China is top concern for Thai economy

The unexpected protraction of the drought and its effects on farmers’ purchasing power along with the chance of Greece exiting the euro and its possible effect on the European Union’s economy are secondary.

The central bank last month lowered its economic-growth forecast from 3.8 per cent to 3.0 per cent. The revision did not consider the possible effects from a longer drought, red cards for illegal, unreported and unregulated (IUU) fishing, or a "Grexit" from the euro.

"The 3-per-cent growth prediction assumed that Greece would not default, but it already has," Don Nakornthab, director of the BOT’s Macroeconomic Policy Office, said at the 19th "MFC Finance Forum" held by MFC Asset Management yesterday.

"Nevertheless, we do not think that the Greece situation will hurt the EU economy that much, so we are more concerned with a further slowdown in China and [elsewhere in] Asia, as exports to China alone are already more than to all the countries in the EU.

"If China can only manage to expand by 6 per cent and a bit, then Thailand’s export growth in 2015 and its forecast for 2016 will be further affected by China’s slowdown."

The International Monetary Fund expects China’s economy to expand by 6.8 per cent this year.

The effect on the tourist industry of the International Civil Aviation Organisation’s red flag and the protracted drought will hit domestic consumption, which is already weak, and the effects from a possible red card for IUU fishing on the export sector could also lead to a further slowdown in economic activities, Don said.

Visit Ongpipattanakul, managing director of Trinity Securities, said a hard landing in China was possible if the bubble in its capital market burst, while Nilsuwan Leelarasamee, vice chairman of the FTI, said he was also concerned about a further slowdown in China. One of the biggest indicators of that was its steel consumption.

"There are still opportunities. China still has to build even though its growth has slowed, and it is importing steel from Thailand to meet this demand.

"But if this slowed down in June and the traffic is switched to China exporting steel to Thailand, then we are in trouble," he said.

"China is still eating our fruits and [other] foods despite the economic slowdown, so this [food] industry is still happy, so we have to monitor its consumption of steel closely, as that is the best sign to keep an eye on."

Greece’s debt default has less of an impact on the Thai economy as that country accounts for only 0.1 per cent of Thai exports and Greeks represent only 0.07 per cent of all foreign-tourist arrivals, said Phacharaphot Nuntramas, senior vice president for the economy and financial-markets research at Siam Commercial Bank’s Economic Intelligence Centre (EIC).

Despite that, the global economy needs to be closely monitored, especially the increase in the US federal funds rate expected this year.

The EIC forecasts that the fed funds rate will be increased by 0.5 percentage point this year and 1 percentage point next year, pushing it up to 1.625 per cent.

The rise will spark volatility in fund flows. The EIC expects the BOT will raise its policy rate next year by 0.25-0.5 percentage point. But before it does that, the central bank will trim the rate again this quarter, since monetary policy plays a crucial role in rejuvenating the Thai economy.

The expected policy-rate cut will restore consumer confidence and revive exports, since after the rate cut, the baht will start depreciating against the US dollar, he said.

The baht this year is expected to stay around 34-35 per US dollar.