or so they say. Low USD dollar liquidity is a cue for the rise in USD/THB volatility
„ As we are in the year of the Rabbit, the markets will tend to be jumpy…with events in Tunisia and Egypt again highlighting USD perceived safe haven stature
„ Resumption of political activities following end of emergency decree is giving a good excuse for foreign investors to take some money off the table
„ …and reintroduces more uncertainty in the USD/THB picture
„ Our main theme for USD/THB downside remains unchanged…but our 4Q11 USD/THB target is scaled back to 29.00 from 28.00
„ Indications from the central bank along with its perceived preference for a less stronger baht coupled with rising commodity prices prompts us to revise up our 4Q11 BOT repo target to 3.25% from 2.75%
1. .Mean S FX & Rates Strategies
KBank Economics /
Strategy
The shortest distance between two points is a straight line
FX / Rates
31 January 2011
…or so they say. Low USD dollar liquidity is a cue for the rise in
USD/THB volatility
Kobsidthi Silpachai, CFA
As we are in the year of the Rabbit, the markets will tend to be kobsidthi.s@kasikornbank.com
jumpy…with events in Tunisia and Egypt again highlighting USD
perceived safe haven stature
Resumption of political activities following end of emergency
decree is giving a good excuse for foreign investors to take
some money off the table
…and reintroduces more uncertainty in the USD/THB picture
Our main theme for USD/THB downside remains unchanged…but
our 4Q11 USD/THB target is scaled back to 29.00 from 28.00
Indications from the central bank along with its perceived
preference for a less stronger baht coupled with rising Disclaimer: This report
commodity prices prompts us to revise up our 4Q11 BOT repo must be read with the
Disclaimer on page 14
target to 3.25% from 2.75%
that forms part of it
KBank Capital Market
Research can now be
accessed on Bloomberg:
Fig 1. Theme Chart…30 day USD/THB vols
KBCM <GO>
%
8 K-BIZ Contact Center
7 0 2888 8822: For all
financial & business
6
inquiries 24 Hours
5 Service
4
3
2
1
0
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11
30 day volatility
Source: Bloomberg, KBank
11
1
2. Yesterday’s darling might be today’s out of favor child
2010 was a great year for the Thai baht gaining about 11.07% against the USD. The
currency was ranked fourth after JPY, AUD and MYR. That is looking into the rear view
mirror. Looking in front passed the windshield with the year of the Rabbit in full swing, the
USD/THB currency has proved so far to be as jumpy as the rodent. Fig. 1 shows that 30
day vol has picked up tremendously to around 6.7%. The Thai stock market, SET, gained
about 48% in 2010 is prompting investors to take some money off the table. Hence,
looking at the following statistics, foreign investors have sold about USD 904 mn, YTD,
the most in the region.
Fig 2. Foreign Institutional Investment in Regional Equities
Day WTD Net MTD Net YTD Net YTD Net As of
(Mil US$) (Mil US$) (Mil US$) (Mil US$) YoY%
India 94.1 136.8 -755.0 -755.0 -224.0 1/25/2011
Indonesia -28.6 120.1 -419.1 -419.1 -951.2 1/28/2011
Japan 222.1 222.1 7,344.2 7,344.2 -60.3 1/21/2011
Philippines 0.6 24.7 -68.2 -68.2 -260.4 1/28/2011
S.Korea -123.7 -74.5 -74.5 -74.5 -112.3 1/28/2011
Taiwan 303.2 1,308.4 3,438.8 3,438.8 13,617.8 1/28/2011
Thailand -23.4 -80.8 -904.2 -904.2 -298.6 1/28/2011
Vietnam 6.8 13.5 50.4 50.4 175.0 1/27/2011
Pakistan 0.4 5.2 61.0 61.0 317.5 1/27/2011
Source: Bloomberg
It is not rocket science that resumption of rainbow political activities, post the end of the
emergency decree is giving a good excuse to take profits from Thailand and rotate it
elsewhere in the region. The political implosions in the likes of Tunisia and Egypt will
bring back memories of the recent past of the Bangkok events in the middle of last year
and hence, a growing distaste for Thai financial assets. The risk premium is a tad higher,
suggesting that the financial markets are expressing a sense of unease. Amidst growing
risk averse coupled with a tight USD liquidity environment, the upward move in the
USD/THB is accentuated further. The next levels for the USD/THB is to test its 200 day
moving average at around 31.19.
