By Orathai Sriring and Simon Webb
BANGKOK (Reuters) – Thailand’s record tourist arrivals and public works spending are expected to offset weak domestic demand and global economic drag, keeping Southeast Asia’s second-largest economy on course for 3.1% growth this year, the central bank governor told Reuters in an interview.
The trade-dependent economy has been hit hard by the deteriorating global economic environment and the slowdown in demand for exports, which the Bank of Thailand (BOT) expects to decline for the fourth consecutive year in 2016.
Tourism has been one of the few bright spots in the Thai economy, and government spending on big ticket infrastructure should give a jolt to the sluggish economy later in the year, BOT Governor Veerathai Santiprabhob said.
“We are on track,” Veerathai told Reuters in an interview on Friday. “We’ll have to monitor the secondary impacts of Brexit. Certain sectors of our economy have been hit by China’s transition. But we expect to see better government disbursement for large projects in the second half of the year.”
The central bank has predicted economic growth of 3.1% this year, with exports contracting 2.5%. The economy expanded 2.8% last year, picking up from 0.8% growth in 2014 when political turmoil brought the country to the verge of recession.
In the first quarter, the Thai economy grew 0.9% on the previous quarter and 3.2% on the year.
The military government has talked up plans for big infrastructure projects since seizing power in a May 2014 coup, but has spent little. That should change now big projects have gone to auction, Veerathai said, adding spending would increase again in 2017.
Veerathai said while the central bank can ease policy if conditions worsen considerably, there was no immediate need to cut interest rates to stimulate growth as liquidity remains ample.
“There are limits on what monetary policy can do to help stimulate economic growth further,” he said.
“It’s more of the supply-side policies that we need to tackle…and I think the government fully realises this. The fiscal engine is moving forward.”
The central bank has left the benchmark one-day repurchase rate at 1.50%, where it has been since April 2015, just a quarter-point above the record low reached during the global financial crisis.
It next reviews policy on Sept. 14, and expectations for a cut are rising due to slow economic growth and upward pressure on the baht.
Veerathai expects headline inflation to return to the bank’s target range of 1-4% toward the end of the year. Headline inflation began picking up again this year after low energy prices caused prices to fall in 2015.
He saw no immediate systemic risks relating to investment flows arising from Thailand’s low interest rate environment, though the central bank was monitoring pockets of risk as investors hunted yield.
And while high household debt levels remain a concern, he expects debt to fall as consumers pay down loans on car purchases made when they were subsidised by the previous government. Household debt at over 80% of GDP has constrained domestic demand.
The bank is concerned about the impact of currency movements on the economy, Veerathai said, with the Thai baht having risen 3.4% against the dollar this year, a headache for exporters.
Thailand on Sunday voted to accept a military-backed draft constitution in the biggest test of public opinion since the coup, paving the way for an election next year.
In comments made to reporters on Monday, Veerathai said the vote clarified the timeframe for Thailand’s return to democracy.
“That will be good for the economy in the second half as well as private investment projects at home and abroad,” he said.
(Additional reporting by Kitiphong Thaichareon, Pairat Temphairojana; Editing by Sam Holmes)