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Thai gains seen in Fed rate increase

Dec 18. 2015
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By Business Reporters

The Nati

Thailand’s export sector is expected to gain from a weaker baht and a stronger US economy in 2016 after yesterday’s increase of the US federal funds rate.

 

The US Federal Reserve raised its policy rate for the first time in nine years, from 0-0.25 per cent to 0.25-0.50 per cent, underlining the recovery of the US economy.

The rate increase will bolster the US dollar, while weakening other currencies, including the baht, making Thai exports cheaper in foreign markets.

The United States is currently the Kingdom’s second-largest export market, accounting for more than 11 per cent of total Thai exports.

Somchai Sujjapongse, permanent secretary of the Finance Ministry, said at a seminar held by the State Enterprise Policy Office that the Bank of Thailand would have measures ready to mitigate any volatility of international capital flows that might happen.

Thailand’s international reserve is high (US$157.56 billion as of October) when compared with the public debt at 43 per cent of gross domestic product, and 94 per cent of it is domestic debts.

The US rate increase will attract international funds to seek higher returns in the United States, causing an outflow from some other countries.

Thailand’s GDP of $387.3 billion as of end of 2014 is expected to grow by 3 per cent in 2015 and 3.8 per cent in 2016, according to the Finance Ministry.

As of Wednesday, foreign investors have been net sellers of Thai shares since the beginning of 2015, with a total of Bt133.592 billion flowing out of the Stock Exchange of Thailand. However, the SET Index managed to pick up along with other exchanges in the region yesterday morning, while the baht depreciated slightly.

"The Thai money markets have been prepared for the increase and if the Fed had not raised the rate, it would have been surprising. The cash-flow situation is being closely monitored by the BOT, and it has reported that there is no foreseeable irregularity at the moment, while the market has responded in a positive way also," Somchai said.

"The short-term effect on financial costs cannot be seen at the moment but if the next increases are continuous, then you can start to see some effect on financial costs."

BOT Governor Veerathai Santiprabhob said the Fed’s decision was as expected by the market, which has already priced in the factor.

He said there was still no clear direction on Thailand’s policy interest rate as Europe, Japan and China still need capital injections, so capital flows and the exchange rate could still move in either direction, between weakening and strengthening.

Nopporn Thepsithar, chairman of the Thai National Shippers Council, said exports should benefit from the depreciation of the baht against the US dollar, with exports to the United States expected to rise strongly. This should be especially true for agricultural and agro-industry products, as they rely mainly on local content.

The council now forecasts export value growing by more than 2 per cent next year, a change from the previous expectation of less than 2 per cent. However, many concerns remain, such a financial crises in many countries including some in the European Union, Japan and China, as well as political problems and drought causing lower supplies of cereal crops in many countries.

Thanavath Phonvichai, director of the Economic and Business Forecasting Centre, said the Fed rate increase would have a positive effect on global economic growth.

"Thailand’s exports next year should be able to expand by 4-5 per cent, up from the previous expectation of 3-3.5 per cent," he said.

The Commerce Ministry foresees a brighter future for Thai exports next year due to the weakening baht.

Exports to the US now account for 11.2 per cent of total Thai shipments, so this country’s export sector should benefit from that country’s economic growth.

The stronger global economic expansion now expected should help ensure that Thailand will be able to meet the Commerce Ministry’s export-growth target of 5 per cent next year.

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