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Headwinds unabated, SCB analysts foresee 2.7% rise for Thai economy

Jan 17. 2020
Yunyong Thaicharoen
Yunyong Thaicharoen
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Siam Commercial Bank’s Economic Intelligence Centre expects the Thai economy to grow 2.7 per cent in 2020, representing a modest improvement from the 2.5 per cent projected for 2019.

Yunyong Thaicharoen, the centre’s chief economist, said on Friday (January 17) the expansion would be driven by an anticipated gradual recovery of merchandise exports following signs of restored health in global trade, which is due in part to the Phase 1 trade agreement between the United States and China.

Also supporting growth are more accommodative monetary and fiscal stimulus measures being enacted by many countries.

Nevertheless, the baht, which has appreciated by more than 24 per cent against other currencies in the past six years and is expected to maintain its strength, will continue to cut into exporter earnings and render Thai exports less competitive. 

Tourism income is due for a decline with foreigners tending to spend less individually. The number of visitors is expected to rise, but Yunyong sees the rate of growth likely moderating.

Private domestic demand is projected to expand more slowly than last year. Even with exports expected to recover, private consumption and investment are forecast to cool further due to several adverse factors.

A decline in employment especially in manufacturing, deterioration of consumer confidence, a contraction in non-farm income, a reduction in farm income due to drought, and the high level of household debt will together choke household spending, particularly on durable goods, he said.

Private investment is expected to slow, in line with subdued domestic purchasing power.

Low capital utilisation and high inventory in the manufacturing sector will contribute to a deceleration in private investment in coming quarters.

In addition, the persistent contraction in consumer and commercial vehicle sales, as well as a decline in real estate construction due to LTV (loan-to-value) requirements from the previous period, will likely further weigh on domestic demand.

However, the government is expected to play a larger role in supporting growth in 2020 through the use of stimulus packages, short-term support for vulnerable groups and infrastructure investments.

It will also enable the private sector to take part in supporting growth, such as auctioning off 5G-spectrum licences, which should set in motion additional investments in telecommunications and related sectors.

With regard to domestic financial conditions, interest rates are expected to remain low throughout the year, while the baht should continue to face appreciation pressures.

Yunyong expects the Monetary Policy Committee to maintain an accommodative stance to lend support to economic recovery.

It will likely keep the policy rate unchanged at 1.25 per cent throughout 2020. The centre still sees the probability of a rate cut in the first half of 30 per cent on three possible conditions – weaker-than-expected growth, much higher non-performing loans and the baht’s continued appreciation.

Supported by a massive current-account surplus, the baht is expected to remain persistently strong, closing 2020 at 29.5-30.5 per US dollar.

Additional relaxation in capital outflows, both for overseas business operations and investment in foreign assets, will only marginally help ease pressure on the baht in the short run. More time is needed to tackle structural limitations such as financial literacy, foreign investment capabilities and impeding rules and regulations.

Only after that would capital outflow be sizeable enough to significantly mitigate appreciation pressures on the baht.

There are three key risk factors for the Thai economy in 2020 – trade war uncertainties, geopolitical risks and household and business financial vulnerabilities.

Despite completion of the Phase 1 trade deal between the US and China, many uncertainties remain around America’s protectionist policies that can impact global trade, such as the next phase of the negotiation, potential trade retaliations with Europe, and the decision to cut GSP privileges for many trading partners.

At the same time, geopolitical risks, especially from the conflict between the US and Iran, the prolonged protests in Hong Kong, and Brexit, will continue to pose challenges for global growth recovery.

Domestically, key risks to growth include financial vulnerabilities among households and businesses, particularly those with high debt and whose income suffers from the economic slowdown, technological disruptions and increasing competition.

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