Baht Outlook Dims as Amnesty Bill Sparks Unrest: Southeast Asia

The prospect of a sustained bout of political unrest in Thailand is stoking concern the baht, already Asia’s worst performer this quarter, will extend losses.

The currency will fall 2 percent by Dec. 31 to 32 per dollar, according to Australia & New Zealand Banking Group Ltd., the most accurate baht forecaster over the last four quarters. Overseas investors have pulled almost $1 billion from Thai stocks and bonds since the beginning of last week as a proposed amnesty law for political offenses triggered demonstrations. BBL Asset Management Co., which runs seven of the 10 best Thai equity funds, said it had been selling shares since mid-October.

Anti-government protests in 2010 led to clashes that left more than 90 people dead and renewed tensions may curb tourism and investment in an economy that’s growing at the slowest pace in Southeast Asia. The Senate is set to reject the bill later today. Thailand ran current-account deficits in five of the last six months, and the demonstrations may damp demand ahead of dollar bond sales promoted by Finance Minister Kittiratt Na-Ranong to fund infrastructure spending.

“Thailand is now running a current-account deficit and economic activity is somewhat weak,” Khoon Goh, a Singapore-based strategist at ANZ, said in a Nov. 4 interview. “Those are reasons enough for the baht to weaken and political uncertainty at the moment is another additional headwind.”

Senate Rejection

The baht dropped 1 percent against the dollar and the SET index of shares fell 5 percent since Oct. 18, when the amnesty bill was expanded to include state officials and people accused of crimes by agencies set up after the 2006 coup that ousted Prime Minister Thaksin Shinawatra. The Thai exchange rate fell 0.2 percent to 31.37 this quarter, the only decliner among Asia’s 11 most-traded currencies apart from the Indian rupee.

Prime Minister Yingluck Shinawatra, Thaksin’s sister, struggled to convince the public that the bill aimed to heal social divisions caused by the coup rather than help Thaksin return to Thailand and recover part of a fortune that was seized after he fled a jail term in 2008.

The upper house will reject the bill, Senate Speaker Nikon Wairatpanij said Nov. 5, following demonstrations the previous day that saw more than 32,000 people rally on the streets of Bangkok, according to police estimates. If the bill is rejected, it would go back to the lower house for 180 days.

Yingluck called on anti-government groups yesterday to end protests after agreeing to their demand to scrap the controversial bill. The parliament scrapped six amnesty proposals yesterday, and the Senate is scheduled to vote on a seventh at 2 p.m. today. She has said the government won’t seek to revive the draft law if it is rejected by the Senate.

“Legally, the bill is still alive despite the Senate’s rejection vote,” Suthep Thaugsuban, a Democrat party member of parliament and a leader of the rally, told the demonstrators yesterday.

Former Prime Minister Abhisit Vejjajiva told a rally on Nov. 5 that he will continue to fight until the legislation is scrapped, adding that the blockage by the Senate doesn’t mean the bill is abandoned.

Growth Impact

“The political tension in Thailand remains in play,” Sacha Tihanyi, a Hong Kong-based senior currency strategist at Scotiabank, the third-most accurate forecaster of Asian emerging-market currencies in the last four quarters, wrote in a Nov. 6 research note. “The issue could be set to drag on, with subsequent protests and political wrangling continuing,” he wrote, adding his year-end baht forecast is 31.3 per dollar.

A prolonged tussle will harm tourism and private investment and could shave 0.5 percentage points from gross domestic product in 2014, according to a Nov. 4 BNP Paribas SA research note.

Thai economic growth slowed to 2.8 percent in the second quarter from a year earlier, after an expansion of 5.4 percent in the preceding three months, official data show. The Bank of Thailand cut its 2013 growth estimate to 3.7 percent from a July projection of 4.2 percent on Oct. 25. The current-account shortfall was $6.1 billion in the first nine months, compared with last year’s $1.5 billion deficit, central bank data show.

Political Risks

The Bloomberg-JPMorgan Asia Dollar Index, which tracks regional currencies against the greenback, rose 2 percent in September and October as the Federal Reserve refrained from tapering stimulus that has buoyed emerging-market assets.

“We have struggled to turn positive on the baht even against the improved September-October emerging-market backdrop,” Sameer Goel, Singapore-based head of Asia rates and foreign-exchange research at Deutsche Bank AG, the world’s biggest currency trader, said in a Nov. 4 interview. “Growth momentum is very weak and political risks could flare up.”

Thai government bond yields will fall should the unrest persist, as the Bank of Thailand will be less likely to raise borrowing costs, according to a DBS Group Holdings Ltd. research note released Nov. 5. The central bank has held its key rate at 2.5 percent since May, after cutting by one percentage point over the previous 18 months.

Dollar Bonds

The yield on the 3.625 percent notes due June 2023 fell five basis points, or 0.05 percentage point, this week to 3.97 percent, paring its increase to 22 basis points since the end of June, according to data compiled by Bloomberg. The 10-year rate dropped 56 basis points in the three months through May 2010, when the last major violence occurred.

Yingluck’s government raised minimum wages last year and introduced a program in 2011 to buy rice at above-market prices to boost rural incomes. The World Bank estimated in October that the program cost the government around 200 billion baht ($6.4 billion) a year.

Thailand is planning to tap the dollar bond market for the first time since 2006 next year, targeting $1 billion to $1.5 billion of issuance, Chularat Suteethorn, director-general of the Public Debt Management Office, said Nov. 5 in Bangkok. The money will be used for infrastructure projects and the timing of the sale will be dependent on whether the political tensions abate, she said.

‘Political Baggage’

“Political uncertainty does weigh on government finances, in that in order to win public support the government adopts populist policies that are not well-managed,” Thomas Byrne, senior vice president for sovereign risk at Moody’s Investors Service, said in an interview in Hong Kong on Nov. 6.

Between Thaksin’s ouster in September 2006 and Yingluck assuming office in 2011, Thailand had four prime ministers. During the period, Thai courts disbanded two parties tied to the 64-year-old tycoon and disqualified two prime ministers allied to him. There has been major civil unrest including the closure of Bangkok’s airport in 2008 and the occupation of a commercial district in the capital by Thaksin supporters in 2010.

The Thai 10-year yield will rise to 4.5 percent in six months, according to Pongtharin Sapayanon, the Bangkok-based head of fixed income at Aberdeen Asset Management Plc, which manages $312 billion globally. The baht will finish the year at 31.3 per dollar and then weaken to 31.6 by the end of the first quarter, according to the median estimates of economists surveyed by Bloomberg.

“It’s definitely not attractive to be putting a lot of money into a country that has heightened risks,” he said in a Nov. 4 interview. “ It’s safer to put money in other countries which have a similar risk profile without the political baggage.”

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