Fig 3. Thai 5yr credit default swap…a gauge of risk
Fig 4. USD/THB: 30, 60, 200 day moving averages
premium
bps over Libor Thai CDS 5Y 38
190 37
36
170 35
34
150
33
32
130
31
110 30
29
90 28
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
70
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 USD/THB 30 day avg 60 day avg 200 day avg
Source: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBank
22
2
3. Unfolding events prompt a rethink
There is a saying that “the shortest distance between two points is a straight line”. The
reintroduction of the Thai risk premium in light of the idiosyncratic political characteristic
complicates our call for a USD/THB target of 29.00 by 4Q11.
We have taken notice that the central bank’s stance on FX intervention as toughened
since mid November. Fig 5 shows that foreign portfolio flows have been instrumental
accentuating the moves in USD/THB. The data points include USD/THB versus the sum
of foreign flows on Thai equities and fixed income securities with the latter being larger.
Based on statistics, correlation between USD/THB and foreign investment flows up to
mid November were highly correlated up to 97%. The breakdown in the relation became
more obvious post mid November. Fig 7 shows our estimate that in December 2010 the
Bank of Thailand most likely bought an additional USD1.9 bn in excess of the balance of
payments to steer the USD/THB in a new direction. This could be a game of “chicken”.
The name might sound childish but it actually is an important concept in
economics…primarily game theory.
Fig 5. Relationship between USD/THB & foreign Fig 6. Relationship between USD/THB & foreign
portfolio flows (equity & fixed income) Jan to Nov 2010 portfolio flows (equity & fixed income) Jan 2010 to now
250 29.0 400 27
29.5 350
200 28
30.0 300 FX intervention was stepped
correlation was nearly 98% between
250 up causing a break in pattern 29
150 Jan 2010 to mid Novebmer 2010 30.5
31.0 200 30
100 150
31.5 31
100
50 32.0
50 32
32.5
0 0 33
33.0
1- 2- 3- 4- 5- 6- 7- 8- 9- 10- -50 1- 2- 3- 4- 5- 6- 7- 8- 9- 10- 11- 12- 1-
-502010 2010 2010 2010 2010 2010 2010 2010 2010 2010 33.5 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2011
sum of foreign equity / fixed income flows USD/THB, right axis, inverted sum of foreign equity / fixed income flows USD/THB, right axis, inverted
Source: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBank
Fig 7. Thai balance of payments, FX reserves and estimated FX intervention levels
USD mn Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10
Exports fob 13,610.4 14,254.7 16,083.8 13,831.7 16,434.7 17,876.5 15,475.1 16,291.6 17,954.9 17,045.5 17,584.0 17,220.0
Imports cif -13,041.9 -13,801.8 -15,082.1 -14,032.5 -14,143.7 -15,334.2 -16,266.3 -15,439.8 -14,712.2 -14,772.9 -17,093.8 -15,911.0
Trade Balance 568.5 452.9 1,001.7 -200.8 2,291.0 2,542.4 -791.3 851.7 3,242.7 2,272.7 490.2 1,310.0
Current Account
Balance 2,107.6 1,655.9 1,779.9 -299.2 1,164.0 820.9 -1,000.8 280.5 2,767.0 2,739.6 1,019.0 1,750.0
Capital and
Financial Account
Balance 2,743.4 -698.6 1,732.6 2,964.5 -2,607.8 741.2 2,979.8 3,205.9 1,125.8 2,404.6
Overall Balance
of Payments 4,965.5 119.3 3,137.3 3,749.0 -989.3 2,166.4 1,412.2 3,589.4 4,269.8 5,821.7 820.3 2,263.0
FX Reserves 142,403.5 141,797.5 144,094.1 147,588.1 143,518.6 146,759.2 151,524.7 155,186.8 163,235.3 171,061.6 167,973.9 172,128.9
Change in FX
Reserves 3,985.9 -606.0 2,296.6 3,494.0 -4,069.5 3,240.6 4,765.5 3,662.1 8,048.5 7,826.3 -3,087.7 4,155.0
Estimated
intervention -979.6 -725.3 -840.7 -254.9 -3,080.2 1,074.2 3,353.3 72.7 3,778.7 2,004.6 -3,908.0 1,892.0
Source: CEIC, BOT, KBank
33
3
4. The popular source of cyber knowledge, “Wikipedia” defines and discusses “chicken” as
follows:
The game of Chicken, also known as the Hawk-Dove or Snowdrift game, is an
influential model of conflict for two players in game theory. The principle of the
game is that while each player prefers not to yield to the other, the worst possible
outcome occurs when both players do not yield.
