The Monetary Policy Committee of the Bank of Thailand (BoT), which will meet next Wednesday, is likely to keep the repurchase rate unchanged at 1.25 per cent, said Thanawat Polwichai, director at the Economic and Business Forecasting Centre at the University of Thai Chamber of Commerce.
Policy rate likely to remain unchanged
Private investment in Thailand has been subdued in the past three years due to uncertainty about the political situation.
In 2006-2008 investment grew by an average of 2.7 percent a year (compared with real GDP growth of 4.3 percent on average), down from 14.8 percent during 2003-2005. This earlier retrenchment of investment has dampened the impact of the financial crisis, most notably on foreign direct investment (FDI). While little new FDI is expected, there has been no rush to exit from foreign investors. Growth of private investment in 2008 came mainly from Thai investors, as gross FDI inflows declined from 2007 levels. Private investment is expected to contract 5 percent in 2009 as capacity utilization remains low (around 50 percent). However, growth could resume in the fourth quarter on the back of increased public investment. Public investment has been sluggish in Thailand since the 1998 crisis, but is expected to increase in 2009 given increased political stability and the political imperative to respond to the slowdown in the export sector. The share of public investment in real GDP averaged only 5.7 percent during 2004-2008 compared more than 10 percent before the 1998 crisis. In 2008, public investment contracted by nearly 5 percent as a result of political uncertainties, which delayed investment decisions. Public investment is projected to grow at 7 percent in 2009 as the implementation of large infrastructure projects step up.
Fiscal policy has become expansionary to mitigate the impacts of the crisis.
Expansionary monetary policy has been employed to help mitigate the impact of the global financial crisis and is starting to be reflected in the financial sector’s lending rates. As inflation rose rapidly in the first half of the year, the central bank of Thailand lowered its policy rate by 50 basis points to 3.75 percent. The decline in inflation facilitated cuts to 2.75 percent in December and 1.5 percent in late February. Market indicators confirm Thailand’s relatively strong financial position. Large foreign exchange reserves, smaller gross financing requirements on both the fiscal and external side, and ample domestic liquidity are among the key strengths in the current crisis. Despite the political turmoil late last year, CDS spreads have risen by about 100 bps less than some other East Asian countries since the onset of the global financial crisis in mid-September.
Thailand’s economic growth is falling by more than earlier expected amid a sharp and continuing decline in global trade.
The contraction would be Thailand’s first since 1998, said Mathew A. Verghis, the World Bank’s Lead Economist in Bangkok. It would follow a decade of growth averaging nearly 5 percent each year.
“Countries like Thailand that have been dependent on manufacturing exports are most affected,” said Verghis, who covers Thailand and four other Southeast Asian countries. The World Bank released its latest forecasts for Thailand and other economies in East Asia and Pacific on Tuesday. The global economic slump shut down what has been, for the past three decades, the main engine for Thailand’s economic growth: exports. As a result, the manufacturing sector has been badly hit. The Thai government estimated that one million or more workers would lose their jobs this year due to the slowdown. In January, the unemployment rate stood at 2.4 percent of the total workforce – a full percentage point higher than the 1.4 percent recorded in December 2008.
The Thai government announced an economic stimulus program totaling 117 billion baht ($3.34 billion). The program included a host of short-term measures to boost household consumption and assist lower-income families. The government is now preparing a second stimulus package worth 1.6 trillion baht ($45 billion). Among other initiatives, this package focuses on public investment in infrastructure projects, which the government hopes will help create 1.6 million jobs. “The infrastructure investments, if implemented, will help generate growth and improve Thailand’s competitiveness,” said World Bank. “However, it is worth noting that financing for infrastructure has been available for the past few years. What has suppressed investment was not funding, but rather political and institutional constraints.” While the impact on the real sector has been larger than expected, the global crisis has not shaken the Thai financial sector. The World Bank attributed this to Thailand’s strong macroeconomic fundamentals; low external debt coupled with high international reserves; and a sound financial sector, which has undergone a series of reforms following the 1997 crisis.
Private consumption in Thailand and investment also grew by more in 2008 than they did in 2007, despite the sharp increase in food and fuel prices. On the other hand, public consumption and investments in real terms have contracted in the first three quarters as a result of slow disbursement rates amidst political instability and slow project completion as raw material prices rose sharply.
Thailand’s real GDP is projected to grow by 0 to 1 percent next year. This will be the lowest growth Thailand has seen since 1998, when real GDP contracted.The major factor weighing down growth next year is the sharp slow down in the global economy, particularly the contraction of the economies that are Thailand’s major export markets – US, EU, and Japan.This will have a large negative impact on Thailand’s exports of both goods and services which has been the major source of income and the driver of the output growth in the past few years. The US dollar value of exports of goods is expected to expand by only 8 percent in 2009, compared to around 20 percent this year.
International reserves stood at US$106 billion in early December 2008 compared to US$87.5 billion at end-2007. This is due to the large capital inflows in the first quarter of the year and again in the last quarter of the year. External debt is low at around US$66 billion or 30 percent of GDP, of which two-fifths are short-term debt.Three quarters of the short term debt are trade credits and inter-company loans. Public external debt (government and state-owned enterprises) make up one-fifth of total external debt and less than 1 percent of it is short-term. Overall, external debt service ratios are manageable at 6.1 percent of exports.
A large share of loans in 2008 was for working capital as the cost of raw materials and fuel increased significantly in the first half of the year.Next year, loans will be more scrutinized for credit quality. Large corporations will increasingly turn to domestic borrowing as the cost of off-shore borrowing increases rapidly. Bank loans to large corporations will therefore to continue to expand, as their credit quality is generally high, but those to small and medium enterprises (SMEs) may not.