Modest outlook for GDP growth amid unresolved issues

Investors keeping a close eye on the farm sector, tourism and the central bank’s policy direction. By Tim Leelahaphan

Questions remain about how broadbased Thailand’s economic recovery is, and whether growth of 4.5% or above for the rest of the year is achievable, based on recent meetings Standard Chartered held with investors and local experts in Bangkok.

The agricultural sector was the main focus of investors; it remains to be seen if the recent improvement in agricultural production, prices and employment will translate into a pickup in private consumption in the second half.

The Fiscal Policy Office (FPO), the Finance Ministry’s think tank, last month raised its 2018 GDP growth forecast to 4.5% from 4.2%, in contrast to investors’ less sanguine view; we expect growth of 4.3%.

Investment and trade are improving. Interestingly, concerns about lacklustre private investment have faded amid an improving manufacturing sector, strong export growth and progress on public infrastructure investment.

Nonetheless, the impact of US-China trade friction on Thailand — especially the automobile and auto-parts sectors — is being closely watched.

Meanwhile, the adverse impact of the stricter Government Procurement and Supplies Management Act appears to be fading. The new law, which aims to improve the transparency of public spending, had earlier resulted in slow disbursement of the public investment budget. Disbursement of around 50% is still below the 65% target for this fiscal year.

Concern about the tourism industry has risen in the aftermath of the July 5 boat accident off Phuket that claimed the lives of 47 tourists from China. Early data shows that growth in tourist arrivals from China — the country’s biggest source of tourists by far — slowed in July but remained positive.

It remains to be seen whether the government can restore confidence in tourist safety ahead of China’s Golden Week holiday from Oct 1-7, and whether the incident will have a broader impact on the tourism sector. More than 10 million Chinese tourists visited Thailand last year, with arrivals concentrated during the Lunar New Year and Golden Week holidays.

Investors remain neutral on the monetary policy outlook. Most are reluctant to raise their expectations of policy rate normalisation in Thailand given low inflation expectations. However, we still expect the Bank of Thailand to increase the policy rate in 2018, as there are clear benefits from normalising policy sooner rather than later.

While the baht is supported by strong fundamentals such as a large current account surplus and ample foreign reserves, we think it is unlikely to remain immune to external market volatility linked to Chinese yuan depreciation.

Moving in line with monetary policy tightening in other countries (both regionally and globally) would reduce the risk of capital outflows. Acting sooner rather than later would also result in a gradual rise in interest rates, avoiding the need for an aggressive catch-up, and would be market-friendly.

We think businesses and markets are prepared to some extent for policy normalisation. A couple of commercial banks recently started to increase mortgage rates. There have also been signals from companies to pursue gradual fund mobilisation through debentures to lock in low financing costs.

Investors will closely watch the central bank’s next Monetary Policy Committee meeting on Sept 19 to see if it signals a clearer shift in its stance towards tightening, or even decides to start normalising policy.

‘‘ It remains to be seen whether the government can restore confidence in tourist safety ahead of China’s Golden Week holiday, Oct 1-7.