HSBC cuts Thai growth forecast for 2 years

HSBC also expects the Bank of Thailand to cut the policy interest rate by 25 basis points to 1.25 per cent at the September 14 meeting of its Monetary Policy Committee (MPC) in order to provide a bit more support to growth.

According to Nalin Chut-chotitham, economist at HSBC’s Bangkok branch, Thailand’s economy continues moderate but uneven growth. Tourism and fiscal spending continue to expand well, but private investment, private consumption, and exports are struggling a little more. 

In the first quarter of 2016, GDP growth was stronger than expected (3.2 per cent year on year versus HSBC’s expectation of 2.6 per cent), but this pace is unlikely to continue because of increased uncertainty on global growth following the United Kingdom’s referendum vote to leave the European Union. 

“We think that Thailand’s exports and private investment are both likely to grow at a slower pace than previously forecast. Also, recent data showed credit growth slowing, as well as weaker business and consumer confidence,” Nalin said.

Besides cutting its GDP growth forecasts for both 2016 and 2017, HSBC expects the MPC to cut the policy rate to 1.25 per cent, from 1.50 per cent currently, at its September meeting. In part, this would be an attempt to pre-empt possible real effective exchange-rate appreciation of the baht as neighbouring economies cut their interest rates, and imports continue to slide because of weak domestic demand (boosting the trade balance). 

HSBC said it was also important to note there are other positive factors that should help to limit the downside risks to growth. 

For a start, the worst of the drought is likely over. According to the Thai Meteorological Department, rainfall is expected to return to normal levels between now and September. This means that HSBC can expect a recovery, albeit gradual, of agriculture output and farm income, followed by an improvement of consumer spending, and amelioration of household-debt problems.

Next, there are stimulus measures to keep growth chugging along. For instance, the Cabinet has approved the one-year extension of a tax-reduction scheme for companies that start to spend on investment this year. 

Since March, US$6.2 billion (Bt218 billion) worth of infrastructure projects have been approved by the Cabinet. 

 

Policy issues

The International Monetary Fund’s Article IV assessment has noted that there is room for further monetary easing to support growth in Thailand, but agreed with the BOT that such decisions should be balanced against financial risks and the need to preserve policy space. 

The BOT has also said that further rate cuts might have little impact on growth, given weak confidence and currently limited structural changes. 

“Yet we think that the weaker external environment now warrants pre-emptive policy action,” Nalin said. “Hence we expect the BOT to provide a bit more support to growth and cut its policy rate by 25 basis points to 1.25 per cent in September, and keep it unchanged at least until end-2017. 

“An aggressive move is not likely at this juncture because the BOT would most likely want more time to assess the impact of the ‘Brexit’ vote and other economies’ policy responses. Furthermore, monetary conditions remain accommodative, so the policy easing will be mainly a symbolic and a pre-emptive move.

“As for structural reforms, we continue to see a faster pace of improvement on the fiscal front. In June, the Cabinet approved the much-awaited land-and-buildings-tax bill. The new tax will replace the existing property tax with more ‘modern’ features. 

“The government estimates that property-tax revenue will double to Bt60 billion in the first few years and not put too much burden on households and farmers. ”

 

Risks

Key downside risks are still-weak exports and the impact of household leverage on consumption growth. However, tourism and fiscal spending may be stronger than HSBC currently expects, it said. 

Given that there are more fiscal measures to support growth, the bank thinks risks to growth are now more balanced.