Key developments and outlook

Transcription

1 This Monetary Policy Report contains the information available as of June 19, 218 the day before the fourth Monetary Policy Committee meeting this year 1 / 24

2 Key developments and outlook The Thai economy is projected to gain further traction on the back of continued improvements in merchandise exports and tourism in tandem with the global economy as well as higher supports from domestic demand. Headline inflation is projected to rise at a slightly faster pace than previous assessment due mainly to acceleration in oil prices. Risks to growth forecast tilt to the downside due to uncertainties pertaining to U.S. foreign trade policies and potential retaliatory measures from U.S. trading partners that might negatively affect global trade, Thailand s trading partner growth, and Thai exports. Risks to inflation forecast tilt to the downside consistent with risks to economic growth. 217* GDP growth (4.1) (4.1) Headline inflation (1.) (1.2) Core inflation (.7) (.8) * Outturn, ( ) Monetary Policy Report, March / 24

3 Trading partner economies record stronger growth but risks have increased due to trade war 3 / 24 G3 economies would continue to expand following domestic demand and robust economic fundamentals. Chinese economy continues expanding despite some slowdown from government economic reforms. Asian economies record stronger growth owing to continued expansion in private consumption and exports. Nevertheless, risks to the global economy tilt more to the downside than previously assessed due mainly to uncertainties pertaining to U.S. foreign trade policies and potential retaliatory measures from its trading partners that might negatively affect global trade and Thailand s trading partner growth. Monetary policy of trading partner economies Asian exports achieve high growth across various product categories Index, sa (Jan 213 = 1) Note: *Asia exporters include Hong Kong, Taiwan, South Korea, Malaysia, and Singapore ( ) a share of total exports in 217 Commodity-related products include crude oil, metals, chemicals, rubber, and veg. oil. Other manufacturing products include textiles, papers, furniture, footwear and miscellaneous Source: CEIC The Fed would likely raise the federal funds rate more than previous assessment. The number of rate hikes was expected to increase to four instead of three in 218, and three more in 219. However, most central banks maintain accommodative monetary policy while ECB announced to keep on its bond purchase until December 218, and would keep policy interest rate on hold until summer Electronics (41.%) Other Manu (22.9%) Commodity-related (21.%) Machinery (5.7%) Transportation (8.2%) Food (1.2%) Apr

4 Dubai oil prices are revised up throughout the forecast horizon 4 / 24 Dubai oil prices are revised up throughout the forecast horizon given higher outturns in Q2/18 following a large decline in oil stock and investor concerns about the adequacy of oil supply. Going forward, Dubai oil prices are expected to decline to levels consistent with global economic fundamentals. Risks to oil price projection are adjusted to be balanced Upside risks are mainly from geopolitical risks Downside risks include higher-than-expected oil supply from both U.S. shale oil producers and countries participating in the oil production cut agreement. USD/Barrel Dubai oil price assumption Jun-18 Mar S.D..75 S.D USD/barrel 217* As of Jun As of Mar * Outturn

5 Merchandise exports continue to expand across various product categories and almost all export destinations 5 / 24 The value of merchandise exports is revised up throughout the forecast horizon both in terms of volume and prices in line with oil prices, global trade volume, and trading partners economies. However, the value of merchandise exports in 219 is expected to exhibit a slower growth in line with a projected slowdown in global trade volume and trading partner growth. U.S. trade policies and trade retaliation from major economies would put pressures on investment and international trade and could affect Thai exports. Thus, the Committee would closely monitor developments and assess potential impacts on the supply chain as well as Thai businesses. Thailand s merchandise export value (by product) Index, 3mm sa (Jan 13 = 1) Agricultural products (12.3%) Electrical appliances (5.6%) Automative parts (6.5%) Petroluem-related products (11.5%) Electronics excl. HDD (9.%) Note: ( ) indicates share of total exports in 216 Source: Thai Customs Department, calculated by BOT Merchandise export value projection (USD) % YoY 217* As of Jun As of Mar * Outturn Apr 18

