Baht's upward trend to continue

Greater financial liquidity in the global markets may bring more funds inflows

Thailand is bracing for further baht appreciation if all global trends are accounted for.

Pongpen Ruengvirayudh, a deputy governor at the Bank of Thailand, said yesterday that the central bank sees a greater possibility of further inflows, with Japan's new monetary policies at the centre of its radar. With more liquidity in global financial markets, some would seep into Thailand. However, as the US property market stabilises, some could also be diverted into that sector.

The situation is shaky with some factors to watch. For now, they are the policy of the Bank of Japan's new governor and the economic conditions in the euro zone, she added.

Yesterday, the Bank of Japan decided to maintain the policy rate at near zero, but more easing measures are expected. Haruhiko Kuroda, a finance veteran and the Asian Development Bank's head, who is a strong supporter of monetary easing, is likely to be confirmed by parliament as the next BOJ governor in the coming weeks.

The 68-year-old Kuroda has long criticised the BOJ for doing too little to lift the economy and is seen as likely to lead a fresh drive for more spending and aggressive easing to beat deflation, putting him squarely in Prime Minister Shinzo Abe's policy camp.

As US Federal Reserve Chairman Ben Bernanke has signalled continuation in quantitative easing, other central banks are expected to follow to boost their economies.

An economist at TMB Bank said the baht could return to the pre-1997-crisis level of 25 per US dollar in a few years. Nomura Research expects the unit to end the year at 29.1 before edging up to 28.6 next year.

Nomura predicts the baht to rise to 29.5 this quarter, stay at 29.5 next quarter, then move up again to 29.2 in the third quarter and 29.1 in the last quarter.

"The baht is not seen as overvalued, despite the 3.7-per-cent appreciation and 4.7-per-cent appreciation on a NEER [nominal effective exchange rate] basis over the past six months. Although this suggests there is still some room for the baht to appreciate based on fundamentals, this reason may weaken over the medium term given the likely narrowing of the current account surplus because of the strong domestic economy," the research house said. It also noted that only political intervention would stop this climb.

The baht was unchanged yesterday at 29.73 per dollar as of 3.51pm in Bangkok, according to data compiled by Bloomberg. The Stock Exchange of Thailand index yesterday hit another 19-year high at 1,560.98 points, as foreigners returned as net-buyers.

Pongpen said that for now, capital inflows have slowed down while the baht is more stable after more US dollar purchases by domestic investors, particularly for direct investment in other countries. Her comment that a stronger baht is not always a "bad thing" suggests that gains in the baht may be tolerated, which will help encourage more inflows.

"Thailand's economy is relatively stronger and the baht may continue to see appreciation pressure," said Koji Fukaya, CEO and currency strategist of FPG Securities in Tokyo.

Pongpen said most foreign capital went to the Thai bond market.

For now, the baht was relatively steady due partly to more US dollar purchases of domestic investors, including those investing overseas, and importers needing greenbacks for payment of products and services. That balances the baht and dollar.

To ease the baht's appreciation, the central bank last year implemented the Master Plan on Capital Movement's first phase, which is expected to be finished by the end of this year. The second phase, which will start early next year, may make it easier for small players to invest overseas directly without any trading through intermediaries like private funds or asset management companies.

"Now, there may be some disagreement with the relaxation for small investors to directly invest in overseas securities. But such relaxation will happen, sooner or later," she said.

In the first phase, nine institutional investors are allowed to invest unlimited amounts overseas, while individual investors can make direct investments overseas next quarter.

More relaxation will follow, to focus more on tourism and trade. The central bank warned that overseas investments could involve some risks.