Thai food prices expected to fall as flood effects fade

AMID a marked downturn in Thai economic growth, inflation stands out as a bright spot on the horizon. Looking ahead to the bottom of this sharp economic slowdown, price inflation is expected to be the first cyclically sensitive economic variable to overshoot market expectations on the low side.

The downward pressure on prices is already being reflected in the producer and wholesale price indeces, both of which are running at close to 3 per cent, and weaker signals from our leading indicator suggest there is still room for a further slowdown. High price inflation for rice and processed food, at 17 per cent and 10 per cent, keeps consumer inflation above 5 per cent. Improved food distribution, fading effects of last year's flooding, and high base effects should bring food prices down rapidly.

Additionally, softer import prices should reduce non-food inflation.

The latest trade statistics reveal export growth to be weaker than previously thought, and an upturn depends to a large degree on external influences. We do not expect gross domestic product growth recovery until the second half of next year, keeping this year's growth to 6.6 per cent. The current account deficit is forecast to widen to 8.5 per cent of GDP this year, up from 8.1 per cent last year. Monetary policy appears excessively tight, with minimum loan rates significantly exceeding the return on capital.

Against slumping credit growth, a wider loan-deposit spread, and sluggish growth, we see a case for a more neutral stance on domestic monetary policy. Dr Paul Alapat is a financial economist at Lehman Brothers (Hong Kong)