Thailand's economy expanded by a healthy 4.6% year-on-year in the second quarter, bringing first-half growth to a five-year high of 4.8%, the National Economic and Social Development Board reported recently.
The consistent recovery to a growth rate above 4%, coupled with inflation moving within the target, has influenced the central bank's Monetary Policy Committee (MPC) to signal a policy rate increase in the near future.
A survey of investors' and analysts' views indicates a high possibility of at least one rate increase within the next six months. From a macroeconomic perspective, the economy is relatively strong with robust growth, a stable money market, low unemployment and a pickup in inflation.
However, given the persistence of low interest rates, investors may be seeking higher-return options and underestimating their investment risk, which could hurt economic stability in the long run.
The Bank of Thailand commented recently that it would be appropriate to increase the policy rate at this time to start creating policy space for potential use in the future.
The current low rate of 1.50%, having been left unchanged for three years to stimulate the economy, may not be enough to cope with future challenges or unexpected events. The question is whether the country is ready for a hike.
SIAMESE TWINS MODEL
The fact is, many people are still not that happy despite the rosy economic growth figures. People at large -- salary earners, tradesmen and those in the farm sector -- have complained about flat or declining income and rising living costs.
What really contributed to the healthy second quarter was the 4.5% growth of private-sector consumption, but only in certain sectors. These included automobiles, finally picking up after the end of the former government's first-car stimulus programme; and tourism-related businesses such as transport, restaurants and hotels. Other categories, such as food and beverages and garments, expanded only slightly.
The sectors that involve the majority of people recorded small growth. Even though farm income picked up, it was mainly supported by huge farm output. Farm product prices continued to contract and farm household debts remained high, thus curbing purchasing power.
I view the Thai economy under such circumstances as a model with conjoined sections. One section has grown well, involving middle- to high-income earners with strong purchasing power, while growth has been limited among lower-income earners saddled with high debts and low purchasing power.
I liken this to the Siamese twins, Chang and Eng, who were joined at the chest and went everywhere together as a single person. However, they were not the same person and were actually different from each other.
Just like the Siamese twins, the country's economy today consists of two major segments. One has grown healthily and embraced the opportunities offered by new technology, and the other has been weak with low purchasing power, contracting income, limited skills and few opportunities to access technology.
The fortunes of these conjoined twins are diverging, as reflected by the large gap between the income growth of SET-listed companies and that of the agricultural sector.
RISING RATES
In light of recent signals sent by the central bank and good headline economic numbers, several research houses have predicted the MPC will increase the policy rate by year-end. However, we see that as too early. Economic expansion has not yet been distributed in all sectors.
The appropriate time for an interest rate increase should be the first quarter of 2019. This would create more time for the healthy parts of the economy to create jobs and expand working hours, and for agricultural prices to move up.
If the MPC moves sooner, it may be because there are some clear macroeconomic signs. It may also intend to send a message to prevent over-investment in risk assets amid the prevailing low-rate climate. All we can do is offer encouragement and hope the weaker segment can survive. If not, even the stronger one will struggle to advance further.
In any case, we believe everyone needs to adjust to the economic circumstances. Growth will be quicker for high-income earners and slower for low-income groups. Even though both can grow, the gap will inevitably widen. If possible, low-income earners should switch to non-farm jobs such as those in tourism or other service fields.
Most importantly, they need to develop their technical skills and language proficiency. Government spending programmes to support public welfare can only sustain the economy for so long. More concrete support is needed in areas such as skill development, creation of job opportunities and the search for new markets to give lower-income people a more sustainable future.
To cope with rising interest rates, I recommend that entrepreneurs who require credit go ahead with their projects while rates remain low, amid moderate competition, in anticipation of a hoped-for convergence of the two different economic segments.
Moreover, they should focus on innovation and creativity as price competition alone may no longer be viable. For salary earners or people with fixed incomes, there are still opportunities even amid rising interest rates.
In short, I remain concerned chiefly about the slow transmission of advantages from the improving economy from the healthy group to the weaker group. However, I believe there should be a clearer picture within the next six months.
I hope those who feel upset about current economic conditions will soon cheer up and find ways to benefit from the prospect of a brighter economy. It will be important for them to be able to deal with the increase in financial costs in the face of rising interest rates.
Amonthep Chawla is the head of the research office of CIMB THAI Bank.