6 Exports of services continue to gain further traction Exports of services are expected to be higher than the previous assessment due mainly to a greater number of foreign tourists albeit lower spending per head 1/. The number of foreign tourists is projected to continue expanding following growth in the number of Chinese tourists for both group tourists and FIT 2/ and newly opened direct flights from second-tier Chinese cities to Thailand. Although there remain capacity constraints in accommodating the rising number of tourists in the main airports, such constraints are eased from recent management by airlines and airports such as additional flights during off-peak times and higher utilization of regional airports. Number of foreign tourists by nationality Index, 3mm sa (Jan 14 = 1) Note: ( ) indicates share of tourists in 217 Source: Department of Tourism China (28%) Projected number of foreign tourists to Thailand Million 217* As of Jun As of Mar * Outturn Apr 18 Malaysia (1%) Europe ex Russia (15%) Russia (4%) Total 1/ According to the survey in the first quarter and second quarter of 218 by the Ministry of Tourism and Sports. 2/ Free and Independent Traveler 6 / 24

7 Private consumption is projected to record stronger growth Private consumption is expected to exhibit stronger growth in the period ahead but could be held down by the following factors: 1) Elevated household debt 2) Agricultural prices of certain crops that lingered at low levels 3) Structural changes in the labor market such as (a) adoption of automation in place of human labor in the production process and (b) migration of workers out of the manufacturing sector to the services sector with relatively lower wages Farm income and nonfarm income Index, 3mm sa (Jan 14 = 1) Private consumption by category Index, 4 quarters mm (Q1 215 = 1) Q private consumption non-durable semi-durable durable services Source: Office of the National Economic and Social Development Board (NESDB), calculated by the BOT Farm income Average non-farm income Sources: Office of Agricultural Economics, National Statistical Office, and Ministry of Commerce; calculated by BOT Apr / 24

8 Private investment is projected to achieve higher growth than previously assessed 8 / 24 Private investment is projected to increase in line with merchandise exports and private consumption as reflected by increased capacity utilization and imported capital goods and machinery. Moreover, private investment would be supported further from (1) infrastructure investment under the Eastern Economic Corridor (EEC) initiative and public-private partnership (PPP) that are taking shape and (2) joint investment by various private sector groups as reflected in the bidding for mass rapid transit projects and high-speed trains connecting the three airports. This would shore up business confidence and foster investment climate. Private investment index Index, 3mm sa (21 = 1) Source: Bank of Thailand Apr 18

9 Public expenditure remains a driver of economic growth despite more-than-expected delays in some investment projects 9 / 24 Public expenditure continues to increase despite smaller projected outlays due to the change in the government budget structure for fiscal year 219, with a larger share of capital spending than previously assessed. Public investment is delayed more than previously projected due to construction problems in some state-owned enterprise projects such as the Bang Pakong power plant construction and the Suvarnabhumi Airport phase 2 development project. Nevertheless, public investment in 219 is revised up due to the following reasons: (1) A larger share of the government budget for fiscal year 219 was allocated to capital spending compared with the previous assessment; (2) Some investment spending would be carried over from 218; (3) More certain disbursement plans for the State Railway of Thailand s Den Chai-Chiang Rai-Chiang Khong dual-track railway project. Public spending projection at current prices (calendar year) Billion baht 217* Government consumption Public investment 2, * Outturn, ( ) Monetary Policy Report March 218 2,669 2,819 (2,676) (2,838) 1,28 1,115 (1,38) (1,92)

10 The Thai economy is projected to record higher growth than the previous assessment (%YoY) 217* Mar 18 Jun 18 Mar 18 Jun 18 GDP growth Private consumption Private investment Government consumption Public investment Exports of goods and services Imports of goods and services Current account balance (billion USD) Value of merchandise exports Value of merchandise imports Number of tourists (million) Note: * Outturn 1 / 24

