Baht faces risks if BOT takes over FIDF debt, US lender says

“It is a concern,” said Ashok Bhundia, a strategist for Asia-Pacific foreign exchange and currencies at BAML.
In the next five years, the baht could underperform other regional currencies if the BOT has to be responsible for the Financial Institutions Development Fund (FIDF) debt, he noted.
Structurally, Asian currencies are expected to appreciate in the long term with short-term caution on volatility tracking from the West, he said.
BAML expects the baht to weaken to Bt32-Bt32.50 per US dollar by the end of March and to Bt30.8 by year-end. The FIDF issue is not included in these estimates.
If the BOT is required only to service the FIDF debt, it would likely be less negative for the baht, Bhundia said. But if it has also to pay the principal and roll over the debt that is due this year, that will hurt the currency.
However, the draft executive decree, which is currently pending royal endorsement, has not been disclosed yet. “Once we see the language in the emergency decree, we will see the Bank of Thailand’s commitment on the legacy debt,” he said.
According to the BOT, the draft executive decree shifts to the central bank responsibility for repaying the FIDF’s Bt1.14-trillion debt. The FIDF amassed this huge debt in the rescue of several banks after the 1997 financial crisis.
According to a 2002 decree, the BOT is required to make a payment on the principal whenever it earns a yearly profit and returns on foreign-reserve management operations. The central bank has reported annual net income once since 2004 and in 2010 reported a net loss of Bt117 billion, mostly due to losses on foreign exchange.
“The Bank of Thailand could now be more determined to prevent the Thai baht’s appreciation” if it has to earn on foreign exchange to pay down the principal, Bhundia said.
Given the likelihood of capital inflows to Asia, there could be an increase in risk for capital controls in Thailand, he noted, which could affect foreign investors. Capital control measures are commonly designed to manage and limit foreign capital coming into a country and prevent currency appreciation.
With the European and US economic problems, foreign capital is expected to flow into Asia this year, where economic fundamentals are stronger than in the West.
Quantitative easing is expected in the European Union in the first half of this year and the third round of QE is likely in the United States around the second half, said Victoria Ip, managing director for Merrill Lynch (Asia Pacific).

CAPITAL FLIGHT
Such an increase in money supply could lead to capital seeking higher-return assets outside the United States, where growth is fragile and interest rates are low, and the EU, which seems set to enter a recession this year.
“Risky assets will do well,” said Ip, who expressed positive views on emerging-market assets, including both equities and bonds. “Emerging-market countries are expected to grow two to three times faster than the G-3,” she added, referring to the Group of Three – the US, the EU and Japan.
However, given the European debt crisis and anticipated recession, Ip expects 2012 to see a backdrop of slow growth and a soft landing in Asia.
Asean central banks and governments have room to respond aggressively via both monetary and fiscal policies if the downturn worsens. In Thailand, however, there is uncertainty over where the BOT’s policy rate will go, Bhundia said.
The Thai economy has started rebounding and growth will be supported by government spending on post-flood reconstruction.
This week, “we could see a rate cut by 25 basis points, and the Bank of Thailand could keep the rate at 3 per cent” throughout the year, Bhundia said. The central bank’s Monetary Policy Committee is scheduled to convene on Wednesday.
In its last meeting last year, the MPC slashed the policy rate by 25 basis points, citing a relatively accommodative stance to help restore the flood-hit economy.