Thailand: Measures to prevent contagion

Concerned that the deepening uncertainty over the debt crisis in the eurozone, combined with a general slowing of the global economy, could impact the country’s capital markets, Thailand is keeping a wary eye on the situation in Europe.

Thai officials have been quick to reassure investors that the general health of the domestic economy, which is shored up by various barriers and policy instruments, should be able to insulate the markets from the worst of any contagion. One area that Thai officials are monitoring carefully is the inbound and outward flow of capital, which has seen fluctuating movement across June as news good and bad comes from Europe.

On June 20, Prasarn Trairatvorakul, the governor of the Bank of Thailand (BoT), said that measures were being taken to ensure local capital markets would be insulated against any meltdown in the eurozone. Though he said there was no need at present to lower the bank’s key interest rate, such a step could be taken if the inflow of capital from overseas increased sharply. For the moment, the 3% policy rate is appropriate for the current economic conditions.

However, if the economic problems in Europe develop further and bring the global economy to stagnation, Thailand will have to adjust its policy rate immediately. Additionally, leniency will be given to non-performing loans, Prasarn said.

The BoT governor also said the reserve had other tools at its disposal to cool the flow of hot money should the need arise, including the provision to restrict the purchase of US dollars by investors who do not live in Thailand, or allowing exporters to hold US dollars for up to one year without converting into Thai baht.

A few days prior, Prasarn issued a statement stating that while the eurozone debt crisis could have an effect on Thailand’s financial markets, as well as its foreign trade, the BoT and other state agencies were confident the impact will be contained, largely due to the strong fundamentals of Thai financial institutions and the country’s high foreign reserves.

Of late, those capital market fundamentals have not been tested too severely. Across May and June, the baht fluctuated around 2%, nowhere near the 10% it depreciated in the first few months of 2009 when the global economic crisis was at its peak. On June 19, news that exports were marginally up for May – reversing a fall in April – was in part offset by further unease over developments in Europe, particularly the weakness of Spain’s banking sector. The baht was pushed up to its strongest position in four weeks, while there was increasing interest in government bonds, rather than stocks.

According to Tohru Nishihama, an economist at Dai-Ichi Life Research Institute, there was a move towards safe assets, such as five-year sovereign notes.

“The baht seems to get some support from companies repatriating overseas profits,” Nishihama told The Bangkok Post. “Sentiment itself remains fragile as Europe’s debt problem still persists. That also means investors prefer bonds to stocks, providing some support for local debt.”

In the first two weeks of June, there was positive movement on Thai government debt, with global funds buying $1.9bn more of bonds than were sold, according to data issued by the Thai Bond Market Association, backing the view that investors were focusing on solid assets.

The stock market, however, has been less solid. The market fell 10% from May to June before recovering more than half of the lost ground. In mid-June, Charamporn Jotikasthira, the president of the Stock Exchange of Thailand, warned that the market would likely continue to experience a degree of volatility over the next two months as a result of the eurozone debt crisis.

While there had been a positive response to the victory of pro-austerity parties in the recent Greek general election, and to moves to support the Spanish economy, there was no end in sight to the debt crisis in Europe, with uncertainty lingering over the situation, Charamporn said on June 18.

“Investors who are adept might be able to gain benefits at this time, but inexperienced investors should be careful about the volatility that might occur over the next couple of months,” said Charamporn.

Careful is likely to be the watchword for Thailand’s capital markets for some time, as investors and regulators monitor events overseas and the ebb and flow of hot money seeks safe and profitable havens if the eurozone debt crisis deepens.

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