Thailand Economic Growth Accelerates, Maintaining Pressure for Rate Rises

Thai economic growth accelerated in the first quarter to the fastest pace in a year, adding pressure for higher borrowing costs to contain inflation as the government prepares for a July 3 election.

Gross domestic product rose 2 percent in the three months to March 31 from the previous quarter, when it climbed a revised 1.3 percent, the National Economic and Social Development Board said in Bangkok today. The median of 11 estimates in a Bloomberg News survey was for a 2.2 percent jump.

Prime Minister Abhisit Vejjajiva has pledged wage increases and capped food and diesel costs to win support ahead of the poll as rising consumer spending contributes to price pressures. The central bank has signaled it may raise interest rates for the fourth time this year in June and the government predicts exports will weather trade disruption from Japan’s earthquake.

“The solid growth, which was supported by both domestic and external demand, would lead to expectations of faster inflation and more rate hikes,” said Tohru Nishihama, economist at Dai-ichi Life Research Institute Inc. in Tokyo. “The earthquake in Japan may have a short-term impact, but not a big one. We may see at least two or three more rate hikes in 2011.”

The nation’s benchmark SET Index has surged 43 percent in the past year, according to data compiled by Bloomberg. It was down 1 percent today as of 10:40 a.m. local time, while the MSCI Asia Pacific index slid as much as 2 percent.

Baht Decline

The Thai baht fell 0.3 percent to 30.38 per dollar and has dropped about 1.3 percent in 2011, the worst performer among major Southeast Asian economies. That aids exports while providing less of a buffer against costlier global food and oil.

Thailand’s GDP advanced 3 percent last quarter from a year earlier, compared with 3.8 percent in the previous period, today’s report showed. The median estimate in another Bloomberg survey was for a gain of 2.6 percent.

The development board is maintaining its forecast for an expansion of 3.5 percent to 4.5 percent this year, said Arkhom Termpittayapaisith, its secretary-general.

Neighboring Singapore last week raised its 2011 GDP growth forecast to as much as 7 percent and Malaysia predicts its economy will expand up to 6 percent as Asia fights price pressures stoked by economic expansion.

Political Test

The forthcoming election in Southeast Asia’s second-largest economy will pit Abhisit’s Democrat party against allies of fugitive ex-Premier Thaksin Shinawatra, who was ousted in a 2006 coup and lives overseas. About 100 people have been killed following disputes over the last election in 2007.

Thaksin’s opponents dressed in yellow seized Bangkok’s airports in 2008 to oust his allies, and his supporters clad in red shirts have rallied against Abhisit since he took office in a parliamentary vote the same year.

“Instability will remain an issue in Thailand,” said Pornthep Jubandhu, a senior economist at Siam Commercial Bank Pcl in Bangkok. “But it won’t be a factor that will threaten economic expansion.”

Abhisit’s government has capped diesel tariffs and applied price controls to items such as eggs and cooking oil to shield Thailand’s 67 million people from the impact of inflation.

The opposition Pheu Thai Party, led by Thaksin’s sister, Yingluck Shinawatra, has used billboard advertisements to blame Abhisit for rising costs. The annual pace of inflation climbed to 4.04 percent in April, the fastest pace in 15 months.

Climbing Prices

Elevated commodity prices have prompted companies such as Charoen Pokphand Foods Pcl (CPF), the nation’s biggest meat producer, to raise charges. The prime minister pledged in February to boost the minimum wage by 25 percent over two years to help the public cope with higher costs, while Pheu Thai has promised a larger increase as the parties vie for votes.

The Bank of Thailand will need to adjust its benchmark interest rate, currently 2.75 percent, to a “normal” level, Governor Prasarn Trairatvorakul said May 12. It raised borrowing costs by a quarter of a percentage point each in January, March and April.

The central bank has forecast economic growth will return to a “normal trend” following a 7.8 percent expansion in 2010, which was the strongest pace in 15 years. The monetary authority predicts inflation of 3.9 percent in 2011.

“We have some concerns going into the third quarter because one of the things that kept inflation down domestically is the diesel subsidy,” Andy Jenwipakul, managing director of the research group at SCB Securities Co. Ltd. in Bangkok, told Bloomberg Television today. “At some point we would think the diesel subsidy has to be lifted. Basically you will see some cost pressures going up from here.”

In Japan, Thailand’s second-biggest export market, gross domestic product contracted an annualized 3.7 percent last quarter as the March 11 earthquake and tsunami disrupted output.

Thailand’s central bank has said the disaster will hurt overseas shipments only in the short term. Exports may rise as much as 15 percent this year, Commerce Minister Porntiva Nakasai said May 20.

To contact the reporter on this story: Suttinee Yuvejwattana in Bangkok at Suttinee1@bloomberg.net. Supunnabul Suwannakij in Bangkok at ssuwannakij@bloomberg.net

To contact the editor responsible for this story: Tony Jordan at tjordan3@bloomberg.net; Stephanie Phang at sphang@bloomberg.net

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