.Mean S Multi Asset Strategies KBank                                                                                      ...
Key Parameters & Forecasts at Year-end                                                    2004                2005        ...
KBank THB NEER Index                                                                                                      ...
Thai inflation parameters                                                                                                 ...
KBank EUR/THB model                                                                 KBank JPY/THB model                   ...
This page has been left blank intentionally666
The West monetizes, Asia sterilizes                                                                                       ...
Fig 3. ECB’s balance sheetEUR bn                                11/11/2011   18/11/2011   25/11/2011   02/12/2011   09/12/...
One indicator that tells us that the EU has more replicated Japan is the growth rate (orlack therefore) of money supply, p...
Fig 8. Thai exports comparison to previous periods Thai export destinations          Latest data (USD mn)              as ...
election year, the Fed is not expected to stand idly by and hope that things fixedthemselves.As for the ECB, given that re...
Will the Thai Central Bank have to monetize as well?Unfortunately for the Thai currency, a recent development raises the r...
1. The fiscalization of uncompensated losses       2. The redemption of the Bt 500 billion government bonds.        Resolu...
October 15, 2002. Subscribers will be able to choose their preferred settlement                 dates so that they can pla...
general government and public sector levels was on a steady downward trend           prior to the global recession.Given t...
ASEAN trade under economic turmoil in 2012       ASEAN has gained more importance role in the world economy with       its...
Fig 19. World economy and the importance of ASEAN                                                              Fig 20. Sha...
Thailand and ASEAN: friend or foe?Trade statistics revealed that Thailand gained significant trade surplus with ASEAN,whic...
Uncertainties concerning demand yield curve steepening danger        Bond market in 2011 saw a lower trading volume compar...
Going forward, the bond market should be supported by policy rate downtrend (althoughwe expect only another 25bp cut for T...
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
K bank multi asset strategies   jan 2012
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K bank multi asset strategies jan 2012

  1. 1. .Mean S Multi Asset Strategies KBank Strategies Macro / Multi Asset The euro: a time bomb with extendable fuse January 2012 Volume 54 Euro and contagion worries uplift USD and depress risk assets…again and again…. Kobsidthi Silpachai, CFA –Kasikornbank kobsidthi.s@kasikornbank.com Based on M2 money supply growth, the US looks better than the Susheel Narula – KSecurities EU and Japan…but is that saying much? susheel.n@kasikornsecurities.com Jobs overhang and ending Operation Twist will rekindle Fed QE Kavee Chukitkasem – KSecurities in 2Q12 and again weigh on USD kavee.c@kasikornsecurities.com …but we hope local authorities juggling of FIDF losses don’t KResearch kr.bd@kasikornresearch.com equate to our own version of debt monetization Dovish external and internal factor nudges us to look for another 25bps cuts in the repo at January’s MPC Disclaimer: This report Due to post-flood renovation efforts, plus governmental must be read with the economic stimuli, the Thai economy could experience a V- Disclaimer on page 48 that forms part of it shaped recovery, after bottoming out in 4Q11 On equities, we recommend active investors focus on high-yield stocks e.g. CPF, MAKRO, EGCO, INTUCH, MAJOR, TTW and BAFS Strategic Thesis “KBank Multi Asset The euro is like a ticking time bomb whose fuse keeps getting extended. This will make Strategies” the world like a person suffering from shortness of breath. The ECB is at its wit’s end on can now be accessed on how to deal with the situation. Of late, it had lent to banks EUR489 bn in an attempt to Bloomberg: KBCM <GO> assuage the tight money market conditions. If left un-dealt with, a growing liquidity problem will eventually lead to a solvency problem. In a nutshell, while the ECB is not admitting towards doing another round of quantitative easing (QE), its actions certainly attest to such measures. Judging by M2 growth, the EU is not much different from Japan. The nerve wrecking state of affairs will hold risk assets hostage for longer and support further upside on USD/THB. While the US looks better on a relative basis, its job market will require the Fed to resume expanding its balance sheet post Operation Twist in June 2012. Hence developed markets continue to monetize their debt whilst Asian central banks try to sterilize their monetization. The burning question locally is whether the administration’s move to reverse fiscalization of FIDF losses equates to its monetization. If it does, we will have to give a serious rethink about USD/THB trajectories. Hopefully, authorities would come to the conclusion that shifting a burden around doesn’t achieve much as long as it is being shifted in the same boat. Long-term bond yields saw little increase in 2011 despite of policy rate hikes and reduction in trading volume in the second half. However, such low borrowing costs are not likely to stay as the government plans large amount of bond issuance and financing. There are risks of yield curve steepening while bond demand is less certain. As for policy rate, we continue to expect a 25bp cut in the next MPC meeting in January while BoT’s latest outlook on 2011 economic growth also suggests that further easing is possible. In anticipation of market volatility in 1Q12, we recommend active investors focus on high- yield stocks such as CPF, MAKRO, EGCO, INTUCH, MAJOR, TTW and BAFS.111 WWW.KASIKORNBANKGROUP.COM
