8447779800, Low rate Call girls in Saket Delhi NCR
K bank multi asset strategies jan 2012
1. .Mean S Multi Asset Strategies
KBank Strategies
Macro / Multi Asset
The euro: a time bomb with extendable fuse January 2012
Volume 54
Euro and contagion worries uplift USD and depress risk
assets…again and again…. Kobsidthi Silpachai, CFA –Kasikornbank
kobsidthi.s@kasikornbank.com
Based on M2 money supply growth, the US looks better than the
Susheel Narula – KSecurities
EU and Japan…but is that saying much? susheel.n@kasikornsecurities.com
Jobs overhang and ending Operation Twist will rekindle Fed QE Kavee Chukitkasem – KSecurities
in 2Q12 and again weigh on USD kavee.c@kasikornsecurities.com
…but we hope local authorities juggling of FIDF losses don’t KResearch
kr.bd@kasikornresearch.com
equate to our own version of debt monetization
Dovish external and internal factor nudges us to look for another
25bps cuts in the repo at January’s MPC
Disclaimer: This report
Due to post-flood renovation efforts, plus governmental must be read with the
economic stimuli, the Thai economy could experience a V- Disclaimer on page 48
that forms part of it
shaped recovery, after bottoming out in 4Q11
On equities, we recommend active investors focus on high-yield
stocks e.g. CPF, MAKRO, EGCO, INTUCH, MAJOR, TTW and BAFS
Strategic Thesis “KBank Multi Asset
The euro is like a ticking time bomb whose fuse keeps getting extended. This will make Strategies”
the world like a person suffering from shortness of breath. The ECB is at its wit’s end on can now be accessed on
how to deal with the situation. Of late, it had lent to banks EUR489 bn in an attempt to Bloomberg: KBCM <GO>
assuage the tight money market conditions. If left un-dealt with, a growing liquidity
problem will eventually lead to a solvency problem. In a nutshell, while the ECB is not
admitting towards doing another round of quantitative easing (QE), its actions certainly
attest to such measures. Judging by M2 growth, the EU is not much different from
Japan. The nerve wrecking state of affairs will hold risk assets hostage for longer and
support further upside on USD/THB. While the US looks better on a relative basis, its
job market will require the Fed to resume expanding its balance sheet post Operation
Twist in June 2012. Hence developed markets continue to monetize their debt whilst
Asian central banks try to sterilize their monetization. The burning question locally is
whether the administration’s move to reverse fiscalization of FIDF losses equates to its
monetization. If it does, we will have to give a serious rethink about USD/THB
trajectories. Hopefully, authorities would come to the conclusion that shifting a burden
around doesn’t achieve much as long as it is being shifted in the same boat. Long-term
bond yields saw little increase in 2011 despite of policy rate hikes and reduction in
trading volume in the second half. However, such low borrowing costs are not likely to
stay as the government plans large amount of bond issuance and financing. There are
risks of yield curve steepening while bond demand is less certain. As for policy rate, we
continue to expect a 25bp cut in the next MPC meeting in January while BoT’s latest
outlook on 2011 economic growth also suggests that further easing is possible. In
anticipation of market volatility in 1Q12, we recommend active investors focus on high-
yield stocks such as CPF, MAKRO, EGCO, INTUCH, MAJOR, TTW and BAFS.
11
1 WWW.KASIKORNBANKGROUP.COM
7. The West monetizes, Asia sterilizes
Kobsidthi Silpachai, CFA - Kasikornbank
New Year, Same Old Problems, and more on the way kobsidthi.s@kasikornbank.com
Conservatives would say their “businesses make money the old fashion way, they earn
it”. What can be said about a growing number of central banks around could be “they Nalin Chutchotitham – Kasikornbank
nalin.c@kasikornbank.com
make money the new way, they print it”.
Amonthep Chawla, Ph.D. – Kasikornbank
It is understandable that readers are most likely fed up about hearing problems in Europe amonthep.c@kasikornbank.com
again and again. Unfortunately, the reason why it is being heard again and again is
Puttikul Akarachalanonth - Kasikornbank
because the problem is structural and not cyclical (some that goes up and down and is puttikul.a@kasikornbank.com
more predictable than a structural issue). The problems in Europe will hold the rest of the
world as hostage since it is a very large market indeed (about slightly larger than the US
economy).
