Recent disaster prompts central bank to rethink its predictions

BANGKOK - The Bank of Thailand (BOT), the nation's central bank, slashed its 2011 economic growth forecast to 2.6 percent from 4.1 percent on Friday because of recent flooding and said it was ready to call a special meeting on interest rates, raising speculation about a rate cut.

The bank faces a dilemma over rates because it expects inflation to remain high next year, forecasting price rises of 3.5 percent versus 3.8 percent this year, with core inflation at 2.5 after an expected 2.4 percent this year.

In the most recent Reuters poll, economists expected the policy rate to still be at the current 3.50 percent at the end of next year, but the chances of a cut to help industry are rising.

"Temporary rate reductions at the next meeting or in some interim special policy meeting cannot be ruled out, but that is not our base case forecast for now," said Ramya Suryanarayanan, an economist at DBS Bank in Singapore.

Reconstruction after the floods and other programs promised by the government prior to elections in July will help push up economic growth to 4.1 percent in 2012, the BOT said, but it could also add to inflationary pressure.

With the flooding far from over and the final cost uncertain, the central bank said it might review its growth forecasts again at its next policy meeting on Nov 30.

"The main factor affecting GDP is the floods, which have vastly damaged the agricultural and industrial sectors," said Assistant Governor Paiboon Kittisrikangwan.

"The impact will be mostly felt this year. But next year after the reconstruction, domestic demand and government measures should lend support," he told a news conference.

Thailand is a manufacturing hub for international companies in the auto and electronics sectors. Its worst flooding in half a century has closed seven huge industrial estates this month, disrupting international supply chains.

Bangkok, which accounts for 41 percent of GDP, faces extensive flooding this weekend.

The flooding and global economic uncertainty prompted the central bank to leave its policy rate steady at 3.50 percent last week, pausing after more than a year of tightening that has brought the rate up from a record low of 1.25 percent.

The central bank aims to keep core inflation - which excludes energy and fresh food prices - in a range between 0.5 and 3.0 percent. Core inflation was pushing up against the top of that range at 2.92 percent in September.

Even before the flooding, Southeast Asia's second-largest economy was having a tough time, contracting 0.2 percent in the second quarter from the first under the impact of the Japanese earthquake in March.

"In terms of the flood impact on factory output and business sectors, it seems like capacity utilization for October will be very low," said Rahul Bajoria, an economist at Barclays Capital in Singapore.

"A drop in industrial production to the tune of 15 to 20 percent month-on-month cannot be ruled out."

Finance Minister Thirachai Phuvanatnaranubala told Reuters last week that the economy would probably grow by little more than 2 percent this year. It grew 7.8 percent in 2010.

The BOT's forecast of 2.6 percent for this year compares with the 3.8 percent in a quarterly Reuters poll. The poll was conducted this month before the disaster worsened but the forecast was already the lowest in Southeast Asia.

Indonesia, which has ambitions to rival Thailand as a manufacturing hub, is expected to grow 6.5 percent this year. Meanwhile, Singapore is predicted to grow by 5.1 percent.

To help with the flooding, the cabinet approved a 325 billion baht ($10.6 billion) package on Tuesday to help companies, small vendors and individuals with soft loans to be arranged or partly guaranteed by the government.

The Thai cabinet earlier approved an increase in the budget deficit to 400 billion baht for the fiscal year from Oct 1 from 350 billion baht.

Because of the floods and a slowdown in overseas markets, the central bank cut its forecast for export growth this year to 20.1 percent from 22.4 percent and to just 7.9 percent for 2012 from 10.4 percent. Exports rose 28.5 percent in 2010.

Reuters

(China Daily 10/29/2011 page10)