IMF, EIC predict growth of less than 3%

The IMF forecasts Thailand’s GDP growth to slow to 2.9% this year before improving marginally to 3% in 2020, while the Economic Intelligence Center (EIC) under Siam Commercial Bank (SCB) sees growth of 2.8% for this year and next.

The IMF’s view is in response to external and domestic headwinds, the global lender said in a report about an Article IV consultation in Thailand by the IMF’s executive board.

Although private consumption has held up, global trade tensions are harming exports through the global value chains.

On the external side, the projected slowdown in global demand and uncertainty stemming from trade tensions are expected to weigh on exports throughout this year, the IMF said.

Domestic factors include a weakening in consumption growth as the debt overhang weighs on credit growth and drought depresses farm incomes. Over the medium term, private consumption and investment are expected to strengthen, supported by a decline in political uncertainty and an increase in public investment.

“Risks to the outlook are tilted to the downside, emanating most notably from the ongoing escalation of protectionism threatening the global trading system,” the report said.

Thailand’s economy is stuttering, with 2.8% growth in the first three months of 2019 and 2.3% for the Aprilto-June quarter. Last year’s growth was 4.1%.

The IMF’s executive directors encouraged an expansionary policy mix to support domestic demand, plus structural reforms to promote inclusive and sustainable growth.

“Directors encouraged the authorities to undertake an investment-led expansion through the judicious use of existing fiscal space, while preserving sufficient buffers and ensuring fiscal sustainability,” the IMF said. “Strong implementation of macro-critical public infrastructure projects in the pipeline would crowd in private investment and stimulate domestic demand in the short run, while helping lift up potential growth in the long run.”

The IMF said it welcomed the August rate cut by the Bank of Thailand.

“Going forward, a number of directors saw scope for further monetary easing to help steer inflation back to target,” it said. “Many other directors considered the current monetary stance to be sufficiently accommodative, and noted monetary policy should be calibrated based on assessment of financial stability risks. Complementary use of macroprudential policy would also address financial stability concerns.”

The central bank at last month’s meeting kept its benchmark interest rate unchanged at 1.50% after August’s surprise cut.

The IMF said many directors considered Thailand’s external position to be substantially stronger than warranted by medium-term fundamentals and desirable policies.

“Directors emphasised the importance of exchange rate flexibility, with foreign exchange intervention limited to avoiding disorderly market conditions,” it said.

EIC DOWNGRADE

The EIC cut its outlook for GDP growth this year to 2.8%, predicting the same rate for next year.

SCB’s research arm downgraded Thailand’s 2019 economic growth outlook from 3% in August in response to the intensified trade spat between the US and China, the stronger baht and swelling household debt, said Yunyong Thaicharoen, chief economist and the bank’s first executive vice-president.

Prolonged trade tensions between the US and China will continue to take a toll on exports, he said, so the EIC sees the export contraction deepening to 2.5% from 2% forecast previously.

The export contraction depressed the unemployment rate to 2.2% in the third quarter from a year earlier, with a sharp decline in employment rate in the manufacturing sector of 3.7% over the period.

For the first eight months of the year, exports excluding gold and military arms shrank 9.8% in dollar terms.

Mr Yunyong predicted the baht would keep strengthening, given the current account surplus and foreign fund inflows, as Thailand is considered a safe haven.

The EIC expects the local currency to move in a range of 30-31 baht to the US dollar until next year.

The baht is up 7.7% against the greenback so far this year and has gained 24% over the past five years.

The baht’s appreciation will also lower tourist income, the EIC said, though it remains upbeat that tourist arrivals will reach 40.1 million this year.

Higher household debt will weaken consumer confidence, Mr Yunyong said, while cautious lending by commercial banks on the back of deteriorating loan quality and tighter loan standards will aggravate the situation.

Against the backdrop of a tepid economy, the EIC forecasts the central bank to cut its policy rate by another 25 basis points this year to support economic momentum.

Fiscal policy, especially infrastructure project investment in the Eastern Economic Corridor, will play a bigger role in expanding the economy, Mr Yunyong said. There is more room for the government to implement additional stimulus packages in the rest of the year and in 2020.

The 316-billion-baht stimulus package is set to boost 2019 GDP growth by 0.3 percentage points, while the 1,000baht cash handout and the cash rebate scheme are expected to contribute 0.03 percentage points to economic growth.

Meanwhile, Fiscal Policy Office director-general Lavaron Sangsnit said the higher cash rebate and allowing people to deduct some spending from personal income tax are among the office’s proposals for the second phase of the cash rebate scheme.