Economic turmoil in the offing with Srettha Thavisin’s plan for a fiscal spending surge amid discord with the central bank and uneasy capital markets. As the rift between the government and central bank widens, Thailand braces for a jump in its budget deficit, feeding into concern over a slump in the baht. With the controversial Digital Wallet plan back on the table and Thai bond sell-offs, analysts still predict interest rate cuts which will exacerbate the problem further. In the meantime, US economic strength further complicates matters as it continues to thrive at interest rates of 5.25% to 5.5%. 

A key Bank of Thailand Monetary Policy Committee decision on interest rates on Wednesday comes against the backdrop of a severe rift between the government and the central bank. This is coming amid continuing capital flight out of Thailand and a six-month low for the Thai baht. In turn, this is being driven by the bank’s already dovish interest rate policy, nearly 300 basis points below the United States. Even more significantly, it is happening against the backdrop of unravelling government finances. On May 14th next, the Thai Cabinet is expected to review the 2025 budget. This is thought to include a plan to more than double the country’s fiscal deficit from ฿713 billion to ฿1,527 billion. It will fund the controversial Digital Wallet plan. 

Deputy Minister of Finance Julapun Amornvivat on April 1st announced that Thailand was scrapping a planned international bond offering to attract foreign investors. He cited ‘uncompetitive’ rates. It comes with a persistent differential between Thai bond yields and US Treasury bonds in addition to a dovish central bank interest rate policy.

This month has seen an even more pronounced difference between the government’s economic policy approach and the Bank of Thailand’s.

It comes with plans by the government to significantly widen the fiscal deficit in 2025.

In turn, this comes amid a sell-off of Thai bonds by foreign investors and markets.

Similarly, there is marked reluctance by the international market to return to an era of cheap money.

Analysts believed the Monetary Policy Committee will hold interest rates on Wednesday but predict a rate cut in June. Weak economy drives speculation

Thai financial markets eagerly await a key Monetary Policy Committee meeting on Wednesday.

However, most analysts suggest no change in the policy rate of 2.5%. Indeed, Bloomberg reported that 17 of 24 analysts polled suggested the central bank will hold interest rates at this time.

Certainly, it is coming at a time when there is growing concern for Thailand’s weakening financial situation.

Those who argue for an interest rate easing point to anaemic if any potential economic growth in the first quarter of 2024.

Undoubtedly, falling government receipts have startled economic policy makers. Revenue is down 11% since the financial year started on October 1st 2023.

In the meantime, even so, most analysts suggest it may be a close-run thing between making the cut in April or June.

At the same time, there are many reasons why Thailand should not cut interest rates at all. Firstly, the country’s already dovish interest rate environment has begun to drive capital flight.

Baht is at a six-month low. At the same time, it is beginning to find its way into inflation although Thailand’s government has done very well on this metric

In the meantime, a key point of concern is the weakness of the baht.

Unquestionably, Thailand’s inflation rate has now been negative for six months in a row.

The February reading is minus 0.47%.

At the same time headline inflation is at 1%, the lower end of the Bank of Thailand’s spectrum. The core Consumer Price Index (CPI) meanwhile is at 0.37%, quite a healthy position.

Nonetheless, the Thai baht has plummeted so far this year to a new six-month low. It is currently fluctuating between ฿36.3 and ฿37 to the US dollar. The baht fell by 6-7% this year.

It is expected to trawl these depths for some months. 

At some point, the lower-valued Thai currency may begin to feed into inflation. In turn, this all argues for Thailand’s central bank not to ease monetary policy.

Stronger than expected US economy has given the United States Federal Reserve more options. Lowering of interest rates still expected to happen in 2024

In brief, this coincides with a seemingly powerful US economy. Consequently, this has left the US Federal Reserve with more options.

In addition, the vibrant US economy has seen inflation hover at 2%.  Certainly, a figure still of concern to the Fed.

The upshot is that it has become cagey about an immediate interest rate cut.

At this time, analysts still believe the Fed will lower interest rates three times in 2024.

Current US interest rates are 5.25% to 5.5%. The European Union interest rate, set by the European Central Bank, is 4%.

In contrast, Thailand’s low rate of 2.5% is undoubtedly an outlier and open to question. A lower trajectory will raise even further questions outside Thailand.

Many analysts believe that the long-term differential between Thai interest rates and those in Western economies is now feeding into capital flight.

Thailand’s economy is operating in a wider economic sphere.

