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Experts urge fiscal policy response from next govt

What does worry them, however, is how the authorities might respond, which they believe could be “excessive” and “harmful” to the economy.

The next government has, therefore, been urged to find a way to control fund inflows via fiscal policy rather than putting a break on them via capital controls.

At The Nation’s “Impacts of Capital Inflows” roundtable yesterday, experts agreed that capital flows into emerging economies such as Thailand would continue, as the United States is widely expected to continue its monetary-easing policy to revive its ailing economy.

No worries over capital inflows

Kasikorn Securities assistant managing director Kavee Chukitkasem said there was no need to worry about a continuing influx of foreign capital, as Thailand’s financial institutions are strong and can easily accommodate movements, both in and out of the country.

Sethaput Suthiwart-Narueput, a well-known economist, said: “What I’m concerned about more than capital inflow is the policy response. The size of the flow is not a concern if the market is allowed to follow its adjustment [path].”

Improper macroeconomic policy could, however, cause problems and economic imbalance may arise if there is an attempt to go against market mechanisms over time, he said.

Capital inflow may not lead to serious problems like those experienced in Brazil and China, as the current situation is not similar to the 1997 financial crisis when Thailand’s corporations carried a large amount of external debt and most of the excess liquidity came from trades, he added.

In the first quarter of this year, the Kingdom’s balance of payments showed a surplus of US$7.3 billion (Bt221 billion), about $6.8 billion of which came from the current-account surplus.

Prinn Panitchpakdi, CLSA senior regional equity manager, said such capital movement would continue.

“There will be a [US presidential] election next year. It is unlikely to have a third round of quantitative easing but the US may reinvest returns from quantitative easing Round 2 [to spur the US economy]. It injected liquidity but was not able to direct it to prop up the US property market as initially intended,” said Prinn, who is based in Hong Kong.

“Liquidity is free to go anywhere with high growth rates, probably Asian markets such as China and India.”

High-growth Asia and its fundamentals will attract capital, Kavee said, adding: “We have a strong economy with relatively high growth, compared with developed countries, and lower risks.”

Such global liquidity has been searching for higher returns mostly in fast-growing emerging bond and stock markets and commodities. The capital waves have been driving up prices of financial assets and global commodities, strengthening emerging-country currencies and probably causing bubbles, he added.

Sethaput said: “Capital will come, anyway.”

Capital flows mostly into Bank of Thailand bonds, which are normally issued to absorb excess liquidity in the market. The central bank’s bonds are low-risk financial instruments with high liquidity and, for sure, speculators will invest in them, he said.

Bond bubble seen, but none in stock market

“Are there any bubbles? At this level of yield, there is a bubble in bond markets [worldwide],” Visit said.

Now, massive capital is invested in US Treasuries, to the tune of more than $150 trillion. With declining bond yields and the current effect of capital movements on global economic imbalance, the 10-year bond’s yield is about 3.8 per cent now, according to the Thai Bond Market Association.

Combined international reserves worldwide are now about $8 trillion, about 70 per cent of which are owned by Asian nations.

“Asia is exposed to huge dollar-denominated international reserves,” because of regional central banks’ intervention in a bid to soften appreciation of local currencies against the US dollar, Visit said.

Meanwhile rising commodity prices, driven by global capital movement, have jacked up Thailand’s inflation, Sethaput said. April’s year-on-year headline inflation rate was 4.04 per cent, compared with 3.14 per cent in March.

Major typical concerns arising from capital movement are high leverage, or overwhelmed borrowings, and skyrocketing inflation. However, Thailand has low leverage as commercial banks stand ready to extend loans but people do not need to borrow, Sethaput said.

The Thai stock market would be in a bubble situation if its price-to-earnings (p/e) ratio exceeded 17 times, Kavee said, adding, “[But] there is a chance for the Thai stock market to move further.”

The Thai p/e ratio is about 12 times, below the regional average, according to CLSA.

“Korean stocks are cheaper, but grow less,” Prinn said. “Thailand’s corporate earnings grow about 15-16 per cent per year with dividend growth of about 3-5 per cent. Some have dividend growth of 7-8 per cent.”

However, the financial experts do not expect the Thai financial authorities to implement tough measures to stem inflows, saying that capital controls should only be used for a short period, say three to six months, as in countries such as Indonesia and Malaysia.

Fiscal policy more suitable for managing inflows

Experts hope the next government will push fiscal policy forward as the tool for managing inflows. Lately, the authorities have focused mostly on monetary policy and ignored fiscal policy, said Trinity Securities managing director Visit Ongpipattanakul.

“Only a small number of listed companies invest overseas. It’s quite difficult to encourage capital outflow. The country’s tax structure does not support overseas investment. Private companies are not able to compete internationally. This should be supported by fiscal policy,” he said.

Sethaput said the authorities should encourage capital outflow through such measures as overseas investment and large-scale state investment, as foreign capital will certainly come.

Political change only has a short-term effect, Prinn said, adding: “Foreigners give Thailand’s politics the lowest priority when making an investment. No one can guess 100 per cent about politics.”

Visit said Thailand’s equity-risk premium was 13.5 per cent, compared with Japan’s 14 per cent, meaning that foreigners are yet to have confidence in the Kingdom’s politics.

Source: The Nation

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