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1. KBank Capital Market Perspectives Market Updates
Macro / FX / Rates
Less hawkish, but not dovish
24 August 2011
Overview:
Nalin Chutchotitham - Kasikornbank
- The Bank of Thailand (BOT) raised its policy rate by another 25bp today to 3.50%. nalin.c@kasikornbank.com
This was an expected outcome by the market today as indicated by the short-dated
swap rates that picked up to above 3.25%. Nevertheless, the decision was based
on a 5-2 vote. This is the 6th time the MPC had raised policy rate this year and
today’s decision was in line with the July policy statement which stated that
inflationary risk remained significant in the near-term.
- Overall, the MPC statement showed a less hawkish stance on the back of weaker-
than-expected data from the major economies but it did not struck us as being
dovish at all. In particular, MPC stated that “Thai economy retained its growth
momentum but with heightened risks to inflation, together with a sub-normal policy
rate. The MPC deemed it appropriate to continue policy rate normalization to
contain inflationary pressure.” Hence, we still see a higher probability of the year-
end policy rate being 3.75% - 4.00%. In any case, our current forecast remained at
4.00% but we would be assessing our target against new data that comes in.
- The BoT retained a relatively positive view about Asian economies compared to
several research houses that are revising their forecasts of Asian growth down due
to concerns of negative impact on the region’s exports. Hence, it seems to us that
the BoT remained focused on near-term inflation pressure and is adopting a wait-
and-see stance on the development of global economic trend. Below is our
interpretation of the MPC statement:
Global economy – There is significant slowdown in the major economies
but MPC expects that Asian economies are in good position to withstand
the negative impacts.
Thai economy – risks to growth had increased but that domestic demand
indicators continued to show that the Thai economy would remain resilient
while the exporting sector had proven to be flexible in the past few
quarters. At the same time, the fiscal position and the financial sector are
in good health to promote and sustain growth going forward.
Inflation pressure – global commodity and energy prices had declined
but the MPC still see volatility going forward. Inflation expectation at home
remained a concern while domestic demand may sustain price pressure
even under global economic slowdown. Local interest rates are deemed
too low for current economic conditions.
MPC had raised policy rate by 1.50% this year alone The market priced in policy rate hike today
% % THB fixing rates and IRS
5.0 4.00
4.0 3.75
3.0 3.50
2.0 3.25
1.0 3.00
0.0 2.75
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 1Wk 1M 2M 3M 6M 9M 1Y IRS 1Y IRS 2Y
Repo rate 12m deposit rate MLR - 4% 24-Aug 5-day ago 1-m ago
Source: Bloomberg, KBank Source: Bloomberg, KBank
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2. GDP Growth %YoY and %QoQ Thailand’s policy rate is catching up with the regional’s
% %
15 9 8.00
12.0 current
8
9.2 6.56 6.75
7 end 2011 (consensus)
10
5.9 6.6 6 end 2012 (consensus)
4.50 4.75
5 3.7 3.8 3.2 5
2.7 2.1 2.9 2.6 3.50
1.3 2.0 4 3.25
0.2 3.00
3 1.88
0
-0.4 -0.2 2
-2.4 -2.8 1
-5
-5.2 0
GDP yoy GDPsa qoq
Australia
Philippines
Taiwan
South
Korea
Thailand
China
Indonesia
India
Malaysia
-7.0
-10
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11
Source: NESDB, KBank Source: Bloomberg, KBank
Commodity prices had declined but food prices stayed
Thailand’s headline and core inflation rates
elevated
500 260
10%
240
8% 450
220
6% 400
200
4%
350 180
2%
160
0% 300
140
-2% 250
120
-4%
200 100
-6%
05 06 07 08 09 10 11
01 02 03 04 05 06 07 08 09 10 11
CPI yoy Core CPI yoy Reuters/Jefferies Comdty index (LHS) UN FAO Food price index (RHS)
Source: Bloomberg, KBank Source: Bloomberg, KBank
OECD leading indicator showed a decelerating trend, U.S. activity indicators point towards contraction in U.S.
