Worst Thai Drought in a Decade Adds Pressure for a Rate Cut

(Bloomberg) -- The drought in Thailand threatens to exacerbate a sharp slowdown in economic growth and intensify pressure on the central bank to loosen monetary policy.

The dry conditions are the worst in a decade, and farming heartlands in the northeastern region are among the hardest hit, according to the Meteorological Department.

“The main impact if drought intensifies or lasts longer is on the growth outlook, which is already weakening,” said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore. “That would then require more coordinated easing from both fiscal and monetary policy.”

The Bank of Thailand has so far resisted joining a global wave of policy easing as officials are concerned about elevated household debt. But expectations for interest-rate cuts are growing, with ING Groep NV predicting a quarter-point reduction to 1.50% as early as the Aug. 7 meeting.

The trade-led economy was already slowing because of sliding exports amid the U.S.-China tariff war and a surging currency. The central bank expects 3.3% economic growth in 2019, which would be the weakest pace in four years.

“The drought situation is severe,” Bank of Thailand Senior Director Don Nakornthab said Wednesday in Bangkok. “But rain has started, so we think the situation is still within our forecast.”

The dry spell imperils crop production and rural demand in Southeast Asia’s second-largest economy, where approximately 11 million people are employed in the agricultural industry. Thailand is the globe’s top grower of rubber, and one of the largest exporters of sugar and rice.

Nomura estimates the current conditions could shave 0.1 percentage point off the growth rate in April through December, rising to 0.2 percentage points if the situation becomes severe.

What Bloomberg’s Economists Say

Thai growth of 2.8% year-on-year in the first quarter was probably the peak for 2019, given strengthening headwinds from the trade war and drought. At the same time, the baht remains supported by capital inflows. I suspect a cut by the U.S. Federal Reserve will trigger a similar move by the Bank of Thailand.

-- Tamara Henderson, Asean economist

Already, nearly half of major reservoirs are operating at less than 30% of capacity, Irrigation Department data shows. The government has resorted to steps such as cloud-seeding to trigger rain and is trucking water into some rural towns.

The Thai administration has also held talks with China about water management along the shared Mekong river. China plans to release more water from its dams upstream to help alleviate the situation, its Foreign Minister Wang Yi said Wednesday.

--With assistance from Chloe Whiteaker.

To contact the reporters on this story: Siraphob Thanthong-Knight in Bangkok at rthanthongkn@bloomberg.net;Suttinee Yuvejwattana in Bangkok at suttinee1@bloomberg.net

To contact the editors responsible for this story: Sunil Jagtiani at sjagtiani@bloomberg.net, Nasreen Seria

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