For the recovery to be sustained, the economy must eventually be supported by a pickup in private capital spending. Thailand is no exception. It is understandable why private investment so far has not contributed much to the economic recovery following the 1997 crisis. With about half of industrial capacity lying idle at the trough of the situation as a result of prior over-investment and demand contraction, there was very little incentive for firms to spend further on capital accumulation. Thus, the share of real private investment to real GDP fell from the average of 33 percent between 1990 and 1996 to just 11 percent in 1999. The collapse in private investment is also reflected in the large and persistent saving-investment surplus, which has thus far narrowed only slowly despite the strong recovery in GDP. These symptoms show that a recovery in private investment has lagged substantially behind the overall economic recovery and that there is still much room for private investment to catch up and close the existing saving-investment gap. The good news is that we have already begun to see a gradual pick-up in capital spending. Private investment growth that was at a modest 4.7 percent in 2001 has accelerated to 13.3 percent in 2002 and 17.5 percent in the first half of this year, and the share of real private investment to real GDP has also risen to 16 percent last quarter. But will this trend continue long enough to provide the needed fuel to sustain the current expansion?
Moreover, the allowed holding period of foreign currency deposits was extended from 3 to 6 months. The important lesson here is that we cannot push away globalization. Instead, we must learn to cope with and understand it well enough to reap maximum benefit from such an open environment. At the same time, we must reinforce our own immunity system, for example, by strengthening and broadening the domestic sector and by having good early warning indicators so that large capital fluctuations, should they occur, will not put a strain on the economy and impede our growth process. Appropriate policy mix regarding interest rate, exchange rate, and capital account liberalization thus remains an important challenge for the central bank. Ladies and gentlemen, I hope I have done my part today in sharing with you my assessment of the economy. My key point is that the economy is now doing better in terms of both the growth prospects and macroeconomic stability, and has the potential to continue to do well in the next year as the global economic environment improves. This important turnaround has come about through a combination of hard work, luck, and appropriate supportive policies, not to mention the progress that has been made on economic restructuring and reforms since the crisis. But most important perhaps has been the commitment, the spirit, and the confidence of our private sector that have helped steer the Thai economy through one of her most difficult periods.