Economic outlook turns dour as committee meets

Economic outlook turns dour as committee meets

Inflation, higher energy prices, a depreciating baht and the war in Ukraine provide headwind for policymakers

A van queues for fuel at a petrol station in Bangkok as global oil prices remain highly volatile. (Photo: Nutthawat Wicheanbut)
A van queues for fuel at a petrol station in Bangkok as global oil prices remain highly volatile. (Photo: Nutthawat Wicheanbut)

All eyes are on the Bank of Thailand as rising inflation, spiking energy prices, a weakened baht and the impact of the war in Ukraine could all combine to influence a revision of key economic figures, especially GDP growth and interest rates, at the central bank's rate-setting committee meeting on Wednesday.

How has the economy performed this year?

Earlier in January, the Finance Ministry had a rosy outlook for 2022, projecting economic growth of 3.5-4.5% with average growth of 4% based on rising domestic spending following an improvement in the global pandemic situation.

The ministry also forecast a 4.5% expansion in private consumption for 2022 and the arrival of 7 million foreign tourists.

Exports were expected to post growth of 3.6% based on recovering global demand.

But since war broke out with Russia's invasion of Ukraine on Feb 24, rising energy and food prices have hurt various sectors and the cost of living for many in Thailand.

February's inflation rate hit a 13-year high at 5.28%, which breached the top end of the central bank's 2022 target headline inflation range of 1% to 3%.

As for its key interest rate, the central bank left it unchanged at a record low of 0.50% in February.

The bank said it wanted to maintain support for a fragile economic recovery amid efforts to revive the battered tourism sector and rising inflation risks, which caused the breach of its target range in February.

A recent Reuters poll forecast the central bank would keep the interest rate unchanged to help support the struggling economy as it attempts to recover from the pandemic and a jump in inflation. Median forecasts showed no change in rates until the second quarter of 2023.

Why is the baht depreciating?

The Thai currency was performing relatively well at the beginning of the year, up to 32.11 baht per US dollar on Feb 18, before falling to 33.7 per dollar on March 28.

Poon Panichpibool, a markets strategist at Krungthai Bank, said the overall economic picture was positive in February because the tourism sector appeared to be on the path to recovery despite the Omicron variant.

"Then the Ukraine-Russia war erupted, and the markets quickly entered a risk-off territory, with investors preferring to hold safe currencies like the US dollar. The baht felt pressure from the dollar's appreciation," said Mr Poon.

He said soaring inflation around the world caused by the war also pushed up the prices of consumer goods and commodities, including oil.

This condition then exacerbated the inflation rate and triggered the Federal Reserve to be more rigid with its monetary policy, supporting a stronger dollar, said Mr Poon.

"Thailand is a net importer of oil. This means the country faces risks in both trade deficit and current account deficit, especially during a period when not many foreign tourists have returned to Thailand," he said.

Mr Poon said the prospects of an economic rebound look grim because exports will face high manufacturing costs coupled with ongoing supply chain obstacles. These will all contribute to the baht's depreciation, he said.

What are the key drivers that impact the GDP forecast?

Kasikorn Research Center (K-Research) recently slashed its forecast for economic growth this year to 2.5%, down from 3.7%.

The research house cited the primary factor as the likelihood of the Russia-Ukraine war dragging on, driving up global inflation and energy prices.

Nattaporn Triratanasirikul, assistant managing director of K-Research, said Thailand's diesel price could rise above 30 baht per litre in the second half of this year after the government's oil subsidy ends.

The government decided to maintain the cap on diesel prices at 30 baht a litre, using subsidies from the Oil Fund until the end of April. After that period, only 50% of any increase in prices will be subsidised because of the high fiscal deficit, according to the administration.

Will manufacturing and exports feel the pinch?

K-Research said higher fuel prices resulting from the war are estimated to increase operating costs for businesses by 80 billion baht, especially in the manufacturing sector.

The impact differs from industry to industry, depending on the energy expenses of each sector, with some of the higher costs likely passed on to consumers, said the research house.

As for the export sector, the Commerce Ministry reported growth of 16.2% for shipments in February compared with the same period the previous year, which was higher than expected.

Customs-cleared exports fetched $23.5 billion in February, while imports rose 16.8% year-on-year to $23.4 billion, resulting in a trade surplus of $123 million.

Commerce Minister Jurin Laksanawisit said he remained optimistic but cautioned that the impact of the Ukraine-Russia war would take some time to hit the sector.

"The ministry maintained the export growth target at 3-4% this year, with key risk factors including rising oil prices from the conflict between Russia and Ukraine," Mr Jurin said.

What are the chances Songkran can reinvigorate tourism?

Another key sector that contributes almost 20% of GDP is tourism. Many business operators hoped certain areas of the country would be able to celebrate with water splashing during Songkran this year, but those wishes were dashed on Tuesday after Public Health Minister Anutin Charnvirakul told companies on Khao San Road to plan for a dry Thai New Year.

Khao San Road previously attracted more than 50,000 tourists per day during Songkran, which produced 90-100% occupancy rates for properties along the road and in nearby areas.

Sa-nga Ruangwatthanakul, president of the Association of Business Operators on Khao San Road, said the famous street is a favourite spot to celebrate the holiday.

A dry Songkran means tourists will spend their money elsewhere in the country, he said.

Mr Sa-nga estimated spending of 50-80 million baht from tourists during Songkran on Khao San Road if water splashing were allowed during the four-day festival.

What is the current country credit rating for Thailand?

S&P Global Ratings maintained Thailand's sovereign credit rating at BBB+ last year and stated the country's economic outlook is stable. Fitch upheld the same view, keeping Thailand's rating in December 2021 at BBB+ with a stable outlook.

Fitch Ratings said the risks associated with an increase in general government debt from its pandemic relief measures are offset by the country's record of sound fiscal management and positive economic recovery.

But with no end in sight for the Ukraine-Russia war, the outlook for Thailand's country rating being maintained is unclear, according to the credit rating agency.

The Thai government collected net revenue of 911 billion baht during the first five months of fiscal 2022, surpassing the target by 46 billion baht.

A source at the Finance Ministry said the global credit rating agency Moody's would assess Thailand's country rating in April, though the source expressed confidence the kingdom could service state debt in the long run despite the government's heavy borrowing of 1.5 trillion baht over the past two years to keep the economy afloat.

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