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Thailand’s Baht to Stocks Drop After Yingluck Declares Emergency

Thailand’s baht and stocks fell after Prime Minister Yingluck Shinawatra declared a state of emergency in Bangkok yesterday as escalating violence threatens to derail elections set for Feb. 2.

The declaration marks a shift in strategy by Yingluck, who put up only mild resistance as demonstrators calling for an unelected council to take power occupied buildings and streets since late October. The currency pared losses after the central bank unexpectedly kept its benchmark interest rate at 2.25 percent. Fourteen of 21 economists surveyed by Bloomberg forecast a cut to 2 percent, while the rest predicted no change.

The baht declined 0.1 percent to 32.884 per dollar as of 4:59 p.m. in Bangkok, after falling as much as 0.3 percent earlier, according to data compiled by Bloomberg. The currency has weakened 5.2 percent since the protests began on Oct. 31. The SET Index of shares dropped 0.2 percent to 1,290.49.

“The central bank probably didn’t want to cut as the baht has already weakened a lot, and they possibly wanted to see the effectiveness of the previous reduction” on Nov. 27, said Toru Nishihama, an economist covering emerging markets at Dai-ichi Life Research Institute Inc. in Tokyo. “We may see some correction in short-term bond yields, but with the possibility of a rate cut in the future, that may be short-lived.”

Blockades Continue

Two-year government notes, which are the most sensitive to interest rates, were little changed. The yield on the 3.125 percent securities due December 2015 was 2.42 percent, according to data compiled by Bloomberg. The yield has fallen 17 basis points, or 0.17 percentage point, this year.

The Bank of Thailand may lower its policy rate by 25 basis points at its next meeting in March given the political unrest, worsening confidence and delays in infrastructure investment, Tim Leelahaphan, Bangkok-based economist at Maybank Kim Eng Securities (Thailand) Pcl, wrote in a research note today.

Bombings at anti-government rallies and shootings in the capital have killed one person and injured 70 since Jan. 17. Global funds bought $139 million more Thai bonds than they sold in the first two days of this week on speculation the central bank will lower borrowing costs today. They pulled a net $76 million from equities, exchange data show.

Suthep Thaugsuban, a former opposition party lawmaker leading the protests, vowed to continue blockades of major Bangkok intersections that began on Jan. 13. Thailand last experienced a state of emergency to combat protests in 2010, when Suthep’s Democrat party held power and oversaw a crackdown on protesters loyal to Thaksin Shinawatra, Yingluck’s brother, that killed more than 90 people.

“The weak economy and the political unrest will further weigh on the baht,” said Jessada Sookdhis, Bangkok-based chief investment officer at CIMB-Principal Asset Management Ltd., which oversees about $760 million. “We should see fund outflows from bonds and stocks in the short term.”

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell one basis point to 7.21 percent.

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