SET's rise adds to pressure on BOT to stem flow of 'hot' money

The sharp gain in the bourse last week is pressuring the Bank of Thailand to take some action to stem the flood of speculative foreign funds.

It remains uncertain whether Bank of Thailand Governor Prasarn Trairatvorakul would vote for a cut in the policy rate when the Monetary Policy Committee meets on February 20. While lower interest rates may deter some foreign capital inflows, they could also encourage savers and others to channel their funds into the stock market. This would only drive the market up and may lead to a bubble.

Plus, strong corporate earnings are soundly backing the recent spike in the Stock Exchange of Thailand Index, which last week ended at 1,499.22 points - the highest in over 16 years. Foreigners' net-buys so far this year have been to the tune of Bt16 billion.

In their commentaries to The Nation, Therdsak Thaveeteeratham, senior vice president of Asia Plus Securities, and Kitpon Pripisankit, vice president for research at Kasikorn Securities, agreed that the market will continue climbing this week due to fund flows as well as positive developments in the global economy. Kitpon sees the index testing |1,560 points in the middle of this month.

But it seems the central bank may soon launch some measures |to ease the negative impacts from the inflows. And it seems some condominium segments may get hurt, as prices have been rising fast due to speculation. While 70 per cent of purchases were for speculative purposes before the property bubble burst in 1996-97, the ratio of some projects is now creeping up to 50 per cent. Besides stocks, global funds also bought $92 million (Bt330 million) more government bonds than they sold last week. It was no surprise that the baht strengthened 0.3 per cent last week to 29.81 at 3.08pm in Bangkok.

Usara Wilaipich, senior economist of Standard Chartered Bank (Thai), said last week that over |the past 10 years, the baht has staged two big advances. From 2001-08, the baht strengthened from 46 per dollar to 29.50 thanks to huge current account surpluses. From 2009-10, the baht first weakened to 36.30 on fears that the export sector would suffer |from weak global demand, only |to rise to 29.50 after the US launched quantitative easing measures. Importantly, the baht appreciation in the two years was supported by current account surpluses.

In her interview with Krungthep Turakij, she said that since 2011, Thailand has witnessed two-way baht movements - weakening and appreciating in line with market conditions. However, the appreciation was limited by smaller current account surpluses and more overseas investment by Thai companies.

This convinced her that the baht appreciation in this round is purely because of the inflows of speculative funds.

'RATE CUT NEEDED'

Usara supports a capital control measure or rate cut, as the current movement goes against fundamentals. As Thailand should register a smaller current account surplus or even a deficit, the baht should be stabilised or weakened.

The capital control imposed in 2006, however, could not stop the baht appreciation.

The Bank of Thailand has been lauded by the International Monetary Fund for its achievement in maintaining stability |from 2008-11. During those years, the central bank cut rates and maintained foreign exchange |stability. The IMF model shows that counter-cyclical rate cuts and forex flexibility contributed to growth by up to 1.6 and 2.1 percentage points, respectively, from 2008-10.

Whatever it does, the central bank has to deal with the consequences. Herve Hannoun, deputy general manager of the Bank for International Settlements, told |the governors' conference in |Seoul last year that in the wake |of the crisis, demands on mone-tary policy have grown beyond recognition, putting frameworks under enormous pressure. Central banks are increasingly seen by market participants as all-powerful, able to intervene without any limit.

"The trend towards unlimited intervention combined with |ultra-low interest rates does |not only have potentially serious side effects on the functioning |of the market economy. It also gives rise to three major risks |and one ultimate possible consequence for monetary policy itself. These three risks are those of financial dominance, exchange rate dominance and fiscal dominance. And the ultimate possible consequence is an inflation surprise that could severely damage central banks' hard-earned credibility.

"To prevent these risks from materialising, we need to forge a consensus on what could be called 'the new frontier of monetary policy' in order to refocus monetary policy on maintaining lasting price stability. This also implies that central banks should reject the market illusion of unlimited intervention and the associated theory of the 'printing press'."