Monetary Policy Group
Against the backdrop of the Covid-19 outbreak and the oil price war, it is likely that the Thai economy is heading along with the rest of the world toward a major growth slowdown. The relevant question, though, is “how long will the slowdown be?” This article analyzes the prospects of the Thai economy in such a challenging time.
This year, while we were more hopeful about external developments thanks to an agreement between the US and China over the phase one trade deal and expected an economic rebound from last year’s export-driven slowdown, three events simultaneously have emerged and completely changed the whole picture. The first event, which all of us must be paying attention to, is the outbreak of the coronavirus, Covid-19. The outbreak has inevitably affected the Thai economy through various channels. The hardest hit is the tourism sector, which relies much on Chinese visitors and will this year be a key drag on growth. In addition, due to a temporary production halt for certain industries in China including electronics and automotive, the event potentially leads to regional supply chain disruption. A particularly worrying issue is the uncertainties surrounding the spread of the disease, which makes it difficult to assess the overall impact, let alone fears in spending everyday life. Therefore, consumption and investment sentiment has been eroded.
Apart from external disturbances, shocks also emerge from within Thailand, one of which is the delay in the Annual Budget Expenditure Act. This factor has derailed necessary investment and fiscal stimulus at times the economy needs it most. The last event comes from the drought which turns out to be more severe than previously expected. The drought affects agricultural output, thereby weighing on income of households in the agricultural sector and hence on their purchasing power.
Given the diverse nature of the three events, households and businesses in several sectors have been impacted. It is unfortunate that shocks appear and hit the economy at times we have still been vulnerable from trade tensions. We have yet to mention the recent collapse in oil prices which might derail financial market sentiment further. In light of the current situation, which foresees another year of an economic slowdown, there is clearly an urgent need to coordinate policy measures so as to shore up the economy. At the Bank of Thailand, the MPC, last month, has voted unanimously to cut the policy rate to a historically low level of 1%, making us the first central bank to promptly react to the coronavirus outbreak. Because downside risks to growth have mounted, the Committee believes such a policy rate cut is a necessary preemptive move to alleviate the potentially large, negative impacts on growth in the future.
Given such gloomy economic factors, is the Thai economy heading toward a prolonged growth slowdown? Our proposed answer is “not likely” based on how transitory these shocks will stay with us. First, given the ruling of the Constitutional Court, the budget bill has already come into effect, with the government attempting to accelerate disbursement in the remaining seven months of the fiscal year. Second, regarding the drought, the problem will likely be contained in certain regions, while we can expect some kinds of fiscal measures to alleviate any impact on farmers’ income. Lastly, regarding the Covid-19 outbreak, the current base case is for the situation to subside in the next few months. There are, however, risks that things get escalated and prolonged, which we have to vigilantly monitor.
Aside from the temporary nature of shocks, other factors in support of the economic recovery also include the coordinated policy actions by all related parties. During this hard time, the MPC has admitted that monetary easing alone is not enough, especially when the policy rate already stays at an exceptionally low level. Other diverse and more targeted financial and fiscal measures are much-needed to uplift the economy. Since the shocks have brought about liquidity and debt-serviceability problems to households and SMEs, we are fortunate to witness most commercial banks and government-owned financial institutions in Thailand launching initiatives to assist clients who were affected by the outbreak and the drought. These measures range from suspension of principal repayment, interest reduction to additional loan provision, all of which would ensure that liquidity gets transmitted to those who are in a serious need. Furthermore, the SMEs can resort to the government’s relief package, which offers credit guarantees and various lending schemes.
Apart from these liquidity provision measures, the Bank of Thailand has revised rules in order to encourage financial institutions to engage in “preemptive” debt restructuring with SMEs. This initiative wishes to enhance debt-servicing capability of businesses and keep them businesses in operation. All in all, the complementarity between these diverse policy measures will be crucial in cushioning these unforeseen repercussions.
While monetary policy will remain accommodative for some time to deliver a sustained economic rebound, fiscal policy will play an important role in sheltering growth in the future partly thanks to several infrastructure projects in the pipeline. However, more effective and targeted measures are further needed to address specific sectors impacted by shocks. Having said that, we must remind ourselves that, in the VUCA+ world, situations can abruptly change and are hard to predict. It is crucial that individuals, businesses as well as policymakers remain vigilant on risk factors and prepare ourselves well for any possible scenarios to come.
*** The opinions expressed in this article are those of the authors and should not be attributed to the Bank of Thailand.***