Thailand's potential growth is likely to falter due to structural factors, some members of the Monetary Policy Committee (MPC) warned in edited minutes of the policy rate setter's meeting held last month.
Long-term potential growth is likely to decline due to a wide range of structural factors, including a declining labour force due to an ageing population, skill mismatches in the labour market and slower productivity growth, the MPC said in its edited minutes released yesterday.
Skill mismatches could lead to underutilised capacity while slow productivity growth was caused by a shift in investment towards the service sector, which requires less capital investment and has lower sectoral productivity, the MPC said.
The Bank of Thailand's preliminary long-term potential growth estimate was calculated based on projected growth for several production factors, including hours worked, labour quality, capital and total factor productivity.
The projection also incorporated several structural changes in the economy such as the ageing population, adoption of productivity enhancing technology and large-scale infrastructure investment.
Thailand's growth potential has fallen to 2-3% over the past several years from 4-5%, largely due to lacklustre private investment. The government is therefore trying to boost the country's economic growth to 6% through the S-curve model.
The MPC assessed that Thailand's growth outlook further improved this year but was still limited to some parts of the economy and faced with risks on the external front.
In addition to uncertainties faced by the business sector, some MPC members said the slowdown in investment could be attributed to the fact that businesses are keeping their hurdle rates at a high level as in the past.
Hurdle rate is the minimum rate that a company expects to earn when investing in a project.
The high hurdle rate despite recent declines in financing costs could partly reflect some increase in risks, said the edited minutes.
Bank of Thailand governor Veerathai Santiprabhob had said earlier the central bank is trying to find a way to collect and evaluate the data on intangible investments, which kept increasing in contrast with conventional investment. These include investment in human resources through seminars and training programmes and investment in software, intellectual property and other intangible assets.
The Bank of Thailand expects economic growth of 3.4% this year and 3.6% in 2018.
Loan Credit quality continued to deteriorate as reflected by the rise in non-performing loans, and the move towards lower quality credit among small businesses. This deterioration in part reflects the country's unbalanced economic growth and other ongoing structural changes, the edited minutes read.
Expectations of a gradual monetary policy normalisation in major economies and an improved global economic outlook have led to relatively strong capital inflows into the bond and equity markets in the region, including Thailand.
"Capital inflows to Thailand, however, were smaller than the inflows to other countries in the region," the edited minutes read.
The MPC expects capital flows and exchange rates to remain volatile going forward.