The ECB is at its wit’s end on how to deal with the situation. Of late, it had lent to banks
EUR489 bn in an attempt to assuage the tight money market conditions. If left un-dealt
with, a growing liquidity problem will eventually lead to a solvency problem. In a nutshell,
while the ECB is not admitting towards doing another round of quantitative easing (QE),
its actions certainly attest to such measures. Credit spreads are rising and credit ratings
are falling.
Fig 1. ECB balance sheet is expanding Fig 2. A jump in long term refinancing amount
3,000 800
700
2,500
600
2,000
500
1,500 400
300
1,000
200
500
100
- 0
02 03 04 05 06 07 08 09 10 11 00 01 02 03 04 05 06 07 08 09 10 11
Fed's balance sheet, USD bn ECB balance sheet, EUR bn Securities of Euro residents, EUR bn Long term refinancing, EUR bn
Source: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBank
It seems that after piling into the bonds of PIIGS and company, with little success of
keeping these sovereign government cost of funding from skyrocketing, the jump in the
long term refinancing facilities is hoped to kill two birds with one stone i.e. 1) ease the
tight money market conditions within the European commercial bank system and 2) that
the commercial banks would on lend to the governments . The important point is that this
is not a cure but only a pain killer whose effects will wear off.
77
7
9. One indicator that tells us that the EU has more replicated Japan is the growth rate (or
lack therefore) of money supply, primarily M2. Rising M2 money supply is a gauge that
more money is changing hands and hence is a indication of a pick up in economic activity
as well as inflation. Fig 4 shows the case of the US, whereby if we assign M2 money
supply as the independent variable (x, or horizontal axis) and CPI (consumer price index)
or inflation as the dependent variable (y, or vertical axis), money supply growth explains
about 94% of the changes in inflation. M2 money supply growth is probably one reason
why the market is more optimistic about the US economy relative to the EU and Japan.
Fig 4. M2 money supply and inflation, the case of the Fig 5. M2 money supply growth, the Japanification of
US the EU?
US CPI index
250 14.0%
230 12.0%
210 10.0%
190 y = 0.0181x + 73.484 8.0%
170 2
R = 0.9374
150 6.0%
130 4.0%
110
2.0%
90
70 0.0%
50 04 05 06 07 08 09 10 11
1000 2000 3000 4000 5000 6000 7000 8000 9000 10000
US M2 money supply, USD bn US EU JP
Source: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBank
The ill omen for Thai businesses that conduct lots of business with the EU, will or already
have felt the pinch on declining exports is seen on fig 6. Fig 6 shows that the EU
economic lead indicators precede, by and large, the rise and fall of Thai exports to that
region. Of late, November’s Thai exports to the EU has declined to USD 1,386mn, which
can be reflective of both the demand side (EU’s ability to consume) and supply side (Thai
producers’ ability to supply amidst flooded production facilities).
Fig 6. Thai exports to the EU feeling the pressure Fig 7. Thai production index…the flood feeling
200
15 50
40 180
10
30
5 20 160
10 140
0
0
-5 -10 120
-20
-10 100
-30
-15 -40 80
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 00 01 02 03 04 05 06 07 08 09 10 11
OECD lead indicator for EU, % , left Thai exports to EU, % YoY, right production index
Source: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBank
99
9
10. Fig 8. Thai exports comparison to previous periods
Thai export destinations Latest data (USD mn) as % of vs 1 mth vs 3 mth vs 6 mth vs 1yr ago
total earlier earlier earlier
Japan 1,741 11.4 -7% -24% -17% -9%
USA 1,558 10.2 -7% -23% -20% -14%
Canada 126 0.8 -5% -24% -17% -11%
Mexico 84 0.5 -28% -34% -6% 0%
Australia 482 3.2 -20% -38% -13% -34%
China 1,816 11.9 -21% -33% -14% -10%
Hong Kong 722 4.7 -25% -46% -50% -44%
Indonesia 646 4.2 -24% -21% -19% 3%
Philippines 417 2.7 16% -15% 5% -1%
South Korea 291 1.9 -14% -30% -29% -11%
EU Countries 1,386 9.1 -19% -38% -34% -28%
other ASEAN Countries 4,054 26.5 -5% -22% -15% 3%
Middle East Countries 588 3.8 -19% -39% -37% -32%
Others 1,376 9.0 26% -3% -8% -10%
Total 15,287 100.0 -10% -27% -21% -13%
Source: Bloomberg
Asian central banks sterilize what the West monetize
While the US economy from a monetary perspective looks better…but the “better” is a
relative term. The jobs market remains an issue and unfortunately, it is a structural issue.
