E aren’t many economies that can experience three months of political protest without it denting growth, but that is exactly what HAS happened to Thailand. The protests, which lasted from March to May, saw the National United Front of Democracy Against Dictatorship, otherwise known as the Red Shirts, try to oust prime minister Abhisit Vejjajiva.
Although the world’s media focused on the outbreaks of violence, the economy still managed to grow by 0.2 per cent during the second quarter.
The expansion was driven by external trade and pretty solid domestic demand, household spending actually surged in the quarter, rising 2.7 per cent compared to 0.2 per cent in January to March. This pushed the annual rate of growth to an impressive 9.1 per cent; consensus had been for an annual growth rate of 8 per cent.
And Capital Economics’ John Higgins is optimistic that this can continue. Although he argues that Thai exports will slow down over the rest of the year, domestic demand “should stay healthy and limit the downside for the economy as a whole,” Higgins wrote in a note to clients yesterday. In fact, after the release of the GDP figures, Thai authorities almost doubled their growth target for the rest of the year from 3.5-4.5 per cent to 7-7.5 per cent.
Tourists also shrugged off the political turmoil and returned to Thailand in their droves in July, which is good news for third quarter growth. This means that the pressure will be on for the Bank of Thailand (BOT) to raise interest rates. The markets now expect rates to rise 25 basis points to 1.75 per cent when the BOT meets for their August meeting, which will be announced at 8.30am this morning.
But is there potential for more upside from the baht? A hawkish central bank is probably priced in already. For example, the baht has strengthened by 5 per cent against the dollar since the start of the year. But there could be further upside to come.
The BOT targets core inflation – which strips out volatile food and energy prices – this remained steady at 1.1 per cent in July. However, there is upside pressure from strengthening tourist trade, rising incomes and low unemployment. This means that the could raise rates further to keep a lid on inflation. Capital Economics predicts that interest rates will rise to 2 per cent at the end of this year and 3 per cent at the end of 2011. It also forecasts the dollar to weaken further against the baht and end the year at ThB29.5; it is currently at ThB31.5.
There may be further gains in the baht, but beware any more political turmoil. Elections are scheduled for 2011 and markets could get sensitive closer to the event. So forex traders should look for pullbacks in the baht to take a long position in the short to medium-term.