CIMB Thai Bank (CIMBT) expects the economy to contract this year if the government is unable to get Covid-19 infections under control in the third quarter.
Given the prolonged outbreak and rising daily infections, the bank slashed Thailand's GDP forecast for this year from 1.3% previously to 0.7%.
Under its base-case scenario of 0.7% GDP growth, the bank's research centre expects new infections per day to peak this month, with the government gradually relaxing restrictions next month, said CIMBT's chief economist Amonthep Chawla.
"If the government cannot contain daily new infections by September and instead extends the lockdown measures, GDP will contract this year," he said.
Rising new infections, the prolonged outbreak and the government's tighter containment measures will significantly impact domestic consumption, the tourism sector, and the country's reopening plan, said CIMBT.
These negative factors have impacted the economic outlook, which has weakened the baht. The local currency declined to 33.30 baht against the US dollar yesterday.
CIMBT expects the baht to continue depreciating against the greenback next week, mainly because of higher new daily infections, Mr Amonthep said. But a weaker baht supports Thai exports, which is the key engine for growth this year, thanks to a recovery in global demand.
Amid higher downside risk, the Bank of Thailand's Monetary Policy Committee (MPC) should cut the policy rate at its next meeting in September to support the economy and help households and businesses, he said.
Two of six MPC members voted to cut the policy rate on Wednesday, signalling the rate could be cut later in the year.
The MPC, which has seven members, on Wednesday voted four to two to maintain the policy rate at 0.50%. Two members voted to cut the policy rate by a quarter-point. One member did not attend the meeting.
Mr Amonthep said collaboration between members of Asean or Asean Plus would improve the region's containment of the outbreak. Asean nations have been hammered by the outbreak, but the regional economy has high growth potential, especially when the outbreak is contained and borders reopened, he said.
Kasem Prunratanamala, director and head of research at CGS-CIMB Securities (Thailand), said the baht depreciation and increase in daily infections has caused rising foreign capital outflows from the Thai equity market. On a year-to-date basis, net selling by foreign investors in the local bourse is around 100 billion baht.
"If daily new infections peak in the third quarter, the SET could reach 1,690 points in the fourth quarter," he said.