Vietnam and Thailand are facing their worst drought in decades, with water levels in the Mekong River at their lowest since 1926. The drought is already having an impact on growth. A decline in agricultural output was the main cause of the slowdown in Vietnam’s GDP growth last quarter, while monthly data show agricultural production in Thailand is also falling. So far at least there has been little impact on inflation, which remains low in both countries. In the event that food prices did start to spike, the Thai government could release more rice from its large reserves onto the market, which should help to mitigate any upward pressure on rice prices. The near-term outlook is dependent on the strength of the coming monsoon, which is due to arrive next month. Provided rainfall patterns return to normal, agricultural production should rebound strongly.
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