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Despite risks, Thailand may consider rate cut

Dario Pignatelli | Bloomberg | Getty Images

Calls for Thai policymakers to cut interest rates are growing despite an environment of high household debt, as the economy continues to struggle six months after a coup d'etat.

HSBC, Citi and Bangkok-based Kasikorn Research Center all expect the Bank of Thailand (BoT) to cut rates by 25 basis-points to 1.75 percent on Wednesday, from the current three-year low of 2 percent. That's in contrast to economists polled by Reuters last month, who forecast no change in rates.

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The key argument against looser policy is Thailand's massive household debt, one of the highest in Asia at 83 percent of gross domestic product (GDP). Economists argue that lower interest rates encourage households to ramp up borrowing, thus worsening debt levels and further constraining consumption, which accounts for half of GDP. Consumer confidence is already shaky, down for the second time in three months in November.

"Given the high percentage of indebted households and muted economic growth, the debt servicing ability of households remains an important risk factor that could dent potential consumption," CIMB said in a note.

Reasons to cut

Downside risks to growth are widely cited as the key reason for more monetary stimulus. Third-quarter GDP rose 0.6 percent on year, below Reuters estimates for 1 percent. Last week, the country's finance minister said the economy could expand by less than 1 percent this year, versus forecasts of 4-5 percent a year ago.

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"The Monetary Policy Committee (MPC) appears to be more dovish on growth and less concerned about household debt," HSBC said in a report.

"From a lackluster fiscal disbursements in November, to a negative output gap likely to close in 2016, to a missing consumption lift (and wealth effects to be undermined by impact of U.S. monetary tightening), there's an abundance of downside macro risks that support monetary stimulus soon," stated Citi economist Jun Trinidad.

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Confidence was temporarily restored to Southeast Asia's second-largest economy following a military takeover in May. Yet, key pillars of the economy remain weak: Exports, which constitute over 60 percent of GDP, dropped 1.7 percent in the June-September period from the previous quarter, while tourist arrivals declined in the first seven months of the year. Tourism makes up 10 percent of GDP.

"Many people thought that the economy had undergone a V-shaped recovery following a more stable political environment. They forgot that many people withheld spending during the 7-month political stalemate [from Oct 2013-May 2014]. Thus, when the political situation calmed after the coup, many Thais started to spend money and this caused a big jump in economic activities. However, this pent-up demand is exhausted," added CIMB.

HSBC also pointed out that subdued inflation gives the central bank ample room to lower rates. Headline annual inflation dropped to a five-year low in November on the back of sliding oil prices.

Meanwhile, Kasikorn Research Center believes Thailand will have to maintain a low benchmark interest rate for some time.

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"Since our financial markets still have plenty of liquidity, fund mobilization should not be problematic, while lending activities will likely be moderate in early 2015," it said in a note.