Investment banks are maintaining a stable forecast on Thailand's economic growth outlook but warn turbulence looms ahead, with the Bank of Thailand's fiscal policy rate and last month's labour law shake-up the key factors to watch.
The Thai central bank raised its GDP growth projection in 2017 by 0.1% to 3.5%. Its last policy report cited public expenditure as an essential factor in growth, given the global risks to the country's export heavy economy. Trading partners' growth, China's economic reforms and apprehension over US trade and monetary policies are among investors' most pressing external concerns.
Deutsche Bank's GDP growth projections remained stable, according to its July 14 economic brief. Weak consumer spending may notch down the first quarter's 3.3% growth in the second quarter, but growth in the second half of the fiscal year will be propped up by strong exports and fiscal disbursement.
"While exports rebounded in April and May, the domestic demand picture is not as encouraging," said Deutsche Bank. "Purchasing power is being held back by non-farming sectors, which have yet to reflect the effects of the export recovery. Private investment is still contracting, but its more moderate decline could signal a pickup in the following months."
The main risk, the German bank said, is the Bank of Thailand's possible policy rate cut, which has been kept at 1.5% for over two years.
The Bank of Thailand predicts inflation will fall below its 1% low to 0.8%, largely due to low food and oil prices and sluggish demand. The central bank, however, also expects headline inflation to double by 2018.
While Deutsche Bank said this forecast could signal the government's unwillingness to lower the rate, the Bank of Thailand also said it "would stand ready to utilise available policy tools to sustain economic growth".
The private sector might need a push to complete its turnaround. Deutsche Bank said the government may slash the policy rate by 0.25% in August or September, before inflation rebounds.
Credit Suisse kept its 2017 GDP growth forecast stable at 3.5%, in spite of the June 23 labour law. The effect of the policy will depend on perceptions of enforcement and the total number of foreign workers, for which there is not an authoritative figure.
Statistics put the number of illegal workers at 1.5 million (close to 4% of the workforce), but human rights groups claim the number is much higher, Credit Suisse said.
Small and medium-sized enterprises will bear the brunt of the labour law changes, since they employ a large percentage of foreign workers and are less able to absorb the cost of complying with the regulations.
The cost of registering a foreign worker can climb to 20,000 baht -- 166% of the average monthly wage in Thailand. The percentage is higher for agriculture and low-end restaurants, where many of these workers are employed. Delinquent firms can face fines of up to 800,000 baht.
Close to one in four employees in the household sector are registered foreigners; in construction, that ratio is closer to one in 10, said Thailand Department of Employment. While these sectors may be the most vulnerable, hotels and restaurants will also be heavily affected.
Private investment is likely to be affected by dampened business sentiment. Businesses feel that deficient communication with regulators made the labour law uncertain and disruptive. The policy, and the way it was carried out, may make employers more cautious in hiring foreign workers in the future.
"Businesses were caught off guard," said Credit Suisse.
The measures' damage on SMEs financials may increase the ratio of non-performing loans (NPLs). "The NPL ratio for SMEs has been rising faster than the overall ratio," Credit Suisse said.