Worst drought in decade adds pressure for policy rate cut

Worst drought in decade adds pressure for policy rate cut

Drought hits Huay Saneng reservoir in Surin's Muang district. (Bangkok Post photo)
Drought hits Huay Saneng reservoir in Surin's Muang district. (Bangkok Post photo)

Drought threatens to exacerbate a sharp slowdown in economic growth and intensify pressure on the Bank of Thailand to loosen monetary policy.

The dry conditions are the worst in a decade, and farming heartlands in the Northeast are among the hardest hit, according to the Meteorological Department.

“The main impact if drought intensifies or lasts longer is on the growth outlook, which is already weakening,” said Euben Paracuelles, an economist at Nomura Holdings Inc in Singapore. “That would then require more coordinated easing from both fiscal and monetary policy.”

The Bank of Thailand has so far resisted joining a global wave of policy easing as officials are concerned about elevated household debt. But expectations for interest-rate cuts are growing, with ING Groep NV predicting a quarter-point reduction to 1.50% as early as the Aug 7 meeting.

The trade-led economy was already slowing because of sliding exports amid the US-China tariff war and a surging currency. The central bank expects 3.3% economic growth in 2019, which would be the weakest pace in four years.

“The drought situation is severe,” Don Nakornthab, senior director of the economic and policy department of the central bank,  said on Wednesday. “But rain has started, so we think the situation is still within our forecast.”

The dry spell imperils crop production and rural demand in Southeast Asia’s second-largest economy, where approximately 11 million people are employed in the agricultural industry. Thailand is the globe’s top grower of rubber, and one of the largest exporters of sugar and rice.

Nomura estimates the current conditions could shave 0.1 percentage point off the growth rate in April through December, rising to 0.2 percentage points if the situation becomes severe.

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