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7 Nov 2012

Financial Markets

Portfolio Investment Volatility Remains a Near-term Challenge, But Long-term Focus Should Be on Direct Investment (Business Brief No.3374 Full Ed.)

Growth in Thailand's foreign reserves over recent years has been largely due to a steady increase in net capital inflows into Thailand, especially as seen from the current account balance. However, it is quite apparent that net capital inflows, especially portfolio investments, have played a major role in Thai financial markets and they can steepen volatility if foreign investors orchestrate their portfolio adjustments. As a result, Thai authorities are now monitoring this matter very closely.
Nevertheless, KResearch is of the view that structural changes in capital movements would be a long-term challenge for the Thai authorities because we have assessed that foreign direct investment (FDI) into Thailand is unlikely to increase as much as seen recently. This trend could therefore hurt our exports that are highly dependent on FDI. Meanwhile, outward FDI by Thailand is trending higher due to the AEC integration and easing regulations on capital outflows though profit repatriations may help offset this somewhat.

With respect to a possible deterioration in the current account surplus as the government focuses on domestic spending to stimulate the economy, we are of the view that Thai authorities will need to watch this matter for the structural change in capital movements that could cause Thailand's international reserves to decline. Eventually, Thailand may become an investing country, rather than a recipient of FDI.

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Financial Markets