11 Risks to growth projection tilt more downward than previously assessed given uncertainties surrounding U.S. foreign trade policies and retaliation by major economies 11 / 24 % YoY GDP growth forecast Note: Fan chart covers 9% of the probability distribution Downside risks U.S. trade protectionism measures and retaliation by major economies Geopolitical risks that may affect trading partner growth Lower-than-expected growth in domestic spending as improvement in purchasing power is not yet sufficiently broad-based Larger-than-expected impact from the Public Procurement Act on public expenditure Upside risks Better-than-expected trading partner growth due to U.S. tax reform and a softer-than-expected slowdown of the Chinese economy A higher-than-expected domestic spending due to government infrastructure investment projects, publicprivate partnership (PPP), as well as government measures aimed at stimulating private spending

12 Inflation is projected to slightly trend up In recent periods, headline inflation trends up due mainly to energy prices while core inflation gradually increases. Going forward, inflation is expected to rise at a slightly faster pace than previously assessed due to acceleration in prices of energy-related products following global crude oil prices. However, government regulations on energy prices partly curb the increase in costs of transportation and prepared food. Meanwhile, fresh food prices are projected to slowly rise due to larger-than-expected agricultural supply. Moreover, demand-pull inflationary pressures rise only slightly as e-commerce leads to intensified price competition while technological advancements help reduce production costs. Contribution to headline inflation %YoY 3 2 May Raw food price (15.69%) Energy price (11.75%) Core inflation (72.56%) Headline inflation Source: Ministry of Commerce, calculated by Bank of Thailand, ( ) denotes share in headline inflation basket Inflation projection %YoY 217* Headline inflation (1.) (1.2) Core inflation (.7) (.8) * Outturn, ( ) Monetary Policy Report March / 24

13 Risks to inflation projection tilt more downward than previously assessed consistent with risks to growth projection Headline inflation forecast Core inflation forecast % YoY 5 5 % YoY Headline inflation target % Note: Fan chart covers 9% of the probability distribution 13 / 24

14 Forecast summary as of June / * GDP growth (4.1) (4.1) Headline inflation (1.) (1.2) Core inflation (.7) (.8) * Outturn, ( ) Monetary Policy Report March 218

15 Key considerations and assessments in formulating monetary policy Sustainable economic growth The Thai economy is projected to achieve higher growth than previously assessed driven by stronger momentum from both domestic and external demand, particularly private consumption. However, benefits from economic expansion have yet to fully extend to overall income and employment due to elevated household debt and structural problems in the labor market, which should be addressed through reform measures. Price Stability Financial Stability Headline inflation is expected to rise at a faster pace than previously assessed and return toward target mainly on the back of oil prices. Meanwhile, demand-pull inflationary pressures would gradually improve, and structural changes might cause inflation to rise slower than in the past. Financial stability remains sound overall but there remain pockets of risks that must be monitored, particularly search-for-yield behavior in the prolonged low interest rate environment and debt serviceability of households with high debt burden and SMEs which had yet to clearly improved. The MPC voted unanimously (6 to ) at the meeting on May 16, 218 and later 5 to 1 at the meeting on June 2, 218 to keep the policy interest rate unchanged at 1.5 percent (with one Committee member absent each meeting). Monetary policy accommodation would support economic growth and foster headline inflation to move within target in a sustainable manner. One Committee member voted to raise the policy rate to 1.75 percent at the meeting on June 2, 218. The prolonged monetary accommodation might induce households and businesses to underestimate potential changes to financial conditions. Furthermore, a gradual and timely reduction in monetary policy accommodation in the current juncture would not hinder economic growth or price stability; it would instead help alleviate risks to financial stability and also build policy space for future needs. 15 / 24