  2. 2. Key Parameters & Forecasts at Year-end 2004 2005 2006 2007 2008 2009 2010 2011E 2012E GDP, % YoY 6.3 4.6 5.2 4.9 2.5 -2.3 7.8 1.5 4.3 Consumption, % YoY 6.2 4.6 3.0 1.6 2.7 -1.1 4.8 2.5 2.8 Investment Spending, % YoY 13.2 10.5 3.9 1.3 1.2 -9.2 9.4 4.6 5.5 Govt Budget / GDP % -0.2 0.3 -0.7 -1.5 -1.0 -5.6 -3.2 -2.7 -4.8 Export, % YoY 21.6 15.2 17.0 17.3 15.9 -14.0 28.5 16.7 5.0 Import, % YoY 25.7 25.8 7.9 9.1 26.5 -25.2 36.8 23.6 5.0 Current Account (USD bn) 2.77 -7.6 2.3 14.1 1.6 21.9 14.8 10.1 12.8 CPI % YoY, average 2.8 4.5 4.6 2.3 5.5 -0.9 3.3 3.9 3.9 USD/THB 38.9 41.0 36.1 33.7 34.8 33.3 31.4 31.55 29.50 Fed Funds, % year-end 2.25 4.25 5.25 4.25 0.25 0.25 0.25 0.25 0.25 BOT repo, % year-end 2.00 4.00 5.00 3.25 2.75 1.25 2.00 3.25 3.00 Bond Yields 2yr, % year-end 2.78 4.94 5.02 3.91 1.98 2.17 2.35 3.11 3.25 5yr, % year-end 4.0 5.3 5.1 4.5 2.2 3.6 2.75 3.16 3.50 10yr, % year-end 4.9 5.5 5.4 4.9 2.7 4.3 3.25 3.35 4.00 USD/JPY 102.5 118.0 119.1 111.8 90.7 93.0 82.0 76.9 80 EUR/USD 1.36 1.18 1.32 1.46 1.40 1.43 1.40 1.30 1.30 SET Index 668.1 713.7 679.8 858.1 450.0 734.5 1040 1025.3 1100 Source: Bloomberg, CEIC, KBank, KResearch, KSecuritiesKBank Thai Government Bond Rich / Cheap model Bps (actual YTM vs. model) 20.00 15.00 10.00 5.00 0.00 -5.00 -10.00 -15.00 3 mth avg Now -20.00 LB296A LB123A LB133A LB137A LB145B LB14DA LB155A LB15DA LB167A LB16NA LB175A LB183B LB191A LB196A LB198A LB19DA LB213A LB24DA LB267A LB283A LB396ASource: Bloomberg, KBank222
  3. 3. KBank THB NEER Index KBank USD/THB – FX Reserves / USD Majors model KBank USD/THB model Jan 1995 = 100 KBank THB Trade Weighted Index 48 105 46 44 100 + 1 std 42 d 40 95 38 36 90 average 34 85 32 30 80 -1 std dev 28 01 02 03 04 05 06 07 08 09 10 11 12 75 00 01 02 03 04 05 06 07 08 09 10 11 12 actual modelSource: Bloomberg, KBank Source: Bloomberg, KBankFX reserves – USD/THB model DXY – USD/THB model USD/THB USD/THB since 2001 48 50 46 y = -7.3216Ln(x) + 68.66 44 2 R = 0.8888 45 42 40 40 38 36 35 y = 30.109Ln(x) - 97.424 2 34 R = 0.7692 32 30 30 28 25 26 70 75 80 85 90 95 100 105 110 115 120 125 25 50 75 100 125 150 175 200 225 250 DXY FX reserves to USD/THB mapping current 2012 forecast FX reserves, USD bn DXY to USD/THB mapping currentSource: Bloomberg, KBank Source: Bloomberg, KBankKBank BOT repo model (model not updated) SET forward dividend yield vs. 10yr bond yield % % 5.5 5.0 9 4.5 8 4.0 7 3.5 6 3.0 5 2.5 4 2.0 3 1.5 2 1.0 1 0.5 0 0.0 03 04 05 06 07 08 09 10 11 12 01 02 03 04 05 06 07 08 09 10 11 12 13 actual model 10yr yields SET forward dividend yieldsSource: Bloomberg, KBank Source: Bloomberg, KBank333
  4. 4. Thai inflation parameters Thai contribution to GDP growth 25% % yoy 20% 15 15% 10 10% 5 5% 0 0% -5 -5% -10 -10% -15 -15% 1Q09 3Q09 1Q10 3Q10 1Q11 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Private consumption Government Consumption Gross fixed capital formation CPI yoy PPI yoy Core CPI yoy Inventory change Net exports GDP yoySource: CEIC, KBank Source: NESDB, KBankImplied forward curve: swaps Implied forward curve: TGBs % Implied forward rate shifts (IRS) % Bond yields implied curve shifts 4.00 4.00 3.75 3.50 3.50 3.00 3.25 tenor (yrs) 2.50 3.00 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Jan-12 Apr-12 Jul-12 Jan-13 tenor (yrs) Jan-12 Apr-12 Jul-12 Jan-13Source: Bloomberg, KBank Source: Bloomberg, KBankUS 2yr yields and implied forward US 5yr yields and implied forward 7.0 8 6.0 7 5.0 6 5 4.0 4 3.0 3 2.0 2 1.0 1 0.0 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 2yr yields, % implied forwards 5yr yields, % implied forwardsSource: Bloomberg, KBank Source: Bloomberg, KBank444
  5. 5. KBank EUR/THB model KBank JPY/THB model EUR/THB JPY/THB 43.0 56.0 54.0 41.0 52.0 39.0 50.0 37.0 48.0 46.0 35.0 44.0 33.0 42.0 31.0 40.0 29.0 38.0 36.0 27.0 34.0 25.0 01 02 03 04 05 06 07 08 09 10 11 12 01 02 03 04 05 06 07 08 09 10 11 12 actual model actual modelSource: Bloomberg, KBank Source: Bloomberg, KBankKBank GBP/THB model KBank CNY/THB model GBP/THB CNY/THB 5.8 78.0 5.6 73.0 5.4 68.0 5.2 63.0 5.0 58.0 4.8 4.6 53.0 4.4 48.0 4.2 43.0 4.0 01 02 03 04 05 06 07 08 09 10 11 12 01 02 03 04 05 06 07 08 09 10 11 12 actual model actual modelSource: Bloomberg, KBank Source: Bloomberg, KBankKBank THB/VND model KBank AUD/THB model THB/VND AUD/THB 800 35.0 750 700 33.0 650 31.0 600 29.0 550 500 27.0 450 25.0 400 350 23.0 300 21.0 01 02 03 04 05 06 07 08 09 10 11 12 01 02 03 04 05 06 07 08 09 10 11 12 actual model actual modelSource: Bloomberg, KBank Source: Bloomberg, KBank555
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  7. 7. The West monetizes, Asia sterilizes Kobsidthi Silpachai, CFA - KasikornbankNew Year, Same Old Problems, and more on the way kobsidthi.s@kasikornbank.comConservatives would say their “businesses make money the old fashion way, they earnit”. What can be said about a growing number of central banks around could be “they Nalin Chutchotitham – Kasikornbank nalin.c@kasikornbank.commake money the new way, they print it”. Amonthep Chawla, Ph.D. – KasikornbankIt is understandable that readers are most likely fed up about hearing problems in Europe amonthep.c@kasikornbank.comagain and again. Unfortunately, the reason why it is being heard again and again is Puttikul Akarachalanonth - Kasikornbankbecause the problem is structural and not cyclical (some that goes up and down and is puttikul.a@kasikornbank.commore predictable than a structural issue). The problems in Europe will hold the rest of theworld as hostage since it is a very