March 01, 2014 00:00 By Takayuki Kanaboshi
The Thai economy is expected to experience a recession in the first half of this year due to a dearth of growth engines, according to Amonthep Chawla, vice president and head of economic and financial-market research at CIMB Thai Bank.
He expects gross domestic product to contract by 1.6 per cent this quarter, and by 0.3 per cent in the second quarter.
He believes that if a government can be set up by the third quarter, confidence will return to stimulate growth in the second half of the year.
The bank has also lowered its forecast of GDP growth to 2.4 per cent this year from 3.4 per cent predicted last September. In the worst-case scenario, with the political situation dragging on and a government failing to be set up by the end of the third quarter, he expects the GDP to contract by 1 per cent overall this year.
With the economy in such a state, Amonthep thinks that the Monetary Policy Committee may reduce the Bank of Thailand’s benchmark interest rate from 2.25 per cent to 2 per cent at its meeting on March 12, to reduce the burden on consumers and households with high levels of debt and to stimulate some growth.
From the ongoing political strife, consumer and investor confidence is low and still falling. As a result, tourism growth is slow, with hotels and restaurants the most affected. Businesses that rely on the domestic market are at a risk from weaker demand, and many are suffering from lower sales affecting their financial liquidity.
Investments by businesses are in a decline, with a decrease of 11.3 per cent in the fourth quarter of last year. This suggests a trend of businesses and investors delaying their investments until the current political situation abates and the country is in a more stable position.
According to Amonthep, there are two factors that Thailand should be worrying about the most: quantitative easing (QE) being tapered off by the United States, and slower-than-expected growth in China.
Though at a glance the current crisis in Thailand is like history repeating itself, Amonthep argues that this situation is worse than the last one.
The difference is that this time Thailand’s export position is much weaker than it appears on paper. Thailand is shown as still being a net exporter, but that is because despite the poor export performance, import is doing even worse.
Thailand’s current export figures are not very impressive despite the depreciating baht and the recovering global economy, he said. This reflects a reduction in demand for Thai exports, products that are technologically inferior to goods that are high in demand at present. Even the export of paracetamol to China is decreasing, despite being a significant part of Thailand’s shipments.
Additionally, Thailand’s trade partners have changed since 2007. Back then, Thailand’s major trading partners were countries such as the United States and Japan, whereas after the global recession Thailand focused its trade more on Asean countries and China. The problem is that the biggest current economic growth is in developed countries, whose trade with Thailand has lessened.
Another point to worry about is how the credit-rating agencies may change Thailand’s ratings and outlook. Currently Moody’s and Fitch are reviewing Thailand’s "stable" outlook, while Standard & Poor’s is still keeping the outlook at "stable". But Amonthep argued that Thailand’s economic outlook (based on GDP growth) ranks it lower than other countries with the same credit rating, which is a worrying sign. If the political situation is prolonged for another six to 12 months, its economic outlook will become worse and the country will be at risk to be downgraded.
QE tapering is also problematic for Thailand. Though the US programme is being tapered off US$10 billion at a time, a meeting by the Federal Open Market Committee on March 19 could decide to end the programme earlier if the US economy is doing better than expected.
Amonthep suggests that if the monetary stimulus is tapered off by $15 billion at a time instead, it could result in a panic where investors abandon Thailand for safer investment options. This as well as the potential changes in Thailand’s credit rating and outlook could discourage foreign investors further, resulting in a net capital outflow from Thailand.
Amonthep concluded that though the future was looking bleak for Thailand, it still had potential for recovery. He pointed out that what Thailand needed was an event – not necessarily the setting up of a new government – to spark confidence in consumers and investors again, to act as a driver for economic growth.