Rate Cuts Beckon From Thailand to Philippines as Europe Crimps Asia Growth

By Karl Lester M. Yap, Suttinee Yuvejwattana and Farhan Sharif – Nov 29, 2011

Asian central banks from Thailand to the Philippines may be preparing to cut interest rates as an escalating impact from Europe’s debt crisis prompts economists to scale back growth forecasts for the region.

Thailand will cut its benchmark one-day bond repurchase rate tomorrow, all 16 economists surveyed by Bloomberg News predict. Pakistan’s central bank may add to its previous rate cuts or refrain from raising borrowing costs, a separate survey showed. Three analysts expect the Philippines to cut its key rate on Dec. 1, the first predictions for an easing since August 2009 based on Bloomberg surveys.

Morgan Stanley and Citigroup Inc. lowered Asian economic estimates this week as the region that led the rebound from the 2009 global recession sees export demand impaired by Europe’s sovereign-debt turmoil. Asia’s currencies and stocks have fallen in the past month as investors shun emerging-market assets and the faltering growth outlook prompts companies including Philippine Long Distance Telephone Co. to cut profit forecasts.

“Downside risks to growth have risen mostly because of external or internal factors, and policy makers are expected to ease gradually and selectively,” said Aninda Mitra, Singapore- based head of Southeast Asian economics at Australia & New Zealand Banking Group Ltd. “While policy settings have not been loosened across most of Emerging Asia, the balance of risks has clearly shifted to the downside along with the risks to growth.”
Growth Forecasts

Deadly floods in Thailand and Pakistan as well as storms in the Philippines have further damped growth in those economies, adding pressure on policy makers to ease borrowing costs.

Citigroup trimmed its 2011 growth forecast for the Asia Pacific to 7.3 percent from 7.4 percent, reducing estimates for Hong Kong, India, Pakistan, South Korea and Thailand in a report today. Morgan Stanley this week cut growth estimates for Asia excluding Japan to 6.9 percent in 2012 from 7.3 percent previously, while UBS AG lowered 2011 GDP predictions for the Philippines and Thailand.

Thailand’s industrial output slumped by the most in more than a decade in October as the nation’s worst flooding in almost 70 years shut thousands of factories, including those operated by Western Digital Corp. and Honda Motor Co., a report showed yesterday.

The finance ministry cut its 2011 economic growth forecast to 1.7 percent to 2 percent from 2.6 percent previously, and Prime Minister Yingluck Shinawatra has proposed spending 130 billion baht ($4.2 billion) on rehabilitation and measures to prevent future floods after the disaster claimed more than 600 lives since July.

Start of Easing?

“The floods, coupled with clearer signs of weakening global demand, provide sufficient justification for the central bank to start its easing cycle,” said Santitarn Sathirathai, a Singapore-based economist at Credit Suisse Group AG.

Eight of the 16 economists surveyed expect the Bank of Thailand to lower its key rate to 3.25 percent from 3.5 percent, with the rest predicting a half-point cut to 3 percent. It would be the first reduction in more than two years.

Governor Prasarn Trairatvorakul said last week the central bank will “significantly” cut its growth forecast for this year from the current 2.6 percent to reflect the damage caused by the floods. He said yesterday the bank has room to be accommodative on interest rates. Thailand’s baht declined toward its weakest level in 15 months this morning.

Philippine gross domestic product increased 3.2 percent from a year earlier in the third quarter, less than analysts estimated, a report showed yesterday. Tropical storms hurt farming and faltering government spending that slowed construction was compounded by a 13.1 percent plunge in exports.
Philippine Stimulus

Bangko Sentral ng Pilipinas may consider easing its policy rate, Economic Planning Secretary Cayetano Paderanga said after the report. Twelve of the 15 economists surveyed expect the central bank to keep the benchmark at 4.5 percent, with three predicting a reduction to 4.25 percent. Two analysts revised their forecast from no change to a rate cut after the GDP report.

President Benigno Aquino unveiled a 72 billion-peso ($1.6 billion) fiscal stimulus package in October, joining neighbors including Malaysia and Indonesia in seeking to protect growth. Bank Indonesia unexpectedly cut rates by half a percentage point to a record low this month to 6 percent.

Pakistan Moves

The State Bank of Pakistan has already lowered borrowing costs by 2 percentage points since the end of July, as policy makers aim to boost economic growth from 2.4 percent in the year ended June 30, one of the slowest expansions in the past decade.

Economic expansion may be 0.5 percentage point lower than the government target of 4.2 percent after floods devastated the nation’s southern region, a finance ministry official said in October. Floods in August forced more than one million people from their homes, killed more than 400 people and damaged crops in the southern Sindh province that was still recovering from last year’s worst ever monsoon inundations.

Central bank Governor Yaseen Anwar may keep the discount rate at 12 percent, according to 8 of 14 economists surveyed. The rest expect him to lower the benchmark to 11.5 percent on Nov. 30.

“The central bank’s stance is definitely toward easing monetary policy given the risks to growth from the global environment,” said Saad Khan, an economist at Arif Habib Ltd. in Karachi.

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