large market indeed (about slightly larger than the USeconomy).The ECB is at its wit’s end on how to deal with the situation. Of late, it had lent to banksEUR489 bn in an attempt to assuage the tight money market conditions. If left un-dealtwith, a growing liquidity problem will eventually lead to a solvency problem. In a nutshell,while the ECB is not admitting towards doing another round of quantitative easing (QE),its actions certainly attest to such measures. Credit spreads are rising and credit ratingsare falling.Fig 1. ECB balance sheet is expanding Fig 2. A jump in long term refinancing amount 3,000 800 700 2,500 600 2,000 500 1,500 400 300 1,000 200 500 100 - 0 02 03 04 05 06 07 08 09 10 11 00 01 02 03 04 05 06 07 08 09 10 11 Feds balance sheet, USD bn ECB balance sheet, EUR bn Securities of Euro residents, EUR bn Long term refinancing, EUR bnSource: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBankIt seems that after piling into the bonds of PIIGS and company, with little success ofkeeping these sovereign government cost of funding from skyrocketing, the jump in thelong term refinancing facilities is hoped to kill two birds with one stone i.e. 1) ease thetight money market conditions within the European commercial bank system and 2) thatthe commercial banks would on lend to the governments . The important point is that thisis not a cure but only a pain killer whose effects will wear off.777
  8. 8. Fig 3. ECB’s balance sheetEUR bn 11/11/2011 18/11/2011 25/11/2011 02/12/2011 09/12/2011 16/12/2011 23/12/2011 30/12/2011ECB Balance Sheet Total Assets 2,344 2,393 2,420 2,436 2,461 2,494 2,733 2,736Gold & Gold Receivables 420 420 420 420 420 420 420 423Receivables From the IMF 80 80 80 80 81 83 84 86Banks Security Investments 149 149 150 152 153 152 153 159Claims on Euro Area Residents 33 33 34 32 70 73 95 98Security Investments & Loans 28 29 29 28 28 30 26 25Credit Facility under ERM 2 - - - - - - - -Claims on Non Euro Area 28 29 29 28 28 30 26 25Main Refinancing Operations 195 230 247 265 252 292 169 145Long Term Refinancing 392 392 392 383 383 369 704 704Fine Tuning Reverse Operations - - - - - - - -Structural Reverse Operations - - - - - - - -Marginal Lending Facility 2 3 2 7 7 5 6 15Credits Margin Calls 0 0 0 1 0 0 0 0Euro Area Credit Institutions 89 91 93 92 90 90 95 79Securities of Euro Residents 581 591 601 606 607 610 611 619ECB Balance Sheet Govt Debt 34 34 34 34 34 34 34 34Other Assets 340 342 337 335 335 336 337 349ECB Balance Sheet Total Liabilities 2,344 2,393 2,420 2,436 2,461 2,494 2,733 2,736Banknotes in Circulation 866 865 865 874 880 883 891 889Current Accounts 295 237 212 181 139 298 265 224Deposit Facility 145 237 256 333 335 214 412 414Fixed Term Deposits 183 187 195 194 207 208 211 211Liabilities Fine Tuning - - - - - - - -Deposit Margin 1 2 1 0 0 0 0 1Other Liabilities Credit Inst 3 7 2 2 3 3 3 2Debt Certificates Issued - - - - - - - -General Govt Liabilities 50 57 89 54 62 46 66 65Other Liabilities 8 8 8 10 9 10 12 14Liabilities to Non Euro 52 52 51 51 89 93 132 157Liabilities to Euro Residents 4 4 2 4 4 4 5 5Deposits & Balances 10 10 12 9 9 9 9 9Credit Facility under ERM 2 - - - - - - - -Special Drawing Rights 54 54 54 54 54 54 54 56Other Liabilities 208 210 208 205 205 208 208 214Revaluation Accounts 383 383 383 383 383 383 383 394Capital & Reserves 81 81 81 81 81 81 81 81Source: Bloomberg888
  9. 9. One indicator that tells us that the EU has more replicated Japan is the growth rate (orlack therefore) of money supply, primarily M2. Rising M2 money supply is a gauge thatmore money is changing hands and hence is a indication of a pick up in economic activityas well as inflation. Fig 4 shows the case of the US, whereby if we assign M2 moneysupply as the independent variable (x, or horizontal axis) and CPI (consumer price index)or inflation as the dependent variable (y, or vertical axis), money supply growth explainsabout 94% of the changes in inflation. M2 money supply growth is probably one reasonwhy the market is more optimistic about the US economy relative to the EU and Japan.Fig 4. M2 money supply and inflation, the case of the Fig 5. M2 money supply growth, the Japanification ofUS the EU? US CPI index 250 14.0% 230 12.0% 210 10.0% 190 y = 0.0181x + 73.484 8.0% 170 2 R = 0.9374 150 6.0% 130 4.0% 110 2.0% 90 70 0.0% 50 04 05 06 07 08 09 10 11 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 US M2 money supply, USD bn US EU JPSource: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBankThe ill omen for Thai businesses that conduct lots of business with the EU, will or alreadyhave felt the pinch on declining exports is seen on fig 6. Fig 6 shows that the EUeconomic lead indicators precede, by and large, the rise and fall of Thai exports to thatregion. Of late, November’s Thai exports to the EU has declined to USD 1,386mn, whichcan be reflective of both the demand side (EU’s ability to consume) and supply side (Thaiproducers’ ability to supply amidst flooded production facilities).Fig 6. Thai exports to the EU feeling the pressure Fig 7. Thai production index…the flood feeling 200 15 50 40 180 10 30 5 20 160 10 140 0 0 -5 -10 120 -20 -10 100 -30 -15 -40 80 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 00 01 02 03 04 05 06 07 08 09 10 11 OECD lead indicator for EU, % , left Thai exports to EU, % YoY, right production indexSource: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBank999
