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Published on March 22, 2008

The existence of a trade deficit for two straight months indicates continuing economic momentum and helps reduce pressure on the baht, the Bank of Thailand said yesterday.

BOT senior director Amara Sriphayak said the central bank was not surprised by the trade deficit, which was caused by the accelerating growth of imports and declining expansion of exports.

Import growth, particularly in capital goods, indicates recovering domestic demand. Export growth remains high at 16 per cent year on year, although lower than the 33 per cent recorded in January.

"Exports in January grew strongly, due partly to a high-base effect, so the growth in February did not slow down so much. We have actually expected an export slowdown since the second half of last year," said Amara.

The Commerce Ministry reported a trade deficit of US$688.9 million (Bt21.5 billion) in February, on the heels of a deficit of $653.3million in January.

Amara said the deficit would reduce pressure on the baht as it continued to appreciate against the dollar, but competitiveness remains, considering the real effective exchange rate.

The baht opened at 31.28 per dollar yesterday, weaker than 31.21 on Thursday. The nominal effective exchange rate in February was 78.94, compared with 78.06 in the previous month, reflecting the baht's strength compared with the currencies of trading partners. According to the central bank, net international reserves in the week ending March 14 were $130.2 billion, compared with $127.2 billion the previous week.

The BOT forecasts that the trade and current-account balances

could turn negative next year due to the high growth of imports.

It projects the trade balance to be between minus $2.5 billion and a surplus of $0.5 billion. The current-account balance is expected to be between minus $0.5 billion and a surplus of $2.5 billion.

Charl Kengchon, chief of Kasikorn Research Centre, said the current account would run a deficit in 2010, the magnitude of which would be larger in later years. This would result from strong economic growth, expected to expand by more than the fundamentals would suggest.

Year-to-date cumulative exports and imports totalled $26.9 billion and $28.3 billion respectively, with a resulting trade deficit of $1.3 billion.

Tisco Securities said in a report that it expected the trade deficit to widen and that this would alleviate upward pressure on the baht. The currency has appreciated by 7.7 per cent for the year to date against the US dollar, the biggest rise in Asia (ex-Japan).

The company anticipates an imminent weakening of export momentum for Thailand's primary markets as the US recession bites.

Tisco Securities estimates that the private consumption index will rise by 9.5 per cent year on year boosted by rising car sales and improving consumer confidence. Despite the low base effect, the private investment index is expected to rise by a moderate 4.3 per cent year on year, since capital-goods imports softened slightly from the previous month and growth in commercial vehicle sales was small.

Following softer export growth in February, the manufacturing production index and capacity utilisation rate are expected to slow to 9.9 per cent and 74.4 per cent year on year, respectively.

Finally, headline inflation is expected to surge to 5.2 per cent year on year with core inflation of 1.6 per cent in March, Tisco said. This is because crude-oil and gasoline prices rose sharply before mid-March, offsetting the impact of the government's price-control policy.

Anoma Srisukkasem

The Nation