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Thailand Hopeful Interest Rate Cut Will Boost Economy

FILE - A woman is seen browsing for shoes at a store in downtown Chiang Mai, northern Thailand.
FILE - A woman is seen browsing for shoes at a store in downtown Chiang Mai, northern Thailand.

Thailand’s central bank this week joined other countries in the region in lowering its main interest rate.

The interest rate cut of 25 basis points was a surprise to analysts as the bank joined others in the region, such as that of South Korea, saying the lower rates came with a Thai economy weaker than earlier forecasts.

Thailand, once a leader of Asia’s ‘economic tigers’, has seen growth hit by political conflicts and uncertainties, and presently by weakening global demand marked by slower growth in China and Southeast Asia.

Economists at the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) forecast Thailand's growth rate in 2015 at 3.5 percent, better than the .8 percent last year but well below higher rates a decade ago.

Some analysts expected last year's coup and military takeover would lead to a rebound in the economy as it would end street demonstrations and lead to political stability. But the economic rebound failed to occur. Investors are uncertain about the political outlook ahead of elections expected in early 2016.

Boosting exports is key

Supavud Saicheau, managing director of finance house Phatra Securities, says Thailand’s exports are the main hope for recovery.

“For many reasons [the economy is weak] but mainly because exports have not recovered and exports is the biggest sector in the Thai economy. And if you can’t get exports up then everything else is less consequential,” Saicheau said.

In January, Thailand’s export growth contracted by more than three percent, pointing to flat growth in the first half of the year.

Thailand’s deputy prime minister, Pridiyathorn Devakula, said he believed the official rate cut would help unpin exports by curbing any appreciation in the Thai baht.

The European Central Bank's moves to ease monetary policy in the eurozone has led to a decline in the value of the euro, making European exports more competitive against those from a country such as Thailand.

The Bank of Thailand says tourism remains a strong feature, especially for tourists from China, where outbound travel appears unaffected by a slowing in China’s economy.

Consumer spending depressed

Andrew McBean, a partner with consultants Grant Thornton, says Thailand’s economic signs are less upbeat than the government’s official outlook.

“Things are soft, they are I think to some degree and obviously the rhetoric coming out from the government is necessarily optimistic but the reality is someway different. And we can see lots of data points about that too as well -- the care sales figures that came out recently; just consumer spending - it seems very, very depressed,” McBean said.

The Thai government is pinning hopes for recovery on an $11-billion stimulus package over a range of sectors, including infrastructure spending and road repair.

The spending is especially targeted to provincial areas hard hit after previous populist programs were withdrawn following the military takeover.

Thailand’s past growth relied on low labor costs and abundant resources. But Thammasat University economist Pavid Pananond says the economy for Thailand has changed with the emergence of other regional economies.

“We need to move up to the next level. We can no longer offer Thailand as a country with cheaper production costs. That has now been the role that Vietnam, or even Indonesia, or Laos; Cambodia is trying to play that role. Thailand needs to do much more,” Pananond said.

The Thai economy’s weakness is also undermining popularity in the government while foreign investors are remaining cautious, awaiting the outcome of the debate over a new constitution and promised 2016 elections.