Some stability set to return

Observers foresee some stability resuming in the financial markets in the latter half of the year. While the baht should stabilise in the range of 30-31 per US dollar, new foreign investment in Thai bonds is expected despite the scaling down of the quantitative easing (QE) programme in the United States.

The Stock Exchange of Thailand, however, is expected to witness great volatility in the period, with zero chance that the SET Index will hit a new high in the next six to nine months.

Narongchai Akaraseranee, chairman of MFC Asset Management and a member of the Bank of Thailand’s Monetary Policy Committee (MPC), sees the baht stabilising at 30-31 in the current half, absent unforeseen new factors influencing the exchange rate.

At that level, the baht is supported by the expected 4-per-cent growth in gross domestic product, with a positive current-account balance despite some trade deficit. Meanwhile, domestic inflation is not high.

Asserting that the policy interest rate is a tool to maintain economic stability and not to influence the exchange rate, Narongchai said the central bank should focus more on buying and selling US dollars to stabilise the baht.

Expecting a rise in interest rates in the United States after the Federal Reserve announced the likely reduction of monthly bond purchases from US$85 billion (Bt2.6 trillion) now, foreigners pulled investment out of the Thai bond and stock markets. Foreign net-sells of Thai bonds during May and June exceeded Bt90 billion, according to Thai Bond Market Association (Thai BMA).

While net-sells in May totalled Bt50 billion, the value in June was Bt40 billion. At the end of last month, foreign holding of Thai bonds fell to Bt770 billion. As of June, the year-to-date net-buys were Bt70 billion. Of total outstanding, 79 per cent is invested in long-term bonds.

Niwat Kanjanaphoomin, president of Thai BMA, attributed the sell-off to the scaling down of QE in the US. However, he is confident that foreign investment will return in the latter half thanks to new supplies.

“Foreign investment in Thai bonds will rise without QE, as their combined investment is as low as 10 per cent of outstanding value, compared with 30 per cent in Malaysia. The Thai bond market has also shown positive development in terms of the number of issues and liquidity, which will draw more investment. If more Thai bond issues are integrated in global bond indices, this will also draw more investment,” Niwat said. The bond market’s outlook depends on further monetary injection in Japan and Europe, which has been slowing in recent months, he said.

Meanwhile, Thai BMA expects a total of Bt400 billion of corporate bonds will be issued this year, above the previous target of Bt300 billion. In the first half, about Bt200 billion was issued.

The situation looks less bright at the SET, which in the past two months lost 9 per cent or 11.68 per cent  from its peak on May 21 at 1,643.43 points.

 

New high unlikely 

Sombat Naravuthichai, secretary-general of the Securities Analysts Association (SAA), said the stock market would remain highly volatile in the second half and was very unlikely to hit a new high in the next six to nine months.

He noted that if the Fed starts scaling down bond purchases in September, volatility would resume but at a lesser scale than in the past two months. Correction will be minimal if the bond-purchase amount is cut slightly and in line with expectations, such as from $85 billion to $60 billion. Still, the SET Index could fall to 1,400 points again if the amount is cut by half.

“The SAA will revise our targets, but this needs further discussion,” he said. The association’s current SET target for 2013 is 1,625 points, based on a GDP growth forecast of 4.9 per cent and listed companies’ earning growth of 20 per cent.

Narongchai, however, showed concerns on long-term financial stability.

He is worried about household debt, which is as high as 80 per cent of GDP. Domestic demand in first and second quarter of this year slowed because of the rising debt burden of most households as, for instance, the government’s first-car policy affected disposable income for other goods. 

The weaker domestic demand is likely to keep GDP growth this year below 5 per cent. The corporate sector debt is still healthy, similarly to public debt, which is around 44 per cent of GDP. In any case, the rapid rise of household debt should not be ignored as it is the country’s debt as well, and government policies must take into account the consumer’s purchasing power, he said.

He supports a cut in the rice pledging price to alleviate financial damage, as the reduction should not significantly hurt farmers’ income.

Thailand’s economic problems are not too difficult to solve; in the past, things have got worse because such problems were not tackled promptly, he noted.

Most economic problems have to be reviewed by committees who have to agree on measures to solve them. Perhaps more frequent meetings, and more prompt decisions on measures to tackle the problems at hand, might help, Narongchai added.