boding poorly for Thai exports production and overall slowdown in the economy
1.0 = Jan 2005
15% 15%
6
10% 10% 4
5% 2
5% 0
0%
0% -2
-5% -4
-10% -5% -6
-8 Dallas Fed Empire State
-15% -10%
00 01 02 03 04 05 06 07 08 09 10 11 -10 Richmond Fed Chicago Fed
-12
OECD lead indicator, % YoY, left axis TH GDP, % YoY, right axis Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Source: Bloomberg, KBank Source: Bloomberg, KBank
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3. Bond yields collapsed on inflows and weaker growth
2-10 spread and foreign holding of Thai debt securities
outlook
% Government bond yield change bp Bt bn Foreign holding in Thai GBs & fixed income Jan 2010 = 0 bps
4.00 10 450 0
400
3.90 0
350 50
3.80 -10
300
3.70 -20 250 100
3.60 -30 200
3.50 -40 150 150
3.40 -50 100
3.30 -60 50 200
3.20 -70 0
-50 250
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 12Y 14Y 15Y 16Y 20Y
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11
Yield Change from 1m ago (right axis) 24-Aug-11
Holding (bn baht, left axis) 2-10 spread (inverted, right-axis)
Source: Bloomberg, KBank Source: ThaiBMA, KBank
MPC Decision on 13th July 2011 MPC Decision on 24th August 2011
Mr. Paiboon Kittisrikangwan, Assistant Governor, Bank of
Thailand, announces the outcome of the Monetary Policy Committee Mr. Paiboon Kittisrikangwan, Assistant Governor, Bank of
(MPC) meeting today, as follows. Thailand, announces the outcome of the Monetary Policy Committee (MPC)
meeting today, as follows.
In the first half of the year, advanced economies expanded
more slowly than expected. The US economy was particularly affected by The MPC assessed that the risks to economic growth of the
the surge in oil prices and supply disruption in the automobile sector advanced economies had increased as the US economic growth continued to
stemming from the Japan crisis which should abate in the latter half of the slow to a rate lower than expected. Core member economies in the euro area
year. The Japanese economy has been recovering faster than expected. began to slow somewhat. Meanwhile, Asia is expected to be able to
The euro area continued to expand from growth in the core member withstand some of the impact from the global economic slowdown due to
countries while sovereign debt problems remained a key risk to the the resiliency of its domestic demand and exports as well as remaining
economy. Meanwhile, the Asian economy continued to grow from both monetary and fiscal policy space to stimulate the economies.
internal demand and exports. However, going forward, growth may slow
slightly due to tightened monetary policy to contain inflation in many The MPC agreed that the slowdown in advanced economies
countries. would partially weigh on Thai exports. However, expanding intra-
regional trade in tandem with the continued growth of domestic demand
The Thai economy continued to expand in the second quarter in Asian economies as well as export diversification to new markets will
primarily from internal and external demand as well as continued fiscal help mitigate the impact. Domestic consumption and investment are
stimulus. The supply disruption in the automobile sector was resolved expected to expand due to favorable employment conditions, improved
sooner than expected, paving the way to a manufacturing recovery in the confidence, robust growth in credit demand, and fiscal stimulus going
second half of the year. Going forward, consumption and investment will forward.
continue to be supported by favorable employment and credit conditions as
well as increased fiscal spending. Despite the slowdown in global oil and commodity prices,
inflationary pressure remained as domestic demand continued to expand amid
Inflationary pressure remained high due to elevated energy fiscal stimulus. As a result, inflation expectations have risen.
prices and continued upward adjustments in the prices of prepared foods.
The extension of price administration and cost-of-living alleviation The MPC judged that, despite increased risk on growth emanating
measures may slow the rise in measured inflation figures, but other from risks on global growth compared to the previous meeting, the Thai
measures such as the prospective increases in the minimum and fiscal economy retained its growth momentum but with heightened risks to
spending amid continued economic growth will likely add to inflationary inflation, together with a sub-normal policy rate. The MPC deemed it
pressure and may result in heightened inflation expectations. appropriate to continue policy rate normalization to contain inflationary
pressure. The MPC therefore decided with a 5-2 vote to raise the policy
In light of the continued risks to inflation amid robust domestic demand, the interest rate by 0.25 per cent, from 3.25 to 3.50 per cent, effective
MPC deemed it necessary to continue increasing the policy rate to immediately. The MPC will closely monitor global economic developments and
maintain economic stability and anchor inflation expectations. The inflationary pressure and stands ready to take necessary action to ensure
MPC therefore decided unanimously to raise the policy interest rate by 0.25 sustainable growth for the Thai economy.
per cent, from 3.0 to 3.25 per cent, effective immediately.
Source: Bank of Thailand Source: Bank of Thailand
Thai version - http://www.bot.or.th/Thai/MonetaryPolicy/Documents/MPC_62554.pdf
English version - http://www.bot.or.th/Thai/MonetaryPolicy/Documents/MPC_62011.pdf
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4. Table 1. Monthly Key Economic Indicators Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11
Manufacturing index 189.6 189.5 188.3 187.0 180.3 182.0 195.7
% YoY -3.4 4.1 -3.0 -6.7 -8.1 -3.7 3.3
Industrial capacity utilization rate (%) 62.4 62.3 59.5 66.1 54.4 58.8 63.6
Retail sales (% YoY) 8.4 9.6 9.0 4.1 7.9 8.4 n.a.
