Thailand's technical recession raises the odds of a rate cut when the central bank meets this week, says Moody's Analytics.
The domestic economy has been the main driver of growth over the last 12 months; however, the artificial boost from flood-related reconstruction and the government's post-election sweeteners has faded. This was particularly evident in the second quarter's private consumption and investment numbers and aligns with the easing in construction, manufacturing and consumer services.
Externally, exporters are feeling the pinch from slower regional demand. The weakness in the global investment cycle has hit electronics producers hard, particularly those not involved in the production of smartphones.
"Easing rates would buttress consumer and business confidence, stimulating domestic demand," says Moody's. "Inflation remains a moot point, giving policymakers room to cut rates."
The Bank of Thailand, however, is concerned about rampant lending growth and rising household debt, which pose significant downside risks to overall financial stability. Softening export receipts and steady import payments are weighing on the current account, which in addition to the persistent portfolio outflows is dragging on the baht.
"Despite the higher odds of a rate cut, we still expect the Bank of Thailand will keep rates on hold at 2.5%," says Moody's.
Moody's adds that the recent influx of positive data out of the developed world suggests the global economy is picking itself up, posing upside risks to the exporters. "With this in mind, we should see the external sector pick up the slack created by the slowing domestic economy later in the year. Failing this, we could see rates move toward 2% by year's end."