FRIDAY, March 29, 2024
nationthailand

Ripples from the Fed policy rate increase

Ripples from the Fed policy rate increase

THE US Federal Reserve finally raised its policy rate on Wednesday. The decision will affect not only the United States but many other countries. Higher interest rates, together with declining world oil prices, will have two profound impacts.

First, more outflow of capital from some countries to the US will be induced, and worsen those countries’ fiscal deficit and/or current account deficit.
A fiscal deficit occurs when a government has higher treasury expenditures than revenues. The current account deficit is the deficit in trade and service accounts. For oil exporting countries, lower world oil prices will worsen their current account deficit, while oil importing countries like Thailand will benefit from a narrowing current account deficit.
Second, both the public and private sectors’ debt burden denominated in US dollars may increase. If that happens, the debt burden would rise because of the appreciation of the US dollar. In addition, declining world oil prices could make oil companies more vulnerable to default risks, since these companies have borrowed heavily to finance their drilling activities due to low-interest rates. Hence, the net total outcome may eventually push up those net borrowing countries’ default risks.
Stock markets have been volatile due to the rapid decline in oil prices and the rise of the Fed funds rate. The SET Index fell from 1300 points to 1280.92 points on December 11. Investors sold energy stocks which had gained a lot of weight. The share price of PTT dropped to Bt220 per share, which is the lowest in five years.
Falling oil prices gives the government more time to launch the 21st round of offshore gas exploration concessions.
Overseas companies may face higher financing costs to operate under these new concessions. This is likely to be the main reason giving the government more time to negotiate with opponents of the concessions.
Although world oil prices will go up when those high-cost producers are temporarily out of business and global economic growth becomes stronger, it is still likely that this situation of low oil prices will persist throughout next year.
In a recent report of the International Energy Organisation, it predicted that next year the oil supply glut will become more severe. It is also expected that average global oil consumption growth will be about 1.23 million barrels per day. The sluggish global economy could slow oil demand growth further.
If oil prices remain quite low over this period of having a strong US dollar, prices of big-cap energy stocks in Thailand could move downward further. On the other hand, the price of stocks that are related to construction, real estate and the promoted “10 future industries” should increase.
Overall returns from the domestic stock markets could be lower than previous years due to sluggish global growth. Hence, investing more in some overseas stocks can be another bet given that investors are well protected from volatile foreign exchange risks.

Prof Arayah Preechametta is a lecturer at the Faculty of Economics, Thammasat University.   

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