Strong Thai GDP weakens government case for rate cut

BANGKOK Mon Feb 18, 2013 3:18am EST

BANGKOK (Reuters) - Thailand's economy grew a far stronger-than-expected 3.6 percent in the fourth quarter of 2012 from the previous three months, a pace that undercuts government calls for lower interest rates.

Exports picked up in the quarter while, as in other Southeast Asian economies, and domestic demand was buoyant, helped by a surge in new car purchases that was spurred by a government subsidy for first-time buyers.

Finance Minister Kittirat Na Ranong has put pressure on the Bank of Thailand (BOT) to cut interest rates to help exporters and discourage capital inflows, which have pushed the baht up around 2.5 percent this year. This month, he said he had written to the central bank - which zealously guards its independence from government - to press his case.

After a quarter-point cut in October to 2.75 percent, the monetary policy committee has left the benchmark rate unchanged at its last two meetings. Most economists expect it to hold fire again on Wednesday, especially after Monday's buoyant GDP data.

"The rate cut cycle is probably over despite pressure from the government. In fact, the focus will likely turn towards inflation, especially considering the robust growth number," said economist Eugene Leow from DBS Bank in Singapore.

The economy grew 6.4 percent in 2012 and the National Economic and Social Development Board (NESDB), which compiles the data, forecasts 4.5 to 5.5 percent for this year.

Although BOT Governor Prasarn Trairatvorakul is relaxed about inflation, playing down the impact of a jump in the minimum wage in January, he has noted a jump in consumer credit, which an interest rate cut would only exacerbate.

Kittirat, pressed by reporters after Monday's data, declined to comment on his earlier call for lower rates, although he warned that any rise in rates carried risks.

"Higher interest rates may also cause a bubble if they are a factor attracting more capital inflows," he said, a reference to the central bank view that an extended period of low interest rates could lead to asset price bubbles.

The baht initially rose after Monday's data but then slipped back a little to trade around 29.90 per dollar, still up around 2.5 percent this year.

FLOOD IMPACT

Economists in a Reuters poll had forecast just 0.2 percent for quarterly GDP growth. Their median forecast for 2012 growth was 5.5 percent, with the highest single projection for 6.3 percent - below the posted pace.

On an annual basis, economic growth in the fourth quarter was a record 18.9 percent, compared with a forecast of 15.4 percent in the Reuters poll and revised growth of 3.1 percent in the third quarter.

A high figure had been certain because of devastating flooding in the final months of 2011 that caused huge industrial estates to close and slashed economic growth that year to just 0.1 percent.

"Fourth-quarter GDP was not just the effect of the low base in 2011, but also government stimulus, leading to double-digit growth in both consumption and investment," said Kampon Adireksombat, an economist with Tisco Securities.

"It's clear from the number that we have less downside risk on growth. We need to monitor price pressures because we've seen some cost-push pressure from higher oil prices as well as more signs of demand-pull inflation," Kampon added.

The NESDB kept its forecast range for inflation in 2013 at 2.5 to 3.5 percent but indicated a figure of 3.2 percent, above the midpoint. The central bank has forecast 2.8 percent. Economists generally think inflation will be higher, some saying as high as 5 percent.

Gundy Cahyadi, an economist at OCBC Bank in Singapore, said the performance of exports in the first quarter would be "crucial for sentiment among manufacturers locally".

The government and central bank both expect global trade to pick up as the year progresses.

Thailand, Southeast Asia's second largest economy, is the latest country in the region to report solid economic growth for 2012 in spite of weakness in the global economy last year.

Indonesia, the largest, reported full-year growth of 6.2 percent, while the Philippines posted 6.6 percent growth.

Thai exports jumped 18.2 percent in the fourth quarter from a year earlier while manufacturing expanded 44 percent, reflecting low output in late 2011 because of the floods but also the car subsidy scheme, the NESDB planning agency said.

The government had targeted 500,000 participants but ended up with 1.26 million, including more than a million who signed up in the final three months of the year, the NESDB said.

Private consumption rose 12.2 percent in October-December from a year before while private investment surged 21.7 percent.

Su Sian Lim, ASEAN economist for HSBC Bank, noted that in the last quarter, investment and government consumption cooled from their break-neck pace after the floods. But private consumption "is moderating from red-hot speeds only very slowly," she wrote.

(Additional reporting by Boontiwa Wichakul and Satawasin Staporncharnchai; Editing by Richard Borsuk and Alan Raybould)

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