The Thai economy is turning increasingly Japanese — and monetary policy is unlikely to cure what ails it.
The Bank of Thailand’s 1.5 per cent policy rate provides little room for manoeuvre. With interest rates already so low, further monetary loosening is unlikely to give much of a boost to borrowing, and may not be able to dent the baht’s strength.
Even with the dovish turn by the US Federal Reserve, the Bank of Thailand has no good answers for the country’s malaise, lending credence to the bearish outlook for the economy.
The Thai economy grew just 2.3 per cent last quarter, seeing weakness across key drivers including exports and tourism, while private consumption growth also decelerated. Excluding periods of extreme political disruption and natural disasters, its performance in the first half was the worst since the Asian financial crisis. A recently announced stimulus package is nowhere near enough to turn things round.
The central bank briefly surprised markets on August 7 by trimming its policy rate 25 basis points. Some commercial lenders have reduced their rates by a corresponding amount, but with the cost of borrowing — and economic sentiment — already so low, consumers are unlikely to care. A larger cut of 50 or more basis points could give a jolt to growth in home and car loans, but the cautious central bank has not made a move of that size since the global financial crisis.
Instead, another 25 basis point cut appears increasingly probable before year-end, though this will probably matter only to bond markets — and then only slightly.
The baht has strengthened marginally since the cut, even though the Bank of Thailand has warned it may take further steps to fight currency appreciation. Although the baht was not included on the latest US Treasury department currency watchlist, this remains a concern and means direct market intervention will be tricky.
Central bank inaction
In many ways, Thailand now looks more like Japan than a healthy emerging market. Inflation is too low, growth has stalled for over a decade and the population is rapidly ageing. Between early 2015 and late 2018, the Bank of Thailand kept rates pinned at just 1.5 per cent, even as the US Federal Reserve rolled back its quantitative easing programme. With the economy still reeling from the political chaos of 2013-14, raising rates to follow the Fed was not on the cards.
By early 2018, the effective US Federal Funds Rate had climbed past Thailand’s policy rate, yet the central bank still did not budge. It raised rates only once, by 25 basis points, in its final meeting of last year.
Despite higher US rates, the baht’s resilience has given it safe haven appeal among emerging markets investors. At the end of the first quarter, foreigners held Bt857bn ($27bn) in baht-denominated government bonds, accounting for 18 per cent of outstanding issuance, up from 15.2 per cent of the market a year earlier.
The almighty baht
The Thai economy continues to lag its Asean 5 peers considerably. Since 2014, Thailand has managed to grow just 3 per cent on average, compared with about 5 per cent for Malaysia and Indonesia and over 6 per cent for the Philippines and Vietnam.
While political volatility is the main culprit for Thailand’s long-term underperformance, the baht is dragging on exports and deterring tourists. The currency has gained 15 per cent against the US dollar since the start of 2017 and 8 per cent since mid-2018.
Thai exports have been falling since December, while the growth of spending by tourists, the big economic driver these past five years, has decelerated to low single digits.
Thailand’s persistent current account surplus, which remains Asean’s highest at $29bn for the 12 months through June, explains the baht’s strength. Exports have fallen, but so have imports, and tourists are continuing to pump money into the country, pushing foreign currency reserves to a record $209.2bn in July.
The central bank has taken modest steps to reduce foreign capital inflows, including lowering the cap on non-resident bank accounts to Bt200m from Bt300m. Such marginal efforts have not been enough to weaken the baht, however, and industry groups including the Federation of Thai Industries are lobbying the bank to cut rates and take additional measures to deter “hot money” inflows.
In the wake of disappointing second-quarter GDP numbers, the government announced a Bt316bn stimulus package, but the central bank predicts that its impact will be limited to boosting GDP by 50 basis points — helpful, but nowhere near enough.
The latest measures are spread thin, including an extra Bt500 per month for low-income welfare card holders, a convoluted rebate programme for domestic tourism, and reductions in government bank interest rates for farmers hit by drought. Further spending is likely, especially on greater subsidies for farmers — a common feature of populist Thai governments.
The Thai economy will need more robust stimulus than this to achieve what monetary policy cannot. Fortunately, the government wields a relatively clean balance sheet — public debt is just 41.3 per cent of GDP — and can afford to spend.
Yet stimulus spending can only go so far. To avoid turning Japanese, Thailand needs to renew its ability to attract high-quality foreign direct investment, such as mobile phone manufacturing, which increasingly prefers Vietnam. Larger investment incentives — with fewer restrictions — would signal that the government is serious about longer-term, structural reform.
FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.
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