The name "Chicken" has its origins in a game in which two drivers drive towards
each other on a collision course: one must swerve, or both may die in the crash,
but if one driver swerves and the other does not, the one who swerved will be
called a "chicken," meaning a coward; this terminology is most prevalent in
political science and economics. The name "Hawk-Dove" refers to a situation in
which there is a competition for a shared resource and the contestants can
choose either conciliation or conflict; this terminology is most commonly used in
biology and evolutionary game theory. From a game-theoretic point of view,
"Chicken" and "Hawk-Dove" are identical; the different names stem from parallel
development of the basic principles in different research areas. The game has
also been used to describe the mutual assured destruction of nuclear warfare,
especially the sort of brinkmanship involved in the Cuban Missile Crisis.
The game is similar to the prisoner's dilemma game in that an "agreeable" mutual
solution is unstable since both players are individually tempted to stray from it.
However, it differs in the cost of responding to such a deviation. This means that,
even in an iterated version of the game, retaliation is ineffective, and a mixed
strategy may be more appropriate.
In 1997, the Bank of Thailand and hedge funds had locked horns in a game of “chicken”,
with the hedge funds shorting the baht while the Bank of Thailand bought baht to defend
the peg. As bystanders became more biased towards the hedge funds, the defense
crumbled since the peg was built on a house of cards with the odds stacked against the
Thai central bank such as the long list of imbalances:
persistent current account deficits,
rising financial leverage,
land / real estate speculation,
mounting short term foreign currency debt facilitated by the Bangkok
International Banking Facilities (BIBF),
Thai firms conducting interest rate arbitrage by issuing euro convertible
debentures (ECDs) encouraged by the fallacy of no FX exchange risks
For the present situation, it looks like luck has sided with the central bank as the foreign
flows are swerving into outflows. By stepping up the FX intervention, foreign investors
were discouraged from aggressively putting more money into the Thai markets since
losses on FX will reduce their returns on the financial assets i.e. local currency capital
gains and interest rate differentials.
We agree that FX intervention and sterilization should be conducted on foreign portfolio
flows since by not doing so, Thai juristic and natural persons would become
unconsciously indebted to foreign funds, since we do not have the funds’ ownership.
Conversely, the point that we have consistently stressed is that flows belonging to Thai
juristic and natural persons i.e. current account flows should not be intervened for the
following reasons:
It represents a cross subsidy between the external side and internal side of the
economy i.e. exporters gain at the expense of the general population
44
4
5. …correspondingly, it facilitates wealth concentration. Said another way: “Spread
the pain and concentrate the gains”
Supports moral hazard as Thai exporters would be discouraged from improving
on productivity and quality for gaining a competitive advantage and continue to
look to the Bank of Thailand to be competitive based on price function alone.
Egyptian events is a reminder of the Iranian Revolution
While Egypt is not a member of OPEC, it proves to be critical to the global economy. Two
canals are vital to global trade, one is the Panama canal linking the Atlantic to the Pacific
Ocean and the other is the Suez Canal in Egypt. It is said that the Suez Canal cuts
shipping distances by about 6000 miles. Should the social unrest cause the closure of the
canal, shipping between Europe and Asia would be disrupted, causing spiraling logistic
costs, shortages of goods and services and eventually exporting inflation through out the
world.
The Iranian Revolution was a regime change from a Monarchy to an Islamic Republic.
The protest disrupted oil production and resulted in the second oil shock. Note that today,
Iran is the second largest OPEC producer after Saudi Arabia.
The jump in oil prices is an ill omen for the baht as Thailand is one of the lesser oil
efficient countries in the region given the lack of logistic developments with some railways
dating back to possibly WWII. With Thai logistics still depended on trucks and hence
diesel, the jump in crude can only mean higher demand for USD/THB to settle for oil
imports, at least for the short-term.
