Bubble warning as signs of speculation appear

This week we shall look at the signs of bubbles in the Thai property market, stock market and the baht. Let's start with the stock market.

Recently, UBS organised a property tour for a group of institutional investors. The group held meetings with the management of the major property developers, including Sansiri, LPN, Raimon Land and Prueksa. UBS's findings are not a surprise. It said in its report (Morning Expresso - Asia, March 14) that while it seems there is increased speculative buying in the Thai property market, this is confined not only to the condo market but also to specific segments in the condo sector.

"Based on discussions with industry experts and property companies, we believe there is increased speculative buying in the mid- to high-end condo market, but not at levels that warrant concern as yet."

Well, finally a foreign investment-banking firm has confirmed that there are signs of speculative buying in the Thai property market. Although UBS said the situation does not warrant concern as yet, the Thai authorities should monitor the property market even more closely before the speculation or bubbles go out of control. Not too long ago, Hong Kong and Singapore introduced tough measures to curb property-market speculation. Bangkok should follow suit to pre-empt a repeat of the speculative bubbles seen in the run-up to the Thai crisis in 1997.

The SET index is now trading at the 1,570 level. It is about to quadruple its value since its low of 400 in 2009. The recent sharp rise of Thai stocks is due to corporate tax cuts, improving economic conditions in Thailand and a rating upgrade by Fitch Rating. Moreover, the government's plan to invest Bt500 billion a year in mega-infrastructure projects has further fuelled the speculative buying of the grand Thai story.

The baht has been strengthening notably since the beginning of this year, rising by more than 3 per cent. It is now one of the emerging markets' darling currencies for speculative buying, for investors understand that the Thai authorities aren't likely to intervene in the foreign exchange market as aggressively as in the past to stem the baht's rise.

Dr Prasarn Trairatvorakul, the Bank of Thailand governor, said on Wednesday that the central bank is not concerned with the baht's current level. He noted that the baht may have risen because of rising investor confidence and improving economic conditions. Yesterday morning the baht was moving at Bt29.60-Bt29.65 to the US dollar.

However, the situation is rather worrisome in the baht market. Foreign investors are now borrowing cheap US dollars at a 0.30-per cent Libor rate, buying up the baht and parking the money in the bond market, which offers a higher-yield free lunch. When foreign investors bring in the dollar, they exchange the baht from the commercial banks. Since the banks can't hoard too many dollars, since they are doing business mostly in the baht, they will have to get the baht back by selling the dollar to the Bank of Thailand.

Now the central bank has to come up with baht to exchange for dollars. First, they can print fresh baht for dollars; or they can borrow baht in the money markets to exchange for dollars. The first method will compromise the central bank's monetary management to curb inflation. A baht injection will lead to higher inflation and complicate the BOT's operation to maintain the benchmark rate of 2.75 per cent. So the central bank mostly opts to borrow baht from the money market by issuing BOT bonds.

This intervention has created losses on the BOT's balance sheet because it has to shoulder the burden of paying interest for its bonds. Moreover, the dollar weakness creates loss in its portfolio.

A financial analyst told me that the central bank has gone so far as to issue short-term bonds - seven days, 14 days - in its bond market operation. This allows the foreign investors, almost risk-free, to make money from the primary bond market. They can get in and out of the BOT bond market in a hurry, since the BOT is being handcuffed in its lose-lose baht operation.

The property market, the stock market and the bond market with links to the dollar/baht exchange rates are showing signs of speculation amid the backdrop of easy money. We can expect hard times ahead if these markets are no longer sustainable.