  10. 10. Fig 8. Thai exports comparison to previous periods Thai export destinations Latest data (USD mn) as % of vs 1 mth vs 3 mth vs 6 mth vs 1yr ago total earlier earlier earlier Japan 1,741 11.4 -7% -24% -17% -9% USA 1,558 10.2 -7% -23% -20% -14% Canada 126 0.8 -5% -24% -17% -11% Mexico 84 0.5 -28% -34% -6% 0% Australia 482 3.2 -20% -38% -13% -34% China 1,816 11.9 -21% -33% -14% -10% Hong Kong 722 4.7 -25% -46% -50% -44% Indonesia 646 4.2 -24% -21% -19% 3% Philippines 417 2.7 16% -15% 5% -1% South Korea 291 1.9 -14% -30% -29% -11% EU Countries 1,386 9.1 -19% -38% -34% -28% other ASEAN Countries 4,054 26.5 -5% -22% -15% 3% Middle East Countries 588 3.8 -19% -39% -37% -32% Others 1,376 9.0 26% -3% -8% -10% Total 15,287 100.0 -10% -27% -21% -13% Source: BloombergAsian central banks sterilize what the West monetizeWhile the US economy from a monetary perspective looks better…but the “better” is arelative term. The jobs market remains an issue and unfortunately, it is a structural issue.Sure, the first Friday’s non-farm payrolls printed 200k versus economists expectations of155k, the number of people in the non-farm jobs are still 6 million short of peak of 2008while most people out of a job for longer, about 40.8 weeks. This is an attestation that theunemployment issue is structural and not frictional.Fig 9. US non-farm payrolls are still 6million short of Fig 10. Out of a job and for longer2008 peak 140,000 45 40 138,000 35 136,000 30 25 134,000 20 132,000 15 10 130,000 5 128,000 0 00 01 02 03 04 05 06 07 08 09 10 11 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 non-farm payrolls, k number of weeks unemployedSource: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBankOnce the end of the Fed’s “Operation Twist” draws to a close in the middle of this year,the market will be anxious (again) for another round of Quantitative Easing (QE).Operation Twist was bullish for the US dollar since Fed would refrain from expanding itsbalance sheet and hence printing money as it rotates short term assets into longer termassets. But with the jobs markets remaining in a dismal state of affairs as well as an101010
  11. 11. election year, the Fed is not expected to stand idly by and hope that things fixedthemselves.As for the ECB, given that refinancing needs of the weaker links within Europe, unlessGermany and France can pull a rabbit out of the hat and bring about fiscal union, theburden will remain on the monetary side, i.e. ECB. Italy, Spain, Greece, Portugal andIreland will have EUR 568.6 bn of debt maturing will need to be refinanced. Fig 12. Bigger PIIGS can not afford market funding willFig 11. 2012 maturing debt of PIIGS need to resort to direct / indirect ECB funding EUR mn % 350,000 8 7 300,000 6 250,000 5 200,000 4 150,000 3 2 100,000 1 50,000 0 - Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Italy Spain Greece Portugal Ireland Italy Spain Germany 7% lineSource: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBankIn the August 2011 edition of our research we has discussed that debt monetization wasa cheat sheet for highly indebted nations. In a nutshell, governments which continue toborrow heavily will force the hand of its central banks to intervene in the bond market inorder to reduce the crowding out effects. Government borrowings will tend to driveinterest rates higher and increases cost of private investments. Hence central banks willprint money and use these funds to buy its government bonds. As the central bank printsmoney, inflation will rise to a point higher than the bond yields i.e. negative interest rateswhich means debtors gain at the expense of creditors (investors).Fig 13. The West monetize and the East sterilize Fig 14. Post the dust settle, USD/THB would decline Asia FX reserves, USD bn USD/THB 7,000 50 6,000 6921.2 45 5,000 y = -0.004x + 57.142 2 40 R = 0.89 4,000 3,000 y = 1.4048x - 3680.3 35 2 2,000 R = 0.9775 30 6921.2 1,000 - 25 3000 3500 4000 4500 5000 5500 6000 6500 7000 7500 3000 3500 4000 4500 5000 5500 6000 6500 7000 7500 sum of USD, EUR M1, bn sum of USD, EUR M1, bnSource: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBankHere, we wanted to add the external angle as shown on fig 13. This chart shows that asboth the ECB and Fed print more currency, it tends to end up at Asian central banksvaults in the form of current account surpluses or capital inflows. In an endeavor to limiteffect of spill over of inflation, the Asian central banks will sterilize the flows.111111
  12. 12. Will the Thai Central Bank have to monetize as well?Unfortunately for the Thai currency, a recent development raises the risk of furtherweakening in addition to the lack of risk appetite owing to the impending break up of theeuro. The current government is mulling in principle to relocate the cost of the 1997financial crisis out of the government budget to possibly the Bank of Thailand or theFinancial Institution Development Fund (FIDF). As the fiscalization of the closed financialinstitutions is closed to a decade in the making, the following is Bank of Thailand circularto get readers better acquainted with this issue. In accordance with several measures implemented by the Government and the Bank of Thailand to resolve the economic and financial crisis and restore stability and public confidence in financial institutions, the Financial Institutions Development Fund (FIDF) has been given the responsibility to administer such measures. These included the full guarantee of depositors and certain creditors of financial institutions pursuant to the cabinet resolution on 5 August 1997, and the Financial Sector Restructuring Plan pursuant to the cabinet resolution on 14 August 1998 involving bank recapitalization and other rehabilitation measures. As a result, the FIDF has been put under a problematic financial situation, with liquidity shortages and substantial losses. The actual as well as estimated future losses from operations are as follows: Breakdown of estimated losses classified by type of assistance Type of assistance Net losses (THB mn) 1. Assistance to depositors and creditors and