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23 Nov 2020

Econ Digest

The BOT introduces additional measures to manage the Baht and balance fund flows

          There was an influx of capital flows in Thai stock and bond markets after the US Presidential election and amid hopes for COVID-19 vaccines. During November 1-19, 2020, such capital flows 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.

 

            Therefore, the Bank of Thailand (BOT) introduced several measures to stabilize the Baht on November 20, 2020. The BOT has relaxed regulations on the opening of Foreign Currency Deposit (FCD) accounts, and has increased investment limits and expanded investment options in foreign securities for Thai investors. Meanwhile, foreign investors are required to complete a Bond Pre-Trade Registration prior to investing in Thai debt instruments, in line with measures that have also been adopted in many countries in Asia that welcome capital inflows and allow investors to freely trade debt instruments, though they must have their identity verified.        

 

KResearch views that the measures introduced by the BOT are aimed at coping with more capital flows that might enter into the Thai financial market in future, since the US dollar tends to weaken following the signals of the Federal Reserve (Fed) for monetary easing, an external factor that cannot be avoided. The measures for Thai investors are aimed at stimulating the purchase of foreign currencies and increasing flexibility for capital outflows, which may slow down or reduce appreciation pressures on the Baht. Meanwhile, the Bond Pre-Trade Registration will upgrade the bond surveillance system which will allow close monitoring of foreign investors’ behavior and thereby 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 (KASIKORNBANK projected that the Baht will stand in a range of THB29.00-29.25/USD at the end of 2021). As a result, the BOT may have to intervene in the foreign exchange market in order to reduce the short-term volatility of Thai currency while also assessing the needs to introduce any new measures to maintain the Baht’s stability in the future. 


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