Avoid the Thai Market: There Are Better Opportunities Elsewhere

Three government bodies in Thailand are opening Thailand's capital accounts so that more baht can flow out of the country. What are the market implications?

1. What measures have been introduced
• The Central Bank has been intervening to keep the baht from rising: it has been selling baht and buying dollars, thus swelling liquidity
• The Securities and Exchange Commission (SEC) has, according to today's Asian Wall Street Journal -

o on Monday asked the Central Bank to to increase the total limit for offshore investment by domestic investors under the regulator's supervision by 47%, from $6.8bn to $10 bn. (According to Bloomberg, "Institutional investors have only used 25% of the $6.8 bn ...they are allowed to invest in overseas stocks." The higher limit will help facilitate the planned introduction of financial products such as derivatives, with foreign securities being used as the underlying assets, according to the SEC,
o will consider expanding the range of investors eligible to invest offshore now to include private funds and domestic foundations,
o plans to discuss with the Public Debt Management Office ways to amend relevant regulations to make it easier for foreign institutions to issue baht-denominated bonds, and
o the Stock Exchange of Thailand is planning to cross-list equity exchange-traded funds, based on the blue chip SET-50 Index, on a foreign stock market by the end of this year.

• The Cabinet introduced these measures with effect today:

o now, exporters and individuals can hold (foreign exchange (forex) as long as they want; before, exporters had to convert forex to baht within 15 days;
o publicly-traded Thai companies also may buy forex worth $100 million per year in order to invest in overseas investments such as plant and equipment, and
o companies and individuals that earn or borrow forex can deposit those currencies with domestic banks for $100 mn and $ 1 mn, respectively.

2. Liquidity Implications
• Currently Thailand has an excess supply of money - not because of Central Bank easing, but because aggregate demand is very low, so people do not need so much money.
• The economic mood Thailand's is rather gloomy: witness sluggish demand as well as capital expenditure. Indeed, the only pillar that is supporting growth is a build-up in inventories!
• So, our guess is that plenty of capital will flow out of Thailand, to capture higher overseas interest rates and more attractive stock markets.
• Add to this that price-sensitive Thai exports are being hurt by the strong exchange rate.
• All of which suggests baht weakness.

How to Make Money Off This Idea
1. buy overseas markets like pre-Olympics China, Hong Kong and Korea
2. buy Thai banks, however, that stand to gain from the new measures, e.g. allowing foreigners to issue baht-denominated bonds.

How to Save Money Off This Idea
1. Avoid the Thai market: there are better opportunities elsewhere.