Domestic investment to drive Thai economy; BoT to favour weaker THB to support exports

Domestic investment is expected to mainly drive Thai economic growth this year rather than external demand or private consumption. It is quite vital that the promised infrastructure project starts for the economy to perform better this year. If this happens, the economy is expected to grow slightly stronger by 2.8 percent in 2016, said Commerzbank in a research report. However, this is quite dependent on the fiscal boost coming through.

Meanwhile, the disinflationary pressures are being faced by the Thai economy. Last year, the country registered headline inflation of -0.9 percent. For this year, inflation is expected to be around 0 percent, reflecting risks on the downside to inflation due to the lower oil prices and moderate economic rebound.

However, Bank of Thailand (BoT) has downplayed the deflationary risks. It said that core inflation continues to hover around one percent. In spite of the low inflation environment, the central bank kept the key rate on hold at 1.5 percent in May. It last lowered rates by 50 basis points in the first half of 2015.

The BoT is likely to keep the rates on hold for the foreseeable future due to restricted effect on consumption expected given higher household debt to GDP and because of restricted pass through to investment given the subdued investor sentiment. In fact, the Bank of Thailand is likely to favour a weaker currency in order to keep loose monetary conditions and underpin exports, according to Commerzbank.

Last year, the THB (The Baht, curency of Thailand) was the third worst performer in Asia. It depreciated almost nine percent against the USD. This was because of the stronger USD, the central bank’s preference for a weaker THB, decelerating growth momentum and continuous political uncertainty. These factors are likely to keep dragging the THB.

“We forecast USD-THB at 36.70 by end-2016 on the assumption of a continued strong USD," noted Commerzbank.