A potential spike in the US interest rate could prompt the exit of foreign investors from the Thai capital market next year, but the capital outflows will not be significant as the value of holdings is marginal and Thailand has accumulated a sizeable reserve buffer, the central bank chief says.
"The capital outflows will not be large because foreign holdings of Thai bonds is around 7-8% [of outstanding bonds ]. We're different from Malaysia and Indonesia, where foreign holdings of bonds stands at 34% and 30%, respectively. Both countries' capital outflows are more sensitive than Thailand's," Bank of Thailand governor Veerathai Santiprabhob said in an exclusive interview with Post Publishing.
"Thailand's capital account surplus this year is around 10% of GDP [gross domestic product]. Fund flows to Thailand amounted to US$4 billion while we ran a current account surplus of around $40 billion. Even if there are some capital outflows, we have a strong enough buffer, which reduces the volatility of capital mobility and the baht. Baht volatility stayed at 4.8%, while Malaysia's and Indonesia's currency volatility nearly doubled to 6-8% (until late November)."
A selling spree by foreigners in the Thai bond and equity markets was spotted in October and November. However, as of Dec 9, foreigners also bought Thai shares and bonds, yielding a net of 80.8 billion baht and 63 billion, respectively.
Thailand's foreign reserves amounted to $175.6 billion as of Dec 2.
Mr Veerathai said there needs to be a clear-cut policy from president-elect Donald Trump on the amount of funding the US government will raise to finance infrastructure projects, although the impact of such investments will take around a year to manifest.
Mr Trump's policy to slash corporate income tax can be delivered at faster pace with a more immediate impact, he said.
Trump's protectionist stance on trade and fiscal expansion has been perceived to stoke inflation, which is expected to lead to more US rate hikes next year. The market anticipates two interest rate hikes in 2017, compared to the one increase expected to be seen this year.
The baht has weakened at a lower pace than the neighbouring countries' currencies in the past 1-2 weeks due to its high current account surplus, but it cannot be said whether this slower pace of retreat will result in Thailand losing competitiveness, as it takes a longer time to gauge this, the incumbent governor said.
He estimated that the country's current account surplus next year will be smaller than this year largely due to the rebound in energy prices and increasing imports for the government's big-ticket infrastructure developments.
To balance capital inflows and outflows, the Bank of Thailand is still moving towards easing capital outflow control and jointly developing new financial instruments with financial institutions, he said, noting that the current capital control regulations are a legacy of the country's financial meltdown in 1997, and are capital outflow control-oriented regulations.
The central bank is likely to step into the foreign exchange market if the baht is too volatile, but what it wants is that investors should learn how to ride through the fluctuation, he said.
Mr Veerathai assured that lower volatility and the buffer can offset negative impacts of the slower weakness of the baht against the greenback, and the fall could result in being a boon to trade growth.
The baht has fallen by around 1% against the dollar, while the Malaysian ringgit and the Indonesian rupiah declined by 3% this year.
Direct currency settlement for cross-border trade can be an efficient tool to stem risks from currency volatility and reduce the costs incurred by converting from one currency into the US dollar, and again from the dollar into a third currency, he said.
Baht-ringgit direct settlement transactions have increased since its implementation in March as such direct transactions can remove the risks from the US dollar's volatility and save hedging costs, he said, adding that baht-yuan direct settlement transactions have also increased to 2-3% of Thailand and China's trade value.
He expects that the Thai economic recovery will continue to gather steam next year in light of global improvements.
"The US and German economies are better, the Chinese economy will be all right in the short run, while Japan and the UK are not doing well. The global economy will be a better backdrop. We need to be cautious as shocks are still likely. For example, if Mr Trump imposes trade protection, it will take a toll on export-dependent countries. German and French elections could also have surprise results," he said.
He is sanguine the Thai economic growth will continue next year, though it is still not broad-based as some sectors, including farming, continue to struggle, he said.
The central bank forecasts that the country's economy will expand 3.2% this year and next, and the Monetary Policy Committee (MPC) is set to review its economic growth forecast in this year's final meeting on Dec 21.
Mr Veerathai said external headwinds are more worrisome than internal ones.
Tourism is likely to improve next year if the government manages to alleviate the impact from the recent crackdown on illegal tour operators, which has deterred hundreds of thousands of foreign tourists this year, he said.
Much-needed private investment will improve next year on the back of the high value of Board of Investment's (BoI) approved privilege applications, and the need to upgrade technology, he said.
"The amount of investment will still need to be monitored. Sectors which might experience production capacity surplus might earmark technological upgrades. The government's tax holiday for investment, financial costs are expected to start increasing, and state investment in infrastructure projects will be a boon to private investment. In my view private investment next year will improve," he said.
Tepid private investment is a common global problem as the service sector does not need high capital investment, new technology requires lower investment and more countries are faced with ageing populations.
"Technological upgrades could be the major contributor to improving private investment," he said.