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Wake me up when the global liquidities are gone

Dec 10. 2017
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14 TRILLION US dollar is roughly the size of three major central banks’ balance sheets, ie Federal Reserves (Fed), European Central Bank (ECB) and Bank of Japan (BoJ) combined this year together, compared to merely US$6.5 trillion in 2009.

It was the results of “Quantitative Easing” measure. 

On top of lowering interest rate towards near zero, the central bank decided to prescribe an unconventional medicine “the QE” to fix the economy through the purchase of government securities or other securities like mortgage-backed securities. This flooded the financial market with “liquidity” and lowered yields on government securities (as central banks increase their demands for these assets) which are the basis of long-term interest rates and corporate bond yields.

Since the birth of the Fed’s QE1 in December 2008, followed by Bank of Japan’s QE in 2012 and ECB’s asset purchases in 2015, these central banks continuously added liquidities to financial institutions. 

As the global financial market becomes more and more connected, it is undeniable that the impact from excess liquidity has spilled over to the Thai financial market as investors, who used to invest heavily in those developed countries, diversified their investment destinations to emerging market to search for higher yields. 

So what will happen to global liquidity when “QE” is completely gone? Will there be any consequences for Thai economy? 

Evidently, Thai financial market received strong foreign fund flows during slews of QEs. As the Fed ramped up their QE purchases in late 2010, accumulated foreign fund flows into Thai financial market (both equity and bond markets) soared rapidly from Bt350 billion to Bt2.5 trillion by the end of the Fed’s QE in October 2014 (accumulated foreign fund flows set to zero in December 2008). 

Such drastically moves in fund flows pushed Thai government 10-year yield from its peak of near 4.3 per cent towards its trough around 3 per cent and lowered cost of funding for corporate debt and long-term loans. 

Moreover, cost of dollar borrowing which could be implied from 1-month Libor rate also hit its historical low around 0.15 per cent due to Fed’s “Zero-Lower Bound” interest rate policy. The low rate environment has been the norm since then.

As for the cost of borrowing Thai baht, Thai policy rate has been kept low since 2015 to accommodate the struggling economy caused by prolonged political plague and global trade slowdown. 

Undoubtedly, businesses get too familiar with extremely cheap cost of funds. However, the environment of cheap credit is fading as the Fed started to gradually vacuum liquidity by reducing its balance sheet. It is finally the time to wake up from the low-interest rate world. 

The Fed was the first central bank which announced a proper plan for balance sheet reduction. The rate of balance-sheet trimming will increase to US$50 billion per month by October 2018. The Fed’s action alone will not create liquidity problem as the ECB and the BoJ still pump money into the market via their QE programmes. Nonetheless, financial market will definitely have growing concerns over liquidity when these two central banks decide to step the brake on QE, which is expected to be in 2019. 

Combining with impact from the Fed’s balance sheet reduction, “2019” will be the year that three major central banks will actually withdraw liquidity from the financial market for the first time since the beginning of balance sheet expansion. Thus, “liquidity squeeze” is likely to occur in less than 2 years from now. 

Furthermore, we expect 10-year government bond yield to rise about 10-15 basis point per year when the Fed maximise its balance-sheet run-off. Given that other central banks will likely begin QE tapering next year (2019 for the BoJ) which could cause fewer demands for long-end bonds while long-end yields could surge more than our expectations. Thai government’s 10-year yield could rise from 2.45 per cent by the end of 2017 to at least 3.60 per cent by the end of 2019. As a result, it will be costlier in borrowing long-term debts.

What’s about cost of dollar funding? According to the Fed’s “Dot plot”, series of Fed rate hikes will uplift the Fed fund rate to 2.75 per cent in 2019. Hence, cost of dollar borrowing will surely rise higher as 1-month Libor will move in tandem with the Fed fund rate.

With robust Thai economic outlook and the global trend of tightening monetary policy, there is a higher probability that Thai central bank will start to hike interest rate as well. However, the rate hike will be gradual to accommodate private investment recovery. 

For now, liquidity may not yet be a pronounced problem for Thai businesses. Nevertheless, businesses should consider this rising cost of fund environment carefully, so that they won’t abruptly wake up in the morning and realise that the good old time with a low rate and a plethora of liquidity is long gone. 


VIEWS EXPRESSED in this article are those of the author/s and not necessarily of TMB Bank or its executives. This article were co-authored by DUANGRAT PRAJAKSILPTHAI and POON PANICHPIBOOL. They can be reached at


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