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Virabongsa worried about bubbles, supports a cut in interest rate

The Nation

BANGKOK: -- Pressure is bearing down on the Bank of Thailand's Monetary Policy Committee, even from its own chairman Virabongsa Ramangkura, to cut the policy rate at its February 20 meeting amid a flood of foreign funds that has boosted financial markets.

"Companies' financial performances today and six months ago are not different, but their stock and bond prices have more than doubled. This is coming with the baht's appreciation.

"The symptoms show that if the situation is not closely watched, financial bubbles could take shape. And if this happens, the property market will be the next," Virabongsa told a seminar on "Thailand's Economic Outlook 2013" hosted by the Thai Institute of Directors.

Estimating that foreigners carry 0.75-1 per cent in borrowing costs, Virabongsa said the inflows would dry up if Thailand's policy rate was not much different than that.

The policy rate was cut by 25 basis points last October 17 and has stayed there since then. The MPC meets every 45 days.

"Hot money" from abroad seeking quick returns has been seen flowing into the local stock and bond markets. Yesterday, the Stock Exchange of Thailand Index gained 12.05 points or 0.81 per cent to close at 1,490.82 on turnover of Bt62 billion. The index rose even though foreigners sold off a net Bt1.4 billion of Thai shares. Their net-buy position this month to date has slipped to Bt13.3 billion.

Supavud Saichuea, managing director of Phatra Securities, envisages the baht climbing to 28 per dollar late this year and even 27 next year on Thailand's favourable growth record compared to developed economies and its current-account surplus. With the global environment continuing to support bets on riskier assets, Thailand should keep attracting funds throughout this year and next.

The baht edged up 0.2 per cent to 29.79 per dollar as of 3.12pm in Bangkok. With a 2.7-per-cent gain this month, it is the second best performer after India's rupee. More inflows are expected, as Thailand's bond yields are better than in developed economies.

Virabongsa said that if the interest-rate gap between Thailand and developed economies, chiefly the US at 0.25 per cent and Japan at 0.075-0.9 per cent, remains, the bubble syndrome in the Thai stock market will intensify.

"The most worrisome part is policy-makers don't see the connection between the interest-rate gap and capital flows. Even the BOT governor can't comment on this," he said. If this continues, "the baht will keep strengthening and the central bank has limited capability to mount a defence, as that would increase its accounting loss. The unit could then hit 28 per dollar."

Prasarn Trairatvorakul, governor of the Bank of Thailand, came out on Monday saying rate cuts alone may not tame the baht, as many other variables were at play.

Bandid Nijathaworn, a former central banker who is now president and CEO of the Thai Institute of Directors, noted that a rate cut could deter inflows but may spur spending at home. Through a proper mix of policies, inflows should be diverted to financing investment from fuelling consumption. For greater effectiveness, the government should turn the tap down on its stimulus measures and work with the central bank. A policy mix is necessary, he said, and in the absence of intervention, this will allow stable economic growth.

Sethaput Suthiwart-Narueput, executive chairman of the Thailand Future Foundation, noted that inflows will not stop soon as quantitative easing has injected a combined $10 trillion into the financial markets. The government should invest more by abandoning populist policies and increasing investment budgets.

-- The Nation 2013-01-31