However, with disturbing signs of weakness in China and additionally now in Japan, the kingdom has become more exposed.

The yen is currently trading at a 34-year low. 

Thailand’s investors and those holding capital are being tempted away by higher returns on offer elsewhere. The persistent differential is now impacting 

This comes despite the Bank of Japan’s decision to end its negative interest rate policy this month. In effect, this is seen as the end of an era of economic easing and cheap money.

The message coming to Thailand from international markets is just this. 

However, the Bank of Thailand has nevertheless found itself at the end of a strong and vociferous government campaign this year to lower interest rates.

The campaign has been led by Prime Minister Srettha Thavisin. In short, it is seen by the international financial market as a weakness. A sign of internal conflict in the management of the floundering Thai economy. 

Thailand is now regarded as an ailing economy with chronic structural problems. 

More worryingly, these long-term effects are now seeping into its financial environment. Out-of-control private debt is similarly now being joined by a government planning to borrow its way to economic growth.

Srettha Thavisin’s government has done very well with a policy of energy price supports giving a rate of inflation that is one of the lowest in the world

Presently, the Ministry of Commerce has begun to detect an upward movement in inflation from February 2024.

It suggests this is linked to higher oil prices but undoubtedly also, depreciation of the baht. This is, in turn, linked to the central bank’s already dovish interest rate policy.

Nevertheless, Srettha Thavisin’s government has been praised for its price support initiatives. 

In particular, the government lowered inflation led by electricity and energy subsidies. In short, it is a policy in contrast to the trend in Western countries.

This and a rise in the supply of fresh food produce all contributed to the 0.47% drop in headline inflation for February 2024.

At the same time, there is no guarantee that this policy will continue. 

Annual inflation rate of -0.77%, 4th best in the world

A weakness in the government’s economic approach which was highlighted in Parliament last week by the young, aggressive and soon-to-be-disbanded Move Forward Party. This is the party that triumphed in the 2023 General Election.

The party was sidelined by a subsequent backroom deal which saw the Pheu Thai Party along with parties of the previous government take power.

Nevertheless, Thailand can take some credit for its inflation rate. It ranked number 4 out of 136 countries in February 2023 with an annual inflation rate of minus 0.77%.

Government’s spat with the Bank of Thailand in addition to newly unveiled plans to use the annual budget to spend and borrow big, draws hawkish attention

However, the country’s weakening public debt position has been attracting the attention of hawkish analysts. This includes S&P Ratings and Fitch.

Thailand is anxious this year to retain its BBB+ sovereign rating from such firms. Unquestionably, it is presently being reviewed.

This is critical for the kingdom. It is a key factor in investment decisions on bonds.  

This is how the Thai government has managed to fund itself over the last two decades.

The domestic Thai market has provided for the government’s financial needs. In any event, 98.2% of bonds sold by the government were baht-denominated and bought by Thai investors.

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At length, however, the poor economic performance of the kingdom’s economy, the slowest in Southeast Asia, is beginning to focus attention.

Analysts are also expressing concern at the direction taken by Prime Minister Srettha Thavisin. In particular, the decision by the government to expand the government deficit in the medium term beginning with the 2025 budget.

Controversial Digital Wallet scheme is being pursued by the Prime Minister. Inevitably, it will lead to both political and economic problems up ahead

There are fears that the government may insist on its unpopular Digital Wallet stimulus plan.

This comes despite warnings from state bodies and, to put it mildly, a lack of enthusiasm from the Bank of Thailand.

Reports suggest that Mr Srettha is intent on railroading through the plan. The government, it is reported, plans to use the state budget to fund the digital credit scheme.

Prime Minister Srettha still doggedly pushing his less-than-popular and legally perilous Digital Wallet plan

Meanwhile, on Tuesday, Krystal Tan of the Australia & New Zealand Banking Group plumped for the central bank holding interest rates. 

‘The central bank will hold off from pulling the trigger just yet,’ disclosed Ms Tan. ‘The odds are tilted in favour of a June or August cut instead, with the timing dependent on incoming second-quarter economic data.’

Nonetheless, Barclays Bank projected a 25 basis point cut on Wednesday.

However, research analyst Shreya Sodhani argued it was a close call between April and June.

‘The growth outlook seems weak which makes me think a cut is needed in the second quarter,’ she opined. ‘The timing is a close call between April and June.’

