Economic Outlook (Thailand) – 10/04/2014

Lacklustre Growth Outlook for 2014 Amid Increased Political Risks

u  Thailand’s economic growth moderated sharply to 0.6% y-o-y in 4Q 2013, Downside risks to growth, have increased following the recent constitutional court ruling that voided the inconclusive 2 February elections, as it was not held nationwide on the same day. This suggests further political turbulence ahead, with increasing risks that a new government may not be formed by 1H 2014 that could further weigh down domestic demand. As a result, we are downgrading our real GDP growth forecast to 1.9% in 2014, from +2.7% projected previously and +2.9% in 2013.

u  On the external front, investors are paying close attention to China’s latest developments as they are worried about its economic prospects and whether it could avoid a full-blown credit crisis. Although there are downside risks, we are of the view that China has the capability and financial power to overcome it. As a whole, the world economy is on track to chart a stronger growth in 2014. This will likely provide support to Thailand’s export recovery going forward.

u  The overall fiscal deficit is projected to increase to 2.6% of GDP in FY2014, from a deficit of 1.8% in FY2013, before receding to 1.4% of GDP in FY2015. Although Thailand’s public debt has increased steadily over the years, the recent rejection of the THB2trn infrastructure investment plan will likely keep the public debt manageable at below 50% of GDP.

u  The current account deficit will likely reverse into a surplus in 2014 and 2015, after registering a deficit in 2013. However, the Thai baht, in our view, is still vulnerable to financial market volatility as a result of a global swing in risk appetite due to the US Fed’s tapering of monetary easing. As a result, the Thai baht is expected to trade at the range of between THB32.00 and THB34.00 in the near term but could gradually strengthen to THB31.50 towards the end of 2014.

u  Although inflation is envisaged to trend up going forward, overall price pressures remain subdued amid the lack of demand-pull factors. As the political environment and economic conditions have yet to improve, we think the BOT may reduce the policy rate by another 25-50 basis points in the coming meetings, if the Thai baht remains stable.

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