Tisco foresees no improvement in 2016 GDP growth

The outlook for public investment is also less optimistic than last year. According to the Ministry of Transport’s action plan, big-ticket items will not be delivered until the second half, and the planned investment in fiscal year 2016 is only Bt58.6 billion, or about 0.4 per cent of gross domestic product. 

The key drag, however, will come from exports. Since global demand has continued to weaken and has shown no sign of recovery, we reiterate our non-consensus view that exports will likely contract again for the fourth consecutive year, by 2 per cent. China’s manufacturing PMI (purchasing managers’ index), which is a leading indicator for Thailand’s exports, remained on a downtrend in January.

Consumption will also suffer a setback from front-loaded demand in the fourth quarter of 2015, due to the impending change in vehicle tax and fiscal stimulus. 

Toyota Motor Thailand forecasts domestic car sales dropping by 10 per cent year-on-year in 2016, and car sales were highly correlated with consumption over the past decade. 

As global and domestic demand remains stubbornly weak, recovery in private investment will also be slow. Moreover, heightened political uncertainties will cloud the investment climate throughout 2016.

The Monetary Policy Committee meeting on March 23 will be reminiscent of the MPC meeting on March 11 last year, which delivered a surprise rate cut. Back then, disappointing GDP data from the fourth quarter of 2014 and soft economic data for January 2015 called for a pre-emptive move by the MPC. This time is not different in our view, as we expect fourth-quarter 2015 and January 2016 data to disappoint on the back of weak exports and lukewarm domestic recovery. 

Not only has economic recovery stalled, deflationary risk has increased. Falling oil prices have weighed on prices of other goods and services. In January, core inflation already showed signs of weakness, as it has fallen for four consecutive months to the lowest level since May 2010. With rising deflationary risk, we think the MPC will be under more pressure to reconsider its monetary-policy stance. 

Moreover, the real interest rate (policy rate minus headline inflation) remains very high despite two policy-rate cuts in 2015. The real interest rate in Thailand is still higher than those of East Asian peers, the only exceptions being Indonesia and the Philippines. Real interest rates have been on the rise since 2009, implying that monetary conditions have been tighter for many years already. The real interest rate now stands at 2 per cent, compared with the average of 0.2 per cent in the past decade.

The baht is also no longer conducive to economic recovery as it continued to gain strength against the US dollar and relative to peers in early 2016. A policy-rate cut now would help restore a balance in price competitiveness relative to regional currencies, thus helping to alleviate pressure on exports. 

In short, we think the MPC will deliver a pre-emptive 25-basis-point rate cut in March to ward off downside risks to growth, after it has reviewed disappointing fourth-quarter 2015 GDP data and monthly economic indicators for January 2016 – which will be released on February 15 and 29 respectively. 

The MPC meeting will also come after the meeting of the US Federal Open Market Committee on March 15-16. If the MPC learns then that the Fed has held off on a rate increase – which is highly likely in our view – the MPC can rest assured that its decision to cut the policy rate will not go against the Fed move.

 

Charnon Boonnuch is economist at the Tisco Economic Strategy Unit. He can be reached via [email protected].