Shaken markets breathe again, but wary that US nightmare could return to haunt again
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The clouds over the financial market have dispersed - reflected here in a gain in Thai shares and the Thai baht - as the US Congress reached a budget agreement to reopen the government and avert a first-time debt default in the world's largest economy.
Standard and Poor’s Ratings Services estimated the shutdown, a result of the epic political drama that rattled the world economy, has taken $24 billion out of the economy.
Market watchers warned that the nightmare could return around February, when a new debt ceiling discussion will take place. The bill reopens the government until January 15 and permits the Treasury to borrow normally through February 7, or perhaps a month longer.
International Monetary Fund Managing Director Christine Lagarde praised Congress for the important and necessary step.
“Looking forward, it will be essential to reduce uncertainty surrounding the conduct of fiscal policy by raising the debt limit in a more durable manner. We also continue to encourage the US to approve a budget for 2014 and replace the sequester with gradually phased-in measures that would not harm the recovery, and to adopt a balanced and comprehensive medium-term fiscal plan.”
Amonthep Chawla, vice-president at CIMB Thai Bank’s Economic and Financial Market Research, warned of the possibility of another shutdown and said the chance of a debt-ceiling crisis was high. “The US would now have greater difficulties in lowering the budget, as most of the money will be channelled to social entitlements like health insurance and social security. Meanwhile, spending on military and other administrative operations has been cut largely.”
In the long term, negotiations on the budget and debt ceiling would intensify and this will increase the default risk and hurt the appetite for US Treasuries. A lower appetite would raise Treasuries’ yield and the US cost of funding. At present, China holds 23 per cent of outstanding US Treasuries, or 40 per cent of its reserves. Thailand's portion is 0.8 per cent, or 25 per cent of reserves. “Thailand’s exports will be directly hit. Lower government spending in the US, which accounts for 20 per cent of gross domestic product, would result in lower-than-expected growth. Demand for Thai exports could be affected by lower consumer confidence,” he said.
The Stock Exchange of Thailand and other bourses globally yesterday staged an upswing. The SET Index gained 4.71 points or 0.32 per cent to close at 1,469.09, on turnover of Bt50.5 billion. The baht was also firmer against the US dollar. It opened some 0.38 per cent higher from the previous day. The baht jumped 0.7 per cent to 31.05 per dollar in Bangkok.
