Outlook Quarter 3/2015
EIC maintains its forecast that Thailand’s GDP will grow by 3.0% in 2015. The economy stagnated in the first half of the year. Private consumption and public investment showed some encouraging signs of recovery in the first quarter but then lost momentum. Exports sank by 4.2% in the first 5 months. A strong rebound in inbound tourism kept economic growth afloat. EIC expects that the economy will pick up in the second half of the year, boosted by the final push of budget disbursement before the end of the fiscal year in September. Another round of government handouts to farmers and a pay raise for government employees, with a 6-month retroactive effect, will lift private investment growth to 1.4% this year. Exports will resume expansion, after shrinking in the year’s first half, supported by rising global prices and a weaker Thai baht. This rebound will limit the full year’s export contraction to only 1.5%, despite headwinds from currency volatility and economic fragility among major trading partners. While the overall economy has seen some improvement, private-sector confidence has continued to erode. Weak sentiment, together with the risk of inflation falling below target, makes it likely that the Bank of Thailand will cut its policy rate for yet a third time this year, to 1.25%. Although the baht has weakened against the dollar, it is still considerably stronger than the currencies of Thailand’s export competitors, such as Indonesia and Malaysia. As the world braces for the U.S. Federal Reserve’s expected rate hike, Thailand is sufficiently protected against financial instability. Given the strong current account surplus, large foreign exchange reserves and low inflation rate, Thailand’s finances are stronger than other emerging economies. As for other external factors, EIC expects that global growth will pick up in the second half of the year. Yet this upturn will be accompanied by risk factors such as higher volatility in the foreign exchange and bond markets due to the divergence of monetary policies between different countries and regions.
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Economic Outlook 2015
EIC maintains its forecast that Thailand’s GDP will grow by 3.0% in 2015. The economy stagnated in the first half of the year. Private consumption and public investment showed some encouraging signs of recovery in the first quarter but then lost momentum. Exports sank by 4.2% in the first 5 months. A strong rebound in inbound tourism kept economic growth afloat. EIC expects that the economy will pick up in the second half of the year, boosted by the final push of budget disbursement before the end of the fiscal year in September. Another round of government handouts to farmers and a pay raise for government employees, with a 6-month retroactive effect, will lift private investment growth to 1.4% this year. Exports will resume expansion, after shrinking in the year’s first half, supported by rising global prices and a weaker Thai baht. This rebound will limit the full year’s export contraction to only 1.5%, despite headwinds from currency volatility and economic fragility among major trading partners. While the overall economy has seen some improvement, private-sector confidence has continued to erode. Weak sentiment, together with the risk of inflation falling below target, makes it likely that the Bank of Thailand will cut its policy rate for yet a third time this year, to 1.25%. Although the baht has weakened against the dollar, it is still considerably stronger than the currencies of Thailand’s export competitors, such as Indonesia and Malaysia. As the world braces for the U.S. Federal Reserve’s expected rate hike, Thailand is sufficiently protected against financial instability. Given the strong current account surplus, large foreign exchange reserves and low inflation rate, Thailand’s finances are stronger than other emerging economies. As for other external factors, EIC expects that global growth will pick up in the second half of the year. Yet this upturn will be accompanied by risk factors such as higher volatility in the foreign exchange and bond markets due to the divergence of monetary policies between different countries and regions.
Bull - Bear: Oil Prices
EIC’s view: BEAR
We expect that crude oil prices will stabilize in 3Q2015 despite the recent spike in 2Q2015. The increase in 2Q2015 is likely to have been only a short-term rise caused by conflicts in the Middle East. Also, the imbalance between oil supply and demand will persist, because OPEC and Russia announced their intention to keep production levels high. Moreover, the recent price spike and improved efficiency of U.S. shale oil producers will induce more supply from previously high-cost producers that will re-open their refineries. That will put downward pressure on oil prices this year.
In focus: Strong Baht and its implications to Thai export
The shrinkage of Thailand’s exports during the past two years has raised the question of whether the Thai baht is too strong. Thai exports shrank by an average of 0.4% YOY in value terms during 2013 and 2014. Since the end of 2013, the baht has appreciated by more than 18% and 13% against the euro and yen. This year it has also appreciated against other Asian currencies. But a weak currency does not always translate into strong exports. To contribute toward a nuanced understanding of the baht’s role in Thailand’s export competitiveness, EIC offers the following analysis. Appreciation of the baht against many of its peer currencies has adversely affected exporters’ price competitiveness, as suggested by the rising real effective exchange rate (REER) index. Price competitiveness is not the only factor, however, that influences export growth. Moreover, price competitiveness is less important for manufactured exports than agricultural ones. This is because while agricultural products are comparable across many countries, manufactured products are differentiated by each country's production capacity and value-added. Furthermore, the health of manufacturing industries is subject to conditions of global supply chains. As such, manufactured exports depend on many factors in addition to price competitiveness.
In focus: Bubble alert: soaring asset prices call for caution
Quantitative easing measures taken by the Fed, the Bank of Japan (BOJ) and the European Central Bank (ECB), along with policy rate cuts by central banks around the world, have contributed to the rapid rise in prices of financial assets such as bonds and equities in recent years. Now the question is whether price bubbles have developed. If so, which asset types and markets are most affected by bubbles? And which bubbles present the greatest risk to the global economy?