BoT: Thailand not at risk from taper

Low inflation, jobless rate cushion impacts

Thailand's economy can withstand a downdraft from the tapering of quantitative easing (QE) in the US, finds a new report from the Bank of Thailand.

The report entitled International Spillovers of the Implementation and Termination of Quantitative Easing examines the likely impact on Thailand when the Federal Reserve starts to scale back its US$85-billion monthly asset purchase programme.

But the bank's researchers conclude that Thailand's strong fundamentals will shield it from adverse effects.

"If Thailand can maintain investment environment, continue developing the country's basic factors and boost investors' confidence in long-term structural problem-solving, the possibility of sudden capital outflows in the period ahead from external factors which could trigger adverse effect to the Thai economy will be lowered," the report said.

In addition to its low unemployment rate of 0.6%, Thailand has an inflation rate of only 0.75% and substantial foreign reserves, totalling $168.9 billion on Sept 6, according to central bank data.

Investors around the world are now awaiting the outcome of a US Federal Open Market Committee (FOMC) meeting on Sept 17-18, expected to trigger a $10-15 billion reduction in QE spending.

But the global impact of lower US stimulus measures will be muted, as markets have already anticipated the move and the taper is likely to be gradual, according to the report.

A nascent global economic recovery could offer a further buffer.

Kampon Adireksombat, head of Tisco Securities' economic strategy unit, said the upcoming FOMC meeting is likely to trim monetary stimulus to $70 billion each month, as the US economy is now picking up.

In his view, capital flow will continue to return to Thailand, while the baht will stand at 31.50 per dollar this year.

The Bank of Thailand can apply interest rate and baht exchange rate policies to cushion the impact of the Fed's taper, he said. The rate-setting committee may keep its 2.5% policy rate, as the Thai economy is still growing moderately, then raise it to 3% in the second half of 2014, he added.

But Benjarong Suwankiri, a first vice-president of TMB Analytics, expects the Fed to maintain its current level of monthly asset purchases until the end of the year, when US unemployment and consumption data for December are released.

He expects the Fed's upcoming meeting to either hold off the taper or only scale back the programme by $5 billion each month.

A sharp reduction in US stimulus spending to $65 billion a month would hit the baht and cut capital flows into Thailand, he added. But if the programme stays at $75 billion or above, the baht will rise along with foreign investment.

In any case, the Fed is set to end its money-pumping programme by the start of the third quarter next year, as the US economy will likely be back to its normal growth path, added Mr Benjarong.

The Bank of Thailand will probably maintain its current benchmark interest rate if the Fed only implements a gentle taper, he added.

Before deciding whether to cut the rate, the central bank is likely to assess economic data in August, he said.

If exports continue to grow sluggishly, then the bank might cut the rate by 25 basis points this year. But the Monetary Policy Committee is expected to raise the policy interest rate by 25 to 50 basis points in the fourth quarter next year, he added.

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Writer: Pathom Sangwongwanich
Position: Business Reporter