Sure, the first Friday’s non-farm payrolls printed 200k versus economists expectations of
155k, the number of people in the non-farm jobs are still 6 million short of peak of 2008
while most people out of a job for longer, about 40.8 weeks. This is an attestation that the
unemployment issue is structural and not frictional.
Fig 9. US non-farm payrolls are still 6million short of
Fig 10. Out of a job and for longer
2008 peak
140,000 45
40
138,000
35
136,000 30
25
134,000
20
132,000 15
10
130,000
5
128,000 0
00 01 02 03 04 05 06 07 08 09 10 11 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11
non-farm payrolls, k number of weeks unemployed
Source: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBank
Once the end of the Fed’s “Operation Twist” draws to a close in the middle of this year,
the market will be anxious (again) for another round of Quantitative Easing (QE).
Operation Twist was bullish for the US dollar since Fed would refrain from expanding its
balance sheet and hence printing money as it rotates short term assets into longer term
assets. But with the jobs markets remaining in a dismal state of affairs as well as an
1010
10
11. election year, the Fed is not expected to stand idly by and hope that things fixed
themselves.
As for the ECB, given that refinancing needs of the weaker links within Europe, unless
Germany and France can pull a rabbit out of the hat and bring about fiscal union, the
burden will remain on the monetary side, i.e. ECB. Italy, Spain, Greece, Portugal and
Ireland will have EUR 568.6 bn of debt maturing will need to be refinanced.
Fig 12. Bigger PIIGS can not afford market funding will
Fig 11. 2012 maturing debt of PIIGS
need to resort to direct / indirect ECB funding
EUR mn %
350,000 8
7
300,000
6
250,000
5
200,000 4
150,000 3
2
100,000
1
50,000
0
- Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11
Italy Spain Greece Portugal Ireland Italy Spain Germany 7% line
Source: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBank
In the August 2011 edition of our research we has discussed that debt monetization was
a cheat sheet for highly indebted nations. In a nutshell, governments which continue to
borrow heavily will force the hand of its central banks to intervene in the bond market in
order to reduce the crowding out effects. Government borrowings will tend to drive
interest rates higher and increases cost of private investments. Hence central banks will
print money and use these funds to buy its government bonds. As the central bank prints
money, inflation will rise to a point higher than the bond yields i.e. negative interest rates
which means debtors gain at the expense of creditors (investors).
Fig 13. The West monetize and the East sterilize Fig 14. Post the dust settle, USD/THB would decline
Asia FX reserves, USD bn USD/THB
7,000 50
6,000 6921.2
45
5,000 y = -0.004x + 57.142
2
40 R = 0.89
4,000
3,000 y = 1.4048x - 3680.3 35
2
2,000 R = 0.9775
30 6921.2
1,000
- 25
3000 3500 4000 4500 5000 5500 6000 6500 7000 7500 3000 3500 4000 4500 5000 5500 6000 6500 7000 7500
sum of USD, EUR M1, bn sum of USD, EUR M1, bn
Source: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBank
Here, we wanted to add the external angle as shown on fig 13. This chart shows that as
both the ECB and Fed print more currency, it tends to end up at Asian central banks
vaults in the form of current account surpluses or capital inflows. In an endeavor to limit
effect of spill over of inflation, the Asian central banks will sterilize the flows.
1111
11
12. Will the Thai Central Bank have to monetize as well?
Unfortunately for the Thai currency, a recent development raises the risk of further
weakening in addition to the lack of risk appetite owing to the impending break up of the
euro. The current government is mulling in principle to relocate the cost of the 1997
financial crisis out of the government budget to possibly the Bank of Thailand or the
Financial Institution Development Fund (FIDF). As the fiscalization of the closed financial
institutions is closed to a decade in the making, the following is Bank of Thailand circular
to get readers better acquainted with this issue.
In accordance with several measures implemented by the Government and the
Bank of Thailand to resolve the economic and financial crisis and restore stability
and public confidence in financial institutions, the Financial Institutions
Development Fund (FIDF) has been given the responsibility to administer such
measures. These included the full guarantee of depositors and certain creditors
of financial institutions pursuant to the cabinet resolution on 5 August 1997, and
the Financial Sector Restructuring Plan pursuant to the cabinet resolution on 14
August 1998 involving bank recapitalization and other rehabilitation measures.
