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Brace for stronger baht: economists

Mar 18. 2016
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THE BAHT is likely to strengthen further against US dollar, as Thailand’s financial market is expected to welcome more investment inflows amid no change in US interest rates and continued quantitative easing in Japan and the euro zone, economists said yes

However, they cautioned that the inflows would stay only as long as Thailand’s economic and political conditions showed some signs of improvement.

DBS Bank economist Gundy Cahyadi said recent inflows were driven by the US Federal Reserve’s postponement of an interest-rate increase.

“That the Fed turned even more dovish [on Wednesday] was clearly a bonus for risk appetite. Given the prospect of inflows, clearly there is going to be pressure on EM [emerging market] currencies, including the Thai baht, to strengthen against the USD. At least in the near term,” he said.

The Thai currency on Wednesday closed below 35 per dollar and strengthened further to 34.80 at 4pm yesterday.

 Since the end of last year when the baht closed at 36.03, the currency has gained 3.53 per cent against the greenback.

Because of quantitative easing in Japan and the euro zone, international investors are searching for higher yields in selected markets. Southeast Asia is the main recipient, mainly Indonesia.

The Fed’s decision on Wednesday triggered a slump in the dollar and a surge in risk appetite that rolled from Wall Street to Asia and then into Europe.

The Stock Exchange of Thailand gained 2.40 points or 0.17 per cent to 1,380.20 yesterday.

In a recent Asean FX report, HSBC economists noted that Thailand was among the main recipients of a surge of foreign-portfolio inflows to emerging-market assets from late January to early February.

“During episodes of reversal in global risk sentiment, we believe foreign investors sometimes temporarily park funds in Thailand’s liquid bond market, likely also attracted by low baht volatility, before reallocating the funds shortly after,” they said.

HSBC has revised its year-end baht target from 36.80 to 36.40.

Short-term bonds

Tim Leelahaphan, economist at Maybank Kim Eng Securities, noted that of the total flows from the beginning of this year, more than 80 per cent or about Bt133 billion went to short-term bonds, with maturities of less than one year. The SET drew some Bt5 billion while longer-term bonds attracted about Bt17 billion.

“Personally, I think the inflows [in this round] are here for foreign-exchange gains. If the economic fundamentals were better, more could have been diverted to the stock market and longer-term bonds,” he said.

After expecting the baht to end the year at 37.50, Maybank is in the process of revising the target.

Tim has high hopes that the investment pattern will shift if the government can convince investors that its infrastructure investments will really kick off in the second quarter as planned.

He added that it would be a plus if political risks did not heighten because of the controversial draft constitution.

It was announced that the government’s Thailand Future Fund would be listed on the SET next quarter, to pool funds for the Bt1.8 trillion worth of infrastructure mega-projects.

Renewed inflows will be on the agendas of emerging-market central banks. Next week, the Bank of Thailand as well as three other central banks in Asia – Indonesia, the Philippines and Taiwan – will hold policy reviews.

Nevertheless, though baht appreciation will dampen the weak export sector, all the economic houses above believe that the BOT will hold the policy rate at 1.50 per cent when its Monetary Policy Committee convenes next Wednesday.

A rate cut would slow inflows and hence slow the baht appreciation.

DBS expects no change in the policy rate at all this year.

“The BOT’s FX policy appears aimed at lowering baht volatility to historical norms, rather than biased towards baht underperformance,” HSBC said.

Maybank and HSBC both said the Thai policymakers apparently agreed that they should focus more on fiscal measures rather than monetary policy to boost the economy. A raft of short-term tax-relief measures and higher public spending to stimulate domestic demand are in sight.

“Looking further out, we maintain our view that the BOT will start tightening its policy again once GDP growth returns to the 3.5-4.0-per-cent range. Given current conditions, this is likely to mean early 2017 at the earliest,” DBS said in a research note.

Kobsidthi Silpachai, Kasikorn-bank’s head of markets and economic research for capital markets, thinks differently. He expects a 25-basis-points cut in the second quarter, mainly to stem the baht’s appreciation, not to boost domestic consumption.

Monetary policies in key economies, which include negative interest rates, showed that weakening currencies are their main targets. A cut in the Thai policy rate would not dent foreign direct investment, unlike the capital control imposed in late 2006, he said.

KBank accordingly revised its year-end target for the baht to 37 from 38.

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