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25 Aug 2010

Financial Markets

Decelerating FCI in July Reflecting Increased Costs with Upward Interest Trend (Business Brief No.2916)

KResearch has developed a Financial Condition Index (FCI) for gauging capital mobilization within the Thai business sector from the three major funding channels, i.e., commercial bank loans, stocks and bonds. Our FCI, therefore, is derived from three components – the nominal MLR, SET Index and Bond price index. The latest FCI for July 2010 exhibited a decline from June, indicating increased financial costs within the Thai business sector. This decline also reflects an upswing in domestic interest rates, led by the first policy rate hike on July 14, 2010, that drove up bonds yields and commercial bank lending rates, while the volumes of capital mobilization in July via the bond and stock markets, as well as at commercial banks were decelerating as well.
Nevertheless, KResearch is of view that the decline in volumes of capital mobilization by the private sector may only be short-term, in tandem with our expectations that lending by commercial banks, which is the key funding channel for the Thai business sector, will likely grow further over the remaining months of 2010, given an easing in political risks and the environmental impact problems at Map Ta Phut. Meanwhile, the government's plans for a 3G license auction are on track, which will consequently add demand for corporate loans during the remainder of this and the following years.

Despite this, the private sector will possibly see their funding cost to continue its upward momentum, particularly after the BOT is expected to raise their key policy rate further during the rest of this and the next year (following the second straight increase on August 25, 2010), aiming at maintaining price stability amid a more stable economic recovery that seems to better withstand the surrounding external downside risks. In this regard, bond yields and bank lending rates will also trend higher, albeit a measured pace. Eventually, such a scenario would pressure the FCI downward further (or decelerate somewhat), emphasizing that the overall costs for capital mobilization are gradually increasing.

Financial Markets