Bt1.3 trillion in excess liquidity despite crunch

The Bank of Thailand has said Bt1.3 trillion of excess liquidity remains in the financial system, but it is concerned that any prolonged political uncertainty could play a crucial role in capital flows.

Suchada Kirakul, the BOT's assistant governor, said the country's liquidity was high while the global market had encountered credit-crunch conditions. The excess liquidity, measured by banks' excess reserves at the central bank, is enough for the banks to provide loans to the real sector as they could unload bonds for cash.

"The central bank has issued short-term bonds to absorb liquidity in the market. If we had not done that, interest rates would have declined rapidly," she said.

The global liquidity shortage could lead to capital outflows, which would lessen domestic liquidity. Moreover, foreign investors may be reluctant to expand their investment if the political uncertainty is prolonged.

However, she said capital movements would balance with both inflows and outflows. The central bank is optimistic that foreign direct investment (FDI) will continue for this year and next due to sound economic fundamentals, although it has slowed down because of rising costs and political uncertainty.

Suchada said a lack of infrastructure, high capacity utilisation and free-trade agreements would encourage investment.

Moreover, the Asean Economic Community, which has an agreement providing investment protection for FDI, would increasingly encourage direct investment between regions, she added.

FDI registered net inflow of US$2.7 billion (Bt90 billion) in the first five months of the year, far beyond half of last year's entire net inflow of $7.5 billion.

Suchada said that although foreign investors had unloaded Thai stocks and taken money out of the country, they were expected to come back to the market in the long run due to attractive price-to-earnings ratios and good economic fundamentals.

The bond market, however, has presented a positive picture since it was weighted in the JPMorgan Index.

"Despite being reluctant to step into the market early, fund managers have gradually loaded Thai bonds," she said.

The BOT expected direct and portfolio investment in the future after it allowed Thai investors last year to invest abroad without limit.

Thai investment in foreign securities has dramatically increased, encouraging a further balance of the country's capital movement, Suchada said, adding that it would help increase the capacity of portfolio diversification and risk management.

In the first five months of the year, portfolio investment accounted for a net inflow of $2.7 billion, compared with a net outflow of $5.2 billion for the whole of last year.