Thailand's Swap Forwards Overprice Rate-Increase Prospects, Barclays Says

Investors may profit from receiving Thailand’s one-year non-deliverable forward swap starting in 12 months because the rate overestimates the potential increase in local borrowing costs, Barclays Capital Plc said.

The Bank of Thailand will probably raise its benchmark interest rate when policy makers meet on July 14, joining policy makers in South Korea and Malaysia who acted last week, the U.K. bank said. Any increase in the swap before the meeting will create a better entry level for investors, the bank said.

“We think the market is pricing in approximately 70 basis points of hikes to come through in six months,” Rahul Bajoria, a Singapore-based economist at Barclays said in an interview. “Our forecast is for 50 basis points of hikes. As we get closer to the policy meeting, there’s a chance of the market pricing in more than what we are currently thinking.”

Barclays recommended investors receive non-deliverable one- year baht interest payments starting in 12 months when the rate reaches 2.95 percent from the current 2.8 percent, Bajoria said. It forecasts a 30 basis points profit in three months, according to a July 9 research note.

In swap contracts, two parties exchange a fixed rate for a floating payment that varies in accordance with a benchmark interest rate. In forward swap contracts, investors agree to start exchanging the rates after a certain period, for a set number of months or years.

Quarter Point

Bank of Thailand policy makers will increase the benchmark interest rate to 1.5 percent from the current 1.25 percent on July 14, according to 11 of 18 economists surveyed by Bloomberg. The rate may increase to 1.75 percent at the end of this year, according to a separate Bloomberg survey of economists.

Thailand may raise borrowing costs this year amid concern inflation will accelerate, central bank Governor Tarisa Watanagase said on July 6. Consumer prices rose 3.3 percent in June from a year earlier after gaining 3.5 percent the previous month, the government said on July 1.

A rebound in exports helped Thailand’s $272 billion economy, the second-largest in Southeast Asia after Indonesia, expand 12 percent last quarter from a year earlier, the most since 1995.

“The recovery in Thailand has predominantly been export- driven and we do not expect a very strong pick up in domestic demand,” Bajoria said. “So, we are unlikely to see very strong rate hikes coming through over the course of six to 12 months.”

To contact the reporter on this story: Yumi Teso in Bangkok at yteso1@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net

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