The passage of Thailand's new constitution is positive for short-term political stability and economic growth and will pave the way for elections in 2017. However, from a long-term perspective it will likely deepen Thailand's large societal divide and potentially undermine economic growth.
Thailand's relatively strong Q216 real GDP growth print supports our view of an acceleration of full-year growth to 3.0% in 2016 and 3.5% in 2017. The tourism sector was a key driver of growth, but faces downside risks from the potential for a flare up in political instability and slowing Chinese growth, but ongoing public infrastructure projects and a recovering manufacturing sector should support growth.
We continue to expect the BoT to maintain its benchmark interest rate at 1.50% over the coming quarters even as headline CPI rises. The inflation cycle has likely turned and the bond market is signalling the potential for higher inflation expectations, but CPI is likely to remain at the lower end of the BoT's 1.0%-4.0% target band over the medium term.
We continue to see gradual further Thai baht strength amid low inflation and favourable terms of trade dynamics, which continue to support the country's saving rate. However, risks are weighted to the downside given the risks posed by the ongoing slowdown in China and the weakening of the Chinese yuan.
The Thai government has ramped up spending this year as part of its ongoing infrastructure investment programme, with capital spending rising 24.0% y-o-y for the January-July period. Given the productive nature of such expenditure, we do not expect to see fiscal sustainability deteriorate notably.
Major Forecast Changes
We have made some slight revisions to Thai baht forecast to reflect recent strength, but we continue to see the currency edge slightly stronger versus the US dollar over the coming year thanks to the recent improvement in the terms of trade and the country's record savings rate.
A key risk could come from renewed political instability. The military has been successful in quelling protest activity since it assumed power, with the recent constitutional referendum passing will little opposition. However, with King Bhumibol Adulyadej in poor health, his eventual death may spark renewed instability in Thai politics and the business environment.
On the economic front, Thailand's tourism boom has been largely driven by rapid growth in mainland Chinese arrivals, which could slow sharply should the Chinese economy undergo a recession.
|Real GDP growth, % y-o-y||0.8||2.8||3.0||3.5|
|Nominal GDP, USDbn||404.4||395.3||397.4||432.4|
|Consumer price inflation, % y-o-y, eop||0.6||-0.9||1.0||1.5|
|Exchange rate THB/USD, eop||32.90||36.00||34.00||34.00|
|Budget balance, % of GDP||-2.0||-1.7||-2.4||-1.8|
|Current account balance, % of GDP||3.8||8.8||11.9||8.5|
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