liquidity support (56 closed finance companies and 554,149 other financial institutions) 2. Losses from recapitalization in intervened financial institutions 169,139 3. Losses from managing non-performing assets 650,750 4. Interest and other expenses 165,975 less FIDF premium (138,563) 1,401,450 The Bt 1.4 trillion estimated total loss has already been partially fiscalized by the issuance of Bt 500 billion worth of government bonds in 1998 with total receipt of Bt 512,824 million. However, the remaining Bt 88,626 million has yet to be fiscalized. In 2000, the Government gave assistance to the FIDF by providing MOF guarantee on Bt 112 billion of FIDF bonds. The interest expense on these bonds has been paid for from the government budget. This assistance, though helping to reduce the FIDF’s interest burden and restructure its liabilities, has not completely resolved the losses of FIDF. Resolution Principles In the process of resolving FIDF losses, the Ministry of Finance and the Bank of Thailand jointly agreed on the principles that the resolution must be clear, acceptable to all parties, and has minimal impact on the Government’s fiscal position and minimal burden on taxpayers in both short and long terms. The resolution must be transparent, must be in keeping with good governance and has minimal adverse impact on the bond market. In order to completely resolve the problem, the resolution of the losses has 2 components:121212
  13. 13. 1. The fiscalization of uncompensated losses 2. The redemption of the Bt 500 billion government bonds. Resolution Methodology (1) On 21 June 2002, the Government passed an Emergency Decree empowering the Ministry of Finance to issue bonds up to Bt 780 billion to fiscalize actual FIDF losses. In order to comply with the resolution principles, the Ministry of Finance will be responsible for the interest expense to be paid for from the budget. As for the amortization of the principal, the Bank of Thailand will meet this obligation by using annual net profits from Currency Reserve from 2002 onwards. A separate account will be set up within the Bank of Thailand’s General Account to keep such profits in order to ensure the transparency and accountability of this operation. The use of the profit flows from the Currency Reserve will not affect the levels of international reserves. (2) As for the redemption of the Bt 500 billion bonds issued according to the Emergency Decree Empowering the Ministry of Finance to Borrow and Administer the Borrowing to Assist the Financial Institutions Development Fund B.E. 2541, which stipulated that the amortization is to be funded by the privatization proceeds and 90% of net profits of Bank of Thailand’s General Account operations, very little proceeds have been received so far from the privatization program. Meanwhile, the Bank of Thailand’s General Account continues to accumulate losses since the 1997 currency stabilization policy. To ensure that the Bank of Thailand has the capacity to remit profits to the government for this amortization, two Emergency Decrees were passed to eliminate the accumulated losses and to allow the use of assets in the Special Reserve Account for backing issued banknotes such that the Bank of Thailand will have more flexibility in managing its assets to generate earnings and profits as well as will increase its efficiency in implementing monetary policy. Bond Issuing It is expected that the size of the new government bonds issuance will not exceed Bt 780 billion and the issuing time frame will be set according to FIDF’s cash requirement. Market conditions will also be taken into account in order to minimize the impact on the bond market. Between August and December 2002, FIDF’s obligations of Bt 115 billion to pay depositors of the 56 closed finance companies will fall due and its outstanding borrowing from the repurchase market is Bt 300 billion. Consequently, the FIDF would need to issue a large amount of bonds. In order to minimize the impact on the bond market, the Government will instead offer saving bonds with 5-, 7- and 10-year maturities with the total size of Bt 300 billion to specific groups of savers who currently do not transact in the money market, namely individuals, cooperatives and foundations. These saving bonds will not only resolve the FIDF’s losses incurred from providing assistance to the financial institutions but also serve as an alternative investment option for retail investors, which offers higher yields with longer maturity than commercial banks’ deposits. The saving bonds can be purchased via commercial banks’ branches nationwide serving as selling agents. Subscription period of 45 days will be between July 15 - August 30, 2002 and the 45-day settlement period will be from September 2 –131313
  14. 14. October 15, 2002. Subscribers will be able to choose their preferred settlement dates so that they can plan to reinvest their maturing time deposits or other investments in the saving bonds.As of October 2011, Thailand’s public debt was THB4.33 trn or about 41% of GDP. Will itcould be argued that Thailand is no Greece and public debt / GDP is still below theMaastricht treaty threshold o 60%. However, the contentious variable is the 15% debtservice ratio i.e. debt service as a percent of the budget. It is no wonder as to whyadministrations become concerned about rising interest policy rates and attempt to prodthe central bank to cut rate as to give more flexibility with regards to this self imposedcovenant.The Public Debt Management Office (PDMO) projects that the debt service ratio to rise to11.5% in 2012 and could reach 13.4% by 2016. Given that 2011 flood has raised seriousquestions of Thailand as a safe place while the administration has cited the flood as anatural disaster and as a consequence, brand Thailand as a disaster prone area,investors’ confidence needs to be restored to get back to “Business as Usual”. As such,funds are needed to compensate for the growing budget deficit trend to stimulate therecovery.Fig 15. Thai public debt Fig 16. 