THE EXPECTED policy-rate increase by the US Federal Reserve next month would result in the baht deprecating for at least two quarters consecutively, and Thai companies that plan to raise finances from bonds would face rising funding costs, according to Bank of Ayudhya (Krungsri).
The market predicts that the Fed will increase its benchmark interest rate by 25 basis points in December, and Krungsri has the same view, said Tak Bunnag, head of the bank’s Global Markets Group.
The bank expects the Fed will rise the policy rate twice in 2017, ending up at 1 per cent from 0.25 per cent currently.
Tak forecast that a rate increase would result in the baht depreciating over the next two quarters before turning to appreciation in the second half of next year after the market sees clearer policies from US President-elect Donald Trump.
The baht against the dollar at the end of this year is expected to be 35.75.
The baht in the first quarter of 2017 is expected to be 36, and 35.75 in the second quarter. In the third quarter of 2017 it is expected to reach 35.50 and 35.25 in the fourth quarter, according to the Global Markets Group.
Tak said a Fed rate increase would also drive yield curves and increase the funding costs of bond issuers, while banks would face rising funding costs too.
Krungsri believes that the Bank of Thailand’s Monetary Policy Committee (MPC) will keep its rate of 1.5 per cent throughout next year, although fund-flow movements in Thailand and elsewhere in Asia are factors to be further monitored because of their possible influence on the Kingdom’s interest rates.
Tak said bond issuers who planned tenors of five to seven years would face rising costs but at the same time their bonds would attractive to investors as the interest rates of deposit products in Thailand are expected to decrease further. This should be a win-win situation for both bond issuers and investors, he added.
He said banks that were arrangers of bond issues should balance the expected issuers and investors, while the Global Markets Group was active in consulting Japanese companies in Thailand about investing in the Thai bond market because of Japanese companies’ earlier preference for deposit products.
Even if the funding costs from issuing bonds were increased, large companies would still look at capital markets as an option for them apart from bank loans.
Thai companies have managed their risks well, while banks have been conservative in approving loans amid the economic uncertainty, although they still support lending to Thai corporates that are able to grow here and overseas.
Krungsri believes that the debt capital market and bank loans will still be funding sources for Thai corporates.
The Global Markets Group plans to grow in four segments – Japanese firms in Thailand, multinational companies, financial institutions, and Thai companies.
Krungsri is a member of Mitsubishi Financial UFJ. Tak said the bank was increasing its role in encouraging Thai investors including financial institutions to put more money into Japanese government bonds.
He said the bank would also leverage Japanese firms’ knowledge of risk management to help Thai companies better manage risk amid financial-market volatility.