Demand for liquidity in public and private sectors accelerates in 2021, but remains manageable

       While the COVID-19 outbreak will continue to prolong and delay the economic recovery, factors affecting liquidity in Thailand’s financial system are increasing this year, both from the government’s need to increase spending to support the economy and from private funding through corporate bonds and borrowing from financial institutions. At the same time, increased liquidity due to the current account balance or foreign investment in the capital market has slowed down during recent periods.

       KResearch has assessed the liquidity demand and liquidity trend in 2021 and found that there will be about THB1.46 trillion of excess liquidity compared to about THB1.38 million in 2020. KResearch believes that this excess liquidity demand will remain manageable and will not put spiking pressure on yields or market interest rates to the extent that it will affect the economic recovery for the rest of the year. This is because the Bank of Thailand (BOT) has the tools/mechanisms to maintain overall liquidity in the system at a level sufficient to meet demand, and also to manage liquidity accumulated in other parts of the system. Moreover, the pressure on the current account balance is expected to gradually decrease in the second half of 2021.

       Although liquidity issues remain manageable, KResearch maintains the view that other factors could force the cost of fundraising via the Thai bond market to go up for the rest of 2021. Yields on Thai 10-year bonds could rise to a range of 1.70-2.10% by the year-end 2021, while yields on Thai 2-year bonds could rise to a range of 0.50-0.90%. The upward trend in bond yields will inevitably raise the cost of issuing corporate bonds, but the direction of interest rates in the bond market will not affect commercial banks' interest rates, which will be more dependent on the policy interest rate, monetary policy and the Thai economy’s conditions.