By THE NATION
According to its report on the Asian economic outlook for 2017-18, its below-consensus growth forecast of 2.5 per cent for Thailand’s 2017 gross domestic product envisages that recent positive impulses will wane while the drag on growth from the credit cycle persists.
The rise in non-performing-loan (NPL) ratios in recent quarters following a credit boom from 2010-2014 suggests a misallocation of capital and a need for balance-sheet adjustment. Ultimately that process should be good for growth. In 2018, as balance sheets are progressively cleaned up, UBS projects real GDP growth to reaccelerate to around 3 per cent.
Politics and fiscal policy are key sources of uncertainty in UBS’s projections. It is possible that long-awaited infrastructure spending by the military-backed government ahead of an end-2017 election could support growth.
It is also possible that uncertainty in the bureaucracy around political leadership after a long-anticipated election slows down public investment activity.
Projections by the Public Debt Management Office suggest that after providing a meaningful impulse in late 2015 and early 2016, the incremental impulse to growth from deficit spending will wane in 2017 and 2018. UBS takes this as its base case scenario.
The boost to growth from Bank of Thailand policy should also be limited. UBS does believe policy interest rates will edge lower in early 2017 on the grounds of low inflation and disappointing growth. However, the BOT does not appear keen to ease policy because of concerns over financial stability. As with several other economies in the region, interest rates in Thailand are probably close to their lows. UBS projects policy-rate increases in 2018.
Low interest rates and public infrastructure spending – if it proceeds as planned – should be positives for private investment. So could a recovery in export growth at close to double digits (not UBS’s base case). However, in addition to signals from NPL data that some balance-sheet repair is necessary, private businesses may also choose to postpone investment until the change in political leadership is clearer.
The military government has proposed elections in late 2017. After the passing of His Majesty King Bhumibol Adulyadej, the election road map was confirmed, but delays or changes in plans are still possible.
UBS expects private investment growth to remain subdued.
More positively, the agricultural sector (9 per cent of GDP, 35-40 per cent of employment) should contribute to growth in 2017 after contracting by 4 per cent in 2015 because of poor weather conditions. That in turn should help consumption – but only at the margin given the modest contribution of agriculture to GDP.
Consumption activity may also be supported by the end of debt repayments associated with the first-time-car-buyer scheme in 2012 – although the availability of new credit and the willingness to borrow may be curtailed by still-high household-debt levels more generally.
Conversely, tourism growth could become a less positive contributor to consumption after a tightening of rules for Chinese tour groups.
Nevertheless, tourism, subdued private investment and the moderate expansion in credit all promise to keep Thailand’s current-account surplus elevated. Risks to competitiveness from being outside the Trans-Pacific Partnership is also reduced after the US election – although US policy could still affect Thai trade.
UBS projects the current-account surplus to remain in the range of 5-10 per cent of GDP in 2017 and 2018 – even with the rise in oil prices. The baht should continue to be somewhat less volatile than peer currencies as a result – although that may add to pressure on the BOT to ease policy one last time.