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Policy rate cut, ongoing political chaos affect March

The central bank's Monetary Policy Committee (MPC) voted 4-3 to cut the benchmark rate by 25 basis points to 2.0 per cent on March 12, with the expectation that a rate cut would help boost growth in an economy that has been slowing because of political unrest that has unnerved consumers.

The prolonged unrest has hurt domestic demand and confidence as well as delayed public spending, so the central bank was under pressure to cut the rate to stimulate growth. Even though any major interest-rate cut would not help revive the economy hit by political unrest, monetary policy would remain accommodative to support business.

Nevertheless, the anticipated growth of gross domestic product in Thailand for 2014 will stay below the threshold of 3 per cent, if the political unrest continues until the second quarter. At the same time, the MPC adjusted its GDP growth prediction from 3 per cent to 2.7 per cent. The main reason for lowering the forecast is the continuation of internal downside risk from prolonged political uncertainties and externally from tapering of the US Federal Reserve's quantitative easing (QE) programme that may stunt economic growth of emerging markets. The latter could delay Thailand's export recovery.

In response to the policy-rate cut, yields of short-term government bonds (less than one-year maturity) shifted down in the range of 5-16 basis points, as there may be continual buying, especially from the domestic institutional investor group. Meanwhile, yields of long-term government bonds (longer than one-year maturity) shifted up in the range of 1-5 basis points on external factors, particularly in the United States.

After the meeting of the Federal Open Market Committee (FOMC) on March 18-19, the Fed decided to reduce its asset-purchasing programme by a further US$10 billion in April to $55 billion a month. It will maintain the Federal Fund Rate within its low target range of 0-0.25 per cent for a considerable time after the QE programme ends.

For the movement in the bond market throughout March, total trading value was Bt1.72 trillion or Bt81.74 billion per day, increasing 12 per cent from Bt72.79 billion per day in February. More than 67 per cent of daily trading value was in the less-than-one-year bonds. Major investors in the Thai bond market were still the group of asset-management companies, which participated in 58 per cent of total trading value, while non-resident investors captured 13 per cent.

Foreign investors were net sellers of Bt7.6 billion last month, buying Bt18.0 billion in short-term bonds and selling Bt10.4 billion in long-term bonds. Furthermore, there was another Bt11.5 billion of expired bonds held by non-residents during the period. So there was Bt3.9 billion of capital outflow from the Thai bond market, in contrast to the stock market, where non-resident investors were net buyers of Bt14.25 billion in the same period.

At the end of March, foreign investors' bond holdings stood at Bt679.2 billion, accounting for 7.4 per cent of the total bond market's outstanding value, which decreased from Bt707.9 billion at the end of December.

However, there will be many interesting factors this month that investors need to be concerned about, such as the political uncertainly and the Chinese government's structural reform, which will have an impact on global financial markets. All of these factors will affect the investment environment in the Thai bond market and need to followed up continuously.

The author,Porpit Yodsang,is assistant manager for research and development, Thai Bond Market Association (ThaiBMA). He can be reached at porpit@thaibma.or.th or 02-252-3336 ext 213.


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