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Thai GDP May Shrink This Quarter, Prasarn Says After Rate Pause

Thailand's Finance Minister Thirachai Phuvanatnaranubala
Thirachai Phuvanatnaranubala, Thailand's finance minsiter. Photographer: Dario Pignatelli/Bloomberg

Thailand’s economy may contract this quarter and the central bank said it will lower growth forecasts for 2011 as the worst floods in 50 years threaten to keep factories closed for months, exacerbating risks from weakening global demand.

The central bank may ease monetary policy if needed, Governor Prasarn Trairatvorakul said in Bangkok today, after Finance Minister Thirachai Phuvanatnaranubala said yesterday’s decision to hold interest rates for the first time this year failed to “help.” Gross domestic product may shrink this quarter and the Bank of Thailand will probably reduce its 2011 growth estimate to below 3 percent from 4.1 percent currently, he said.

Prime Minister Yingluck Shinawatra is struggling to limit damage from surging waters that have killed 320 people, left millions scrambling for dry ground since July and swamped more than 1,000 factories operated by companies including Honda Motor Co. While the central bank said it is aware of the severity of the damage, it signaled vigilance against a resurgence in inflation as reconstruction spending may spur demand for goods and services.

“Sandbags remain stacked in Bangkok and elsewhere, and the near-term outlook for growth remains shaky,” Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong, said in a report yesterday. “Given the devastating impact of recent floods, especially on the manufacturing sector, a rate cut would have provided a nice psychological boost. But, at the same time, ultimate reconstruction spending will likely stoke price pressures.”

Fight on Hold

The Bank of Thailand kept the one-day bond repurchase rate at 3.5 percent yesterday, putting its fight against rising prices on hold. The decision was predicted by 16 of 17 economists surveyed by Bloomberg News, with one expecting a rate cut. The central bank had boosted borrowing costs nine times since the start of July 2010, more than any other major Asian economy after India.

“We can use monetary policy when there is a gap between the real economy and its potential,” Prasarn told reporters today. “If there is a wide gap, we can ease. If there is not much gap and we ease too much, that will create problems. If we ease monetary policy too much, it will create inflationary pressure.”

Thailand’s inflation slowed in September after accelerating in August to the fastest pace since 2008. Still, core inflation, which excludes fresh food and fuel prices, quickened last month to 2.92 percent.

Growth Curtailed

Policy makers noted that the floods “would substantially curtail economic growth in the remaining part of the year from previously projected,” Assistant Governor Paiboon Kittisrikangwan said in a statement yesterday. “Nonetheless, upside risks to inflation from higher public and private spending as the floods recede would need to be monitored.”

The damage caused by the floods may amount to as much as 120 billion baht ($3.9 billion), Prasarn said Oct. 14. He said today the disaster may erase 100 billion baht off GDP because of lower output and the figure excludes loss of assets.

Asia’s expansion is already easing as faltering recoveries in the U.S. and Europe weigh on the region. China’s economy grew at the slowest pace since 2009 last quarter, Bank Indonesia lowered interest rates this month while Singapore’s central bank said it will reduce the pace at which the currency strengthens as it lowered its 2011 growth forecast last week.

No ‘Help’

Thai stocks and the baht weakened in the past three months as overseas investors sold emerging market assets amid faltering global economic growth. The benchmark SET Index has fallen 17 percent while the baht has lost 3.5 percent over the period. The stock index dropped 3.1 percent today, the most in Asia.

“This is not the time to worry about inflation or an overheating economy,” Thirachai, the finance minister, said yesterday after the rate decision. “Though we didn’t get help on monetary policy, I am ready to go ahead and use fiscal policy to revive the economy.”

The Cabinet on Oct. 18 agreed to widen the 2012 budget deficit by 50 billion baht to fund flood reconstruction. The floods may erase between 1 percentage point and 1.7 points off Thai growth this year, Thirachai said this week.

The central bank uses core inflation to guide monetary policy and aims to keep it at less than 3 percent. It plans to switch to using headline inflation in targeting price gains of 3 percent, with a so-called tolerance band of 1.5 percentage points, from 2012, Prasarn said Oct. 4.

Inflation Trajectory

The Bank of Thailand “might continue its hiking streak” in the first quarter of next year, Malayan Banking Bhd. said in a note yesterday. “Inflation is likely to be back on its upward trajectory amidst strong domestic demand and reconstruction spending following the recovery from the floods.”

Japanese carmakers led by Honda, Toyota Motor Corp., and Nissan Motor Co. may lose more than $500 million because of the floods, according to Kohei Takahashi, an analyst at JPMorgan Chase & Co. in Tokyo. Computer disk-drive maker Western Digital Corp., which counts Hewlett-Packard Co. and Dell Inc. as customers, may see exports from Thailand slide as much as 40 percent, Industry Minister Wannarat Charnnukul said Oct. 18.

The disaster will temporarily put 500,000 people out of work, Deputy Prime Minister Kittiratt Na-Ranong said. Overseas companies may slow investment or move operations to neighboring countries unless Thailand bolsters its infrastructure and strengthens flood defenses at its industrial estates, Kittiratt said late yesterday.

Jobs at Risk

Rainfall about 25 percent more than the 30-year average filled upstream dams to their capacity, prompting authorities to release large amounts of water this month down a flood plain the size of Florida. The waters have affected 14,254 factories and businesses in 20 provinces, leaving 664,567 workers at risk of losing jobs, according to the Labor Ministry.

It will take about 40 days for the 12 billion cubic meters of water, enough to cover Connecticut with about a meter (3.3 feet), to drain into the Gulf of Thailand, Irrigation Department spokesman Boonsanong Suchatpong said. Yingluck called a meeting last night to divert more of the water through provinces to the east of Bangkok.

“We will try to build more levies but the water level this year is massive,” she told reporters in Bangkok yesterday as her eyes welled up with tears. “Wherever we drain the water, there are always problems.”

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