Fig 8. Suez canal Fig 9. First and Second Oil Shock
45
40
35
30 second oil shock
25
first oil shock
20
15
10
5
0
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85
Crude oil, Asia, USD / barrel
Source: Central Intelligence Agency Source: Bloomberg, CEIC, KBank
55
5
6. We are scaling back our USD/THB targets: 29.50 for 2Q11 and 29.00
for 4Q11
The new stance expressed by the Bank of Thailand on FX management reflects a more
hands on style, being more aggressive in limiting the USD/THB downside and more
lenient on the capping the USD/THB upside. This is a significant change from what we
saw for the earlier part of 2010. With consideration to these points, we are scaling back
our targets for USD/THB and revising them to:
29.50 for 2Q11
29.00 for 4Q11
Fig 10. KBank USD/THB model Fig 11. USD/THB Fibonacci levels
KBank USD/THB model
48 34
46
33
44
42 32
40 31
38
36 30
34 29
32
30 28
28 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11
01 02 03 04 05 06 07 08 09 10 11 12
USD/THB Min Max 23.6%
actual model 38.2% 50.0% 61.8% 76.4%
Source: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBank
We have not changed our major thesis for the USD/THB. The risk of the USD has been
temporarily dismissed from the markets for the time being. Japan’s sovereign downgrade
from AA to AA- by Standard & Poor’s is an attestation that countries can not go on
forever without fiscal discipline. Greece is a reminder and so as with the rest of the PIIGS
in the Eurozone. Beside the US Federal Government, the growing concern with the US
(the United States) is with the state and local governments’ ability to keep themselves
afloat amidst mounting debt. The following function in Bloomberg (MIFA <GO>) shows
that the likes of California, Texas, New York are experiencing ever larger deficits. This
means the Fed is unlikely to shift its ultra accommodative monetary policy anytime soon
(please see the annex to the FOMC’s recent statement). More US dollars can eventually
only mean lower prices.
Fig 12. The arguments for and against USD/THB directions
USD/THB positives USD/THB negatives
Resumption / escalation of political unrest, which Current account surpluses of Thailand, meaning,
prompts a more extended outflows of foreign portfolio exporters outnumber importers. This is a result of
flows out of Thailand irregularities in the Thai political and social landscape
Increasing probability that the Eurozone breaks up, which thwarted domestic demand
hence reallocation of foreign currency reserves back Expectation of further USD/CNY downside as to
to the USD supplement the fight against inflation
Service account outflows from SET dividend Continued Fed accommodative monetary policy,
repayments / Japan fiscal year closing meaning more USD, lower USD price
Better economic growth prospects in Asia relative to
the West
Political clarity on Constitutional amendments and
general elections
Return of Thai portfolio flows e.g. from Korean bonds
Source: KBank
66
6
7. Fig 13. The USA or USB, the United States of Bankruptcy
Source: Bloomberg, KBank
Federal Open Market Committee (FOMC) Statement January 26, 2011
Information received since the Federal Open Market Committee met in
December confirms that the economic recovery is continuing, though at a rate
that has been insufficient to bring about a significant improvement in labor market
conditions. Growth in household spending picked up late last year, but remains
constrained by high unemployment, modest income growth, lower housing
wealth, and tight credit. Business spending on equipment and software is rising,
while investment in nonresidential structures is still weak. Employers remain
reluctant to add to payrolls. The housing sector continues to be depressed.
Although commodity prices have risen, longer term inflation expectations have
remained stable, and measures of underlying inflation have been trending
downward. Consistent with its statutory mandate, the Committee seeks to foster
maximum employment and price stability. Currently, the unemployment rate is
elevated, and measures of underlying inflation are somewhat low, relative to
levels that the Committee judges to be consistent, over the longer run, with its
dual mandate. Although the Committee anticipates a gradual return to higher
levels of resource utilization in a context of price stability, progress toward its
objectives has been disappointingly slow. To promote a stronger pace of
economic recovery and to help ensure that inflation, over time, is at levels
consistent with its mandate, the Committee decided today to continue expanding
its holdings of securities as announced in November. In particular, the Committee
is maintaining its existing policy of reinvesting principal payments from its
securities holdings and intends to purchase $600 billion of longer-term Treasury
77
7
8. securities by the end of the second quarter of 2011. The Committee will regularly
review the pace of its securities purchases and the overall size of the asset-
purchase program in light of incoming information and will adjust the program as
needed to best foster maximum employment and price stability. The Committee
will maintain the target range for the federal funds rate at 0 to 1/4 percent and
continues to anticipate that economic conditions, including low rates of resource
utilization, subdued inflation trends, and stable inflation expectations, are likely to
warrant exceptionally low levels for the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial
developments and will employ its policy tools as necessary to support the
economic recovery and to help ensure that inflation, over time, is at levels
consistent with its mandate. Voting for the FOMC monetary policy action were:
Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A.
Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I.
Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; Kevin M. Warsh; and Janet L.
Yellen.
Playing “chicken” with inflation?
Economics is the study of opportunity costs and hence any decisions taken by economic
agents will incur a trade off. The inconsistency in monetary policy of pricing baht with
respect to other currencies (FX exchange rates) and with respect to time (interest rates)
might be causing more problems than it solves. The riots in Tunisia and Egypt is said to
be partly attributable to rising inflation. In layman’s term, inflation simply means that one
is getting poorer as to oppose to getting gaining prosperity.
The rise of China in the global economy is proving to more like a double edge sword. On
the positive side, it is serving as a large production base as well as becoming a large
market for goods and services. On the other hand, it is clear that the planet is being
strained to supporting a population with over 1.36 billion with growing wealth of nearly
10% a year.
Coupled with more frequent supply shocks from nature i.e. floods, drought, diseases, it is
no wonder as to why the prices of commodities, whether it is metals, energy or
agriculture have consistently climb. Fig 14 shows that before the fall of Lehman Brothers,
there is a high correlation between China’s nominal GDP and the CRB (Commodity
Research Bureau) index of 19 commodities including agriculture, energy and metals.
Fig 14. China’s nominal GDP & CRB commodity index Fig 15. Not just coincidence
CRB index
100000 500
500
90000
450
80000 450
70000 400 y = 0.0044x + 121.16
400
60000 350 2
R = 0.8826
50000 350
40000 300
30000 300
250
20000 250 from Dec 99 to Jun 08
200
10000
0 150 200
99 00 01 02 03 04 05 06 07 08 09 10 150
10000 20000 30000 40000 50000 60000 70000
CH nominal GDP 4Q moving sum, CNY bn, left CRB index, right CH nominal GDP, CNY bn
Source: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBank
88
8
9. Fig 16. …neither is this: China’s nominal GDP & Thai
Fig 17. …as well as explaining a lot
CPI
TH CPI index
100000 115
115
90000
110
80000 110 y = 0.0004x + 77.118
70000 105 2
R = 0.9389
105
60000 100
50000 100
40000 95
30000 95
90
20000 90
85
10000
0 80 85
00 01 02 03 04 05 06 07 08 09 10 80
10000 20000 30000 40000 50000 60000 70000 80000 90000 100000
CH nominal GDP 4Q moving sum, CNY bn, left TH CPI index, right CH nominal GDP, CNY bn
Source: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBank
The question is, how can an increase in Thai policy rates control Thai inflation if inflation
is more of a function of regional supply and demand rather than just Thai supply and
demand? After all this is by design via all the Free Trade Agreements sign for regional
economic integration. Fig 17 shows that size of the Chinese economy has a large
influence on Thailand’s inflationary environment.
So, it seems that by playing “chicken” with portfolio flows, the central bank is also playing
“chicken” with inflation. By allowing the baht to weaken amidst rising commodity prices,
the transmission of imported inflation will be much more rapid.
The Bank of Thailand’s recent inflation report strongly indicates a fear of rising inflation
and that core inflation might get out of hand if interest rates remained low. The following
table is the probability distribution for core inflation going forward. With the assumption
that the repo remains at 2.25%, there is a 43% probability that core inflation will exceed
the 3% upper band in 3Q11 and a 55% probability for 4Q11.
