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6 Jul 2018

Thai Economy

Thailand’s External Stability Remains Solid to Brace for Volatility of Capital Outflows … Eyeing Heightened Volatility from Trade War (Current Issue No. 2918)


            Tensions stemming from the trade war over the past two weeks and the US Fed's signals to accelerate the key policy rate hike have steepened the volatility of capital outflows in Asian financial markets, adversely affecting asset prices and regional currencies across the board.

            Although that incident is not beyond market expectations, any abrupt capital flight in the future may hinge on economic fundamentals of each country rather than regional factors.

          Countries, which are prone to external volatilit​y, namely India, Indonesia and the Philippines, are the most vulnerable due to their current account and fiscal deficits. Regarding Malaysia, although it enjoys current account surplus, the country's international reserves to short-term debt ratio is at a crisis level. It is noticeable that those countries were among the first in Asia to raise their policy rates, aimed at preventing capital outflows during the first half of 2018. The move has left them with a few monetary tools to cope with any capital flight later on; therefore, there is a risk that short-term or speculative investments may steadily flow out of those countries during the remainder of 2018.  

            However, countries with solid external stability, including Thailand, will likely be spared because they have high current account surplus and low external debt compared to their international reserves. It is expected, therefore, that such countries will face limited pressure from the capital flight. Meanwhile, China may be able to avoid that incident because the relevant authorities have diverse financial resources and policy tools despite its current account and fiscal deficits.

               Looking ahead, close attention must be paid to the ongoing trade war. If it persists beyond 2018, our real economic sector could be undermined over the next 2-4 years. Moreover, due to the cyclical upturn in interest rates, concerns may shift toward internal stability, in particular when Thailand is plagued by hefty commercial and household debt, which may lead to systematic risk in the future. 

Thai Economy