(Updates market reaction in fifth paragraph.)
Sept. 26 (Bloomberg) -- Thailand’s central bank may cut its economic growth projections as the global recovery falters, Governor Prasarn Trairatvorakul said, signaling there may be less scope for interest rates to rise further. Stocks fell the most in almost three years.
Inflation expectations aren’t likely to increase and the Bank of Thailand has “closed the gap somewhat” on normalizing borrowing costs, Prasarn said in an interview in Washington on Sept. 24. The bank is due to unveil forecasts next month.
Europe’s debt crisis and a weakening U.S. recovery are threatening growth in Asia, prompting central banks from South Korea to the Philippines to refrain from rate increases in recent months. The Bank of Thailand bucked that trend by raising its key rate for a seventh straight meeting last month, citing inflation risks posed by the government’s plan to raise wages and support rice prices.
“Looking at the current developments in the world market, you may probably get somewhat lower inflation expectations,” said Prasarn, 59. “If that were so, we would probably have closed the gap somewhat, although there still remains domestic momentum. I would say there is some possibility for downward adjustments” in growth forecasts, he said.
Thailand’s benchmark SET Index slid 5.7 percent to 904.06, the biggest decline since October 2008. The baht fell to its weakest level in eight months, dropping 0.8 percent to 31.14 per dollar as of 4:47 p.m. Bangkok time.
The central bank expects gross domestic product to increase 4.1 percent in 2011 and 4.2 percent next year.
“There is a higher possibility the central bank may pause its rate increases because the global economy is worsening,” Somprawin Manprasert, an economist at Tisco Securities in Bangkok, said yesterday by phone. The Bank of Thailand will raise its key rate once more to 3.75 percent before holding borrowing costs steady through 2012, Somprawin said.
Philippine central bank Governor Amando Tetangco is facing a similar challenge, saying in a Sept. 24 interview that Bangko Sentral ng Pilipinas will probably leave interest rates unchanged for the rest of 2011.
Thailand’s central bank lifted the benchmark rate to 3.5 percent on Aug. 24, the ninth increase since the start of July 2010, and said the rate is now close to “normal levels.”
“In the past year, we have made good progress in the normalization of the policy rate,” Prasarn said. Still, “we have to watch out for the new fiscal policy indicating an expansionary direction.”
Thai inflation accelerated to 4.29 percent in August, the fastest pace since 2008, as rising food prices countered a decline in oil costs. Core inflation, which excludes fresh food and fuel, was 2.85 percent. The central bank uses core inflation to guide monetary policy and aims to keep the gauge at less than 3 percent.
Thai Prime Minister Yingluck Shinawatra has pledged to boost the daily minimum wage to 300 baht ($10), almost double the current level in some parts of the country, and buy rice from farmers at as much as 42 percent above market rates, spurring concern inflation will quicken. The Cabinet this month approved wage and salary increases for government officials as well as tax incentives for first-time buyers of homes and cars to help bolster consumption.
“The strong domestic demand, boosted by the government’s policies, will help cushion the impact from the global markets and make 3.75 percent the appropriate level” for the benchmark rate, Tisco’s Somprawin said.
Asian currencies had their biggest weekly drop since 1998 last week as concern the global economy is headed for a recession dimmed the outlook for exports and prompted investors to favor safer bets than emerging-market assets.
Thailand has the capacity to intervene to ease volatility in the baht, Prasarn said. The currency has dropped more than 3 percent in the past month against the U.S. dollar, according to data compiled by Bloomberg.
“If there were abrupt movements in the markets, we certainly have ammunition to do some market intervention but the aim is not to change the direction but to lower the sharp volatility at times,” the governor said.
Thailand’s benchmark SET Index slid 7.3 percent last week, its biggest weekly decline since November 2008. Overseas investors have sold a net $520.8 million of Thai stocks so far this month, according to data compiled by Bloomberg.
Capital inflows may make a “vigorous” return after the selloff in the nation’s stocks, and the government is prepared to help control such investments if needed, Finance Minister Thirachai Phuvanatnaranubala said in an interview on Sept. 23.
“Once investors get over this short-term pessimism, the long-term fundamentals would come in and this could translate into a more vigorous capital inflow,” he said, adding it would be “jumping the gun” to disclose measures the government can undertake.
Policies unveiled by Yingluck’s government “aim to rebalance the economy by boosting local demand as we rely too much on exports,” which account for about 70 percent of GDP, Commerce Minister Kittiratt Na-Ranong said Sept. 22. Kittiratt has asked the central bank to refrain from further increases in interest rates to support the economy.
Higher wage bills and borrowing costs may hamper exports of manufacturers such as Hana Microelectronics Pcl, Thailand’s largest packager of semiconductors. Toyota Motor Corp., General Motors Co. and Ford Motor Co. are among automakers that have used Thailand as a global production hub due to tax incentives and trade arrangements that grant access to Southeast Asia’s 592 million consumers.
Thai exports increased 31.1 percent from a year earlier in August to a record $21.6 billion as shipments of rice, rubber and food products climbed. Shipments are expected to expand about 20 percent this year, surpassing an earlier target of 15 percent, the Commerce Ministry said Sept. 22.
“We see a threat to growth,” Prasarn said. “There will be some impact on exports and we cannot avoid it because of trade links, although lately Thai exports are diversified very well.”
--Editors: Tony Jordan, Stephanie Phang
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