Policy rate cut set to soak up damage caused by the deluge

We must stay strong: together, we will get through this disaster.

Over the past month, there has been concern over the new euro-zone rescue package to save Greece from defaulting on her debts. Euro-zone leaders eventually reached a resolution to extend the rescue fund to 1 trillion euros (Bt43 trillion), and to recapitalise banks, which will now take a 50-per-cent “haircut” on Greek debts. Cheered by the resolution, stock markets across Europe bounced back strongly, and the euro hit a high of over US$1.41. However, markets have seen a downturn, with investors sceptical about the viability of the plan going forward, pointing out that debt-laden countries such as Italy will also need help.

On the local front, Thailand has experienced its worst flooding in 50 years. Industrial estates in Ayutthaya and Pathum Thani were inundated, bringing production of electronic devices, auto parts and auto assembly to a halt. Rice crops from Nakhon Sawan down to Ayutthaya have been destroyed. Thailand is also one of the world’s largest producers of hard-disc drives and auto parts, and the interruption of the supply of these products has become a global concern. 

Though we may not be able to assess the magnitude of the damage now, the Thai economy is sure to be hard hit in the fourth quarter of this year. We may see the economy contract by 1-2 per cent and GDP growth for 2011 revised down to 2-2.5 per cent. The government has announced a reconstruction budget of Bt320 billion. We expect that the Bank of Thailand will consider lowering the policy rate to aid economic revival. 

However, the long-term rate will edge higher if the government needs to “borrow” funds from the public. The baht’s value surprisingly strengthened over the past month, mainly because the dollar was in decline. We expect the baht to trade at around 30.50-31 to the dollar in the next few weeks.

 

Padej Piroonsit is head of treasury sales at CIMB Thai.