Top university boss predicts that, technically, Thailand has already entered into a period of 1970s stagflation as he lowered the economic growth projection for the country to between 2% and 3% for the year with inflation running at 5%. At the same time, a lower baht was heralded by Minister of Finance, Arkhom Termpittayapaisithm, this week, as he predicted that the kingdom will ease entry criteria to boost foreign tourism while achieving export growth of between 5% and 6% in 2022.

Thailand’s economic team in government is adopting a wait and see approach to the current crisis caused by the war between Russia and Ukraine with the Minister of Finance, Arkhom Termpittayapaisith, suggesting on Monday that economic growth, at this point, takes precedence over curbing inflation, in a signal to the central bank. This leaves the route open to a weakening baht which may boost export competitiveness and tourism receipts in the short term while the government estimates that the threat of inflation will recede over the course of the year particularly if the war in Ukraine is brought to a close.

Minister of Finance, Arkhom Termpittayapaisith, on Monday, said that the current Thai baht rate, after falling by over 4% against the US dollar since mid-February, was ‘appropriate’ as he signalled that the key goal for the country now was economic growth. It comes as the United States begins to raise interest rates with Thai fiscal policy predicted to remain weak for the foreseeable future, at least until early 2023.

Thailand’s Minister of Finance, on Monday, appeared to urge the Bank of Thailand not to raise interest rates at the Monetary Policy Committee on Wednesday and to give priority to economic growth over the central bank’s fiduciary duty to maintain price stability and hold inflation in check.

The current situation comes as the baht has lost 4.64% since the 17th of February last, one week before the Russian invasion of Ukraine when the dollar to Thai baht rate was at ฿31.12. 

It comes as there is a belief among economic pundits that Thai interest rates may not be raised until early 2023.

Minister says the trend in the declining value of the Thai baht is ‘appropriate’ as he urged a policy of treating economic growth as the key priority

On Tuesday evening, the baht was trading at ฿33.60 having hit ฿33.80 earlier in the week.

The minister, on Monday, said the current value of the baht was ‘appropriate’ and appeared to suggest that it should become the swing factor in any calibration or decision on fiscal policy.

‘The baht may swing, but at ฿33 per dollar, everyone should be happy,’ he told reporters.

A Reuters poll published, on Tuesday, on the eve of the Bank of Thailand’s Monetary Policy Committee meeting, showed that all surveyed economists, 22 in all, were convinced the Bank of Thailand would leave the historically low-interest rate of 0.5% for one-day interbank lending unchanged.

Ultra low lending rate means a lower Thai baht if US Federal Reserve ratchets up rates and capital continues to flow west due to geopolitical tensions

This is despite the threat of rising prices in the kingdom driven by higher oil costs since February 24th and concern over supply chain shortages worldwide and the cost of imports.

There is now a strong body of opinion that suggests that this ultra-low rate may be maintained by the Bank of Thailand which could see the Thai baht set to weaken further as the year progresses.

Currently, the US Federal Reserve is fully committed to a stronger and faster rate rise in the United States where there are dangerously untamed inflationary pressures.

The United States inflation rate for February was 7.9%, the highest since 1982 or within 40 years.

The trend is also occurring with a flight of capital from Asia to western markets particularly the United States because of the spiralling crisis over the war in Ukraine and strained geopolitical tensions between China and western powers.

Thailand’s inflation rate hit 5.28% in February

Thailand’s inflation rate in February surprised many analysts, coming in at 5.28%, the highest rate since September 2008 and following a 3.2% rise in January.

‘Under the hood of an unchanged policy rate, the Monetary Policy Committee is likely to deliberate on rising inflationary pressures amid elevated commodity prices and supply shocks, against a backdrop of a fragile economy that is facing high uncertainties and downside risks from geopolitics and the pandemic,’ explained Han Teng Chua of DBS Group Research in Singapore on Tuesday.

The top economist emphasised, however, that the whole of ASEAN is facing an elevated risk because of the current tensions and economic effects brought about by the war in Ukraine, the most significant conflict in Europe since World War Two and one which, increasingly, has implications for Asia because of Russia’s alliance with China.

This is coming at a time when investors across the world have begun pulling their money out of China although the Institute of International Finance, a financial trade body representing 450 firms including banks, asset managers and wealth funds, is predicting that the same level of capital flight is not being seen in emerging markets such as Thailand.

Assurances from Finance Minister after the downgrade of four Thai banks last week with two rated as investment-grade BBB, just above junk status

Last week, the minister responded to fears that the kingdom may be suffering from a liquidity crisis after four Thai banks were downgraded.

Two banks, Siam Commercial Bank Pcl and Kasikornbank Pcl, went to BBB from BBB+ status while a further two institutions, Krung Thai Bank Pcl and TMB Thanachart Bank Pcl, went from BBB status to BBB-.

Minister Arkhom insisted, nonetheless, that the fiscal situation in the kingdom remained on stable footing.

He estimated liquidity at ฿3 trillion or nearly $89.3 billion. 

Banks downgraded as the Thai economy faces a liquidity crisis caused by war and tourism barriers

He pointed to rising exports and increased government spending stimulus this year as key factors in pushing the economy forward towards growth.

In banking and investment terms, BBB- which is used by S&P Rating and Fitch rating agencies and is denominated by Baa3 over at the third large agency Moody’s, is still considered investment grade while institutions or bonds rated lower are classed as speculative or high yield investments, known in the industry colloquially as ‘junk bonds’.

Minister insists that 3% to 3.5% growth is possible in 2022 as Thailand seeks new status as a regional capital market in a five-year plan up to 2027

On Monday, Mr Arkhom estimated that the economy would grow by between 3% and 3.5% this year, driven by a 5% to 6% boost in exports and a growing number of foreign tourist arrivals as he indicated that entry restrictions would be lifted in an interview with Reuters.

‘Growth of 3.0%-3.5% should be achievable this year, and 2023 should be better,’ he said.

On Friday last, the minister gave a keynote speech at a seminar in Bangkok organised by the Security Exchange Commission in which he introduced a vision of Thailand as a key capital market in both the global and regional arena.

The Thai Security Exchange Commission has produced a strategic plan toward that goal to run from this year until 2027 in anticipation of an end to the COVID-19 crisis.

Technically stagflation has returned to Thailand

Thanavath Phonvichai, the President of the University of the Thai Chamber of Commerce (UTCC), estimated that already Thailand has lost ฿244.7 billion because of the war which has reduced the potential GDP gain for 2022 to between 2% and 3%.

Oil is still boss as Thailand’s economy faces a return to 1970s stagflation over the ongoing Ukraine war

‘The Thai economy is highly likely to grow at a rate of 2% to 3%, with inflation staying at 5% this year if the Russia-Ukraine conflict is prolonged throughout this year,’ Mr Thanavath said. ‘This scenario will lead Thailand to enter technical stagflation in 2022.’

Mr Thanavath said this stagflation could become more serious and akin to the 1970’s era nightmare seen in Thailand but more particularly and pronounced, in western countries, if oil continued to rise.

This is not thought likely at this stage.

‘The world’s economic shock and economic disaster for all countries worldwide are anticipated if global crude oil prices surge to $200 to $300 per barrel,’ he said. ‘Likewise, the Thai economy would then be expected to plunge into contraction this year.’

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