Thailand's tourism props up flatlining domestic demand

The Bank of Thailand's May economic report reveals that domestic demand continued to flatline, despite the BoT's back-to-back rate cuts in March and April. But this is being partly mitigated by a further pickup in tourism and fiscal spending. 

While both tourism and government spending should remain strong in the near term, the government's focus on constitutional reform may be preventing a more committed growth push, says Barclays. This, alongside weak farm incomes due to depressed agricultural prices, as well as slowing export demand from China, is likely the main reason behind the failure of private consumption and investment to respond to the BoT's monetary stimulus.

Despite the persistent weakness in domestic demand, the BoT continues to signal its comfort with the current policy stance for the time being. With that said, the risk remains tilted towards further accommodation, according to Barclays. One trigger for this would be a renewed strengthening in the THB, which continues to see support from a sharply widening current account surplus and has become a key policy focus of late. A further trigger would be an additional material weakening in domestic demand conditions.

"Our base case is that the sluggish pace of the recovery will continue, but that the risk of further near-term easing has diminished somewhat given the recent stability in the THB", adds Barclays.