12mth running budget balance 4,500 THB bn 4,300 200 4,100 100 3,900 0 3,700 -100 3,500 -200 3,300 -300 3,100 -400 2,900 -500 2,700 -600 2,500 02 03 04 05 06 07 08 09 10 11 00 01 02 03 04 05 06 07 08 09 10 11 outstanding public debt,THB bn 12mth running rate budget balanceSource: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBankThe news flow remains fluid as to whether or not the FIDF losses would be relocated tothe fund itself but legal amendments would empower the fund with an income stream toservice the debt. In a nutshell, the movement seems to be a reserve fiscalization of thelosses, which could strongly imply a move forward monetizing the FIDF losses.Moody’s Investors Service has just made disclosure with regards to Thailand’s creditrating albeit no mention of this event. Moody’s noted that: Thailands Baa1 government ratings reflect medium economic and institutional strength, but receive support from a relatively high level of government financial strength as the post-1997 crisis debt overhang has eased. Vulnerability of the governments balance sheet to external shocks has been reduced by a steady repayment of external debt and accumulation of official foreign exchange reserves. External indicators are considerably stronger than the median values of not only Baa peers but also many A-rated countries. However, Thailands government debt relative to government revenue is more elevated than its Baa-rated peers, although the debt trajectory at both the141414
  15. 15. general government and public sector levels was on a steady downward trend prior to the global recession.Given that a balance sheet as to balance i.e. Asset = Liabilities + Equity, a relocation ofthe FIDF losses back to the Bank of Thailand would have rather negative implications.Since the fluid developments would suggest that the Bank of Thailand’s liabilities wouldincrease whilst Assets are unchanged, what needs to adjust is its Equity. Fig 17 and 18are figures released by the Bank of Thailand and may not fully reflect its true equity. Forexample, its financial statements audited by the Auditors’ General for 2010 showed anegative equity of THB 81.8 bn since it reflects the marked to market effects.Note that the BOT’s equity will fluctuate for several reasons. For one, its assets arelargely foreign currency whilst its liabilities are local currency. If USD/THB moves down,so does the BOT’s equity, and vice versa. Another reason is interest rate differentialsbetween yield on assets and the cost of its funding of those assets. Given that US andother countries in which the BOT invests in are developed markets will tend to have lowerrates than Thailand’s emerging markets, the BOT will incur a natural negative carry andweighing on its equity as time passes by. We have are trying to point out is that in itscurrent form, the BOT’s financials are design to deteriorate for the gains in FX and pricestability. But of course it makes sense since the Bank of Thailand a central bank and nota commercial bank. Given this assessment, there is little problem that the BOT’s balancesheet can generate income to cover the FIDF losses and strongly suggest that the onlyway to reduce this interest paying debt is refinancing…either with interest bearing paperor simply non-interest bearing paper…also known as “currency in circulation”. The otherominous alias would be “monetization”. We hope that authorities realize such implicationsand exercise more discretion on a larger picture with regards to both fiscal and monetarypolicy.Fig 17. BOT assets Fig 18. BOT liabilities, equity 100% 100% 90% 90% 1,097,308 80% 80% 699,343 70% 70% 60% 4,732,721 60% 2,498,555 50% 50% 40% 40% 30% 30% 1,121,840 20% 20% 10% 1,448,311 10% 499,818 510,704 0% 0% 1 1 Others Non resident securities Equity Others Loans Bonds Deposits Bank notesSource: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBank151515
  16. 16. ASEAN trade under economic turmoil in 2012 ASEAN has gained more importance role in the world economy with its size is slightly smaller than Indian economy, yet the region is full of diversity AEC 2015 or greater economic integration within ASEAN is seen to apply more to Myanmar and Indochina, yet it is unlikely that these countries are ready to open for free trade by that time as they need to protect their agricultural sector Most countries’ major export market is within ASEAN, except for Thailand that we relies a lot more on the EU market, which is seen vulnerable to financial turmoil Thai exporters are seen to benefit more from diversifying their markets toward more ASEAN as we gain trade surplus from most countries in this region Economic integration in this region is seen to mutually benefit each other while international trade enhances specialization and economies of scales; however, we also tend to see each other as core competitorsDiversity in UnityASEAN consists of 10 nations, including Brunei (BN), Cambodia (KH), Indonesia (ID),Laos (LA), Malaysia (MY), Myanmar (MM), Philippines (PH), Singapore (SG), Thailand(TH) and Vietnam (VN). ASEAN has gained more importance role in the world economy.ASEAN economy is slightly smaller than Indian economy, which constituted about 3% ofthe global economy. The region here is full of diversity. Indonesia is the biggest economyin this region followed by Thailand and Singapore, while Laos is the smallest economy. Interms of population, Indonesia also ranks the first, followed by the Philippines andVietnam, while Brunei