Fig 18. BOT Inflation Report, Core CPI probability distribution
Ranges: % 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12
>3 0% 12% 43% 55% 11% 6% 3% 3%
2.5 3.0 2% 26% 31% 28% 24% 17% 11% 11%
2.0 2.5 22% 34% 19% 13% 32% 31% 25% 26%
1.5 2.0 51% 21% 6% 3% 23% 29% 32% 32%
1.0 1.5 23% 6% 1% 0% 8% 13% 21% 20%
0.5 1.0 2% 1% 0% 0% 2% 3% 7% 6%
<0.5 0% 0% 0% 0% 0% 0% 1% 1%
Source: BOT Inflation Report, Jan 2011
The major source of unease for the central bank is that economic growth has closed the
output gap. In layman’s term, fig 19 shows what an output gap is. If the actual growth is
above trend (in this figure, it is a simple best fit regression line), it suggests that the
output gap has closed, meaning that there is little slack left in the production side. This
would then indicate that the pass through of inflation (the depreciation rate of money)
would be more readily transmitted. A case in point is our current problem with palm oil. If
there is not enough slack on the supply side, there will not be enough goods to go around
and prices have to rise anyways. Actually price ceilings might exacerbate the problem as
black markets form where the price sold is higher than the price ceiling.
99
9
10. Fig 19. Output gap has closed Fig 20. KBank BOT repo model
5,000,000 %
6
4,500,000
5
4,000,000 above potential growth
4
3,500,000 3
long term trend
3,000,000 2
below potential growth
2,500,000 1
2,000,000 0
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 01 02 03 04 05 06 07 08 09 10 11 12
Thai GDP, 1998 price, 4Q moving sum Linear (Thai GDP, 1998 price, 4Q moving sum) actual model
Source: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBank
We have inputted the assumptions suggested by the BOT Inflation Report which we
believe that the MPC also believes in these assumptions, after all, BOT scholarships are
not cheap and easy to come by. Fig 20 shows our repo model which is a behavioral
model. Simply it gauges how the MPC responds to key economic data points (e.g. growth
and inflation) as reflected in the repo rate. With the new assumptions, we view that the
BOT is likely to take policy rates up to 3.25% by the end of the year, as opposed to our
earlier call of 2.75%. The release of the MPC minutes (the first ever) shed a lot of light of
their concerns for growing potential financial imbalances.
Minutes of the Monetary Policy Meeting of the Monetary Policy Committee
Bank of Thailand
12 January 2011
Publication date: 26 January 2011
Members Present Prasarn Trairatvorakul (Chairman and Governor), Atchana
Waiquamdee (Vice Chairman and Deputy Governor, Monetary Stability),
Suchada Kirakul (Deputy Governor, Corporate Support Services), Ampon
Kittampon, Praipol Koomsup, Siri Ganjarerndee, Krik-krai Jirapaet
Financial Markets
The Thai baht was volatile, appreciating relative to the US dollar on the back of
capital inflows while depreciating in the beginning of 2011 due to sales of equity
by foreign investors after better-than expected US economic data. Going forward,
investors are expected to give greater weight to recovery in major countries,
resulting in greater two-way movement of the baht as opposed to continued
appreciation pressure observed in the previous year. In addition, the yield curve
shifted slightly upwards following the previous MPC meeting reflecting market
pricing of an interest rate hike this meeting. The majority of market participants
surveyed expected the current MPC meeting to result in a rise in the policy rate
by 0.25 percentage points while some expected an overall rise of 0.50-1.00
percentage points in 2011.
International Economic Conditions
Risks to global economic growth have fallen. The US economic recovery
continued to strengthen. A survey of economists indicated that the majority
viewed that the US economy would grow faster than forecasted and that
employment would improve although risks from house prices remained.
Nevertheless, certain MPC members expressed concerns regarding the
continually high rate of unemployment. The European economy stabilized
although money markets remained volatile due to concerns over sovereign debt.
However, core member countries, especially Germany, are projected to become
1010
10
11. drivers of growth. The Japanese economy still faced deflation while the
appreciating yen may impede growth going forward. The Asian economy
continued to grow on the back of domestic demand and exports destined to both
within the region as well as new markets with high growth potential. Overall, the
region is becoming less reliant on the G3 economies. However, the risk to
inflation for the region as a whole increased significantly. The uneven growth of
advanced economies and emerging markets has led to varied monetary policy
responses. Advanced economies pursued accommodative monetary policy to
safeguard economic recovery while emerging markets tightened to maintain price
stability and are expected to accelerate the pace of interest rate normalization in
2011. As a result, challenges for Asia going forward are likely to come from
capital flow volatility and the appropriate pacing of monetary policy tightening.
