The Thai financial market has substantially been affected by increased volatility and downside risks in the global financial markets since the beginning of 2020. Recently, there was an influx of investment in assets within the emerging markets, including Thailand, following the US Presidential election and encouraging news about COVID-19 vaccines. During November 1-19, 2020, capital flows in the Thai stock and bond markets reached THB69.7 billion, representing the highest level in 17 months, while the Baht hit a new 10-month high of THB30.14/USD, before sliding to THB30.30/USD at the time of writing this report. The strengthening of the Thai currency is a cause for concern because it will likely undermine the recoveries of the overall Thai business sector and economy.
To maintain the Baht's stability, the Bank of Thailand (BOT) has introduced three new measures so as to advance the development of the new Thai FX ecosystem: 1) Allow residents to freely deposit funds in foreign currency deposit (FCD) accounts; 2) Increase investment limits and expand eligible financial products in order to offer new investment options for residents; and, 3) Investors are required to complete a Bond Pre-Trade Registration. Similar registration measures have also been adopted in various other countries, such as South Korea, Malaysia and Taiwan, to welcome capital inflows and allow investors to freely trade debt instruments, though they must have their identity verified.
KResearch is of the view that it may take a while to see the effectiveness of such measures, in particular a measure aimed at providing greater flexibility for residents to invest in foreign securities because portfolio diversification continues to hinge on the timing and foreign market conditions, risk-adjusted returns, and an understanding of foreign securities investment in the case of retail investors. Meanwhile, the Bond Pre-Trade Registration will likely help reduce volatility arising from foreign investors' short-term parking of funds, which may affect the Baht's movements during a specific period, though this measure is not intended to prevent foreign capital inflows. In addition, fundamental factors, including a current account surplus may drive up the Baht, while the US Dollar will likely soften further in 2021 in line with the Fed's quantitative easing and signs to hold its policy rate at a low level for a long time. Given this, KResearch expects that the Baht will pass THB30.00/USD in 2021 (KBank projects that the Baht will stand in a range of THB29.00-29.25/USD at the 2021 year end). As a result, the BOT may have to intervene in the forex market in order to reduce short-term volatility of the Thai currency while also assessing its needs to introduce any new measure to maintain the Baht's stability in the future.