UK bank sees further baht rise, keen on Thai bonds
The Royal Bank of Scotland's chief Asia economist sees the baht continuing its uptrend, and expects foreign investors will buy more local-currency bonds because of attractive returns if policy-makers start to resist any excessive appreciation of the unit
RBS estimates that over the past three months, the real effective exchange rate of the baht has appreciated almost 3 per cent, Sanjay Mathur, managing director and head of economic research for Asia-Pacific, said yesterday at a press conference.
At the same time, the surge in Thai exports that followed the post-flooding reconstruction period has come to an end.
With the slowdown in exports in February, there has been a clamour for a more competitive exchange rate across industries, even in tourism, he said.
Given the recent performance of the baht, RBS believes policy-makers will need to start resisting any excessive and rapid further appreciation of the currency, especially against the backdrop of faltering exports.
“The upshot to this resistance should be an improved outlook for local-currency bonds.
A modest [policy interest] rate hike is possible, but flows will contain the rise in bond yields.
“The baht is looking fairly valued, not taking into consideration the rise in real wages, and we expect its appreciation to be more modest from here on, at a level that is consistent with fundamentals.
“We remain positive on the currency and expect it to strengthen to 28.25 [per US dollar] by end-2013,” Mathur said.
He said attractive returns would draw more foreign investors to the Thai bond market, as the 10-year bond yield here is currently about 3.4 per cent, compared with the US benchmark at 1.7 per cent.
Moreover, there is much room to increase foreign holdings in the local-currency bond market in Thailand, because of its current much smaller holdings when compared with foreign holdings in the Malaysian and Indonesian markets.
Mathur remains positive on Thailand’s economic growth and expects a solid rate of 5 per cent this year.
This is because of the combination of an expansionary fiscal policy, rising foreign direct investment (FDI) and favourable monetary conditions.
“Thailand has one of the most expansionary fiscal policies in the region, with an emphasis on off-budget spending,” he said.
FISCAL STANCE
“When coupled with rising FDI, the government’s fiscal stance is generally appropriate in the current global environment and has helped drive growth in Thailand.”
The Kingdom’s main government spending programmes include post-flood reconstruction, increasing the minimum wage, a reduction in corporate tax rates, the rice price-intervention programme and the now-completed incentives for first-time car buyers.
Increased investment by the |government, especially in road |and rail infrastructure, will continue to support domestic demand, |said the economist.
With declining commodity prices, RBS also expects the risk of inflation to remain contained.
However, bank lending and household credit have grown at an aggressive pace, partly reflecting both consumer demand for loans as well as post-flood reconstruction. Bank lending has grown by 15 per cent year on year and the loan-to-deposit ratio by 22 per cent, also year on year.
Growth in total domestic loans, excluding those of Thai bank branches overseas, reached about 15.4 per cent by the end of last year, a level that was seen before the floods in the final quarter of 2011.
Growth in personal consumption, meantime, tripled its momentum to 21.6 per cent in the final quarter of last year from 7.6 per cent in the third quarter of 2009, he said.
Mathur highlighted that curbing consumer demand would probably require tighter macro-prudential standards, regardless of whether interest rates were pushed lower or not.
Accordingly, it would be logical to assume greater intervention in the foreign-exchange markets in the coming months.
However, whether the intervention can be fully sterilised is debatable, he said.
“Overall, interest rates are likely to stay stable if intervention is fully sterilised, or decline if partially sterilised.
“This implies that the risk reward of being in long baht bonds is favourable. Also, the issuance of longer-dated bonds is officially forecast to decline through the course of the year.”
According to the Thai Bond Market Association, foreign holdings of Thai bonds were worth Bt861 billion as of April 19, representing about 15 per cent of the market.
