More liquidity on the way

All eyes are on the policy-rate meetings in London and Tokyo this week, with global investors anticipating that both Britain and Japan will follow the United States in continuing with quantitative easing and guarantee the injection of additional liquidity into global bonds and equities.

After US Federal Reserve chairman Ben Bernanke's signal that the US will not soon exit its quantitative easing (QE) mode, the decisions of the Bank of England and Bank of Japan would only mean higher liquidity in global financial markets, which guarantees higher capital inflows to Thailand and other emerging markets as well as further gains in their currencies.

Chayotid Kridakorn, chief of JPMorgan Securities (Thailand), said yesterday that last year about US$800 billion (Bt24 trillion) flew into global bonds, with little to equities. But so far this year, equity markets have drawn in $25 billion.

"Whether it will be here for the short or long term depends on the countries' economic potential," he said at a seminar on "Investment in the world of liquidity floods", hosted by MFC Asset Management.

At the same event, MFC chairman Narongchai Akrasanee, who is also a member of the Bank of Thailand's Monetary Policy Com-mittee, said capital will continue streaming into emerging markets like Thailand's after some developed economies' injection of about $7.6 trillion into their banking systems.

It remains to be seen how much will seep into the real economy, but inflows are inevitable, as developed economies are keeping their interest rates at low levels.

While Thailand's rate is higher than those countries', it is not high compared to regional peers. The real interest rate remains minus 0.64 per cent. Inflows are, however, continuing because of returns on Thai equities and bonds, but Thailand will not be inundated. While foreign direct investment is buoying long-term fundamentals, portfolio investment will help develop the capital market.

"Still, short-term money tends to cause more harm than good, leading to market volatility and foreign exchange rate volatility. This requires close monitoring from the authorities," he said. However, there are no widespread bubbles in the property and stock sectors.

"To prevent rapid appreciation of the baht, intervention is an answer, but it is not a favoured option as this could affect foreign investment, as well as the promotion of overseas investment. The overall picture of Thailand's investment remains positive and not worrisome," he said.

Because of high capital inflows, the baht has strengthened by about 3 per cent this year against the US dollar, on top of 3 per cent last year. The outlook is bright as the Bank of Thailand next month is expected to revise upward the economic forecast for 2013 from 4.9 per cent to at least 5 per cent.

This month, foreign investors returned to the Thai stock market after dumping a net Bt17 billion last month. Bonds of less than one year also absorbed most of the inflows in the first 44 days of this year.

Buoyant inflows are, however, feared to cause bubbles in the domestic economy. After the earlier move by Singapore, China's Cabinet on March 1 told cities with "excessively fast" price gains to raise down-payment requirements and interest rates on second-home mortgages and ordered individuals selling properties to "strictly" pay a 20-per-cent tax on the profit when the original purchase price is available.

At this meeting, Moody's Analytics expects the BOJ to maintain the policy rate at 0.05 per cent. But Haruhiko Kuroda said yesterday at a confirmation hearing in parliament in Tokyo that the Bank of Japan would do whatever is needed to end 15 years of deflation should he be confirmed as governor and indicated that open-ended asset purchases could start sooner than next year.

"I would like to make my stance clear that we will do whatever we can do," said Kuroda, president of the Asian Development Bank.

"The central bank hasn't bought enough assets and should consider buying large amounts of longer-term bonds," he said.

Kuroda will need "to show that he's radical at the central bank's two meetings in April, otherwise markets will be very disappointed," Masamichi Adachi, senior economist at JPMorgan Securities Asia in Tokyo and a former BOJ official, told Bloomberg. "He must convince policy board members to change their mindset by 180 degrees."

According to Moody's Analytics, the initial estimate of Japan's fourth quarter GDP showed that the economy was still in recession.

On Thursday, the Bank of England's Monetary Policy Committee is expected to leave interest rates on hold at 0.5 |per cent, but there is a strong |possibility that it will increase its quantitative easing programme by