The party's over as funds head for the door
Thanong Khanthong
thanong@nationgroup.com August 23, 2013 1:00 am
The Thai baht hit Bt32.14 against the US dollar yesterday morning as the regional and emerging market currencies took a hard beating. As you may recall, the baht strengthened to Bt28.55 in April, prompting Thai policy-makers to scramble to arrest the currency's rise. But after May 21-22, when Ben Bernanke, chairman of the US Federal Reserve, hinted at the possibility of a winding down of the US's "quantitative easing" money printing programme, the situation changed completely.
Now the tide has turned against not only Thailand but also the BRICS countries and the emerging markets. US dollar funds have been heading to the exit, flowing back to the global financial centres. If the BRICS and the emerging markets, including Thailand, fail to handle the crisis of capital outflow well enough, they all could face a financial crisis and economic dislocation of galactic proportions.
Of all the currencies, the Chinese yuan, Hong Kong dollar, Taiwanese dollar and Singapore dollar seem to be weathering the storm relatively unscathed; the rest in Asia are reeling under heavy selling pressure.
Since May 22, the Chinese yuan has bucked the trend by rising 0.2 per cent. So has the Hong Kong dollar, which has appreciated by 0.1 per cent. Other currencies have faced big sell-offs, from the Indian rupee (-13 per cent), Indonesian rupiah (-9.4 per cent), Korean won (-0.6 per cent), Malaysian ringgit (-8.4 per cent), Philippine peso (-6.7 per cent), Singapore dollar (-0.9 per cent), Taiwanese dollar (-0.6 per cent) to the baht (-5.7 per cent).
It seems that the crisis of capital outflow is only in the beginning stage. After the Federal Open Market Operation meets from September 17-18, there will be a clearer signal over the Fed's stance on the extent to which it will taper off its assets-purchase programme. US bond yields are rising fast. The 10-year bond yield has now reached 2.93 per cent, the highest level since July 2011. This reflects a growing global monetary tightening. Capital is flowing back to the global financial centres.
Over the past five years, the BRICS, Thailand and other emerging markets got carried away with easy money and easy credit from the funds flowing out of the financial centres as a result of the Lehman Brothers crash in 2008. The easy money helped fuel asset bubbles, increase credit growth, boost consumption and lead to a stock market and real estate craze. Policy-makers in Thailand and other regional markets were complacent, building up a sense of over-confidence in the economic fundamentals. They believed that the US or Europe would take decades to repair the financial system and the economic malaise. Capital would stay in their markets for a long time.
But this reading has proved to be a huge error. Now, foreign funds have been scrambling for the exit over the past three months, and the pace of the outflow appears to be accelerating. This is reminiscent of the scene in the run-up to the 1997 financial crisis in Asia.
In Thailand alone, some US$30 billion has flowed into the Thai economy over the past three to four years alone to create a boom. But now the party is over. In this region, India and Indonesia have faced the most severe situation when it comes to capital outflow because they both run high current account deficits. The next targets are Thailand and Malaysia, both relatively open market economies, which are vulnerable to external shocks. Thailand, in particular, has seen weakening economic fundamentals - with GDP registering minus growth in the first and second quarters against the previous quarters. We are obviously going into recession, with falling exports into the negative territories of growth and a deteriorating current account balance.
Now is the time to manage the economy on a downward trend. Focus should be on stabilising the economy and the financial markets rather than boosting growth or fighting against global market trends.
The party's over from The Nation
Thanong Khanthong
thanong@nationgroup.com August 23, 2013 1:00 am
The Thai baht hit Bt32.14 against the US dollar yesterday morning as the regional and emerging market currencies took a hard beating. As you may recall, the baht strengthened to Bt28.55 in April, prompting Thai policy-makers to scramble to arrest the currency's rise. But after May 21-22, when Ben Bernanke, chairman of the US Federal Reserve, hinted at the possibility of a winding down of the US's "quantitative easing" money printing programme, the situation changed completely.
Now the tide has turned against not only Thailand but also the BRICS countries and the emerging markets. US dollar funds have been heading to the exit, flowing back to the global financial centres. If the BRICS and the emerging markets, including Thailand, fail to handle the crisis of capital outflow well enough, they all could face a financial crisis and economic dislocation of galactic proportions.
Of all the currencies, the Chinese yuan, Hong Kong dollar, Taiwanese dollar and Singapore dollar seem to be weathering the storm relatively unscathed; the rest in Asia are reeling under heavy selling pressure.
Since May 22, the Chinese yuan has bucked the trend by rising 0.2 per cent. So has the Hong Kong dollar, which has appreciated by 0.1 per cent. Other currencies have faced big sell-offs, from the Indian rupee (-13 per cent), Indonesian rupiah (-9.4 per cent), Korean won (-0.6 per cent), Malaysian ringgit (-8.4 per cent), Philippine peso (-6.7 per cent), Singapore dollar (-0.9 per cent), Taiwanese dollar (-0.6 per cent) to the baht (-5.7 per cent).
It seems that the crisis of capital outflow is only in the beginning stage. After the Federal Open Market Operation meets from September 17-18, there will be a clearer signal over the Fed's stance on the extent to which it will taper off its assets-purchase programme. US bond yields are rising fast. The 10-year bond yield has now reached 2.93 per cent, the highest level since July 2011. This reflects a growing global monetary tightening. Capital is flowing back to the global financial centres.
Over the past five years, the BRICS, Thailand and other emerging markets got carried away with easy money and easy credit from the funds flowing out of the financial centres as a result of the Lehman Brothers crash in 2008. The easy money helped fuel asset bubbles, increase credit growth, boost consumption and lead to a stock market and real estate craze. Policy-makers in Thailand and other regional markets were complacent, building up a sense of over-confidence in the economic fundamentals. They believed that the US or Europe would take decades to repair the financial system and the economic malaise. Capital would stay in their markets for a long time.
But this reading has proved to be a huge error. Now, foreign funds have been scrambling for the exit over the past three months, and the pace of the outflow appears to be accelerating. This is reminiscent of the scene in the run-up to the 1997 financial crisis in Asia.
In Thailand alone, some US$30 billion has flowed into the Thai economy over the past three to four years alone to create a boom. But now the party is over. In this region, India and Indonesia have faced the most severe situation when it comes to capital outflow because they both run high current account deficits. The next targets are Thailand and Malaysia, both relatively open market economies, which are vulnerable to external shocks. Thailand, in particular, has seen weakening economic fundamentals - with GDP registering minus growth in the first and second quarters against the previous quarters. We are obviously going into recession, with falling exports into the negative territories of growth and a deteriorating current account balance.
Now is the time to manage the economy on a downward trend. Focus should be on stabilising the economy and the financial markets rather than boosting growth or fighting against global market trends.