US rate rise expected, Thai outflows surge, baht weakens

Strong baht appreciating 2-3% this year weakens a little, good news for Thai exports & tourism industry.

INTERNATIONAL ECONOMICS & EXCHANGE RATE

US rate rise expected, Thai outflows surge, baht weakens

8/03/2017
Pawee Sirimai

Hot money is likely to keep flowing out of Thailand's bond market in anticipation of a US central bank (Federal Reserve, the Fed) interest rate hike this month.

In an important speech last week, Fed chairwoman Janet Yellen said the rate-setting committee would probably have to tighten the interest rate (raise the interest rate) in March.

Raising the long-stalled US policy interest rate is likely to trigger capital flows out of emerging markets and back to the US.

After Ms Yellen's statement, there was a rise in capital outflow from short-term Thai bonds, weakening the baht and reversing previous appreciation in the baht.

The baht has appreciated 2-3% from the beginning of the year, becoming one of the five strongest currencies in Asia this year.

This is according to Tim Leelahaphan, an economist at Maybank Kim Eng Securities Thailand.

HOT MONEY FROM SPECULATION FLOWING OUT

"The baht's appreciation is not caused by capital flows into Thai stocks or long-term bonds, but rather by hot money from speculation flowing into short-term Thai government bonds," the economist said.

"We started to see this hot money flowing back to the US late last week, and the outflow will be even stronger in the coming week and a half before the Fed's decision."

EXPECT FURTHER BAHT DEPRECIATION IF US FED KEEPS RAISING INTEREST RATES

The economist said the constant outflow in this period before the Fed decision will lead to further depreciation of the baht.

Maybank expects the Fed to raise rates two or three times this year, with the first increase likely to occur at the March 14-15 meeting.

The trend of baht depreciation may continue throughout the year to about 36.50 baht against the US dollar by the end of the year, which would mark a 4-5% decrease from the current value of around 35 baht.

FED MAY NOT RAISE INTEREST RATE NOW

Some economists do not expect the Fed to raise rates at the coming meeting, as US GDP growth showed unsatisfying results in the fourth quarter of last year with US economic growth growth at a low 1%.

The other major economies -- Japan, China and the EU -- remain weak, so the Fed to help accelerate global growth the Fed might decide not to raise the policy interest rate.

DEPRECIATION MEANS CURRENCY BECOMES LESS VALUABLE BUT EXPORTS & TOURISM  MORE COMPETITIVE

Remember that in economics currency depreciation means a currency becomes less valuable than other currencies. Another way to say this is that the currency weakens.

In the above example, you get 35 baht per dollar and then you get 36.5 baht per dollar which means people with the baht get less, meaning their baht has decreased in value, the baht has depreciated or experienced depreciation.

Baht depreciation is bad for Thai tourists traveling overseas because their baht will buy less and also for Thais importing foreign goods.

Bath depreciation, however, is good for Thai exports and the Thai tourism industry because more tourists will likely come to Thailand because they get more for their money.

Another economist expects the baht to depreciate to 36 against the US dollar and then fall even further to 37 by year-end.

RATE RISE IN THAILAND TO PREVENT OUTFLOWS POSSIBLE

It is possible that the Bank of Thailand might raise its policy interest rate later this year to prevent capital outflows if the Fed moves more aggressively than expected.

Thailand's rising inflation, which started late last year, could also pressure the Bank of Thailand to raise its policy rate for the first time in almost two years.

The Thai central bank has observed the outflow with no serious concerns, saying the flow has helped tame the pace of the rapidly appreciating Thai baht.

Some economists do not expect the Fed to raise rates at the coming meeting, as US GDP growth showed unsatisfying results in the fourth quarter of last year with growth at a low 1%.

The other major economies -- Japan, China and the EU -- remain weak, so the Fed to help accelerate global growth the Fed might decide not to raise the policy interest rate.

http://www.bangkokpost.com/business/finance/1210793/outflows-surge-on-us-rate-rise-signal

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