The World Bank has slashed Thailand's economic growth this year to 2.5% from 3.5%, the lowest in the East Asia and Pacific region, in its latest regional report released on Monday.
Thailand's growth next year was also cut to 2% from 4% in the previous forecast in April.
The bank also trimmed the 2015 and 2016 growth forecasts for the region, citing the risk of a sharp slowdown in China and possible spillovers from expected increases in US interest rates, in its East Asia Pacific Economic Update.
In the case of Thailand, the bank said household consumption and private investment should recover only modestly from last year while public spending will contribute to almost half of growth this year.
"Tourist receipts were expected to record healthy growth, in a context of enhanced political stability, although prospects may be hampered by the attack on the Erawan Shrine in August," it said in the report.
Exports of goods will remain subdued, growing by less than 1% in dollar terms as key export prices fall and demand from China and Asean weaken, it said.
Imports of goods will continue to contract as prices of fuel imports, around a fifth of total imports, remain low.
"Capital flows will continue to be volatile, with a risk of experiencing potentially larger outflows should there be an increase in interest rates in the US."
The main challenges for Thailand continue to be the uncertain global environment affecting Thai exports, and internal stability.
"In the case of a sharper than expected slowdown of the Chinese economy, accompanied by global financial volatility, Thailand would be mostly affected through the trade and expectations channel [China represents 12% of total exports and 8% of total FDI inflows], which would hamper economic recovery.
"Nonetheless, authorities still have monetary and fiscal space to react to these eventualities," it said.
The bank noted inequality remains a major challenge in Thailand, differentiating the country regionally and across rural and urban areas.
Dimmer East Asia outlook
The Washington-based lender now expects the developing East Asia and Pacific region, which includes China, to grow 6.5% in 2015 and 6.4% in 2016, down from 6.8% growth in 2014, Reuters reported on Monday.
Its previous forecast in April was 6.7% in each of 2015 and 2016.
"The baseline scenario for regional growth is subject to a greater-than-usual degree of uncertainty, and risks are weighted to the downside," the World Bank said.
"In particular, uncertainty surrounds the trajectory of, and spillovers from, China's economic rebalancing and the expected normalisation of US policy interest rates."
The World Bank said the downward revisions to regional growth forecasts mainly reflect a moderate slowdown in China's economy, which it sees growing 6.9% in 2015 and 6.7% in 2016, down from 7.3% in 2014.
The previous forecast was for China to grow 7.1% in 2015 and 7% in 2016.
Growth in developing East Asia excluding China is expected to hold steady in 2015 at 4.6% before accelerating to 4.9% in 2016, the World Bank said. Those were down from previous forecasts of 5.1% growth in 2015 and 5.4% in 2016.
The bank said the outlook for household incomes and business profits in Indonesia and Malaysia was clouded by weakness in global commodity markets. It said lower real trade-weighted exchange rates can play a key role for such commodity exporters to adjust to weaker terms of trade.
"The depreciations of the Indonesian rupiah and Malaysian ringgit against the US dollar have reduced the drop in exporter revenues, corporate profits, and household incomes in local currency terms — a valuable shock-absorbing effect," it said.
"More generally, authorities should limit currency market interventions to smoothing volatility, given the importance of maintaining adequate reserve buffers," the World Bank added.
Further declines in Asian currencies against the dollar could cause balance sheet strains in countries with significant dollar-denominated debt, it said.
"Stress may arise whenever individual firms and sectors suffer from a significant concentration of liabilities," the World Bank said, adding that such risks are a special concern in Indonesia, Malaysia, Thailand and Vietnam.
Source: World Bank