Bangkok--9 Jul--Siam Commercial Bank
EIC revises down 2019F Thai GDP growth to 3.1%, lower from previous projection of 3.3%. The main reason is from trade war situation and global economic slowdown, affecting Thai exports. Going forward, global economic slowdown is likely to continue due to the global trade and investment slowdown, resulting from recent escalating US-China trade tensions in May 2019 when the US decided to lift its trade tariff from 10% to 25% on Chinese products worth USD 200 billion. China retaliated back by hiking tariff to 5-25% on US products worth USD 60 billion. While G-20 meeting in late June resulted in a temporary trade truce with no further tariff hikes, uncertainty remains high over 2H19F. In response to continued trade tensions and gloomy global economic situations, major central banks have turned more dovish, sending signals on easing their monetary policies. However, EIC expects the impacts of those possible easing policies to be limited. Consequently, EIC now expects 2019F Thai exports growth to contract by 1.6% (vs +0.6% previously). Moreover, EIC also revises down the number of tourists to 40.1 million or 4.8% growth and expect a slowdown in tourists' spending per head due to the economic slowdown in several tourists' countries and the strong Thai Baht effects.
The impacts of falling exports spread out to domestic demand. We foresee slower-than-expected private investment due to falling exports, a slowdown in residential construction activities (following stricter LTV measures), and investors' concern on the ability of new coalition government to combine and implement economic policies. On public investment, expanding public construction activities are likely to continue (7.0% growth projected), but purchases of equipment are likely to be slow with a sharp decrease in the first quarter (-11.7%YOY). Besides, the expected 3-month delay in national budget process would be another risk factor affecting disbursement performance in projects that has never been initiated (no contingent debt) before the last quarter of this year. For private consumption, EIC expects the sector to grow by 3.9%. Even though private consumption is supported by expanded employment and government stimulus measures that already implemented in the second quarter and further possible measures after the new government in place, the projected 3.9% growth rate is slower than the previous year. The main factors for lower growth rate would be from anticipated deceleration in durable goods (especially from the strong vehicle sales over the last 2 years), high level of household debt as well as employment risk in manufacturing sector that would possibly be affected by export contraction.
For monetary policy, EIC expects a flat policy rate at 1.75% throughout 2019F. However, given high uncertainty from the trade tension, we foresee a downside risk on a rate cut by 25 bps if the economy slips to below 3% growth in 2019F. The MPC efforts to normalize the policy rate and create a policy space are likely to be delayed from the economic deceleration and heightened downside risks as well as the below target inflation rates. Nonetheless, from the last meeting, MPC still signals a hawkish stance by communicating that Thai economy will likely bounce back next year and continues to show concerns on some financial stability issues over the low interest rate period such as accelerated household debt and risk underpricing. Accordingly, EIC expects in the base case scenario that the MPC is likely to hold its policy rate unchanged at 1.75% for the rest of the year, together with macroprudential measure for taking care of financial stability issues. However, if 2019 economic growth falls under 3%, EIC anticipates a 25 bps policy rate cut to shore up the economy. For Thai Baht direction, EIC accesses that Baht is continually appreciated compared to other regional currencies on the back of more dovish stance by other major and regional central banks, Thailand's massive current account surplus, and hence further capital inflows. From the abovementioned, EIC expects Baht tends to move between the range of 30-31 Baht/USD for the rest of the year.
The upcoming risks stem from internal and external factors. Though US-China trade war sentiment was slightly better after G-20 meeting as there is no further tariff hikes from both sides, trade dispute remains a key risk factor that can be resumed with a further tariff escalation in the future. From EIC scenario analysis, in the worst-case scenario (trade war is intensified), 2019F Thai exports could contract by 3.1% and hence the GDP growth is likely to growth by only 2.7%. Furthermore, other external risks that should be focused on are geopolitical risks such as Brexit and the dispute between Iran and US that could generate fluctuations in global financial and commodity markets. On internal risk, political uncertainty remains a key factor. Although the prime minister was appointed by the parliament, a new coalition government still have many challenges, for example, a slim majority of MP seats in government side could cast doubts on stability and ability on policy implementation. Moreover, compromising policies in dimensions of both policy methodologies and objectives across coalition parties would be another challenge that might reduce investors' confidence. Wait and see strategy can therefore be seen from businesses and households that could slow investment going forward.