16 Key considerations and assessments in formulating monetary policy In monetary policy deliberation the Committee considers all possible aspects in the context of the Thai economy. Although central banks of major economies and many regional countries have started reducing the degree of monetary policy accommodation, the context of the Thai economy is different. In particular, given sound external stabilities and manageable risks to financial stability, monetary policy accommodation could be maintained at the current level. Looking ahead, the need for extra accommodative monetary policy as at the current juncture would start reducing. Monetary policy accommodation would support a stronger growth and foster headline inflation to rise in a sustainable manner. However, should economic expansion continue, and inflation move more firmly within target, the need for extra accommodative monetary policy as at the current juncture would start reducing. The need for a policy rate increase in order to build policy space in the future would be increasing. In long run, structural reform policy is required to raise Thailand s economic potential. Monetary and fiscal policies can address economic cycles but neither can efficiently solve structural problems, especially those related to the labor market, productivity upgrading, and issues in the agricultural sector. 16 / 24

17 Financial conditions remain accommodative and conducive to economic growth Thai government bond yields pick up especially mediumand long-term yields mainly on account of external factors but the impact on financing costs through the corporate bond market is still limited. Thai government bond yields New Loan Rate (NLR)* stabilizes at low levels, indicating accommodative financial conditions. New Loan Rate (NLR)* % MLR NLR RP % 1Mn 2Y 5Y 1Y Apr June Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan * The NLR is calculated from interest payments on loan contracts by 14 Thai 1.15 commercial banks excluding loans to households and financial intermediaries 1. and is weighted by loan size. This covers loan in Thai baht exceeding 2 million Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan baht in all types of loan, objectives, and term, as well as with and without collateral. In addition, interest rates on loan contracts are calculated from the median between the highest and lowest interest rate of each contract. Source: ThaiBMA (as of 19 June, 218) Source: Bank of Thailand 17 / 24

18 Business financing continues to expand through various channels Overall business financing continues to expand with accelerated business credit while issuance of corporate bonds remains largely unchanged. Growth in business financing outstanding classified by source* Percentage change from the same period last year Jan 213 Jan 214 Jan 215 Outstanding of corporate debt** Business credit Total financing Jan 216 Jan 217 Jan 218 Apr Private credit accelerates driven by both corporate and household credits. SME loan growth improves across various sectors, reflecting a more broad-based economic recovery Credit growth in the commercial bank system* Percentage change from the same period last year Jan 215 Jul Jan 216 Jul Business loan Household loan Private loan Jan 217 Jul Jan 218 Apr Note: * Business credit covers lending activities of Other Depository Corporations (ODCs) including commercial banks, special financial institutions, cooperatives and money market mutual funds ** In August businesses in telecommunication and energy sectors did not roll over the matured bonds Sources: ThaiBMA and Bank of Thailand 18 / 24

19 EUR GBP THB INR KRW AUD TWD SGD MYR JPY CNY PHP IDR The baht against the U.S. dollar & the nominal effective exchange rate depreciate driven mainly by strengthening of U.S. dollar The Thai baht depreciates against U.S. dollar mainly due to the strengthening of the U.S. dollar, following the improved economic outlook of the U.S. as well as the reduction in foreign securities holdings in emerging markets (including Thailand), resulting in greater capital outflows. Thai baht vis-a-vis U.S. dollar (USDTHB), Nominal Effective Exchange Rate (NEER), and the Dollar Index (DXY) Index Baht per U.S. dollar Appreciation NEER USDTHB (RHS) REER DXY Jan Jul Jan Jul Jan Jul Jan The Nominal Effective Exchange Rate (NEER) depreciates following the baht s depreciation relative to regional currencies, partly due to high seasonal repatriation of dividends of foreign companies and investors. Meanwhile, the Real Effective Exchange Rate (REER) slightly appreciates following a faster increase in inflation relative to those of trading partners. Currency changes against U.S. dollar % (19 June 218 compared with 3 March 18) % -1% -2% -3% -4% -5% -6% -7% Negative value indicates depreciation Source: Bank of Thailand, Bloomberg, and Reuters (data as of June 19, 218) Source: Bank of Thailand and Reuters (data as of June 19, 218) Note: (1) DXY is currency index of USD relative to EUR JPY GBP CAD SEK CHF (2) REER data are available as monthly averages. 19 / 24

