We revise down our real GDP forecast for Thailand to reflect concerns about a US economic slowdown and rising crude oil prices. Nonetheless, we remain optimistic on domestic demand since fiscal policy should help to mitigate any negative impact from a softening US economy and hefty oil prices. In addition, the likely return of a civilian government brightens the outlook for consumer and business sentiment.
Our view now versus three months ago
We trim our real GDP growth forecast from 5.2% to 4.8% for 2008F, and from 5.1% to 5.0% for 2009F, given concerns over a softening US economy and rising crude oil prices. Lofty oil prices also have us lifting CPI growth from 2.5% to 3.5% for 2008F.
Summary
Concerns about a slowdown in the US economy and high oil prices have us cutting our real GDP growth forecasts. However, we remain optimistic on domestic demand and expect a recovery in 2008. Fiscal policy measures aimed at stimulating demand include large infrastructure projects, such as the Bangkok Mass Transit System.
Moreover, consumer and business sentiment should improve with the likely return of a civilian government following the next general election. We expect the Bank of
Thailand to opt for a tightening stance amid accelerating CPI growth reflecting high oil prices. Money inflows in the form of FDI, particularly in the auto sector, spell continued appreciation of the baht, although the current account surplus is likely to shrink.
Real economy developments and directions
We revise down Thailand’s real GDP growth from 5.2% to 4.8% for 2008F, and from 5.1% to 5.0% for 2009F, owing to concerns about a US economic slowdown and high oil prices.
Domestic demand should improve under a new government
We trim real GDP growth for 2008F and 2009F, and raise CPI growth for 2008F
Healthier domestic demand points to a recovery for the Thai
economy in 2008F
We forecast real GDP growth of 4.8% for 2008F and 5.0% for 2009F
Economics | Thailand Tetsuji Sano / Yuichi Izumi
Nonetheless, we expect an economic rebound in Thailand this year, backed by three factors. First, a stimulative fiscal budget for FY08F should support domestic demand.
With a new civilian government, this would likely include an acceleration of large infrastructure projects, such as a mass transit system in Bangkok. Second, the return of a civilian government would also help to boost consumer and business sentiment. A new coalition government led by the People Power Party (PPP) is expected to take office in February (MPs approved PPP leader Samak Sundaravej as the new prime minister on 28 January). With capacity utilisation rates at their highest since 1995, private investment, which has remained stagnant under the current military government, should start to pick up. Third, rising agricultural prices mean higher incomes for farmers in rural areas, which should mitigate the negative impact of climbing gasoline prices.
Prospects for a slowdown in the US suggest a decline in exports and an increase in imports for Thailand. Thus we revise down our current account surplus forecast from US$6.3bn to US$3.8bn for 2008F, and US$5.0bn to US$4.0bn for 2009F. We note, however, that downward pressure on exports should be mitigated by the diversification of export destinations. In the auto sector, for example, export growth almost doubled in 2007, mainly owing to higher incomes in economies rich in natural resources. On the other hand, we revise up import growth to reflect climbing oil prices as well as growing investment demand.
Fiscal policy
We expect fiscal policy to stimulate domestic demand this year. Prime Minister Surayud’s Cabinet has already passed an accommodative fiscal budget for FY08 (October 2007 through September 2008) in the National Legislative Assembly (NLA).
Thus, the government can disburse fiscal expenditure for FY08 from the beginning of October 2007 (recall that last year’s fiscal budget was disbursed from January 2007, because the NLA had not approved the budget until after the military coup on 19 September, 2006). The FY08 budget calls for more than 25% growth in capital expenditure, or public investment by the central government and state-owned enterprises. More specifically, the FY08 budget earmarks THB405bn (+27% y-y) for the central government and THB445bn (+23% y-y) for state-owned enterprises.
Monetary policy and interest rates
Inflationary pressure (y-y) should continue to accelerate in 2008, reflecting high oil prices. Baht appreciation, however, should work to push down baht-denominated import prices. All in, we raise CPI growth to 3.5%, from 2.5%, for 2008F.
The central bank has consecutively cut the one-day repo rate target (its policy interest rate target) at the regular MPC by 175bps since January 2007. While we expect the Bank of Thailand (BOT) to take a tightening policy stance amid rising inflation, the extent of its rate hikes to end-2009F will likely be limited to no more than 50bps.
The BOT will soon undergo restructuring under a new act. This will include the creation of a board committee, which will act as the bank’s ultimate authority. The governor may not serve as chairman of the board committee. The board committee will appoint members of three separate committees — the Monetary Policy Committee, the Financial Supervisory Committee and the Payment Committee. Monetary policy will be under the Monetary Policy Committee’s control, and thus may change. For example, the central bank may shift its focus to headline CPI instead of core CPI.
Fiscal policy aims to stimulate the economy in the next two fiscal years
CPI growth looks set to accelerate in 2008F
BOT likely to take a tightening stance until end-2009F
Economics | Thailand Tetsuji Sano / Yuichi Izumi
Forex policy and outlook
We see continued appreciation pressure on the baht owing to a likely acceleration of FDI into Thailand over the next few years, despite the expected decline in the current account surplus. FDI application into Thailand grew to THB655.8bn in 2007, from THB494.2bn in 2006, an increase of 33% y-y. In general, it takes a few years for FDI application to be implemented. Political uncertainty, however, would likely put downward pressure on the local unit. Our year-end forex forecast for 2008F and 2009F: THB31.0-35.0:US$1.
Risks
Another military coup following the general election is the key risk. The military remains opposed to the return of former Prime Minister Thaksin.
Structural developments
Private investment in Thailand’s auto sector looks set to accelerate. In 2007, several Japanese automakers invested in Thailand’s “eco-car” initiative, which aims to produce smaller, more fuel-efficient cars. Capacity utilisation in commercial car production (including pick-up trucks) also exceeds 100%. Thus, automakers will have to increase facility investment to avoid production bottlenecks. Moreover, as long as commodity markets continue to show upward growth trends, demand for auto exports in such markets is likely to increase. This has been the case for Australia and Middle-East nations. Finally, auto part exports to India should accelerate under the FTA. India’s expanding middle-income segment points to rising auto sales and, in turn, growing demand for auto parts.
Exhibit 117. Thailand: auto sector capacity utilisation
0 20 40 60 80 100 120
95 96 97 98 99 00 01 02 03 04 05 06 07
Commercial car Passenger car Motorcycle (%)
Note: Seasonally adjusted by Nomura using the Census X-12 method Source: Bank of Thailand
Look for gradual appreciation of the baht
Key risk: another coup
Robust auto sector growth to drive private investment
Economics | Thailand Tetsuji Sano / Yuichi Izumi