The Thai baht weakened to the 2-year low on Friday, following the policy rate cut on Wednesday and renewed concerns on the economic health.

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Baht weakens to 2-year low

The political unrest in the last quarter of 2008 will continue to dampen tourist confidence into at least the first half of 2009. In addition, the slow down in growth of the economies from which a large number of tourists come to Thailand, such as EU and Japan, will reduce tourist receipts next year. With the slow down in exports capacity utilization is expected to fall; which will negatively affect private investment. Household consumption growth will also continue to be dampened as income growth will be slower next year with employment increasing minimally, and consumer confidence falling, even though inflation will be significant lower at only around 2 percent compared to 6 percent this year. Significant downside risks remain to the growth projection should political instability heighten, the global economy decelerate faster than projected, and implementation of the fiscal stimulus is delayed.

The Thai baht weakened to the 2-year low on Friday, following the policy rate cut on Wednesday and renewed concerns on the economic health.

From September 15th to November 25 th before the takeover of the airports, the baht has depreciated by 2 percent against the US dollar. It has, however, appreciated against regional currencies by 6 percent. Similarly, the nominal effective exchange rate (NEER) had appreciated by 2 percent.

Loan growth in Thailand, however, will slow down next year. As the economy slows down, liquidity in the global markets tightened, and corporate balance sheets weaken, commercial banks have signaled that they will focus more on risk management than on loan growth. Commercial banks’ loan growth next year will likely be in a single digit after registering 11.2 percent growth as of October this year.

The government in Thailand has implemented several measures in 2008 to mitigate the short run impact of rising inflation and falling incomes.In 2008, the government issued four sets of measures – three of them are aimed at mitigating the impact of the rise in food and oil prices on households and businesses and one in October aimed at mitigating the impact of the global financial crisis. They include personal income and corporate tax reduction, tax deductions for investment, reduction in property sales transaction
fees, subsidies on gasoline, water, electricity, and public buses and train services, direct transfers from the government to administrations at the grassroot level in Thailand, as well as loans by specialized state-owned financial institutions to SMEs and households. However, additional measures to assist affected workers and SMEs in improving their productivity and capacity would enable them to better cope and withstand future shocks in Thailand.

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