Baht forecast to hit 36.5 by mid-year
Dollar set to rise on Trump’s policies
The baht is expected to weaken to 36.5 against the greenback in the first half of this year before reversing the trend to become firmer at 35.5 at the end of the year as US President Donald Trump might not be able to deliver as strong economic growth as expected, says TMB Bank (TMB).
“As the market’s expectations for Mr Trump’s policies are rather high, coupled with the fact that the Fed (Federal Reserve) has signalled multiple increases in the policy rate this year, we expect the US dollar to keep appreciating in the first half of this year,” said Saranya Phuphatana, executive vice-president and head of capital markets at TMB.
Since the US presidential election in November last year, the market has priced in the new president’s election promises to spur growth. This has triggered capital repatriation to the world’s largest economy and pushed up the greenback, he said.
“But the possibility of implementing these policies remains in doubt and if it turns out that he can’t deliver all that he has promised, the US dollar could depreciate in the second half of this year,” said Mr Saranya.
TMB forecasts the US central bank this year will raise its target rate twice, by 25 basis points each time, while the Bank of Thailand’s Monetary Policy Committee (MPC) will keep its policy rate on hold at 1.5% throughout the year to accommodate the economic recovery.
“Even though we expect inflation to edge up this year, the main engines of the economy, such as private consumption and investment, remain lacklustre. This has lead us to believe that the MPC will stand pat on the rate this year,” he said.
Given the rise in corporate bond yields following a spike in the government’s long-term bond yields, the private sector’s financial costs are expected to increase this year.
With rising bond yields, companies will likely shift to bank loans, with rising loan demand potentially forcing lenders to start raising their rates, he said.
“We think that there’s still the possibility that commercial banks might increase their minimum lending rate despite the unchanged policy rate if loan demand is high this year,” said Mr Saranya.
TMB chief executive Boontuck Wungcharoen recently f orecast that the banks’ lending rates will start rising in the second half of this year due to stronger loan demand.
Meanwhile, a report by Maybank Kim Eng said Thailand’s and Indonesia’s resilience have shown significant improvements since the Fed’s tapering in 2013.
Thailand’s resilience has strengthened because of its ballooning current account surplus, which has widened to more than 10% of GDP from a small deficit during the tapering. This is the widest current account surplus since the 1998 Asian crisis, when investment collapsed, it said.
Robust tourism receipts and weak imports have improved its current account.
The Bank of Thailand has taken steps to encourage capital outflows (one of the few central banks moving in the opposite direction). Foreign reserves are at relatively high levels, but have not increased significantly (at $172 billion or 4.88 trillion baht) as a result, still below the pre-taper tantrum level of $182 billion.
For Indonesia, foreign reserves have recovered most strongly (+$11.2 billion) among Asean members.
Higher trade surpluses, capital inflows, a lower current account deficit, and a successful tax amnesty program have helped. The reserves to import ratio is at a comfortable 9.9 times and reserves to short-term external debt is at 2.8 times.
Portfolio flows to the ASEAN-5 have recovered as of the third quarter last year, after contracting in 2015 .
A recent Fed rate hike in December last year may have led to a pullback in specific countries. In recent years, portfolio flows appear more stable for Indonesia but more volatile for Malaysia. Singapore, which used to witness more volatile portfolio flows pre-quantitative easing, has also seen lower volatility, it said.
“We take stock of standard resilience metrics and assess how they have changed since the tantrum episode. The threeand-a-half year interlude since 2013 has given policymakers some breathing space and time to shore up their reserves and buffers to face the eventuality of another future shock,” it said.
The Philippines has shown some slight deterioration in its resilience, largely because of the sharp fall in its current account surplus.
The fall is largely due to higher
infrastructure-related imports and commodity prices as the Philippines is a net commodity importer.
The country’s peso may face greater pressure if the current account slips into a deficit in the coming years. The Philippines has not had a current account deficit since 2003. Foreign reserves have been sliding in recent months, falling from a high of $86 billion in September 2016 to about $81 billion in December.
Reserves cover to imports and shortterm external debt nevertheless remain comfortably high, at about 12.2 times and 6.1 times respectively.
Malaysia’s resilience has not materially changed since the so-called “tantrums” episode in 2013. Foreign reserves fell sharply during that time from a high of $141 billion and have not recovered since.
FX reserves were $95 billion at the end-2016.