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What should we do with the money as foreign capital keeps flowing in?

Mar 25. 2013
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By Padej Piroonsit
CIMB Thai Ban

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The baht has kept strengthening against the US dollar for the past month from near-30 levels to near 29 now. The common reason cited is the capital flow to the Thai market because the interest rate here is higher than in the United States, the European Un


If cheap money comes to exploit the interest differential, then it should go for baht bonds. Our records show that foreign holdings have increased in the past years from near Bt300 billion in December 2010 to Bt800 billion by the end of last month.
Foreign investors held about 7 per cent of government bonds outstanding in December 2010 compared with about 17 per cent at the end of February this year. The holdings in terms of amount and percentage seem to have stabilised in the past two to three months. However, the baht still strengthened in the past months. Therefore, I believed that money was channelled to other sectors also, either to equity or the real sector. 
So what should we do with the money? I expressed my opinion that the strengthening of the baht presented both problems and opportunities. The problem is that exporters who buy local materials for exports will experience losses once they convert foreign-currency receivables to the baht. They would somehow adjust by setting their prices higher or by buying cheaper raw materials.
For those who import for re-export, they would not be affected, since they can buy things cheaper because of the strong baht, which means their product cost is lower. On the other hand, we would benefit from the situation by paying off foreign-currency loans, importing capital goods, investing in infrastructure or pursuing acquisitions overseas.
Should policy-makers implement measures to control the capital inflows? This is probably the most frequently asked question. In my opinion, it is hard to do this. Any measure is a double-edged sword. There are some negative effects from either reducing interest rates or imposing various kinds of capital controls.
What will happen next? I foresee first that quantitative easing (QE) will be here for some time to come. Though policy-makers in the US, the EU and Japan know full well the negative effects such as creating asset-price bubbles, currency devaluations and inflation, unfortunately, they may have limited options now. Therefore, their interest rates will remain low and we can expect more capital flowing into emerging countries, bonds, stocks and commodities.
Second, there is still no exit strategy for those QE policies. When the time comes, those policy-makers will quickly drain liquidity from the market and interest rates will go back up. Money that flowed to emerging countries, bonds, stocks and commodities will start leaving those assets. Their values will probably fall. Therefore a proper QE exit strategy is needed.
For Thailand, I felt very good to learn that the government was implementing the large infrastructure projects to upgrade the country’s transport both for goods and passengers. I feel that these projects were long in coming. It is a very good time now that the baht is strong, so it will help reduce project costs.
On currency value, we should let the market decide exchange rates. Intervention or capital control would help in the short run but it would not reverse the flows. Reducing interest rates would not be an option either given the fact that our economy is growing strongly. 
Those who might be affected by the strong baht need to hedge their foreign-exchange risks. 
Padej Piroonsit is an executive vice president of CIMB Thai Bank. The opinions expressed in this article are his own. 

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