20 Thailand s external stability remains strong and resilient to withstand volatility in both domestic and global financial markets Q1 217Q2 217Q3 217Q4 218Q1 Apr-18 External stability remains strong thanks to sustained current account surplus, relatively low foreign investors share in the bond market, and external debt relative to GDP that is below the international benchmark. Solvency Indicators External stability indicators Criteria 217 P 218 P Current account / GDP (%) > Debt / GDP (%) < 8 3/ Q1 Mar Apr E Debt / XGS 1/ (%) < 22 3/ Liquidity Indicators Gross reserves / ST debt > 1 time Gross reserves / Imports 2/ > 3 times ST debt / Total debt (%) Note: 1/ XGS Export of goods and services (3-year average) 2/ Monthly import of goods and services (1-year average) 3/ Severely indebted countries P=Preliminary data E=Estimated data Source: Bank of Thailand International reserve remain high. As of April 218, the ratio of reserves to short-term debt stands at 3.6. Time International reserve and short-term debt Source: Bank of Thailand Reserve (RHS) Reserve to short-term debt Billion US Dollar / 24

21 Financial stability remains sound overall but there exist pockets of risks that warrant monitoring, including debt serviceability of households and businesses, as well as an oversupply in the real estate market While overall credit quality remains unchanged, credit quality deteriorated among households with large debt burden and businesses especially SMEs Oversupply of condominiums with prices below 3 million baht remains at a high level, and time taken to be completely sold is relatively long. Non-performing loans ratio of commercial banks Percentage change from the same period last year Q1 212 Q1 213 Q1 214 Source: Bank of Thailand Q1 215 Q1 216 Q1 217 Condominium inventory in Bangkok and vicinity and Time to go Thousand units Months 4 < mio THB mio THB mio THB mio THB mio THB Q1 218 Total NPL (%) Large Corporate NPL (%) SME NPL (%) Consumer NPL (%) Accumulated supply Time to go (RHS) Note: Time to go is the time taken for all real estate inventory to be sold out at the average sales rate per month (since projects launched) given no additional supply. Source: AREA and calculation by Bank of Thailand 21 /

22 The Committee views that there remain key issues that continue to warrant monitoring. Global economy Thai economy Uncertainties surrounding U.S. foreign trade policies and potential retaliation from trading partners which could affect global trade and Thai exports especially through supply chains Geopolitical risks Strength of domestic spending Outlook of public spending after the enforcement of the Public Procurement and Supplies Management Act, B.E. 256 Potential changes in inflation dynamics due to structural factors Financial markets Monetary policy conduct of major economies Intensifying concerns about international trade protectionism and risks of emerging economies that could affect exchange rates and capital flows Thai financial stabilities Deteriorated credit quality among low-income households and SMEs affected by structural changes and business models Search for yield and underpricing of risks in the prolonged low interest rate environment Oversupply of properties with prices below 3 million baht 22 / 24

23 Attachment 23 / 24 Forecast assumptions %YoY 217* Mar 18 Jun 18 Mar 18 Jun 18 Dubai oil price (USD per barrel) Farm income (% YoY) Public expenditure (calendar year) - Government consumption (billion Baht)** 2,532 2,676 2,669 2,838 2,819 - Public investment (billion Baht)** 926 1,38 1,28 1,92 1,115 Fed funds rate (% year end) Trading partners GDP growth (% YoY) Regional currencies per USD (excl. RMB)*** Note: * Outturn ** Includes spending in Infrastructure Investment plans *** Higher value indicates currency depreciation against the USD

24 Attachment Assumption on trading partners GDP growth % YoY Weight 217* Mar 18 Jun 18 Mar 18 Jun 18 United States Euro Area Japan China Asia** Total*** Note: * Outturn ** Weighted by shares of Thailand s major trading partners in 214 (7 Asian countries including Singapore (6.5%), Hong Kong (7.9%), Malaysia (8.%), Taiwan (2.5%), Indonesia (5.9%), South Korea (2.8%), and Philippines (3.7%)) *** Weighted by shares of Thailand s major trading partners in 214 (13 countries). 24 / 24