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Rough sailing ahead for the Thai recovery

Although the Thai economy has recovered pretty well from floods, we foresee mounting risks that the speed of recovery could fade quite quickly in the rest of this year.

The biggest risk will arise from the European debt crisis, from which we believe the worst is yet to come. On the local front, the most asked questions among businesses and investors remain about political stability and the risk of a repeat flood disaster in the upcoming rainy season.

Given the environment of heightened global risk, it is worth noting that crucial to the continuity of Thailand's economic recovery is the stability of government, which needs to carry through fiscal stimulus policies, implement new flood prevention measures, and retain investor confidence. Yet, what we have witnessed over recent months is a difficult journey to political reconciliation.

Turning to Europe, Greece's election result has probably bought some time for Italy and Spain, whose government borrowing costs had soared on uncertainty over the Greek outcome. But questions over the Spanish banking-sector bail-out will persist. In Italy, growing political strains and the risk of an early election are likely to underpin borrowing costs. Indeed, risks remain on Greece, if hopes for Greece's re-negotiation of bail-out conditions do not turn out as positively as markets expect. That said, we are likely to confront risk events surrounding Europe in the future.

Against these backdrops, we see rough sailing ahead for the Thai economy, with policymakers facing greater challenges to achieve the GDP growth forecast of about 6.0 per cent in 2012. The good news is that Thailand continues to have some scope for easing monetary policy to support growth, given the marked drop in crude oil prices followed by easing inflation. In our worst case scenario - a further slump in Europe involving a disorderly default - we see a chance for 50bps of BOT rate cuts, if needed.

On market implications, we are still bullish about the Thai bond market. In addition to an easing of the BOT policy rate outlook, we do not expect to see a durable shift in the underlying fundamentals in Europe, where conditions can continue to deteriorate further. As a result, global market sentiment is likely to remain in risk aversion, with further downside risk for the euro currency. In line with this prospect, the baht is expected to remain in a weakening bias for at least the coming few months.

Usara Wilaipich is senior economist at Standard Chartered Bank (Thai).


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