Outflows surge on US rate rise signal

Outflows surge on US rate rise signal

Economists say the baht will weaken as capital from the bond market flows back into the US in anticipation of the Fed raising rates next week. PATTARACHAI PREECHAPANICH
Economists say the baht will weaken as capital from the bond market flows back into the US in anticipation of the Fed raising rates next week. PATTARACHAI PREECHAPANICH

Hot money will keep flowing out of Thailand's bond market in anticipation of a US Federal Reserve rate hike this month, says a Maybank economist.

In a speech last week, Fed chairwoman Janet Yellen said the rate-setting committee would probably have to tighten the rate in March. Raising the long-stalled policy rate is likely to trigger capital flows out of emerging markets and back to the US.

Tim Leelahaphan, an economist at Maybank Kim Eng Securities Thailand, said that after Ms Yellen's statement, there was a rise in capital outflow from short-term bonds, weakening the baht and reversing previous appreciation.

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

"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," Mr Tim 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."

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

Mr Tim said 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.

Mr Tim said the possibility exists that the Bank of Thailand will raise its policy 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 central bank has observed the outflow with no serious concerns, saying the flow has helped tame the pace of the rapidly appreciating Thai baht.

"Since the market has anticipated the possibility of an interest rate hike, we have seen money starting to flow out already," said Don Nakornthab, senior director in the macroeconomic and monetary policy department at the Bank of Thailand.

"The outflow actually helped ease the pressure of the baht's steep appreciation," Mr Don said. "If it does not disrupt the market, we don't need to do anything. Even if capital flows are irregular, we have sufficient reserves to handle it."

While most economists anticipate the same direction, Amornthep Chawla, head of research at CIMB Thai Bank, does 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.

He said the Fed will focus on GDP growth in the first quarter.

"US economic growth in the fourth quarter came in at a low 1%, so I think the Fed will wait to see if the economy ticks up in the first quarter before deciding to raise its rate," Mr Amornthep said.

He said the other major economies -- Japan, China and the EU -- remain weak, so the Fed might keep the rate on hold at the coming meeting to accelerate growth.

CIMB expects the Fed to raise the policy rate twice this year, in June and December, by 25 basis points at each time, leaving the US rate at 1% by year-end.

Mr Amornthep said he expects the baht to depreciate to 36 against the US dollar and fall to 37 by year-end.

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