The recovery path in 2Q appears to be worse than expected. Data up to May show the economy lost momentum. Consumption was weak and exports fell. Tourism remained strong and was the only bright spot, but it was not enough to support the overall recovery. In late June, the Bank of Thailand revised down its 2015 growth forecast to 3% from 3.8% and said that downside risks remain.



"We are more pessimistic and cut our 2015 growth forecast to 2.5% from 3.3% this year, versus consensus at 3%," notes BofA Merrill Lynch.



The slowing economic activity coupled with worsening drought conditions dampened domestic sentiment, adding to growth risks in 2H. Deterioration in commercial banks' asset quality has extended from consumer loans to SMEs. The business community and bankers have urged the government to help SMEs by providing them with soft loans. While the government appeared to be receptive, no substantive progress has been made thus far. Further action may be pending given persistent speculation of a cabinet reshuffle, which could involve the removal of key economic ministers.



The baht weakened by 3% over the past three weeks, well ahead of other Asian currencies, with the exception of the Korean won. This could in part be a reflection of market concerns about Thailand's policy vacuum and deterioration in the country's economic outlook.