Domestic Economic Conditions
Thai economic growth was projected to return to its long-term trend. The Thai
economy continued to expand in Q4 of 2010 from the previous quarter in line
with domestic and external demand. Going forward, growth will be supported by
1) private consumption expansion on the back of both agricultural and non-
agricultural income, increase in the minimum wage, low unemployment and
robust consumer confidence and 2) private investment, which despite some
slowdown after accelerating in the prior period, should expand going forward due
to favorable business confidence, high capacity utilization in many industries, and
future investment plans to meet internal and external demand for goods in
services and 3) fiscal stimulus from government income support programs for
mostly low-income earners and government investment for both large projects
and state enterprises which was expected to increase from the previous year.
Export growth in the previous year exceeded expectations and was expected to
continue its growth trend into 2011 due to Chinese and ASEAN economic
expansion as well as the rising trend in advanced orders. In addition, various
research houses projected strong export growth in 2011 supported by a rising
export prices (except for fisheries where there is low pricing power) which was
expected to partly mitigate the adverse effects of baht appreciation. Tourism
activity was solid and was expected to expand going forward.
In the monetary sector, private credit expanded well together with overall
economic growth. The expansion in commercial bank credit was primarily due to
demand from households. Corporate loans also increased and were projected to
grow continuously in 2011. Commercial banks rapidly raised both deposit and
loan rates following the policy rate hikes.
In regards to price stability, inflation pressure increased from the previous period.
Headline inflation accelerated in line with the rise in wages while core inflation
picked up due to the pass-through of production costs into goods prices,
especially prepared food and seasonings and condiments. The MPC assessed
that inflation pressure going forward has increased due to both cost-push and
demand pull factors. Cost-push factors include: 1) upward trend in oil and
commodity prices on the back of global economic expansion; 2) increased pass-
through from the Production Price Index (PPI) into Consumer Price Index (CPI)
as authorities allowed price increases in many product categories; and 3) gradual
pass-through of production costs to consumers as producers’ ability to absorb
such costs became more limited. Demand-pull factors include: 1) a diminishing
output gap as output growth neared potential while producers have revised their
inflation expectations upwards for some time. These factors would speed up
price adjustment going forward. In addition, some MPC members expressed
concerns over the possibility that inflation may breach its target this year.
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12. Considerations for Monetary Policy.
The MPC viewed that the risk to inflation had increased relative to the risk to
growth compared to the previous meeting.
The global economic recovery strengthened compared to the previous meeting.
The risk of a double dip recession in the US declined while Asia faced the
challenge of rising prices, particularly those of commodities. The Thai economy
continued to return to its long-term growth trend. The MPC viewed that domestic
demand would become the principal driver of growth in the coming period.
In addition, strong export performance pointed to Thailand’s economic resilience
in face of the baht appreciating in the previous period.
Inflationary pressure clearly increased due to rising oil and commodity prices, the
return of the Thai economy to its long-term growth trend and pent-up pressure
from delayed price adjustments. At the same time, increases in the minimum and
civil service wages may boost consumption expenditures more than expected
and lead to a rise in inflation expectations going forward. Some MPC members
were concerned that low real interest rates may foster financial imbalances,
depress savings and lead to asset bubbles in the future.
MPC members were unanimous in seeing the need to maintain continuity in
signaling rate normalization. Robust economic expansion together with
significantly increased inflationary pressure led to some members discussing the
possibility of a rate hike of 0.5 percentage points. Nevertheless, the majority of
MPC members viewed that policy rate adjustment should be gradual while taking
into account that the neutral rate depends on changing economic circumstances.
The MPC therefore decided unanimously (7 to 0) to raise the policy interest rate
by 0.25 percentage points per annum, from 2.00 to 2.25 per cent per annum,
effective immediately.
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14. Disclaimer
For private circulation only. The foregoing is for informational purposes only and not to be considered as an offer to buy or
sell, or a solicitation of an offer to buy or sell any security. Although the information herein was obtained from sources we
believe to be reliable, we do not guarantee its accuracy nor do we assume responsibility for any error or mistake contained
herein. Further information on the securities referred to herein may be obtained upon request.
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