Fund flows challenge BOT
Fund-flow volatility resulting from many external factors will pose a critical challenge to the Bank of Thailand and its new governor as they manage monetary policy for the rest of the year, according to Kasikorn Research Centre.
Earlier, such volatility was triggered by the actions of the US Federal Reserve, but these days the instability of fund flows is a result of the changing environments of many countries, including China’s stock-market slump and the depreciation of some currencies in Asean, said KResearch managing director Charl Kengchon.
Weakening of the ringgit and the rupiah are influencing the volatility in the Asean region, especially Indonesia, which has witnessed an economic slide and its central bank cannot lower its policy interest rate any further, he said.
"If Greece exits from the European Union [euro], fund flows will be more volatile, hence Thailand’s monetary policy [central bank] will have limited chances to cut the policy rate even if the domestic economy needs additional enhancement," he said.
Managing monetary policy is very difficult because fund flows are more volatile, and if the BOT cuts the rate again, capital outflows could be seen, Charl said.
The BOT so far this year has cut the policy rate twice, to 1.50 per cent. KResearch believes that the rate will be trimmed again if key external factors like those surrounding Greece and China become stable.
The central bank’s Monetary Policy Committee will hold its next meeting on August 5.
Regarding the steep decline in China’s stock markets, KResearch believes the Shanghai Stock Exchange is experiencing a correction rather than the bursting of a bubble. The impact on Thailand is likely to be small.
China is to announce retail-sales data and its Purchasing Managers’ Index (PMI) soon, and if these indicators do not get worse, the stock indices are signalling a correction. Meanwhile, the Chinese government has many tools it can use to remedy the situation, including interest-rate cuts.
Pimonwan Mahujchariyawong, deputy managing director of KResearch, added that what the market should be concerned about is whether the stock-market slide in China has a significant impact on the wealth of Chinese. In any case, Chinese people don’t invest much in their stock markets, she said.
She said KResearch was maintaining its growth forecast for Thailand’s gross domestic product at 2.8 per cent thanks to the tourism sector. However, it has revised down its weighting of some economic-growth indicators.
KResearch has cut its estimate of export growth this year to minus 1.7 per cent and revised down its inflation forecast to minus 1.4 per cent from positive expansion of 0.5 per cent.
Even though the research house has maintained its forecast for GDP growth, Pimonwan said there were many external negative issues that had to be monitored. These include the European Union’s concerns over illegal, unreported and unregulated (IUU) fishing, the US downgrade of Thailand’s status over human trafficking, and the "red flag" over Thailand’s aviation-safety standards.
As for internal factors, the drought will put pressure on Thailand’s growth prospects this quarter.
Kangana Chokpisansin, head of the research group, added that KR Household Economic Condition Index showed that households remained worried over the cost of living.
The KR-ECI in June was at 43.8 points, the lowest in 11 months, and the sub-index on economic expectations for the next three months dropped to 45.2 points, the lowest figure in 13 months. The baseline is 50.
