Bangkok--17 Jan--Siam Commercial Bank
EIC trims down its GDP growth forecast for 2020 to 2.7% from 2.8% previously. While merchandise exports are expected to improve modestly thanks to declining uncertainties from the trade tensions, private domestic demand slowdown is likely to continue due to various constraints.
EIC expects the Thai economy to grow at 2.7% in 2020, a modest improvement from 2.5% projected for 2019. Driving the expansion is the expected gradual recovery in merchandise exports following signs of recovery in global trade and in part resulting from the Phase 1 trade agreement between the United States and China. Also supporting growth are more accommodative monetary and fiscal stimulus measures by countries around the world. Nevertheless, the Thai baht, which has appreciated by more than 24% against its peers over the past 6 years and is expected to maintain its strength going forward, will continue to weigh on exporters' income in baht terms and price competitiveness of Thai exports. Also, tourism income is set to decline given lower spending per head among foreign tourists. In addition, while the number of foreign tourists is expected to expand, the rate of growth will likely moderate.
Private domestic demand is projected to expand at a slower pace. Although the value of exports is expected to recover, private consumption and investment are projected to cool further due to several headwinds. The decline in employment especially in manufacturing sectors, the deterioration in consumer confidence, the contraction in non-farm income, the reduction in farm income due to drought conditions, and the high level of household debt will together adversely affect household spending, particularly on durable goods, going forward. Also, private investment is expected to slowdown in line with subdued domestic purchasing power. Furthermore, low capital utilization and high inventory in the manufacturing sectors will contribute to a deceleration in private investment in coming quarters. In addition, the persistent contraction in consumer and commercial vehicle sales, as well as the decline in real estate construction activities due to the LTV requirements from the previous period, will likely further weigh on domestic demand. However, the government is expected to play a larger role in supporting growth in 2020, through the use of economic stimulus packages, short-term supports for vulnerable groups, and infrastructure investment projects. Moreover, it will serve as an enabler, allowing private sector to take part in supporting growth, such as holding a 5G-spectrum license auction that should set in motion additional investments in telecommunications and other related sectors. Furthermore, the delay in budget approval from the end of 2019 has meant that disbursements for many projects are postponed to 2020.
With regard to domestic financial conditions, interest rates are expected to remain low throughout the year, while the Thai baht should continue to face appreciation pressures. EIC expects the Monetary Policy Committee (MPC) to maintain an accommodative monetary policy stance to lend support to economic recovery. The MPC will likely keep policy rate unchanged at 1.25% throughout 2020. However, we still see a probability of a rate cut in 1H20 at30% on possible 3 conditions, in our view, 1) weaker-than-expected growth 2) much higher NPL and 3) continued baht appreciation. Meanwhile, supported by massive current account surplus, the Thai baht is expected to remain persistently strong, closing 2020 at 29.5-30.5 baht per USD. Also, additional capital outflows relaxations, both for overseas business operations and investment in foreign assets, will only help ease pressures on the Thai baht marginally in the short run, as more time is needed to tackle structural limitations such as financial literacy, foreign investment capabilities, and impeding rules and regulations. Only after that would capital outflows be sizeable enough to significantly mitigate appreciation pressures on the Thai baht.
There are three key risk factors for the Thai economy in 2020, namely trade war uncertainties, geopolitical risks, and household and business financial vulnerabilities. With regard to trade war, despite the completion of the Phase-1 trade deal between the U.S. and China, many uncertainties remain around the U.S. trade protectionist policies which can impact global trade, such as the next phase of the negotiation, potential trade retaliations between the U.S. and Europe, and the decisions to cut GSP privileges for many trading partners. At the same time, geopolitical risks, especially from the conflict between the U.S. and Iran, the prolonged protests in Hong Kong, as well as Brexit, should continue to pose challenges for global growth recovery. On the domestic side, key risks to growth include financial vulnerabilities among households and businesses, particularly those with high debt levels and whose income suffers from economic slowdown; technological disruptions; and increasing competition.