The Bank of Thailand on Wednesday forecast the economy to shrink by 5.3% this year, the first contraction since the 2008 global financial crisis, but stayed unchanged on the policy interest rate.
The coronavirus pandemic is the major factor hurting economies worldwide and has taken a heavy toll on Thailand's tourism and exports this year, said Don Nakornthab, senior director for economics and policy at the central bank.
The Bank of Thailand earlier predicted economic growth of 2.8% for 2020.
"The 5.3% contraction forecast does not take into account monetary and fiscal policy to support economic growth," Mr Don said. "The government's emergency decree, especially to curtail people's movements, will help curtail new infections."
The public sector is the only engine available to support the economy, he said.
The central bank maintained its projection for government consumption growth at 2.6% this year, while cutting its public investment growth view from 6.3% to 5.8%.
The forecast for export growth in dollar terms was lowered from 0.5% to an 8.8% contraction, and import growth from 1.4% to a 15% contraction.
The central bank also cut its forecast for Thailand's 2020 private consumption from 3% growth seen last December to a 1.5% contraction, and private investment from 3.4% growth to a 4.3% contraction.
Mr Don said the outbreak is spreading on a wider scale than the central bank's earlier estimate, particularly outside of China.
Based on data from the Public Health Ministry, the central bank expects coronavirus infections in Thailand to come under control in the second quarter, around April, but a turnaround for tourism will take time.
If Thais cooperate with government measures, especially migration and social distancing, the infection rate will be controlled and the economy will benefit eventually, Mr Don said.
The bank forecasts 2021 GDP growth of 3%, he said.
The Monetary Policy Committee (MPC) on Wednesday voted 4-2 to leave the policy rate on hold at a record low of 0.75% after last Friday's unscheduled rate cut of 25 basis points.
Two members voted to cut the policy rate by 25 basis points, while one member was absent.
MPC secretary Titanun Mallikamas said the committee's view is that the economy will drastically contract in 2020 as tourism and merchandise exports are hit by the pandemic, the slowdown of trading partner economies and supply chain disruptions in many countries.
"In this situation, fiscal measures are key to alleviating the impact on the economy and helping segments affected by the outbreak," Mr Titanun said. "The MPC supports the government's measures, especially those targeted at helping affected groups."
The emergency policy rate cut on Friday was made to address liquidity strains, and accelerated debt restructuring for borrowers, especially households and small and medium-size enterprises (SMEs), must be urgently implemented to be meaningful, in the committee's view. Targeted measures designed to address liquidity needs are crucial.
Mr Titanun said financial institutions' assistance measures for borrowers will help ease their burden and contribute to economic expansion next year if the outbreak subsides.
The stability of Thai financial markets, especially the bond market, has improved after the central bank implemented measures to boost liquidity, though developments still warrant monitoring.
Although commercial banks' lending rate cuts in the wake of previous policy rate cuts helped borrowers to a certain extent, vulnerabilities increased in some areas, especially the debt servicing capability of households and SMEs, which could deteriorate from the significant economic contraction.
Against this backdrop, coordination between monetary and fiscal measures is urgently needed to support households and SMEs, Mr Titanun said.
"The central bank will stand ready to use additional policy tools in an appropriate and timely manner," he said.