Thailand's GDP forecast plunged to 3.7%

On back of lower export projections.

According to OCBC Treasury Research, Thailand’s Finance Ministry cut the 2013 economic growth estimate to 3.7% from a previous estimate of 4.5% in late September, adding that the new growth range is expected to fall between 3.5% - 4.0% (previous: 4.0% - 4.5%).

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The downward revision is hardly surprising given the downgrade in export growth estimate at 1.8% this year amid the technical recession seen in 2Q13, where it contracted 0.3% on a seasonally adjusted basis from the first quarter.

The official growth downgrade to 3.7% may inject downside risks to our own initial expectations for growth to average 4.0% this year.

On this note, fresh cues from the key economic indicators including manufacturing (-3.1%), government expenditure (-13.7%), and private investment (-4.1%) remained lacklustre in August. Manufacturing capacity utilisation has also dipped to 63.5% in August from July’s 64.5%, dragged primarily by the falling output of motor vehicles (-11.9%) and food & beverage (-9.7%) over the same period of time.

Note that the manufacturing and private investment space have already contracted for 5 consecutive months, while the delay in THB2tn on infrastructure and THB35bn on water management project spending may continue to hinder government spending.

Despite these soft prints, exports expanded by 1.6% yoy in August, snapping its four consecutive months of contraction. Note that exports make up roughly 60% of the economy, and the recovery of its external sector due to improving global fundamentals may be one of the few factors to support Thailand’s economic growth.

On top of poor economic indicators, the key risks to economic growth remains to be the ballooning fiscal spending by the government and the increasing household debt. Note that the Thai Cabinet have doubled financial assistance to rubber planters amounting to THB21.2bn, on top of the continuation of its rice buy-back scheme for another crop year of THB270bn.

The dual-commodity subsidies will only serve to undermine efforts to control the ballooning fiscal position, now that the public debt to GDP ratio has expanded to 44.3% in June 2013, vs 2008’s 38.2%.

Meanwhile, the alarming rise in household debt to GDP ratio of 77.5% at 1Q13 vs 2007’s 55.0% will likely constrain consumption and limit the economy’s ability to grow.

Despite the softer economic indicators of late, BOT is likely to keep its main policy rate on hold when it meets on Oct 16.

This is on the back of BOT governor Prasarn Trairatvorakul’s comment that the monetary policy remains supportive while warning that a lower cost of borrowing may lead to a “build-up of financial imbalances”.

Given the lackluster economic indicators of late, we downgrade Thailand’s growth expectation to 3.5% in 2013, slightly below official estimate of 3.7%.

Our previous estimate for inflation to average 2.3% remains intact in view of the recent official downgrade to 2.1% - 2.6% from a previous 2.8% - 3.4%. Meanwhile, we expect the BOT to keep its benchmark rate unchanged at 2.5% for the rest of the year, given the high household and public debt.