Thailand economy:G7financial repression trickles down Event

Event

We lower our interest rate forecasts for Thailand to reflect our projections for amore gradual profile of hikes in the US Fed Funds rate and US 10Ygovernment bond yields (please see ‘The Global Macro Outlook: Keep calmand carry on’, 19 July 2016 by Peter Eadon-Clarke and team for details). Wealso adjust our Baht/USD forecasts to model slightly less weakness in theBaht over the next couple of years as US rates move higher. We maintain ourforecasts for Thai GDP growth and CPI inflation.

Impact

Brexit and G7 interest rates. Our macro team believes that the impact of the‘Brexit shock’ on global growth will be largely offset by a supportive policyresponse from the ECB and the Bank of England. As result, we have cut ourUK & Eurozone 10Y government bond yield forecasts but have made only amarginal downgrade to our global GDP growth forecasts to 2.3/2.6/2.7% for2016-18, respectively. With the Eurozone & UK together accounting for 10%of Thailand’s exports in 2015, our Thai GDP forecasts are unchanged.

US rates: same destination, slower transition. We have also adjusted ourforecasts for US rates to reflect a more gradual path of Fed Funds rate hikesand increases in 10Y Treasury yields. However, we maintain our view thatFed Funds rates will rise to 1.75-2.00% in the current tightening cycle and the10Y yield will move up to around 2.70% by end 2018.

‘Financial repression’ trickles down to emerging markets. Our macroteam’s latest report, ‘Macq-ro insights: Financial repression for decades’, 26July 2016 argues that the political agenda in the G7 advanced economies willkeep bond yields (hence government funding costs) lower for longer, resultingin an implicit tax on savings (‘financial repression’) as governments attempt tosupport growth and maintain entitlement programs whilst managing elevatedpublic debt levels. We think this implies that emerging market bond yields willalso remain somewhat lower relative to nominal GDP vs historical levels.

BOT unlikely to cut but in no hurry to hike. At the short end of the curve,we read the BOT as unwilling to cut policy rates further but certainly in nohurry to hike and we have pushed out the timing of our first forecast policyrate hike from 1Q17 to 4Q17. At the long end, we maintain our view that Thai10Y government yields will tend to track rising US 10Y yields. Our slowerprofile for rising US bond yields thus translates to a slower rate of increases inThai yields, but still pushing up through the 3% level by mid-2018.

Shallower trough in Baht/USD. Our revised US rate forecasts in conjunctionwith our view that US CPI inflation will show a healthy increase imply slightlymore muted further USD strength in this up-cycle. We reflect this in forecastsfor a shallower trough in the Baht vs USD over 2016-18.

Outlook

A more modest profile of upward drift in interest rates in Thailand over thenext 2-3 years implies that the current supportive environment for pricing offinancial assets can continue. A ‘lower for longer’ yield curve outlook alsoimplies a potential boost to corporate earnings from debt refinancing.