Hot spots: Thailand. (International Insight).(financial analysis)(Statistical Data Included)

The country has not been finding it easy, domestically, to keep pace with the rebound seen in a number of other economies in the region. Real GDP growth slowed to 2.1 percent (yly) in the fourth quarter of last year. It was just 1.8 percent for 2001 as a whole. There have been signs of growing strength in recent months, however, and official as well as private expectations for 2002 have been revised upward. A number of reforms--bringing and to export industries, extra funding for rural businesses to help them turn out new products, and the establishment of a new state agency to manage bad loans for local banks--have all contributed to bolstering investor confidence.

Finance Minister Somkid Jatusripitak forecast recently that an expansion in real GDP of 2-3 percent should be the "bottom line" this year. Since then, the Central Bank has raised its projection to 2.5-3.5 percent from 2.0-3.0 percent, pointing to increased consumer spending and a more rapid global recovery than most pundits anticipated after the events of last September 11. The Finance Ministry has raised its prognosis to 3.6 percent, and in our view, even this could still turn out to have erred on the side of caution. Exports, which traditionally have been the engine of Thai economic growth, are officially projected to rise 5.6 percent this year after a 6.5 percent fall in 2001, and they will probably perform better than that.

The government's decision to delay a hike in value-added tax to 10 percent from 7 percent (an increase originally scheduled for October this year) has helped to dampen inflationary expectations. Headline inflation will remain well controlled at under 2 percent this year, following a rate of 1.6 percent in 2001. It was clocked at a mere 0.6 percent in March and at 0.4 percent (y/y) in April. Under the circumstances, it is understandable that the local business community would like to see the Central Bank cut interest rates further, especially as the Thai baht has been ruling so strong in the exchange markets of late that some policy makers are becoming concerned about a possible negative impact on the hoped-for recovery of exports.

The CB's monetary policy committee, however, has been keeping the benchmark repo rate unchanged at 2.0 percent since January, saying that it believes this to be "an appropriate level for the current state of economic recovery." If spokespersons for the Bank were completely honest, they would probably concede that the institution's hesitancy to shave its bellwether rate stems not from concern about economic overheating and inflation, but, rather, from a desire to avoid sending a signal that it would like to see commercial interest rates lower.

It is concerned, in particular, about deposit rates, which it wants to maintain at present levels to please the better-off Thais with savings to worry about The view is not shared by foreign-owned banks in Thailand, of which three recently cut their deposit rates (the most recent having been Standard Chartered Nakomthon Bank, which is majority-owned by the UK's Standard Chartered Bank). The government has made it clear that it is not happy with this development It has said, also, that it has no plans to step in, but will let "market mechanisms work on the interest rates." Chances are, the authorities will indeed not intervene directly, but ...