No measures needed to stem baht depreciation; economic fundamentals remain healthy, foreign investors will return
The Fiscal Policy Office sees no need to impose special measures to stem the sudden depreciation of the baht against the US dollar, expecting the recent capital outflow to be merely a short-term phenomenon.
Together with the Securities and Exchange Commission, it anticipates foreign investors returning to Thailand, while the Bank of Thailand maintains the view that the Kingdom’s macroeconomic situation is solid.
Fiscal Policy Office director-general Somchai Sajjapongse said yesterday that there would be no special measures to slow the sudden depreciation of the baht as a result of the capital outflows of the past two weeks, which have dampened the Thai stock market.
He insisted the capital outflow was only a short-term matter.
As long as the US and Japanese monetary stimulus continues, foreign capital is expected to flow back into Thailand, where growth remains and there are sound economic fundamentals, he said.
“We view that if the US and Japan continue their QE [quantitative easing], they [foreign investors] will come back. If they go to Brazil, the return may be higher but its economic fundamentals are not as good as those of Asian countries. So, we expect capital to flow out [of Thailand] only in the short term,” he added.
Foreign capital has fled Asia, including Thailand, dragging the Stock Exchange of Thailand (SET) Index down sharply and weakening the baht, on concerns about the tapering of US stimulus measures.
Foreign investors may be monitoring the economic situation in other countries before investing, he said.
If the world’s economic powers make a stronger recovery, capital flows into Thailand may not be as large as they were earlier. However, if their economic situation remains gloomy, foreign capital will surely come back, he suggested.
Meanwhile, amid market volatility, the Bank of Thailand has the tools in its pocket for use as necessary in relation to capital movements.
In the past week, the central bank has taken measures to smooth volatility in the baht and has sold US dollars, Bloombergquoted Bank of Thailand Governor Prasarn Trairatvorakul as saying on Wednesday.
The Thai currency strengthened 0.7 per cent yesterday and has appreciated 0.4 per cent so far this week to 30.54 per US dollar, halting seven weeks of losses, according to Bloomberg.
Securities and Exchange Commission secretary-general Vorapol Socatiyanurak yesterday said global economic changes had affected investors’ trading across the world, causing volatility in Asian stock markets, including Thailand’s.
However, he expressed no serious concern over recent sharp drops in the SET Index, believing foreign investors would return due to Thailand’s strong corporate earnings.
“If we remain strong, investors will be interested, despite lower stock prices,” he said.
In another development, the Bank of Thailand’s Financial Institutions Policy Committee and Monetary Policy Committee yesterday jointly convened for the first time this year.
In a joint statement, they said the Kingdom’s macroeconomic conditions remained solid despite slower growth in the first quarter.
The two panels agreed that despite the slowdown in domestic demand, fundamentals remained healthy.
The export sector is expanding, albeit at a slow pace, in line with global economic movements. Thailand’s export value in the first four months of the year showed a higher growth rate than that of other countries in the region, they said.
Overall, some small and medium-sized enterprises (SMEs), particularly those in labour-intensive industries and with low profit margins, still suffer from the minimum-wage hike.
The key central-bank committees agreed that the baht’s appreciation in the first four months of the year had been a catch-up with other regional currencies, which had risen significantly against the dollar last year.
Meanwhile, inflows in the period had gone to the bond market, particularly to long-term bonds, which indicated real investment demand to some extent, they said.
Yet, the committees concluded that capital flows would remain volatile and could affect the financial market, as a result of relaxed monetary policies in major economies as well as the different speed of economic growth across the world.
“The market is quite sensitive to data, like improvement in economic indicators of the US, which led to the expectation of faster tapering in quantitative easing and possible outflows,” they said in the joint statement.
In this regard, Thai banks maintain solid operations, with continued growth in consumption and SME loans.
Loan quality in general is of high quality, while capital funds and reserves are at a high level, and this should help Thai banks withstand volatility.
Yet, the panels conceded that the high level of household debt, which has escalated sharply in the past few years, posed a risk to financial stability and required close monitoring.
Though some of the debts are to finance housing and permanent asset purchases, this could compromise household liquidity and the ability to pay, particularly among low-income households, they warned.