By ERICH PARPART
The baht’s slide will be affected by the deprecation of the renminbi (yuan) and the next interest-rate increases by the US Federal Reserve.
“China is the black swan, the biggest risk scenario for next year,” Prinn Panitchpakdi, country head at CLSA Securities (Thailand), told reporters at the release of the FETCO-NIDA Investor Sentiment Index survey results yesterday.
“It will not be about Japan’s decision on its third round of quantitative easing or how much the European Central Bank will expand its QE or how fast the Fed rate hikes will be. It will be all about China,” he said.
He said China’s policy to open up its command economy and its currency via the yuan’s inclusion in the International Monetary Fund’s Special Drawing Rights (SDR) basket before proper financial reforms would pose the biggest risk to the financial world in 2016.
“The Chinese government still has controls over its lending, interest rates, currency and capital account, and it thinks it is in control because of its high international reserve of around US$3 trillion,” Prinn said.
“The current Chinese government knows what its challenges are, including non-performing loans, shadow banking, and misallocation of resources. But because it is smart, maybe too smart, its first step was to try to consolidate power via anti-corruption measures and the eradication of oppositions, which has left lingering the reform efforts within the state-owned enterprises, trying to change debt into capital. That has been causing an asset bubble within the capital market, and there is still a lot of fluctuation there,” he said.
The yuan has been on a depreciation trend against the US dollar, and the Fed rate increase last Wednesday could push the currency down by another 5-6 per cent in the next six months. If that happens, the baht could reach 37-38 per dollar during the same period and could “overshoot” to nearly 39 in the short term.
Included in SDR basket
The yuan was trading at 6.317 per dollar as of November 30, the day it was included in the SDR basket, before deprecating to 6.483 as of 4.30pm yesterday. In the same period, the baht depreciated from 35.811 to 36.15.
“The overshoot could happen in the situation where the Fed increased its rates, obliging China to lower its interest rates, its reserve requirement ratio, and its promotion of investment outside the country. That means a lot of yuan going Thailand’s way, as seen in the bilateral agreement on the rail project and the meetings between the countries’ economic teams and delegations,” Prinn said.
Tim Leelahaphan, Maybank Kim Eng Securities (Thailand) economist and assistant vice president of its research department, said the baht at 36 per dollar had already surpassed the house estimate for the end of this year. He expects the currency to continue depreciating until the end of the second quarter, since the house expects the next Fed rate increase in that quarter.
“The baht will be less attractive than India’s rupee and the Philippines’ peso in the first quarter, so the baht should continue weakening during that time. The Fed is expected to [increase rates again] in either March or April, so the baht should be on a weakening trend until the end of the second quarter,” he said.
Meanwhile, the divergence in the reactions of central banks’ monetary policy after the Fed rate increase contributed to a slump in the Stock Exchange of Thailand yesterday, and this divergence is expected to be the theme for next year, Tim said. Taiwan lowered its rates, Mexico’s were raised, and Argentina devalued its currency.
The SET Index dropped by 25.42 points to 1,284.92 with a trading value of around Bt41.248 billion as of 5pm yesterday.
The FETCO-NIDA Investor Sentiment Index for December shows that overall investor confidence in the country’s capital markets in the next three months has fallen slightly from November on concern about uncertainties in global markets, but the level of confidence is still in the “neutral” zone.
The index was at 100.12 points before falling by 10.69 to 89.42 points, which is in the neutral zone of 80-120 points. The index ranges from “extremely bearish” at 0-40 points to “bullish” at 160-200 points.