SINGAPORE - Thailand’s new finance minister has caught investor attention with a more conciliatory approach to the central bank, opening a window for policy coordination to support the country’s battered markets.
Thailand’s economy, the second-largest in Southeast Asia and heavily dependent on tourism, has struggled as China’s slowdown has held visitor numbers beneath pre-pandemic peaks, while decade-high interest rates throttle domestic spending.
The government, which has been pressing repeatedly for urgent rate cuts, has been at loggerheads with monetary policy makers concerned about debt. Meanwhile, an underperforming economy and fractious politics have led foreign investors to sell down the country’s stocks and bonds.
Some $5.5 billion in net outflows from Thai stocks last year has been followed by another $1.9 billion in net selling so far in 2024. The benchmark SET index is down 4% this year and touched three-year lows, making it the worst performer in Asia.
A calmer tone from Pichai Chunhavajira, a former Bank of Thailand board member who was appointed finance minister last month, is a potential circuit breaker, market participants say, which could give policymakers more room for stimulus and help sentiment.
“Under Mr Pichai, the government has been less combative toward the central bank as the administration appears to be leaning on fiscal spending and liquidity injections to support the economy,” said Nicholas Chia, Asia macro strategist at Standard Chartered in Singapore.
The cabinet this week approved a plan to boost the 2024 fiscal budget by 122 billion baht, to help finance the 500-billion-baht digital wallet handout, while Mr Pichai has said the government was planning other short-term measures to revive growth.
Mr Pichai has said he has a duty to work with the central bank and there are no plans to weaken its independence, while public calls from Prime Minister Srettha Thavisin for rate cuts have paused. The central bank’s Monetary Policy Committee will hold its next meeting on June 12.
“I think he (Pichai) certainly understands the culture of the people at the Bank of Thailand,” former finance minister Thirachai Phuvanatnaranubala told the Reuters Global Markets Forum last week.
“I think the opportunity for a better relationship going forward is now present.”
Rate worries
Two main factors are keeping the Bank of Thailand from cutting.
One is global: The US Fed Funds rate is above 5% while Thai rates are at 2.5%. A cut in Thailand would likely add pressure on the baht, which has been sliding this year and is the region’s second-worst performer after the Japanese yen with a 7% drop on the dollar.
Another is structural: A 90% household debt-to-GDP ratio is high by regional standards, dampening the pass-through from lower interest rates to higher growth which was already fuzzy in an economy so exposed to world trends in travel and demand.
“You can try to entice people to spend now by lowering the cost of money and hopefully they borrow more and then consume or invest,” said Pongtharin Sapayanon, head of Thai fixed income and asset allocation in Bangkok at abrdn, the investment manager formerly known as Aberdeen.
“But the big, big assumption here is the capital that is raised from that goes into something productive,” he said.
Mr Pongtharin is underweight on Thailand and expects at best a 25-basis-point cut in the policy rate this year.
Daniel Tan, portfolio manager at Grasshopper Asset Management, said that although the economy is growing more slowly than others in Asia, a cut may only come in mid-2025 against the backdrop of expected accelerated government spending.
Still, some conditions are beginning to fall into place and better ties with the government may allow policymakers to act swiftly once the US Federal Reserve begins to cut rates, which would likely come in tandem with investment.
Inflation in Thailand has run well below the central bank’s target for the year — it was negative for seven consecutive months before rising to 0.2% in April. Last month the Ministry of Finance cut its growth target to 2.4% from 2.8% previously.
Domestic banks last month cut lending rates by 25 basis points for vulnerable groups for a period of six months, following a plea from the prime minister.
“We think these cuts by banks suggest they also see the economy as weak and needs monetary accommodation,” said Charnon Boonnuch, an Asean economist at Nomura.