As a result, the FIDF has been put under a problematic financial situation, with
liquidity shortages and substantial losses. The actual as well as estimated future
losses from operations are as follows:
Breakdown of estimated losses classified by type of assistance
Type of assistance Net losses (THB mn)
1. Assistance to depositors and creditors and liquidity support (56 closed finance companies and 554,149
other financial institutions)
2. Losses from recapitalization in intervened financial institutions 169,139
3. Losses from managing non-performing assets 650,750
4. Interest and other expenses 165,975
less FIDF premium (138,563)
1,401,450
The Bt 1.4 trillion estimated total loss has already been partially fiscalized by the
issuance of Bt 500 billion worth of government bonds in 1998 with total receipt of
Bt 512,824 million. However, the remaining Bt 88,626 million has yet to be
fiscalized.
In 2000, the Government gave assistance to the FIDF by providing MOF
guarantee on Bt 112 billion of FIDF bonds. The interest expense on these bonds
has been paid for from the government budget. This assistance, though helping
to reduce the FIDF’s interest burden and restructure its liabilities, has not
completely resolved the losses of FIDF.
Resolution Principles
In the process of resolving FIDF losses, the Ministry of Finance and the Bank of
Thailand jointly agreed on the principles that the resolution must be clear,
acceptable to all parties, and has minimal impact on the Government’s fiscal
position and minimal burden on taxpayers in both short and long terms. The
resolution must be transparent, must be in keeping with good governance and
has minimal adverse impact on the bond market.
In order to completely resolve the problem, the resolution of the losses has 2
components:
1212
12
13. 1. The fiscalization of uncompensated losses
2. The redemption of the Bt 500 billion government bonds.
Resolution Methodology
(1) On 21 June 2002, the Government passed an Emergency Decree
empowering the Ministry of Finance to issue bonds up to Bt 780 billion to fiscalize
actual FIDF losses.
In order to comply with the resolution principles, the Ministry of Finance will be
responsible for the interest expense to be paid for from the budget. As for the
amortization of the principal, the Bank of Thailand will meet this obligation by
using annual net profits from Currency Reserve from 2002 onwards. A separate
account will be set up within the Bank of Thailand’s General Account to keep
such profits in order to ensure the transparency and accountability of this
operation. The use of the profit flows from the Currency Reserve will not affect
the levels of international reserves.
(2) As for the redemption of the Bt 500 billion bonds issued according to the
Emergency Decree Empowering the Ministry of Finance to Borrow and
Administer the Borrowing to Assist the Financial Institutions Development Fund
B.E. 2541, which stipulated that the amortization is to be funded by the
privatization proceeds and 90% of net profits of Bank of Thailand’s General
Account operations, very little proceeds have been received so far from the
privatization program. Meanwhile, the Bank of Thailand’s General Account
continues to accumulate losses since the 1997 currency stabilization policy. To
ensure that the Bank of Thailand has the capacity to remit profits to the
government for this amortization, two Emergency Decrees were passed to
eliminate the accumulated losses and to allow the use of assets in the Special
Reserve Account for backing issued banknotes such that the Bank of Thailand
will have more flexibility in managing its assets to generate earnings and profits
as well as will increase its efficiency in implementing monetary policy.
Bond Issuing
It is expected that the size of the new government bonds issuance will not
exceed Bt 780 billion and the issuing time frame will be set according to FIDF’s
cash requirement. Market conditions will also be taken into account in order to
minimize the impact on the bond market.
Between August and December 2002, FIDF’s obligations of Bt 115 billion to pay
depositors of the 56 closed finance companies will fall due and its outstanding
borrowing from the repurchase market is Bt 300 billion. Consequently, the FIDF
would need to issue a large amount of bonds. In order to minimize the impact on
the bond market, the Government will instead offer saving bonds with 5-, 7- and
10-year maturities with the total size of Bt 300 billion to specific groups of savers
who currently do not transact in the money market, namely individuals,
cooperatives and foundations.
These saving bonds will not only resolve the FIDF’s losses incurred from
providing assistance to the financial institutions but also serve as an alternative
investment option for retail investors, which offers higher yields with longer
maturity than commercial banks’ deposits.
The saving bonds can be purchased via commercial banks’ branches nationwide
serving as selling agents. Subscription period of 45 days will be between July 15
- August 30, 2002 and the 45-day settlement period will be from September 2 –
1313
13
14. October 15, 2002. Subscribers will be able to choose their preferred settlement
dates so that they can plan to reinvest their maturing time deposits or other
investments in the saving bonds.
