The Bank of Thailand's decision to ease its key policy rate for a second time in 2019 and introduce measures to curb the strength of the baht will reduce the need for further easing in 2020 in our view.
As such, we now forecast the central bank will keep its policy rate on hold through 2020, while focusing other measures to curb domestic indebtedness.
However, the relaxing of capital outflow measures is not likely to result in the baht depreciation the central bank desires. Thus, further exchange-rate measures could be introduced through 2020, with the potential for more unconventional monetary policy instruments being used.
We expect the central bank to keep its policy rate on hold at 1.25% through 2020.
The decision to cut the policy rate by 25 basis points at the Nov 6 meeting was backed by five out of seven Monetary Policy Committee (MPC) members, after they had voted unanimously to hold rates at the October meeting.
The shift in stance was a result of a perceived deterioration in the economic growth outlook and the disinflationary impact this is expected to have over the coming quarters. In addition, the MPC backed a relaxation of foreign exchange regulations to ease restrictions on capital outflows, as the baht continued to trade at all-time highs on a trade-weighted basis.
However, as the Bank of Thailand acted earlier than we anticipated -- we previously forecast rates would stay on hold until the first half or 2020 -- we now believe it will refrain from any rate cuts in 2020, unless the economy deteriorates more rapidly.
We do not believe the second cut in four months is a signal the central bank is set to embark on an extended cycle of further monetary easing. Indeed, it has highlighted its desire to maintain policy space and thus will be unwilling to cut rates further.
DEBT LEVELS AN ISSUE
Similarly, policymakers are cognisant of indebtedness among households and small and medium-sized enterprises, with concerns that aggressive monetary easing could fuel a private sector credit bubble. Indeed, household debt-to-GDP has ticked up, from 68.4% in the first quarter of 2018 to 68.9% in the first quarter of 2019.
We view the central bank's announcement of measures to cool appreciation pressure on the baht as the most significant outcome of the Nov 6 meeting. The baht has strengthened by 7.8% against the US dollar for the year to Nov 5, creating import disinflationary pressures and eroding the country's export competitiveness.
The central bank and the Finance Ministry announced measures aimed at easing credit outflow restrictions and decoupling the link between the baht and gold appreciation, effective from Nov 8. The Bank of Thailand committed to quarterly reviews of the measures, with further adjustments possible if the baht fails to weaken meaningfully.
These measures will likely result in wealthier households adjusting their portfolio holdings and, to some extent, reduce constraints on export-focused businesses, given the relaxing of rules around repatriation of export proceeds.
However, we believe the baht-focused measures will fall short of their aim and note the scope for further currency invention is somewhat constrained. We believe the measures do not fully address the attractiveness of the baht to foreign investors and note the easing of capital outflow restrictions for retail investors could threaten the baht's safe-haven status.
The baht has proved popular with international investors because of Thailand's high current account surplus at an estimated 4.8% of GDP in 2019 (with rising upside potential), large reserve base, net external creditor position and favourable real rates compared with most developed market safe havens.
Moreover, the baht has strengthened through heightened risk aversion in recent quarters. As such, Thai retail investors could convert foreign holdings back to baht in times of risk aversion. This would ultimately be bad for the baht's safe-haven status as well.
GSP WILD CARD
We also note the central bank may be reluctant to take aggressive intervention steps in 2020, with potential risk of a backlash from the US as part of its review of Generalized System of Preferences (GSP) duty-free access for Thailand. Already Washington has announced the suspension of $1.3 billion in trade preferences, linked to workers' rights in the fishing industry, starting from April 2020.
With the US a key destination for Thai shippers, a loss of duty-free access could be a significant hit to exporters and efforts to attract foreign investment by manufacturers looking to relocate from China.
As such, fiscal stimulus will take the lead in stimulating the economy in 2020. However, we do flag the possibility of unconventional monetary easing if the Thai economy faces further headwinds. This could prove a more flexible way of supporting economic growth without encouraging leverage among households and small businesses.
The use of macroprudential measures to curb risks relating to private-sector debt is also likely to be accelerated in the coming quarters, to give the central bank more flexibility with regard to monetary policy.