Thailand’s property and stock markets run a risk of facing a bubble burst if foreign capital continues flowing into Asia in large amounts because many countries in the region remain under inflationary pressure, according to a leading economist.
Speaking at a seminar on “In-depth Analysis of the Economic Direction in 2011,” Supavud Saicheua, managing director and head of research of Phatra Securities, said should the United States Federal Reserve inject US$500 billion more into the economic system under the much-anticipated second round of the Quantitative Easing QE2 measure, it would encourage the foreign capital inflow into Asia because economies of the countries in the region are expected to grow 7.7 per cent on average this year.
But with the inflationary pressure still high in the region, the property and stock markets run a risk of experiencing the bubble burst if the foreign capital continues overwhelming the region. Mr Supavud said the Stock Exchange of Thailand SET composite index is likely to continue rallying, driven by external liquidity inflow, but stock prices would be higher than their fundamentals because the price/earnings P/E ratio would rise to 15 times, the same with those of other stock markets in the region.
In addition, the measure, if implemented, would make the US dollar weaken further against the baht. So, he supported the Bank of Thailand BoT plan to issue more measures to contain foreign capital inflow although some might affect the stock market.
Since April 2009, Asia has been taking in foreign capital at a rate of US$2 billion – Bt60.14 billion a day. As a result, the international reserves of central banks in Asia have jumped by US$962 billion, or 13 per cent of the gross domestic product.
Since the beginning of this year, the currencies of Asia have risen by an average 6 per cent against the dollar. Thailand and Malaysia’s currencies have appreciated the most, at more than 9 per cent, compared to 6 per cent for the Singapore dollar and the Philippine’s peso, 5 per cent for the Indonesian rupiah, 4 per cent for the Indian rupee and Taiwanese dollar, 3 per cent for the Korean won and 2 per cent for the yuan.
Brazil has already slapped higher withholding tax on foreign capital invested in its fixed-income securities. South Korea is also pondering measures to curb the capital inflow.
The situation in Thailand is equally tense, as the baht has broken through the Bt30 mark against the US dollar to Bt29.86, a level unheard of in the past 13 years. The authorities are grappling with a huge capital inflow, which is seemingly acting as a one-way bet on baht appreciation.
The foreign money moves into fixed-income securities and also, to a lesser extent, the equity market. It helps drive up the value of the baht and also of the SET index. It appears that the cycle is moving back around again. When Thailand suffered from the crisis in 1997, the baht collapsed from Bt25-Bt26 to the US dollar to Bt56.
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