Plan to increase the fiscal deficit in the 2025 budget from ฿713 billion to ฿1.527 trillion. More than double at a time of deep unease in capital markets

In the meantime, the government is pushing through with its controversial plan to dramatically hike the country’s fiscal deficit for 2025. It is projected to rise from ฿713 billion to ฿1,527 billion.

The cabinet will review the spending bill on May 14th.

In short, it is now accepted that the increased funding will be used for the ฿500 billion Digital Wallet scheme.

This plan is to distribute ฿10,000 in digital credits to be used by Thai adults over 16 years of age.

The credits can be used conditionally in local retail outlets.

Those benefiting from the scheme may not have access to more than ฿500,000 in deposits or have income in excess of ฿70,000 per month.

Meanwhile, a massive sell-off continues in Thailand’s capital markets, particularly of foreign-held bonds. Key drivers of the sell-off include higher returns in the United States and a deteriorating geopolitical environment.

Indeed this has been the situation since early 2023. So far in 2024, the rising price of Gold is another disturbing factor. It appears to be driven by geopolitical instability.

‘The Thai stock market has been pressured by several factors including geopolitical risks, US inflation, weak financial results of listed Thai companies in the final quarter of 2022, and depreciation of the baht by about 5% year-to-date,’ declared Mr Therdsak Thaveeteeratham, Vice President of Asia Plus Securities in February 2023.

For instance, 10-year US Treasury notes offer investors a 4.426% return. 

In turn, compare this 2.296% for a similar sovereign baht note.

Investors are selling Thai bonds while the government proposed an international bond sale in February and called it off just weeks later as ‘uncompetitive’

Meanwhile, in China, it is even worse with 2.43% offered on yuan-priced Chinese government bonds.

At the same time, the business climate has darkened in the communist country, perhaps irreversibly. Unfortunately for Thailand, international investor sentiment is linking it with China.

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In February, at the behest of Prime Minister Srettha Thavisin, Thailand’s Public Debt Management Office (PDMO) looked at selling international Thai bonds. 

Indeed, the primary market for these bonds would have been the United States with a lack of investor interest and sentiment in both Shanghai and Tokyo.

The government touted its plan to raise $1 billion or ฿36.4 billion.

At the outset, Mr Patchara Anuntasilpa the Director-general of the Public Debt Management Office (PDMO) expressed caution.

‘It’s very challenging as the funding cost locally is cheaper and more convenient, so we need to convince people why we need to do it the hard way,’ he explained. ‘We should still go ahead with the plan to set a benchmark for the nation. The proceeds from any international bond sale will likely go to finance sustainability-linked projects as they add value to the economy. The most likely choice will be dollar-denominated bonds as it’s a widely used currency and benchmark.’

Thailand needs to build a ‘competitive’ economy

However, at the end of March, the plan was shelved. Similarly, a proposal to tap international markets in 2022 was previously put forward but was also aborted.

Julapun Amornvivat, Deputy Minister of Finance announced the decision on April 1st.

He noted the rate offered by Thai bonds was uncompetitive. He told reporters that the government will monitor the Federal Reserve’s next moves.

This may signal an unwelcome introduction to a new world economic order for Mr Jualapun and Mr Srettha. The days of cheap money are over. In short, Thailand must now build a ‘competitive’ economy.

There is no easy way forward. In fact, there may already be consequences in play from years of neglect by previous governments of the country’s real problems.

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Further reading:

Economy unlikely to grow in first quarter as Thai manufacturing crumbles. Hard choices ahead

New Finance Minister expected in April as economic malaise deepens with downgrades in GDP growth

Bank of Thailand holding strong against a strident push by the PM for more populist economics as debt levels rise

Property market glut sees minister’s call for supports in the face of the central bank’s ongoing credit crunch

Prime Minister Srettha still doggedly pushing his less than popular and legally perilous Digital Wallet plan

Digital Wallet plan blown out of the water by corruption body on Tuesday warning of illegality

Srettha outlines Digital Wallet as his government begins to flounder with a faltering economy and confusion

Economy is in troubled waters with fears for both exports and foreign tourism as 2023 winds down

Thailand faces an economic future of low growth despite Srettha’s plans because of a darker world

Another dip for the baht or are economic danger signals flashing for both Thailand and the world?

Bank of Thailand boss appears critical of the new government’s policy initiatives on the economy

Economy tanks as demand for loans surges with an acute credit crisis and falling export output reducing growth

Concerns over household debt rising as banks report marginally lower non-performing loans

Thailand preparing for a soft landing as ‘cracks’ open up in the Chinese economy says bank chief