Bank of Thailand Trims GDP Forecast as Floods Lift Rate-Cut Odds

Thailand Faces ‘Double Whammy’
Waters that have swamped about 10,000 factories now threaten Bangkok’s downtown, imperiling businesses, shopping malls and apartment blocks. Photographer: Dario Pignatelli/Bloomberg

Thailand’s central bank lowered its growth forecasts as floods began overwhelming the capital of Southeast Asia’s second-largest economy, raising the odds of an interest-rate cut in the coming months.

The economy may expand 2.6 percent this year from a previous prediction of 4.1 percent, the Bank of Thailand said in Bangkok today, adding that forecasts may be lowered further in November. The central bank cut its estimate for inflation this year, while raising consumer-price forecasts for 2012, Assistant Governor Paiboon Kittisrikangwan said.

“The impact of the floods is severe and widespread, from the agricultural to the industrial sectors, and economic activities including exports, consumption and private investment are expected to slow,” Paiboon said. “If the economy slows, there is a possibility that the central bank may ease monetary policy, but it has to take inflationary pressures into account.”

The economic impact may be followed by a boost to growth when rebuilding from the disaster starts, following a pattern seen in Australia after floods earlier this year and in Japan, where exports are rising as production is restored after a record earthquake and tsunami in March. Thailand kept borrowing costs unchanged this month for the first time in 2011, while policy makers in emerging markets including Brazil and Indonesia have lowered rates or increased fiscal stimulus to shield growth.

‘Double Whammy’

“Thailand is suffering from a double whammy,” said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong. “Exports are already weak across Asia” and the impact of floods on production will hurt employment, incomes and consumption, she said.

The floods may wipe as much as 3 percentage points off gross domestic product growth this year, said Cheung, while Moody’s Investors Service estimates damage from the disaster may be more than 200 billion baht ($6.6 billion), or equivalent to 2 percent of GDP.

Waters that have swamped about 10,000 factories now threaten Bangkok’s downtown, imperiling businesses, shopping malls and apartment blocks. Prime Minister Yingluck Shinawatra’s government said yesterday it is losing its battle to protect the capital city of 9.7 million people from rising floodwaters, and all areas of Bangkok may be flooded for as long as a month.

Thailand’s benchmark SET index has rebounded about 15 percent from a one-year low on Oct. 4, boosted by overseas investors’ net purchases of Thai stocks as they looked beyond the floods and focused on Europe’s measures to resolve its debt crisis. The stock index is down 5 percent this year.

Vital Services

The scale of the flooding, and the economic and humanitarian impact is being badly underestimated, said Robert Lacey, head of institutional equities at Asia Plus Securities Pcl, Thailand’s third-largest stock brokerage. Fourth-quarter corporate earnings will be “miserable” and consumption will be “damaged” for months, he said.

“Vital” services and tourism will be affected as floodwaters reach central Bangkok, which accounts for 25 percent of the country’s GDP, said Chow Penn Nee, an economist at United Overseas Bank Ltd. in Singapore, adding that a rate cut cannot be ruled out. Standard Chartered Plc and UBS AG say the Bank of Thailand may consider such a move.

“The flood makes a policy rate cut for the Bank of Thailand more likely,” said Edward Teather, a Singapore-based economist at UBS. “Clearly there will be some more disruption to economic activity” even though growth will later be boosted by a surge in reconstruction, he said.

GDP Contraction

The Bank of Thailand said today that the economy may contract 1.9 percent this quarter from the previous three months and grow 0.8 percent from a year earlier. It predicts a 4.1 percent expansion in 2012, from a previous estimate of 4.2 percent.

About 9,850 factories with an investment value of 800 billion baht have been flooded, according to Chalitrat Chandrubeksa, a deputy government spokesman, leaving 660,000 workers at risk of losing their jobs.

Companies including Apple Inc. and Toyota Motor Corp. are facing the worst supply disruptions since the March earthquake that struck Japan. Thailand makes about a quarter of the world’s hard-disk drives and serves as a production hub for Japanese carmakers and electronics firms.

Tourists Deterred

As many as one million tourists may be deterred from visiting Thailand and the country may miss its target of 19 million arrivals, Tourism and Sports Minister Chumpol Silapa-Archa said Oct. 25. Revenue from tourism accounts for about 7 percent of the nation’s GDP, according to the previous government, which was replaced by Yingluck’s administration after a July election.

“Given the risk of prolonged flooding, economic losses may continue to mount due to disruptions to manufacturing, exports and tourism, especially given that the fourth quarter is the peak season for both exports and tourism,” said Usara Wilaipich, a Bangkok-based economist at Standard Chartered. “Although a rate cut is not our core scenario, we acknowledge that the Bank of Thailand may consider such a move” as a one-off action to restore consumer and business sentiment, she said in an Oct. 26 report.

The Bank of Thailand had boosted borrowing costs nine times between July 2010 and August this year, more than any other major Asian economy after India. The economy grew 7.8 percent in 2010, the fastest pace in 15 years.

“Combined with the deterioration in the outlook for external demand, real GDP growth in the second half will slow significantly,” Christian de Guzman, an assistant vice president at Moody’s in Singapore, said in an Oct. 24 report. The economy may expand 2.8 percent this year, he said.

Forecast Cut

Credit Suisse Group AG cut its forecast for Thai economic growth this year to 2.7 percent from 3.5 percent, it said in a report yesterday. The central bank is unlikely to lower rates unless Europe’s crisis deteriorates “a lot more” or the post-flood Thai rebound disappoints, it said.

Shortages stemming from the deluge will boost price pressures, with inflation now seen at 3.8 percent next year, from the bank’s previous estimate of 3.4 percent, said Santitarn Sathirathai, an economist at Credit Suisse in Singapore.

The Bank of Thailand cut its forecast today for inflation in 2011 to 3.8 percent from 3.9 percent, and raised it to 3.5 percent from 3.2 percent for next year. Core inflation will be 2.4 percent this year and 2.5 percent in 2012, it said.

Reconstruction Boost

While it is too early to gauge the impact of the disaster on growth this year, Fitch Ratings sees upside risks to its forecast of 4.5 percent expansion in 2012, Philip McNicholas, director of Asia Pacific sovereigns for the company, said in an Oct. 25 report.

“Once the flood waters recede, reconstruction spending will kick in, manufacturing production will rebound and the current flooding could cause a potential lift to prices of rice crops in early 2012,” Hong Kong-based McNicholas said.

Both Moody’s and Fitch say the floods won’t affect the government’s creditworthiness. The Cabinet agreed on Oct. 18 to widen the 2012 budget deficit by 50 billion baht to fund flood reconstruction.

“The robust economic recovery over the past three years and post-crisis stabilization of government finances support Thailand’s creditworthiness,” Moody’s de Guzman said. “The government will have ample fiscal space to absorb flood-related costs without prompting a permanent deterioration in its debt ratios.”

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