is the smallest nation. In terms of development, Singapore is theonly country here that is categorized as a developed country, while Myanmar, Cambodiaand Laos still suffer from poverty and malnutrition.How can these diversified economies move forward together? This will be a challengingquestion for the years to come. Diversity in Unity or the concept of oneness amongdifferent socio-economic groups has not yet been tested whether it could work in thisregion. Despite uncertainty ahead, Thailand is likely to benefit from greatereconomic integration under higher possibility of economic and financial turmoil in2012, largely owing to uncertainty in the eurozone debt crisis.Don’t wait for AEC 2015There have been more and more people talking about ASEAN Economic Community orAEC 2015, which is basically a greater integration among ASEAN in terms of free tradebarriers, free movement of professionals and capital. Actually, tariffs among coreASEAN-5, namely Thailand, Singapore, Malaysia, Philippines and Indonesia are notsignificant, while we also have Free Trade Agreements (FTA) with other countries. AEC2015 is seen to apply more to Myanmar and Indochina, yet it is unlikely that thesecountries are ready to open for free trade by that time as they need to develop moreinfrastructure and system to protect their agricultural sector.161616
  17. 17. Fig 19. World economy and the importance of ASEAN Fig 20. Shares of ASEAN economies BN VN KH US 0.7% 5.8% 0.6% 22% TH Other 16.1% 31% ID 39.5% China 10% SG ASEAN 12.6% 3% India Japan 3% 8% Russia Germany PH LA 3% Italy UK Brazil France 5% 10.2% MM MY 0.4% 3% 4% 4% 4% 2.4% 11.7%Source: IMF, KBank Source: IMF, KBankBased on trade statistics below, using data of the first 9 months of 2011, we can see thatSingapore exported the most, followed by Malaysia and Thailand. Most countries’ majorexport market is within ASEAN, except for Thailand that we relies a lot more on theEuropean Union (EU) market. Apart from ASEAN and EU, other major trading partners ofASEAN are Japan, China and the US. Since the economies in the EU and the US are fullof uncertainty due to debt crisis and banking problems, Thai exporters are seen to benefitmore from diversifying their markets toward more ASEAN. Among ASEAN, there are onlyThailand and Singapore that gained trade surplus with other countries within ASEAN.This shows that we have competitiveness that we could explore more so as to gaingreater benefits from joining this economic community.Fig 21. Shares of ASEAN population Fig 22. ASEAN major export markets VN BN KH USD bn 0.1% 2.4% Exports from ASEAN to selected countries 14.8% 300,000 250,000 TH 11.7% ID 200,000 40.5% 150,000 SG 0.9% 100,000 50,000 PH 0 15.7% BN KH ID LA MY MM PH SG TH VN MY LA MM 4.8% 1.0% CN JP US EU ASEAN Other 8.1%Source: UN, KBank Source: CEIC, KBankFig 23. ASEAN major import markets Fig 24. ASEAN trade balance USD bn USD bn Imports from ASEAN to selected countries Trade balance of ASEAN against selected countires 300,000 50,000 40,000 250,000 30,000 200,000 20,000 10,000 150,000 0 100,000 -10,000 -20,000 50,000 -30,000 0 -40,000 BN KH ID LA MY MM PH SG TH VN BN KH ID LA MY MM PH SG TH VN CN JP US EU ASEAN Other CN JP US EU ASEAN OtherSource: CEIC, KBank Source: CEIC, KBank171717
  18. 18. Thailand and ASEAN: friend or foe?Trade statistics revealed that Thailand gained significant trade surplus with ASEAN,which is seen to benefit Thai exporters if we could explore more of these markets that wehave competitiveness. In particular, even though our exports to Cambodia, Laos,Myanmar and Vietnam (CLMV) are insignificant, we gained large trade surplus to most ofthese countries, except for small deficit to Myanmar. Thailand lies in the strategic locationthat our exporters could access to markets in CLMV. Therefore, it is important that wecould act now so as to capture market shares of products in these countries before otherASEAN members seize this opportunity.Economic integration in this region is seen to mutually benefit each other whileinternational trade enhances specialization and economies of scales, leading to greaterproductivity and economic growth. However, in some cases we tend to see each other ascore competitors as we all lie in the same geography and produce similar products. Inaddition, our major export markets are alike, i.e. China, Japan, the US and the EU. Wealso compete for direct foreign investment. We even compromise our tax policy toprovide more incentives to foreigners more than to local producers through the Board ofInvestment (BOI).How about the role of China in this region? We often see China as the end of verticalintegration in Asia where ASEAN exports raw materials and intermediate products toChina. China uses its cheap labor to assemble and produce final products, and thenexports to Japan, the US, the EU and back to ASEAN. China is not seen as a directcompetitor to ASEAN. What about the prospects of economic turmoil in advancedcountries this year? If the markets in the US, the EU and Japan are in trouble, exportsfrom China are likely to decline, which is seen to unavoidably affect exports from ASEANto China. Therefore, we cannot simply diversify our exports from the advanced markets toChina since China is likely to receive negative impact from economic turmoil as well. Insuch circumstance, increasing trade transactions within ASEAN is likely to mitigate theadverse effects of economic slowdown caused by debt crisis in the eurozone. The nextquestion is what we should be trading within this region during the period of crisis. Wewould like to invite the audience to follow us in the next episode of this topic in the future. Fig 26. Thailand trade balance with major tradingFig 25. Thailand major trading partners partners Trade between Thaiand and selected countries Trade between Thaiand and selected countries 50,000 15,000 40,000 10,000 30,000 5,000 0 20,000 -5,000 10,000 -10,000 -15,000 0 BN KH ID LA MY MM PH SG VN CN JP US EU Other BN KH ID LA MY MM PH SG VN CN JP US EU Other Ex ports (USD mn) Imports (USD mn) Trade balance (USD mn)Source: CEIC, KBank Source: CEIC, KBank181818
