BOT cuts policy interest rate while Thai baht strengthens with hopes for tourism recovery

The Bank of Thailand’s Monetary Policy Committee (MPC) decided to cut the policy interest rate by another 25 basis points at its meeting on Wednesday. 

The MPC voted four to three to lower the country’s benchmark lending rate from the already historic low of 0.75 per cent to the current 0.50 per cent with immediate effect.

The central bank said in March that the Thai economy could go into a recession of 5.3 per cent in 2020.  

“The MPC assessed that the Thai economy has a chance to contract by more than they previously expected,” said MPC secretary Titanun Mallikamas. 

“The slowdown in the Thai economy is in line with the… severe contraction of the global economy and the effects from global outbreak prevention measures,” he added. 

The majority of the MPC members believe that the cut will help lessen negative impact and support all the fiscal and monetary measures that have been introduced in the past months. 

This includes the 1 trillion baht emergency loan – of which half was set aside by the central bank to directly provide soft-loans to SMEs. There are also measures to postpone principal and interest payments for all kinds of debtors for six months.

Nevertheless, external and domestic demands are still lower. The contractions in domestic private consumption and investment are also worse than expected due to the rising unemployment rate and lockdown measures, the MPC added.

Kalin Sarasin, chairman of Thai Chamber of Commerce, said on Wednesday that 7 million people have already lost their job since the outbreak began in January. 

The number could increase to 10 million if the outbreak is prolonged, he said.

He expects the economic recovery to take up to three years before things can return to as it was in 2019. 

According to the National Economic and Social Development Council (NESDC), Thailand’s GDP expanded by 4.1 per cent in 2018 and 2.2 per cent in 2019. Their new prediction on Monday saw the economy going into a recession of 5-6 per cent in 2020.

Another cut expected 

Tim Leelahaphan, a Thailand economist at Standard Chartered Bank, told Thai Enquirer that he expects the MPC to make another cut within the third quarter of 2020. 

He said the close voting of four to three on Wednesday supports the assumption that the MPC will likely maintain the rate in June before making another cut in the third quarter. 

“There is still uncertainty and we are not sure if the bottom will be found within the second quarter as many have expected,” he said. 

Standard Chartered Bank currently predicts a recession of 5 per cent for the Thai economy in 2020.

Krungthai COMPASS and CIMB Thai Bank announced earlier this week that they expect to see a GDP contraction of 8.8 and 8.9 per cent respectively.

When asked if there is a chance for BOT to look at a negative interest rate, Tim said that it is possible since the economic situation could be worse if there is a second wave or a vaccine cannot be found. 

“I agree that there is a chance even though there are limitations because the economy is going into a recession at more than 5 per cent,” he said. 

“If the new downside comes into play and there are no other alternative options coming from the BOT, the central bank could come back to concentrate on the interest rate again,” he added.

The US economy, which is the largest in the world, could also contract by 38 per cent in the second quarter according to some US economists. Tim said that this is another negative risk. 

If external continues to be weak and there is a second wave in the country with no vaccine in sight, the Thai economy could contract by 10 per cent, according to Tim.

However, the downsides, such as a resurgence of infection, have yet to happen. The economic packages that were introduced since March, worth a total of 1.5 trillion baht, may be reason enough to remain optimistic.

Stronger baht 

As for the baht, which has recently appreciated against the US dollar and other Asian currencies, Titanun said the MPC is concerned with the situation as this could affect Thailand’s economic recovery.

They will continue to closely monitor the situation.  

The baht became Asia’s top performer in May as the currency rallied by almost 1.5 per cent after dropping over 7 per cent in the first four months of 2020. 

“Not only is it the best performer in Asia but it is the sole currency that has managed to outperform… only Indonesia’s rupiah has managed to challenge this position in May,” Tim said.

Investors are hoping that the country’s tourism sector will swiftly recover after the economy begins to reopen on May 17.  

However, the Tourism Authority of Thailand (TAT) said that foreign visitor figures could drop by 60 per cent from 39 million in 2019 to 16 million in 2020. 

TAT Governor Yuthasak Supasorn also said in April that Thai tourism is not going to improve until a vaccine is found and that could take another year.

TAT estimated that foreign tourism receipts will drop to 1 trillion baht from 1.9 trillion baht in 2019.

Aside from the expected recovery in tourism, there is also an inflow of capital into the Thai bond market since the end of April, according to Tim.

“The outbreak situation is improving when compared to other countries,” he said.  

The country reported no new cases of coronavirus infections for the first time on May 13 and has been reporting single-digit numbers of confirmed cases ever since.

“Along with low inflation, policy rate cuts and stable external accounts, this has attracted foreign investors into the bond market over the past month, and it has also contributed to the strengthening of the Thai baht,” Tim said. 

Tim predicts the baht will continue to appreciate from its current 32 baht per greenback to around 31 baht by the end of 2020. This is due to the expectation that there will be an economic recovery led by tourism in the fourth quarter.

Other factors include continuing bond inflows and a surplus in trade from a low level of imports.

On the other hand, if import surges back up while US-China tension escalates, the baht could be weaker.

[Photo Credit: BOT]

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