As of October 2011, Thailand’s public debt was THB4.33 trn or about 41% of GDP. Will it
could be argued that Thailand is no Greece and public debt / GDP is still below the
Maastricht treaty threshold o 60%. However, the contentious variable is the 15% debt
service ratio i.e. debt service as a percent of the budget. It is no wonder as to why
administrations become concerned about rising interest policy rates and attempt to prod
the central bank to cut rate as to give more flexibility with regards to this self imposed
covenant.
The Public Debt Management Office (PDMO) projects that the debt service ratio to rise to
11.5% in 2012 and could reach 13.4% by 2016. Given that 2011 flood has raised serious
questions of Thailand as a safe place while the administration has cited the flood as a
natural disaster and as a consequence, brand Thailand as a disaster prone area,
investors’ confidence needs to be restored to get back to “Business as Usual”. As such,
funds are needed to compensate for the growing budget deficit trend to stimulate the
recovery.
Fig 15. Thai public debt Fig 16. 12mth running budget balance
4,500 THB bn
4,300 200
4,100 100
3,900 0
3,700 -100
3,500 -200
3,300 -300
3,100 -400
2,900 -500
2,700 -600
2,500 02 03 04 05 06 07 08 09 10 11
00 01 02 03 04 05 06 07 08 09 10 11
outstanding public debt,THB bn 12mth running rate budget balance
Source: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBank
The news flow remains fluid as to whether or not the FIDF losses would be relocated to
the fund itself but legal amendments would empower the fund with an income stream to
service the debt. In a nutshell, the movement seems to be a reserve fiscalization of the
losses, which could strongly imply a move forward monetizing the FIDF losses.
Moody’s Investors Service has just made disclosure with regards to Thailand’s credit
rating albeit no mention of this event. Moody’s noted that:
Thailand's Baa1 government ratings reflect medium economic and institutional
strength, but receive support from a relatively high level of government financial
strength as the post-1997 crisis debt overhang has eased. Vulnerability of the
government's balance sheet to external shocks has been reduced by a steady
repayment of external debt and accumulation of official foreign exchange
reserves. External indicators are considerably stronger than the median values of
not only Baa peers but also many A-rated countries.
However, Thailand's government debt relative to government revenue is more
elevated than its Baa-rated peers, although the debt trajectory at both the
1414
14
15. general government and public sector levels was on a steady downward trend
prior to the global recession.
Given that a balance sheet as to balance i.e. Asset = Liabilities + Equity, a relocation of
the FIDF losses back to the Bank of Thailand would have rather negative implications.
Since the fluid developments would suggest that the Bank of Thailand’s liabilities would
increase whilst Assets are unchanged, what needs to adjust is its Equity. Fig 17 and 18
are figures released by the Bank of Thailand and may not fully reflect its true equity. For
example, its financial statements audited by the Auditors’ General for 2010 showed a
negative equity of THB 81.8 bn since it reflects the marked to market effects.
Note that the BOT’s equity will fluctuate for several reasons. For one, its assets are
largely foreign currency whilst its liabilities are local currency. If USD/THB moves down,
so does the BOT’s equity, and vice versa. Another reason is interest rate differentials
between yield on assets and the cost of its funding of those assets. Given that US and
other countries in which the BOT invests in are developed markets will tend to have lower
rates than Thailand’s emerging markets, the BOT will incur a natural negative carry and
weighing on its equity as time passes by. We have are trying to point out is that in its
current form, the BOT’s financials are design to deteriorate for the gains in FX and price
stability. But of course it makes sense since the Bank of Thailand a central bank and not
a commercial bank. Given this assessment, there is little problem that the BOT’s balance
sheet can generate income to cover the FIDF losses and strongly suggest that the only
way to reduce this interest paying debt is refinancing…either with interest bearing paper
or simply non-interest bearing paper…also known as “currency in circulation”. The other
ominous alias would be “monetization”. We hope that authorities realize such implications
and exercise more discretion on a larger picture with regards to both fiscal and monetary
policy.