Total vehicle sales (units) 93,122 68,398 77,213 93,008 67,283 55,851 70,259 72,902
Motorcycle sales (units) 167,707 165,152 188,248 191,437 174,244 163,411 205,392
Unemployed labor force ('000 persons) 389 268 268 374 268 276 163
Unemployment rate 1.0 0.7 0.7 1.0 0.7 0.7 0.4
Consumer prices (% YoY) 3.00 3.03 2.87 3.14 4.04 4.19 4.06 4.08
core 1.40 1.32 1.45 1.62 2.07 2.48 2.55 2.59
Producer prices (% YoY) 4.7 6.0 7.4 5.9 6.6 6.2 4.5 5.2
External Accounts (USD mn, unless specified otherwise)
Exports 17,219.0 16,523.0 18,406.0 21,072.0 17,243.0 19,284.0 20,816.0
% YoY 18.6 21.4 29.1 31.0 24.7 17.3 16.4
Imports 15,892.0 17,111.0 16,375.0 19,180.0 17,720.0 19,010.0 18,931.0
% YoY 8.6 31.2 18.6 27.2 26.3 34.4 23.5
Trade balance 1,327.0 -588.0 2,031.0 1,892.0 -477.0 274.0 1,885.0
Tourist arrivals ('000) 1,840 1,810 1,822 1,765 1,506 1,376 1,490
% YoY 9.5 12.8 12.8 22.7 35.9 68.8 56.3
Current account balance 1,750.0 1,090.0 3,823.0 1,881.0 -165.0 -511.0 2,499.0
Balance of payments 2,263 1,689 4,271 1,365 3,570 -2,600 -972
FX reserves (USD bn) 172.1 174.0 179.2 181.5 189.9 186.2 184.3
Forward position (USD bn) 19.6 19.0 17.7 20.8 21.4 23.5 24.4
Monetary conditions (THB bn, unless specified otherwise)
M1 1,302.4 1,326.2 1,346.4 1,345.6 1,347.6 1,396.4 1,337.4
% YoY 10.9 15.5 13.4 13.8 14.0 10.7 13.3
M2 11,776.4 11,817.2 12,152.9 12,280.3 12,481.0 12,575.1 12,610.6
% YoY 10.9 11.5 13.7 13.1 15.2 14.3 16.3
Bank deposits 10,584.9 10,606.3 10,834.2 10,893.1 10,982.1 11,094.3 10,993.3
% YoY 8.7 8.8 10.3 9.1 10.1 8.5 10.1
Bank loans 9,947.0 10,064.5 10,209.7 10,308.2 10,376.2 10,517.7 10,677.6
% YoY 12.6 14.5 15.1 14.9 15.3 15.6 16.1
Interest rates (% month end)
BOT 1 day repo (target) 2.00 2.25 2.25 2.50 2.75 2.75 3.00 3.25
Average large banks' minimum lending rate 6.12 6.37 6.37 6.62 6.75 6.75 6.87 7.13
Average large banks' 1 year deposit rate 1.32 1.51 1.51 1.67 1.86 1.86 2.03 2.16
Govt bond yield 1yr 2.38 2.54 2.68 2.83 3.00 3.15 3.50 3.64
Govt bond yield 5yr 3.26 3.40 3.48 3.41 3.38 3.50 3.78 3.86
Govt bond yield 10yr 3.77 3.85 3.89 3.75 3.70 3.79 3.91 4.02
Key FX (month end)
DXY US dollar index 79.03 77.74 76.89 75.86 72.93 74.64 74.30 73.90
USD/THB 30.06 30.93 30.60 30.28 29.88 30.32 30.73 29.76
JPY/THB 37.01 37.60 37.47 36.42 36.80 37.17 38.13 38.76
EUR/THB 40.23 42.35 42.25 42.86 44.24 43.64 44.56 42.84
Source: Bloomberg
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5. Disclaimer
For private circulation only. The foregoing is for informational purposes only and not to be considered as an offer to buy or
sell, or a solicitation of an offer to buy or sell any security. Although the information herein was obtained from sources we
believe to be reliable, we do not guarantee its accuracy nor do we assume responsibility for any error or mistake contained
herein. Further information on the securities referred to herein may be obtained upon request.
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