The inflow of foreign currency to Thailand will last for another couple of months, which is good news for the Thai stock market, Bank of Thailand (BOT) Governor MR Pridiyathorn Devakula said yesterday.

 "It's no secret, everyone knows that money is coming into Asia," he said.

Earlier, Kim Eng Securities (Thailand) Plc's chief executive officer Montree Sornpaisarn had warned that most foreign money entering the Thai stock exchange recently, came from hedge funds. Hedge funds usually hold stocks with the purpose of speculation for a short period. And their investment decisions rely not only on fundamentals but also on currency trends.

Foreign investors have so far this month bought Thai shares with a net position of Bt2.4 billion.

Yesterday, the baht closed at Bt37.91 against the US dollar while the SET index fell almost 2 per cent at 672.34 on concerns of escalating tensions in the Middle East. Foreign investors have bought Thai shares with a net position of Bt2.4 billion since the US Federal Reserve hinted that it might pause increasing interest rates. The US federal funds rate now stands at 5.25 per cent, but economists are divided in their views about further increases.

One analyst predicted that the Fed might jack up rates another 25 basis points before stopping, while another said that the rate had already peaked.

MR Pridiyathorn forecast that the prime lending rate of commercial banks would be no more than 8 per cent this year, which is an acceptable level for businesses.

"The business sector should be able to cope with interest rates at that level just fine," he said.

The current prime rate at four major banks, known locally as the minimum lending rate, is 7.5 per cent.

"Commercial banks will not jack up lending rates at the moment because deposits seem to have grown at a faster pace than lending since early this year," he said.

Despite the higher interest rates, Pridiyathorn said there had been no sign that the number of non-performing loans (NPLs) was on the increase.

"Interest-rate increases have not yet had an impact on NPLs. In fact we found that NPLs are falling. I maintain our target to reduce NPLs to 2 per cent by October next year. NPLs will decline significantly when commercial banks begin to sell their non-performing assets starting late this year," he said.

As of May, 8 per cent of all commercial banks' outstanding loans were non-performing. That level has been steady since March.

He reiterated that inflationary pressure should decline in the second half of this year, due to the high base effect caused by the government's decision to eliminate diesel subsidies in July 2005.

Headline inflation in June was 5.9 per cent year on year, a decline from a peak of 6.2 per cent in May.

The Nation,

 Dow Jones Newswires