Trade War Now Biggest Economic Risk for Thai Central Bank

(Bloomberg) -- President Donald Trump's trade policy has Thailand worried.

Trade and geopolitics are the key risks for Southeast Asia's second-largest economy, Bank of Thailand Senior Director Don Nakornthab said in an interview Tuesday in Bangkok. Exports of goods and services account for about 70 percent of Thai gross domestic product.

“Trade politics is the most important risk for our economy as it can evolve into trade war,” Don said. "If there's an external shock in the near future, our economy may face a difficult time.”

Trump's plan to impose tariffs on steel and aluminum imports roiled markets as investors weighed the possibility of escalating trade confrontations. Thailand could face greater U.S. scrutiny after its trade surplus with the world's biggest economy exceeded $20 billion last year.

Thailand has been lucky to be able to "rely on external demand while we wait for local demand to gain more strength," Don said. The economy is in the early stages of an upswing and expansion in 2018 could be higher than last year.

GDP advanced 3.9 percent in 2017, lagging peers in Southeast Asia. Vietnam and the Philippines posted growth rates exceeding 6 percent.

Thai inflation pressure is muted and most economists predict the monetary authority this year will hold the benchmark rate at 1.5 percent, near a record low.

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The overall picture is that the country still needs accommodative monetary policy to facilitate economic expansion and bring inflation back to target, Don said.

“Just for the sake of financial stability, we should have raised the rate,” he said. “But we need to look at economic growth and inflation too. The central bank looks at the strength of domestic demand, which remains relatively weak compared to external demand. If it's getting stronger to a certain level, it can be a factor supporting a rate hike.”

The monetary authority should this year begin considering a time-frame for policy normalization, Deputy Governor Paiboon Kittisrikangwan, one of seven monetary policy committee members, said in an interview on the Bank of Thailand's Facebook page on March 6.

The central bank may consider lowering its 1 percent to 4 percent inflation target in the future as an aging population and e-commerce weigh on prices, Don said. But it must meet the current target first to maintain credibility, he said, adding that headline inflation is expected to reach the low end of the band in 2018.

The central bank failed to meet its inflation target in the last three years.

The Bank of Thailand is also grappling with the challenge of currency appreciation.

“Thailand's problem now is capital inflows, not capital outflows,” Don said, adding some outflows would relieve upward pressure on the baht.
The baht has appreciated about 12 percent against the dollar in the past year, the second-best performer in a basket of Asian currencies tracked by Bloomberg. 

The Southeast Asian nation boasts of one of the largest current-account surpluses among emerging markets globally. The central bank is counting on its $213 billion reserves to cushion currency volatility.

To contact the reporter on this story: Suttinee Yuvejwattana in Bangkok at suttinee1@bloomberg.net.

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Karl Lester M. Yap, Sunil Jagtiani

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