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Thai Economy Contracts, Raising Odds of Rate Cut

Greg Elms | Getty Images

Thailand's economy contracted more than expected in January-March from the previous three months, which economists said raises the chances that this month will bring a rate cut the government wants.

Also on Monday, the National Economic and Social Development Board (NESDB) on Monday trimmed its forecast for full-year economic expansion to 4.2-5.2 percent from 4.5-5.5 percent range. For 2013, the Reuters poll projected 4.8 percent growth.

The agency also cut its projection of 2013 export growth to 7.6 percent from 11.0 percent.

In the first quarter, gross domestic product (GDP) shrank a seasonally adjusted 2.2 percent from October-December. The median forecast in a Reuters poll of economists was a contraction of only 0.8 percent because of sluggish domestic demand and exports.

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Thailand significantly revised down quarterly growth for the last three months of 2012, to 2.8 percent from 3.6 percent.

The quarterly contraction in January-March is the first since the last quarter of 2011, when severe flooding caused a 10.5 percent shrinkage.

On an annual basis, GDP expanded 5.3 percent in the first quarter, below the 5.7 percent forecast in the Reuters poll. Revised annual growth in 2012's final quarter was 19.1 percent, which reflects the low comparative base hit due to the late 2011 flooding.

Thailand, like some other Asian nations, has been hurt by weak exports and slowed growth in domestic consumption - which makes up about half of the economy. Earlier, consumption and investment surged on reconstruction work after the 2011 floods.

The NESDB said growth in 2013 will be supported by private and government investment, but added that the delay in global economic and export price recovery, the baht's appreciation, a high base effect and fading out of government stimulation "pose downside risk to the economic outlook."

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Eyes on the Baht

This year, Thai authorities and industry have been concerned about strength of the baht, emerging Asia's strongest currency in 2013.

At its high point in April, the baht hit a 16-year high with a gain of 7 percent against the dollar in 2013. It has fallen since then and was around 29.87 after release of the GDP data, a rise of about 2.5 percent in 2013, on concerns that the government will take steps to tame the currency.

Finance Minister Kittirat Na Ranong, who has repeatedly said the policy rate is too high, said on Sunday he was satisfied with the baht's recent weakness.

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The Bank of Thailand's Monetary Policy Committee (MPC) has left the benchmark interest rate at 2.75 percent since October, resisting government pressure to cut it.

Kittirat has said the rate should be lowered to deter fund inflows. He indicated a rate of about 2 percent would help.

Enrico Tanuwidjaja, an Asia economist at the Royal Bank of Scotland in Singapore, said that with the latest Thai data, "It seems like they are going to go ahead with the cut and this will induce the baht to trade with a weaker bias."

Until recently, economists had not expected any change in the policy rates this month, and most still don't think GDP data will warrant it. However, some have said there is a chance of a cut have grown at the rate meeting on May 29 due to the government pressure.

Indonesia, Southeast Asia's largest economy, grew at its slowest annual pace in 2-1/2 years in the first quarter, on slowing private consumption and lower investment.

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