Capital inflow and investment in the Thai bond market
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Over the past month or two, capital inflow from foreign investors has become the hottest issue in Thailand's financial market. This continual inflow caused the baht to appreciate during the period to its highest level in 16 years, at 29.19 per US dollar.
However, there are a number of fundamental reasons for the country attracting foreign funds. First, liquidity from the recovery and economic-stimulus packages in other countries around the world has caused a global imbalance in capital flows.
Second, the return or yield from investing in Thailand is still attractive, while the recovery and growth rate of the Thai economy have been stronger than in other countries in the region.
The Bank of Thailand, which is responsible for and oversees the stability of the baht, has several measures to monitor and track the appreciation of the currency closely.
However, the central bank has not reduced interest rates to slow the inflow of capital, and has instead focused attention on the baht’s movement being in line with market conditions and reflecting real supply and demand of the unit relative to foreign currencies.
Moreover, some measures have been prepared to respond to external factors beyond the central bank’s control, to limit baht volatility and protect against any economic inequality that would cause severe damage to the country.
Capital inflows and the appreciation of the baht have both beneficial and adverse effects on Thailand’s economy. There are benefits for importers, as the cost of imports is reduced, and also for foreign-currency debt repayment.
The baht’s strengthening mainly has an impact on the export sector, with exporters generating less money when converting foreign currency into the local unit. And, because Thailand’s economy is mainly reliant on exports, this appreciation may slow economic growth in the future.
However, looking at it from the other angle, the continual capital inflow could be a reflection of foreign investors’ confidence in Thailand’s economic fundamentals.
As to movement in the Thai financial market, foreign investors have continued to be net buyers to the tune of Bt93 billion in the bond market, comprising Bt38 billion in short-term bonds and Bt55 billion in long-term bonds.
At the same time, they have been net sellers amounting to Bt6.2 billion in the Thai stock market.
NARROW BAND
Meanwhile, the Thai bond yield curve moved in a narrow band last month, shifting down in a range of negative-5 to negative-10 basis points.
Most trading activity has been concentrated on short-term bonds issued by the Bank of Thailand.
Turnover in the secondary bond market last month reached Bt2.1 trillion, or a daily average of Bt100.8 billion, decreasing 1.5 per cent from February, when a daily average of Bt102.3 billion was recorded.
More than 69 per cent of daily average value, or Bt69.88 billion, was in short-term bonds of less than one-year maturity, while the remainder was in longer-term maturities.
The major investors in the Thai bond market were still asset-management companies, which accounted for 54 per cent of total trading value, while foreign investors captured 20 per cent, or Bt270.7 billion.
At the end of March, foreign investors’ bond holdings stood at Bt850 billion, accounting for 9.9 per cent of the overall bond market’s outstanding value and well above the Bt710.5 billion recorded at the end of last year.
Porpit Yodsang is assistant manager, research and market development department, Thai Bond Market Association.
