Thai Market Euphoria May Be Exaggerated

Includes: THD, TTF
by: Marc Chandler

The beleaguered Thai Prime Minister Vejjajia proposed a mid-November election as part of a broader compromise meant to end the eight weeks of violent protests and keep him in office until next year's budget makes its way through parliament. Although the financial markets responded positively, with a 4.4% rise in local shares--to the highest level in a month and the largest rise in the Thai baht in a couple of weeks. The hospitality industries account for around 6% of Thailand's GDP and this sector had been hit hard by the civil unrest. The local airlines and hotels led the market today.

The civil disorder has already shaved 0.5% off GDP, according the finance ministry, which had warned that if the demonstrations persist, it could lower growth by 2%. Previously the government had forecast 4.5% growth this year. Ironically, last week, the central bank increased its January forecast of 3.3%-5.3% to 4.3%-5.8%.

Earlier today, Thailand reported 3% headline CPI (year-over-year) for March and a core rate of just 0.5%. Both were a tick lower than expected. The central bank meets June 2 but is unlikely change policy.

If the political unrest does end quickly and price pressures rise in H2 as officials expect, a rate hike in H2 is possible. However, it is not immediately clear that the Prime Minister's proposal will satisfy the opposition, even though former PMs Chavalit and Thaksin support the reconciliation plan. The opposition rejected a similar proposal in March and instead was insisting on quicker elections.

The Thai baht has been fairly stable against the dollar through the past several weeks of demonstrations that took 27 lives. Since the first week in March, the dollar has finished on Fridays in a range of THB32.20 to THB32.68. Net-net, since March 1, the baht has gained 1.7% against the greenback. It has lagged behind most of the other regional currencies. The best performer in the region has been Malaysia, where the ringgit is up 5.4%, followed by the South Korean won up 3.5%. The baht could play a bit of catch-up if the compromise were to stick.

Foreign investors were net sellers of Thai shares in the last month, according to the local stock exchange. The sales of about $127 mln worth of Thai shares barely dents the $1.3 bln inflows in Q1.