Thailand Will Probably Cut Key Interest Rate Further, Korn Says

March 1 (Bloomberg) -- Thailand’s central bank will probably cut its key interest rate further this year to boost growth as the country faces its first recession in 11 years and 1 million job losses, Finance Minister Korn Chatikavanij said.

The central bank cut its benchmark interest rate on Feb. 25 for a third straight month to 1.5 percent to buoy demand after consumer prices fell and the economy shrank in the fourth quarter for the first time since 1999.

“Given where inflation is and given where economic growth is, I’d be surprised if last week’s was the last reduction that we’ll see,” Korn said in an interview yesterday in Cha-am, Thailand, where leaders of the 10-member Association of Southeast Asian Nations are meeting for a summit. “There’s probably more to come if I had to bet.”

Prime Minister Abhisit Vejjajiva, who took power 10 weeks ago following months of violent protests, has pledged fresh stimulus measures to stem the economy’s slide. Manufacturing production contracted the most on record in January, the central bank said Feb. 27. The current account surplus widened to the most in two decades in January as oil costs fell and demand for raw materials dried up.

“The way things are looking, we’re going to see some nasty figures for at least the next month or two,” Korn said. “February will be pretty mean, and March probably the same.”

Stimulus Package

A 116.7 billion-baht ($3.3 billion) package of training programs, cash handouts, property tax breaks and public works will enter the economy in April, Korn said. The government is also designing a second package worth 1.9 trillion baht over three to four years consisting of small-scale infrastructure projects that are “as close to being immediately executed as possible,” he said.

The spending will help reduce job cuts expected to be “at least one million” this year, Korn said. “The worst thing that could happen to any government is rising unemployment,” he said.

The largest contraction since 1982 in the U.S. economy, Thailand’s biggest single overseas market, has prompted exporters such as Charoen Pokphand Foods Pcl and local units of Toyota Motor Corp. and Seagate Technology Inc. to predict lower sales and cut jobs. Overseas shipments, which amount to 70 percent of GDP, plunged 26.5 percent in January from a year earlier, the government said.

“We are heading into a recession,” said Somprawin Manprasert, an economist at Tisco Securities Ltd in Bangkok. “The central bank still has room to cut rates, but I don’t think they will cut the rate to zero because they are still concerned inflation may come back.”

Entering Recession

Thailand’s gross domestic product in the first quarter may shrink more than the fourth quarter’s 4.3 percent contraction, the government’s planning agency said this week, putting the economy into its first recession in a decade. For the year, GDP may miss its 0 percent to 2 percent target, Korn said.

“Achieving growth this year all depends on how the economy reacts to the stimulus packages that we put forward and more importantly how the world economy settles down toward the latter part of the year,” Korn said. “Government spending was always designed basically to keep things ticking and buy us time in order for the rest of the world to recover.”

Commercial banks are projecting net loan growth this year of 6 percent to 7 percent, Korn said. The government may inject funds into state-run banks such as the Islamic Bank of Thailand and the Government Housing Bank, and “would be happy” to provide more funding than the 8 billion baht allocated last month to the Export-Import Bank of Thailand and the Small Business Credit Guarantee Corp., both state-run institutions.

Thai banks cut 75 basis points on lending rates and 1.31 percentage points on deposit rates after the central bank reduced the rate in December and January, Duangmanee Vongpradhip, a Bank of Thailand assistant governor, said Feb. 25. Siam Commercial Bank Pcl cut lending, deposit and savings rates by 25 basis points on Feb. 27, the first commercial bank to react to the central bank’s latest rate cut.

Dominant Banks

Siam Commercial, Bangkok Bank Pcl and Kasikornbank Pcl accounted for more than 50 percent of revenue from 11 Thai banks last year. The average profit margin for the three was 21 percent, compared with 12 percent for all lenders, based on Bloomberg data.

The central bank’s rate cut will ease the decline in average net interest margins at Thai banks this year, Sugittra Kongkhajornkidsuk, a DBS Vickers analyst, wrote in a Feb. 26 note to clients. They are forecast to fall 0.34 percent this year to 3.25 percent, she wrote.

Baht’s Loss

Net interest margins at Thailand’s banks are “clearly wider than regional peers, and banks need to provide a clearer answer to society as to why this remains the case,” Korn said. “I haven’t yet received an entirely convincing argument as to why it needs to be where it is.”

Thailand’s baht in January had its biggest monthly loss since October as overseas investors dumped the nation’s stocks. Foreign investors sold $207 million more Thai stocks than they bought this year, according to stock exchange data.

“The balance has probably tipped to the scale of those who want the baht to be weaker rather than stronger,” Korn said. “The baht is pretty close to where it should be and I know that the central bank is keeping a close eye on it.”