership laws still prohibitive• Consolidation is on the (immediate) horizon in steel,

cement and petrochemicals

11

Thailand : Investment Opportunities

• Lack of investor interest in Thai stocks is hitting the prices of both fundamentally sound and unsound companies

• Select companies are fundamentally undervalued absolutely and relatively

• Thailand does have companies that aspire to international standards of competitiveness and corporate governance. These include Shinawatra Group, Siam Makro, BEC World, Hanna Microelectronics and Delta Electronics

• There are growth segments in the economy and companies growing within these segments. Exporters are well placed to grow, as are the superstores as they expand into upcountry markets.

• There are companies gaining market share in segments which may themselves be (temporarily) depressed

• There are companies which are emerging from fundamental problems, where the recovery is not being recognised by the market.

12

Thailand Stockmarket : Outlook

• - Volatile nearterm (election uncertainty and external +/ against a sluggish domestic economic backdrop)

• Scope for recovery in 2 0 0 1 (driven by “value”, political sta bility, lower oil prices, an easier monetary policy in the US and

a (hoped for) soft landing of the US economy, supporting a posit ive external environment for Thai exports)

• Risks are an unsatisfactory election outcome, a hard landing by the US economy, slowing economic growth, domestically, and d

eteriorating bank NPLs

Baht/$US rate

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SET Index

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16/7/9828/8/989/10/9823/11/988/1/9919/2/995/4/9925/5/998/7/9923/8/994/10/9916/11/9930/12/9914/2/0028/3/0016/5/0028/6/0010/8/0022/9/006/11/00

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SET Volume

13

Thailand Stockmarket : Foreign Investor Activity

• Foreign premia stabilising• Worst of foreign selling may be over• - MSCI re weightings (based on free float) will likely be marginall

y negative for Thailand

Foreign premium

10

15

20

25

Dec-98 Mar-99 Jun-99 Sep-99 Nov-99 Feb-00 May-00 Sep-00

% Trend of foreign ownership in the SET

50

150

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450

Dec-98 Mar-99 Jun-99 Sep-99 Nov-99 Feb-00 May-00 Sep-00

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F. Ownership (Btbn)Foreign ownership as % of total mkt caps.

Btbn %