  19. 19. Uncertainties concerning demand yield curve steepening danger Bond market in 2011 saw a lower trading volume compared to 2010 due to the increase in uncertainties in the global financial markets Long-term yields saw lesser change compared to the front-end despite of a 125bp increase in policy rate - helped borrowers to maintain relatively low funding cost but this could be different this year on uncertain bond demand We continue to expect a 25bp in the next MPC meeting in January while BoT’s latest outlook on 2011 economic growth also suggests that further easing is possibleBond market in the year 2011 – a quick wrap upOutright trading volume last year was smaller than that of the year 2010. This was partlydue to the increase in uncertainties in the global financial markets, making it more difficultfor investors to gauge market timing and trends. Thai government bonds (LBs) tradevolume averaged at THB379bn per quarter in the year 2011, a 13.4% decline from theyear 2010 which saw an average trade volume of THB438bn per quarter. Meanwhile,total trading volume for the Bank of Thailand bills (or CBs) continued to maintain a highvolume compared to other types of bonds - average share of total trade is 84%. Share ofcorporate bonds and state enterprise (SOE) bonds trade remained low at only 1.1% and0.2% of total trade, respectively. Government bonds share amounted to about 8.6% in2011, a significant decline from 2010’s share of 11.2%.Bond yields in the first half of 2011 were on an upward moving trend, in line with the pickup in inflation rate and the policy rate. Yet, long-term yields saw lesser change comparedto the front-end: 2-year yield increased by 86bp whereas 10-year yield rose only 14bpduring the first half. The policy rate saw a 1.00% increase during the same period. Suchtrends helped the government and the corporate sector to maintain relatively low costs ofborrowing. For the second half of the year, bond yields started to see declines, althoughthere were sell-offs in certain periods due to global market’s risk-off sentiment. In general,the local market indicated that investors had begun to price in global and local economicslowdown, as well as the earlier-than-expected policy rate cut by the Bank of Thailand inthe aftermath of the floods. 2-year yield ended the year at 3.11%, way below the policyrate while the 5- and 10-year yields were at 3.16% and 3.35%, respectively.Fig 27. Government bond yields Fig 28. Bond trade volume per quarter (exclude <1YR) % Government bond yield curve THB bn 4.50 1000 900 4.00 800 3.50 700 3.00 600 2.50 500 400 2.00 300 1.50 200 1.00 100 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 policy rate 2y 5y 10y Government bonds BoT bonds SOE bonds Corporate bonds (all)Source: Bloomberg, KBank Source: Bloomberg, KBank191919
  20. 20. Going forward, the bond market should be supported by policy rate downtrend (althoughwe expect only another 25bp cut for Thailand, monetary easing remains the theme inAsia) as well as a slowdown in price increase. However, there are also several negativefactors which include high level of borrowing needs by the government in 2012-2013 tofuel a quick economic recovery as well as to equip the country with better watermanagement systems to avoid another 2011-style flooding. Furthermore, foreigninvestors’ demand for Thai bonds this year could be less robust compared to the 2010 –2011 period. All the factors would make demand for fixed income investment ratherunpredictable in the quarters ahead.Uncertain bond demand and growth in mutual funds NAVOver the past few years, the growth of mutual funds or unit trusts had been robust, or atleast, the annual growth of the net asset value (NAV) in the past had usually beendouble-digit high. While the year 2010 was a good year for both stocks and emergingmarket bonds, the year 2011 saw a topsy-turvy trading ground. We note that the NAV ofmutual funds saw an average growth of 11.1% during the past 5 years, including 2011(data as of October 2011), which is much lower than the 28% average growth achievedduring the previous 5 years (2002-2006). In particular, NAV fell 2% from the end of 2010to October 2011. The decline reflected the market-to-market effect of fixed incomesecurities when yields rose as well as the decline in equity value (SET Index fell0.72%yoy in 2011). We also suspect that fresh investment into the mutual funds could beless robust than the previous two years when the stock market was in recovery mode. Fig 30. Size of mutual funds, life policy reserves, andFig 29. Growth of mutual funds bank deposits compared to GDP % Domestic savings in various forms as share of GDP % 2,500 70 25 120 Oct 60 2,000 100 50 20 1,500 40 80 15 30 60 1,000 20 10 40 10 500 5 0 20 0 -10 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Net asset value (left axis :Bt bn) Growth (right axis : % ) Mutual fund Life Policy Reserves Bank Deposits (right axis)Source: AIMC, KBank Source: AIMCIn particular, the investors’ eagerness in fixed income funds could be much moresubdued due to small difference of returns from term deposits and bond yields. Whilefixed income funds continue to have the largest share (62% in 2010) among all of thefund types, its growth has been less significant compared to the other types of funds,namely equity funds, mixed funds, and property funds.202020

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