State of Thai economy will make rate cuts inevitable, says UOB economist

Enrico Tanuwidjaja from UOB’s Global Economics and Market Research was speaking on Wednesday at a seminar titled "Mid-Year Investment Outlook”.

The seminar aimed to give investors an overview of the world economy and strategies to help them navigate the second half of 2024 with resilience amid uncertainty around the world.

Tanuwidjaja made it clear that the current state of Thailand's economy — which includes low exports, high household debt, low private investment, weak domestic consumption demand, and stable low inflation — was the primary reason for his confidence that the Bank of Thailand (BOT) would lower the interest rate. 

"The Thai economy requires additional stimulus, but not too much. Naturally, we also take into account other options. For instance, they may be able to lower the lending requirements if the loan is a mortgage or for borrowing. Based on economic data and the central bank's inflation target, they can ease up once inflation is genuinely low and stable, he explained.

The UOB expert said that given the muted inflationary pressure and growth outlook, the BOT was expected to consider two policy rate cuts of 0.25 percentage point each at its meetings in June and August. As a result, the policy rate will be reduced from 2.50% to 2.0% by the year-end.

Stronger baht next year

He acknowledged that the rate cut would affect the baht’s exchange rate against the US dollar and put short-term pressure on the Thai currency. Thankfully, the country's currency remains supported by strong external positions and fundamentals, he said. 

"Despite pressures, the expected current account surplus would support the baht and counter foreign capital outflows," he added.

Even though it would happen later than anticipated, he underlined that the Fed would lower the interest rate this year. It is sufficient to anticipate that the dollar will weaken following the cut because the Fed will postpone the cut rather than cancel it. 

"Our updated exchange rate forecast is 35.2 baht to the dollar by the end of this year from the current 36.98. The baht would strengthen to 34.8 to the dollar in the first quarter of next year," he said. 

Meanwhile, with a rebound in merchandise exports, government spending, and fiscal stimulus, UOB forecasts a 2.8% GDP growth in 2024 and 3.0% in 2025. Key drivers include sustained tourism inflows, a rebound in manufacturing exports, and stable domestic demand combined with increased government spending.

UOB economist Tanuwidjaja, however, said that Thailand's economic growth this year could be lower than the previous projection of 2.8% to 2.4-2.5%.

"It is likely going to be a downward revision because some economic factors are slowing down momentum," he said.

He explained that high-frequency data revealed a persistent period of weak economic activity in the first two months of this year. Although the tourism industry and some merchandise exports have been significant key growth drivers, they are insufficient to sustainably strengthen the Thai economy over time.

He observed that despite the increase in the number of tourists, the average expenditure per person, particularly among Chinese tourists, is low in comparison to previous years. It is primarily due to the trend of tourists prioritising experience over expenses, he explained. 

"It appears to me that private and consumption data, private investment, and loan growth have all slowed significantly more than we expected,” he said. 

 

 

A case for the digital wallet scheme

He backed the government’s much-debated digital wallet scheme, to boost the country's economic dynamic, citing weak domestic growth and external uncertainties and challenges in particular. 

He said that Thailand needs more push to drive its economy and that supportive measures may include something other than the digital wallet. Other fiscal policies, such as loosening monetary policy, could allow for more stimulus, he said. 

The delay in the implementation of the digital wallet scheme could be one of the factors that UOB considers negative for Thailand's growth this year. He, however, emphasised that there were numerous other factors to consider.

"For example when we see the current tourism recovery, it does not generally reflect the level of economic activity that we expected. Second, we see geo-political tensions, even though it's far away. In addition, issues such as debt or a couple of severe weather seasons can actually result in inflating food prices, or there could be increase in energy prices, proving a dampener for consumption," he said. 

Looking ahead, he said that Thailand's monetary policy direction would be based on the outlook, with growth and inflation being carefully considered in the future. Still, the external environment remains highly uncertain.

 

Diversified portfolios

Considering the challenges posed by the global economic slowdown, unexpected resilient inflation, and central bank policies involving rate cuts that would be data-dependent and may not be synchronised, Abel Lim, head of Wealth Management Advisory and Strategy at UOB Group, emphasised the importance of resilient portfolios in achieving long-term financial objectives.

"Given heightened market sensitivity to economic indicators amid divergent growth and inflation projections, consistent income generation through dividend investing is crucial," he said. 

He also recommended core investments like multi-asset strategies and investment-grade bonds to take advantage of rising yields in the face of persistent inflation. Diversifying across asset classes, regions, and sectors can help reduce portfolio volatility, emphasising the potential benefits of longer-term bonds in the current economic environment.

Among major ideas, Lim recommended Global Healthcare for stock-oriented clients, citing its defensive characteristics and long-term growth potential driven by demographic shifts and technological advances. 

 

A wealth planning tool

To help investors in making better decisions, Gidon Jerome Kessel, head of Deposit and Wealth Management at UOB Thailand, highlighted the bank's new tool, My Wealth Planner, which assists customers in creating a personalised wealth portfolio. 

He pointed out that the platform was currently in pilot mode in Thailand and was expected to be fully operational by the year-end.

"My Wealth Planner Tool assists clients in better understanding their current financial situation and lays the groundwork for long-term investments. It will create a framework that can guide customers towards their investment goals," he said. 

He additionally highlighted the introduction of the UOB Wealth feature in UOB TMRW, which allows investors to buy, sell, and switch mutual funds from their mobile phones, making it easier to manage their wealth. Direct offshore funds allow investors to invest directly in foreign currency-denominated mutual funds from 14 renowned fund houses, including Blackrock, PIMCO, JPMorgan, and Fidelity.

UOB is a leading Asian bank with headquarters in Singapore and banking subsidiaries in China, Indonesia, Malaysia, Thailand, and Vietnam. The company operates approximately 500 offices in 19 countries and territories throughout Asia Pacific, Europe, and North America. It is now ranked among the world's top banks, with Moody's Investors Service rating it Aa1 and S&P Global Ratings and Fitch Ratings rating it AA-.