THE Bank of Thailand is fixing its attention on some instruments that have gained popularity in light of the low interest-rate environment, but have the potential to disrupt the stability of the financial system.
Governor Veerathai Santiprabhob said that low interest rates across the globe had driven investors in all markets to put money into risky assets for higher returns, and several companies in Thailand had taken this opportunity to offer high-return instruments to attract such investors.
“For now, the ‘search for yield’ behaviour has not yet led to the under-pricing of risk, which could result in a systemic problem. Yet, there are some vulnerable areas which need to be closely monitored,” he said in an interview last week.
Some investors are now attracted to short-term instruments without considering how the issuers would allocate the proceeds, the central bank chief said.
Some issuers could finance long-term investment with the rollover of these short-term funds, and great financial losses would be imminent for all involved once interest rates picked up, he warned.
Veerathai added that while the total amount of such instruments remained small, the matter merited special attention.
Another area of concern is money-market funds’ growing investment in corporate debt, which he said would result in higher credit risks and was more difficult to unwind than government bonds.
“Investors overlook risks, and get focused solely on yields. It’s essential that underwriting institutions give investors accurate and complete information,” the governor said.
Aside from this, Thailand also needs to be watchful for other spill-over effects from the relaxation in developed economies’ monetary policies.
Veerathai said that although quantitative easing could somewhat boost economic growth in the short term, risks would prevail in the long term for all countries.
Developed economies themselves could soon witness a downward adjustment in asset prices, once the excess liquidity is sucked out of the market. Meanwhile, long-term savings schemes are facing trouble finding suitable investment bets, and developing countries need to integrate these impacts into the policy-making process, he stressed.
Since 2009, Thailand, like other emerging markets, has witnessed volatile fund flows, particularly in portfolio capital, he said.
From a position of net inflows until 2012, during 2013-2015 the country experienced net outflows of more than US$11.5 billion (Bt398 billion) from the stock market.
In the first seven months of this year, net inflows worth $3 billion were reported, resulting in the recent appreciation of the baht against the US dollar, he said.
According to Maybank Kim Eng Securities, in August alone, inflows to the stock market hit Bt33 billion, or nearly $1 billion, while inflows to the bond market reached Bt62 billion. The governor reckoned that the spill-over effect was greater in countries more reliant on foreign funds than Thailand, like Malaysia and Indonesia.
Of all the government bonds issued in Thailand, foreign holdings account for only about 9 per cent, compared to over 30 per cent in those two countries, he pointed out.
Meanwhile, Thailand’s current-account surplus is widening, thanks to low commodities prices.
“The impact is milder once the ‘risk on’ is switched to ‘risk off’, and vice versa,” he said. “It becomes normal that the baht could move within a range of 15-20 satang in a day against the dollar. Indeed, the baht’s degree of volatility at 4 per cent remains milder than the 8-9 per cent in the South Korean won.”
In times of volatility, the central bank clings on to a menu set of four measures – policy rate, foreign-exchange rate, macro-prudential management and capital-flow management – he said.