Baht Tumble to Six-Year Low Ties Bank of Thailand Hands on Rates

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Thai bonds are regional laggards
Thai and Indonesian local-currency sovereign bonds are theonly Asian decliners the past 3 months

The baht’s descent to a six-year low as investors flee is making it harder for the Bank of Thailand to revive an economy beset by an El Nino-induced drought.

The central bank held its benchmark rate at 1.5 percent on Wednesday following cuts in March and April, even after the Finance Ministry lowered its 2015 growth forecast last month to 3 percent in its third reduction this year. The baht has weakened 3.9 percent this quarter, the most in Southeast Asia. Foreign funds have pulled $1.6 billion from the nation’s stocks in the past year and $900 million from bonds.

Exports have fallen every month this year as rubber and rice prices dropped and agricultural output is being devastated by the worst drought in almost 30 years. Prime Minister Prayuth Chan-Ocha, who took power in a May 2014 coup and is stalling on election plans, isn’t making much progress on transport projects that investors had hoped would spur the slowest-growing emerging-market economy in the region.

“A rush to cut the key interest rate will probably cause a negative impact rather than help the economy because it may accelerate fund outflows,” said Amonthep Chawla, the head of research at CIMB Thai Bank Pcl in Bangkok. “The need to weaken the baht further is fading.”

Optimism Evaporating

Optimism the Thai military junta would kickstart an economy hurt by political unrest has evaporated. The government has so far disbursed less than half of the 450 billion baht ($12.8 billion) earmarked for roads, mass transit and other infrastructure projects in the fiscal year ending Sept. 30.

The 3 percent growth estimate would be an improvement from 0.9 percent expansion in 2014 but is less than the 4 percent forecast by the government at the beginning of the year. The nation’s farming sector may contract 3.3 percent to 4.3 percent in 2015, the worst performance in at least 36 years, Lersak Rewtarkulpaiboon, secretary-general at the Office of Agricultural Economics, said July 16.

“With the continued slowing of the Thai economy, weak growth in China and the government not providing a fiscal boost by increasing spending, the future prospects for GDP growth are weak,” said Manu George, Asian fixed-income investment director at Schroder Investment Management (Singapore) Ltd., whose bond team oversees $10 billion. “This means the Bank of Thailand will have to do the heavy lifting.”

The monetary authority will lower borrowing costs in “small increments” over the coming year to counter the impact of external headwinds, George said.

Outflow Risk

The central bank has cut its benchmark rate by two percentage points in an easing cycle that started in late 2011. Seven of 24 analysts surveyed by Bloomberg see a reduction to 1.25 percent by year-end, with the rest expecting no change.

“The monetary-policy stance now is accommodative,” Bank of Thailand Assistant Governor Mathee Supapongse told reporters on Wednesday. The central bank “will stand ready to utilize an appropriate mix of available policy tools to support the economic recovery,” Mathee said.

One-year interest-rate swaps rose five basis points to 1.48 percent on Thursday, following a two-basis point increase on Wednesday, suggesting investors see a cut in borrowing costs as less likely after Mathee’s comments.

The central bank said on Wednesday that the baht’s weakness is supportive of an economic recovery.

Further drops in the currency could exacerbate outflows though. The SET index of shares has declined 5.7 percent in three months, while Thailand’s local-currency sovereign bonds fell 0.5 percent. That compares with gains of 0.3 percent in Malaysian notes and 2.7 percent for Philippine securities, Bloomberg indexes show.

‘Sharp End’

Domestic economic challenges, the slowdown in China and the prospect of higher U.S. interest rates put Thailand “at the sharp end of Southeast Asia’s economic and financial woes,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy, an advisory firm in London.

“The currency is too weak for a rate cut right now,” he said. “But a further easing in monetary policy could prove even more difficult to undertake once the Fed starts to hike rates.”

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