US rate cuts may deter investors

The steep rate cuts by the Federal Reserve reflect the severity of US financial turmoil and impending recession, and stoke fears that foreign funds might not return to the Thai market for the next six months, stock analysts said yesterday.

The US central bank on Tuesday cut its base short-term interest rate by threequarters of a percentage point to 3.50 per cent amid worries a potential US recession could destabilise the world economy.

Sukit Udomsirikul, assistant managing director of Siam City Securities' research department, said yesterday that the fallout of the sub-prime crisis would prevent foreign capital inflows into Asian markets, including Thailand, at least during the first half of the year.

"The [sub-prime] problem has triggered volatility in all markets worldwide, including regional markets. Six months from now, let's see whether the foreign capital flow will be back. This will depend on local factors," Sukit said.

Sombat Narawutthichai, secretary-general of Securities Analysts Association, said he would not be surprised if the Fed cut the rate to 2.5 per cent by the year-end.

He said since July last year, when the sub-prime crisis initially emerged, foreign net selling amounted to Bt110 billion. Considering foreign net buy over the past three years of Bt300 billion to Bt400 billion, there is room for foreign investors to further sell Thai stocks.

Atchana Waiquamdee, deputy governor of the Bank of Thailand (BOT), said the central bank would revise its economic and financial indicators, responding to the rate cut, the US economic outlook, oil price and the Thai government's fiscal policy.

She said the cut would ensure that the world's largest economy would not slip into recession. But the global economic slowdown would result in rising risk for economic growth and falling risk of inflationary pressure.

The escalating risk for economic growth would lead to lowering of crude oil prices as a natural consequence. This was a factor for central banks to take into account. She, however, added that this did not mean the BOT would slash its policy rate, insisting that Thai monetary policy was independent of US policy.

She said it was the Kingdom's current account surplus that had led to the appreciation of the baht rather than the interest rate spread.

The deputy governor said the Kingdom urgently needed an overall macro-economic policy to shore up domestic demand while exports were likely to slow down. The recovering domestic demand could offset the export slowdown.

Sethaput Suthiwart-Narueput, chief economist at SCB Securities, said the US rate cuts should not become too aggressive because inflation risks might drive up long-term US rates and affect the sub-prime crisis.

"The rate cuts can't resolve the problem of loans in the financial system. This takes time to tackle."

He also said investors would be keeping a watch on corporate bond defaults.

Keith Neruda, head of research of UBS Securities (Thailand), believes foreign investors would not stop selling Thai stocks as they needed to close their position in global markets. It is difficult to tell when they would stop selling, he said.

He believes the Fed fund rate would be cut to 2-2.5 per cent within this year. Neruda predicted the SET Index would fall to 680, though he thinks without the sub-prime factor, the SET Index would be at 900.

Kobsak Pootrakool, executive director of SET Research Institute, said the sub-prime problem would not be settled easily as it has spilled over to the financial sector, while US financial wealth has dropped significantly.

He agreed that the US central bank's steep cut won't solve the root of the problem and that the Fed is likely to cut the policy rate further by 100 basis points from the current 3.5 per cent.

According to UOB Economic Treasury Research, the unexpected move exposes the Fed to the risk that should it not deliver what the market expects next week, the market could react negatively. Fed fund futures have now fully priced in an additional 25bps cut next week and an 80 per cent probability of a 50bps cut. UOB maintains its forecast for a 50 basis points cut to 3 per cent at the meeting next week.

The Fed's historic and sudden rate cut, which pacified some and worried others, is just the tip of the iceberg. Eminent economist Joseph Stiglitz wrote in a recent article in The New York Times that the question of a US recession is undeniable as the economy is performing "below its potential". This is reflected too in the Libor rate, which is still higher than the Fed rate, said Stephen Corry, Merrill Lynch's global wealth management investment strategist. Current three-month Libor is 3.77 per cent.

"[It is a sign that] banks are still fearful of lending to one another," said Corry yesterday at a Merrill Lynch investment outlook talk in Bangkok.

He added that many banks now turned to sovereign wealth funds instead for a much-needed capital injection. Corry said the spread would come down eventually to offset any further credit losses in the second and third quarters.

After the Fed slashed interest rates by threequarters of a percentage point overnight to bolster the flagging US economy and plunging markets, Asian central banks will be assessing whether the surprise rate cut proves to be a quick cure-all or whether it signals panic.

Finance Reporters

The Nation,

Dow Jones Newswires