Macro and Politics

* The CBT will release the July Real Sector Confidence Index and Capacity Utilization Rate @ 10:00 local time today. The RSCI declined from 101.4 in June to 100.3, retreating to its lowest level since the beginning of the year, while the seasonally adjusted index decreased from 98.6 to 98.4, marking its lowest point since August 2024. It is worth recalling that readings below the threshold of 100 in the RSCI reflect a waning sentiment among real sector representatives regarding economic activities. Meanwhile, the Capacity Utilization Rate (CUR) slipped from 75% to 74.6% in June, while the seasonally adjusted CUR dropped from 75.1% to 74.4%. Following the heightened political angst and market volatility since March 19, we began to observe adverse impacts on leading indicators from April onwards. Thus, the decline in the RSCI seen in April and May has evidently intensified in June. We anticipate that the growth, which commenced positively in 2025 supported by robust domestic demand, will shift towards a weaker footing by the second quarter. Household consumption - driven by sustained momentum in credit growth trends and the pre-March 19 interest rate cuts - delivered the strongest annual growth contribution of 1.6% in the first quarter; however, we expect its supportive effect to dwindle, albeit modestly, in the second quarter. Meanwhile, we project industrial activity to experience a deepening slowdown. Although the downside risks to growth outlook have increased following tighter financial conditions domestically post-March 19, high-frequency data have yet to indicate a clear cooling in domestic demand dynamics. On the other hand, public expenditure continues to provide a supportive backdrop for the growth outlook. Accordingly, we maintain our growth forecast at 3.1% currently.

* The Monetary Policy Committee (MPC) cut the policy rate by 300bps, lowering it from 46% to 43%. Both our house forecast and the market median estimate had anticipated a more moderate 250bps cut. Accordingly, the decision can be characterized as somewhat more dovish than expected. That said, the policy statement maintained a cautious tone, which we believe precludes the assumption of an automatic or uniform pace of easing. In addition to the policy rate cut, the Committee also lowered the overnight lending rate from 49% to 46% and the overnight borrowing rate from 44.5% to 41.5%. Hence, the CBT appears to be maintaining its asymmetric interest rate corridor, preserving policy flexibility by keeping the upper bound 300bps above the policy rate—thereby retaining room to maneuver amid heightened uncertainties. Yesterday’s 300bps rate cut has increased downside risks to our year-end policy rate forecast of 36%. Nevertheless, we do not yet see a compelling reason to revise our projection. While no MPC meeting is scheduled for August, we believe the inflation print for that month will be critical in shaping the Committee’s decision in September. Following the expected July spike, the level at which inflation stabilizes in August will play a key role in shaping policy expectations.

* In the week of 11 – 18 July, foreigners registered a net purchase of USD209.4mn in equities and USD36mn in government bonds (excluding repo transactions). Thus, the foreigners’ share in total bond stock rose a tad from 6.2% to 6.3% within the mentioned week. Within the mentioned period, residents’ FX deposits surged by USD2bn (excluding gold accounts and adjusted for the EUR/USD parity effect), driven primarily by corporates’ demand as household FX deposits increased marginally by USD104mn, while corporate FX deposits soared by USD1.9bn. Examining the CBT’s reserves reveals that during the week of 11 – 18 July, the gross FX reserves rose by USD2.3bn to USD168.7bn and the net international reserves increased by USD3bn to USD62.7bn. Moreover, the net reserves excluding swaps climbed by USD3.3bn to USD44.3bn.