Are rate cuts the antidote to Thailand’s COVID-19 concerns and budget delay?

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#Special Report

At its monthly meeting in early February, the Bank of Thailand (BOT) cut its policy rate by 25 basis points to 1%, an all-time low for the country. The move was the third such cut in six months.

In making its decision, the bank cited expected drags on the economy stemming from the outbreak of coronavirus in China, the country’s largest trading partner; delays to the 2020 budget; and a drought that has suppressed agricultural output.

Despite cutting interest rates to record lows, BOT officials are confident there is still capacity to use monetary policy measures to help boost the economy further, if needed. A number of analysts expect to see another rate cut before the end of the year.

The latest revision comes amid a fall in the value of the baht, which, despite rising by nearly 6.9% against the US dollar last year, fell by 5.3% between January and late February.

Moreover, GDP was estimated to have grown by just 2.9% in 2019, according to the IMF – the lowest rate since 2014, according to Oxford Business Group article.

Tourism hit by COVID-19

One of the major factors behind the BOT’s February decision to lower interest rates is the ongoing economic effect of the coronavirus.

With the virus originating in China, Thailand’s largest source market of foreign tourists, the tourism sector has been one of the hardest hit. In January China announced that it had banned outbound tour groups as part of a bid to stop the spread of the virus.

While the decision has been lauded for public health reasons, there are concerns over the impact it will have on neighbouring economies. Chinese visitors – mainly coming to the country as part of large, organised tours – spent $18bn in Thailand last year, accounting for more than one-quarter of all foreign tourism receipts, government data showed.

Given that tourism makes up 10% of GDP, any sustained downturn in the sector could have a significant impact on the wider economy.

At a business seminar in mid-February, Don Nakornthab, senior director of the economic and policy department at the BOT, said that the number of foreign tourists was expected to be down 5m this year due to fears over the virus. This would result in a loss of BT250bn ($8bn), or 1.5% of GDP.

Anticipating this slump, the BOT said the economy is likely to not meet its initial growth projection of 2.8% for 2020, with Nakornthab suggesting that expansion could fall below 2%.

Source and further reading: https://oxfordbusinessgroup.com/news/are-rate-cuts-antidote-thailand%E2%80%99s-coronavirus-concerns-and-budget-delay

*The article is taken from https://oxfordbusinessgroup.com/