FW: CIMB Tactical View - Thailand: Like Wine, Getting Better With Time

 

RATIONALE SUMMARY

·        THB soared as the best performer amongst regional currencies in 2017 from strength in its external balances. In addition, inflation was undershooting the central bank's target. We expect the THB and Thai government bonds to hold gains heading into FY2018 and bearish action will likely be shallow.

·        Strength in exports and tourism revenue would likely maintain its momentum of expansion and keep the current account in surplus through 2017 to 2018 despite anticipation of higher private investments and imports. However, we are aware that the current account-to-GDP ratio declined from 12.17% in 3Q16 to 10.62% in 2Q17 and this trend can continue assuming higher oil prices.

·        Inflation could stay subdued from structural factors of either low oil price or low fresh food prices. This year, increasing agricultural outputs weighed on prices, keeping headline CPI below 1%. Headline CPI may rise in 2018 as food and oil price steadies. Structurally lower inflation is supportive to THB, although we eye volatile oil prices cautiously.

·        Our correlation matrix indicates FX reserves had the highest impact on the Baht. That said, BoT's intervention will prevent the over-appreciation or depreciation in the THB. Meanwhile, portfolio flows may capture short-term directional impacts on the THB but has a minimal impact over the medium-term.

·        External political risk from the US due to the new head of the Federal Reserve, fiscal measures, and international policy ahead of the mid-term election in Nov-2018 remain significant considerations for EM currencies. However, the experience in 4Q17 suggests that external volatility from the US has been well-absorbed by the THB and Thai government bonds. At the same time, Thailand's election is widely anticipated on Nov-2018 and we believe risks from local politics will be less of a worry where we expect a smooth election.


Best Regards,
CIMB Treasury & Markets Research-Fixed Income
Tel: +603 2261 8557 | Fax: +603 2261 8705
www.cimb.com
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