The Bank of Thailand’s Monetary Policy Committee (MPC) left its policy interest rate unchanged yesterday but warned first-quarter economic growth could contract and full-year growth come in weaker than forecast as prolonged political strife takes a toll on private investment and tourism.
Gross domestic product (GDP) is expected to post a contraction in the first quarter and come below the central bank's forecast, said Paiboon Kittisrikangwan, an assistant governor and secretary of the MPC.
"Economic growth in the first quarter is expected to contract by more than previously assessed, as domestic demand, private investment and tourism have felt a greater impact from the political uncertainty," he said.
"Looking ahead, the prospect of economic recovery hinges largely on political developments."
The National Economic and Social Development Board is due to release its first-quarter GDP figures on May 19.
Earlier, Bank of Thailand governor Prasarn Trairatvorakul warned that the country was facing a risk of recession for the first two quarters, but the situation was not worrisome since the economy was likely to rebound from the third quarter.
Thailand has endured political tensions for almost six months after thousands of protesters took to the streets in an attempt to topple caretaker Prime Minister Yingluck Shinawatra and her cabinet.
The rate-setting committee yesterday voted 6-1 to maintain the benchmark interest rate at 2%, saying current monetary policy remains accommodative for economic recovery. One member voted for a 25-basis-point reduction to support economic growth.
The MPC split with a narrow vote of 4-3 to lower the benchmark rate to 2% from 2.25% in March, citing greater downside risks to economic growth stemming from months of domestic political turmoil as grounds for the cut. Mr Paiboon said merchandise exports had gradually improved but could not counterweight overall subdued growth.
Thailand’s GDP growth this year is expected to be lower than the central bank’s forecast as the contraction expected in the first quarter pulls down expansion, he said, adding that the central bank’s revised growth forecast would be announced at the next MPC meeting on June 18.
The central bank recently cut this year’s economic growth projection to 2.7% from 4.8% due to greater downside risks to the economy stemming from the protracted political stalemate.
Mr Paiboon said it was difficult to assess timing of an economic recovery, as there were risks coming from political developments and other uncertainties.
Santitarn Sathirathai, head of Southeast Asian and Indian economic research at Credit Suisse in Singapore, thinks the central bank wants to signal that its monetary policy is not ideal medicine for the slowdown and that one should not expect easing every time politics takes a turn for the worse.
However, another 25-basis-point cut cannot be ruled out later this year if exports recover at a slower-than-expected pace and the economy continues to be dragged down by the political situation, he said.
Caretaker Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong warned the country's credit rating was at risk of being downgraded if the economy expanded by less than 3% this year and next.
Referring to his recent talks with Moody's Investors Service, he said 3% economic growth was the appropriate rate for Thailand. The Fiscal Policy Office last month trimmed its 2014 GDP growth projection to 2.6%, while the central bank also cut its estimate to 2.7%.
Mr Kittiratt said net revenue collection during the first six months of fiscal 2014 was 20 billion baht below the target at 935 billion. But revenue totalled 1.11 trillion baht including contributions to local administrative organisations and tax rebates.
The caretaker government will ask the Election Commission (EC) to approve an extension of the value-added tax rate of 7% that will expire in September, said Mr Kittiratt. If a new general election is successful in July, the fiscal-2015 budget could be approved by early next March.
He said the caretaker government is likely to seek EC approval for additional borrowing from the central budget to pay rice farmers, but the amount might be less than the 40 billion baht sought by farmers.