The ongoing severe drought poses another obstacle to the military government's aim of pushing through a revised constitution at the August 7 referendum. Growing discontent among rural Thais could also aggravate divisions within the royal-nationalist faction, further undermining political stability.
Thailand's strong Q116 growth figures suggest the economy is shrugging off the impact of the ongoing drought, supporting our view for 3.0% full-year growth. While still below potential, this would mark the fastest annual expansion since 2012, supported by rising tourism revenues and large scale public infrastructure investment.
The BoT held interest rates at 1.50% on May 11 and we believe the easing cycle is over. Rate hikes are unlikely to be forthcoming this year or next, however, with little sign of medium-term inflationary pressures amid weakening money and credit growth.
The Thai government's reforms to the country's tax system should help boost foreign investment at the margin, while a focus on asset and indirect taxes will broaden the tax base. The key to unlocking fiscal reforms, however, will be improving the efficiency of state-owned enterprises, which the government appears to be making progress on.
The improvement in terms of trade has led to a surge in Thailand's external surplus, which is currently in double-digit territory and likely to remain in high single digits over the coming years. However, the large surplus partly also reflects the lack of appetite on behalf of foreign investors owing to lingering political risks, and is therefore by no means an unequivocal positive.
Major Forecast Changes
We have made some slight revisions to our monetary policy forecasts for the coming years. We continue to expect the Bank of Thailand to remain on hold at 1.50% until 2018, but expect the hiking cycle to be more aggressive once it begins.
A key risk could come from renewed political instability. The military has been successful in quelling protest activity since it assumed power, but with the referendum approaching there is a risk of Red Shirt protests. Additional, with King Bhumibol Adulyadej in poor health, his death may spark renewed instability in Thai politics and the business environment.
|Real GDP growth, % y-o-y||0.8||2.8||3.0||3.5|
|Nominal GDP, USDbn||404.4||395.3||395.2||418.9|
|Consumer price inflation, % y-o-y, eop||0.6||-0.9||1.0||1.5|
|Exchange rate THB/USD, eop||32.90||36.00||35.10||34.90|
|Budget balance, % of GDP||-2.0||-2.1||-2.2||-1.6|
|Current account balance, % of GDP||3.8||8.8||7.7||7.1|
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