Fig 17. BOT assets Fig 18. BOT liabilities, equity
100% 100%
90% 90% 1,097,308
80% 80% 699,343
70% 70%
60% 4,732,721 60%
2,498,555
50% 50%
40% 40%
30% 30%
1,121,840
20% 20%
10% 1,448,311 10% 499,818
510,704
0% 0%
1 1
Others Non resident securities Equity Others Loans Bonds Deposits Bank notes
Source: Bloomberg, CEIC, KBank Source: Bloomberg, CEIC, KBank
1515
15
16. ASEAN trade under economic turmoil in 2012
ASEAN has gained more importance role in the world economy with
its size is slightly smaller than Indian economy, yet the region is
full of diversity
AEC 2015 or greater economic integration within ASEAN is seen to
apply more to Myanmar and Indochina, yet it is unlikely that these
countries are ready to open for free trade by that time as they need
to protect their agricultural sector
Most countries’ major export market is within ASEAN, except for
Thailand that we relies a lot more on the EU market, which is seen
vulnerable to financial turmoil
Thai exporters are seen to benefit more from diversifying their
markets toward more ASEAN as we gain trade surplus from most
countries in this region
Economic integration in this region is seen to mutually benefit each
other while international trade enhances specialization and
economies of scales; however, we also tend to see each other as
core competitors
Diversity in Unity
ASEAN consists of 10 nations, including Brunei (BN), Cambodia (KH), Indonesia (ID),
Laos (LA), Malaysia (MY), Myanmar (MM), Philippines (PH), Singapore (SG), Thailand
(TH) and Vietnam (VN). ASEAN has gained more importance role in the world economy.
ASEAN economy is slightly smaller than Indian economy, which constituted about 3% of
the global economy. The region here is full of diversity. Indonesia is the biggest economy
in this region followed by Thailand and Singapore, while Laos is the smallest economy. In
terms of population, Indonesia also ranks the first, followed by the Philippines and
Vietnam, while Brunei is the smallest nation. In terms of development, Singapore is the
only country here that is categorized as a developed country, while Myanmar, Cambodia
and Laos still suffer from poverty and malnutrition.
How can these diversified economies move forward together? This will be a challenging
question for the years to come. Diversity in Unity or the concept of oneness among
different socio-economic groups has not yet been tested whether it could work in this
region. Despite uncertainty ahead, Thailand is likely to benefit from greater
economic integration under higher possibility of economic and financial turmoil in
2012, largely owing to uncertainty in the eurozone debt crisis.
Don’t wait for AEC 2015
There have been more and more people talking about ASEAN Economic Community or
AEC 2015, which is basically a greater integration among ASEAN in terms of free trade
barriers, free movement of professionals and capital. Actually, tariffs among core
ASEAN-5, namely Thailand, Singapore, Malaysia, Philippines and Indonesia are not
significant, while we also have Free Trade Agreements (FTA) with other countries. AEC
2015 is seen to apply more to Myanmar and Indochina, yet it is unlikely that these
countries are ready to open for free trade by that time as they need to develop more
infrastructure and system to protect their agricultural sector.
1616
16
17. Fig 19. World economy and the importance of ASEAN Fig 20. Shares of ASEAN economies
BN
VN KH
US 0.7%
5.8% 0.6%
22% TH
Other 16.1%
31%
ID
39.5%
China
10% SG
ASEAN 12.6%
3%
India Japan
3% 8%
Russia Germany PH LA
3% Italy UK Brazil France 5% 10.2% MM MY 0.4%
3% 4% 4% 4% 2.4% 11.7%
Source: IMF, KBank Source: IMF, KBank
Based on trade statistics below, using data of the first 9 months of 2011, we can see that
Singapore exported the most, followed by Malaysia and Thailand. Most countries’ major
export market is within ASEAN, except for Thailand that we relies a lot more on the
European Union (EU) market. Apart from ASEAN and EU, other major trading partners of
ASEAN are Japan, China and the US. Since the economies in the EU and the US are full
of uncertainty due to debt crisis and banking problems, Thai exporters are seen to benefit
more from diversifying their markets toward more ASEAN. Among ASEAN, there are only
Thailand and Singapore that gained trade surplus with other countries within ASEAN.
This shows that we have competitiveness that we could explore more so as to gain
greater benefits from joining this economic community.
Fig 21. Shares of ASEAN population Fig 22. ASEAN major export markets
VN BN KH USD bn
0.1% 2.4%
Exports from ASEAN to selected countries
14.8%
300,000
250,000
TH
11.7% ID 200,000
40.5% 150,000
SG
0.9% 100,000
50,000
PH 0
15.7%
BN KH ID LA MY MM PH SG TH VN
MY LA
MM
4.8% 1.0% CN JP US EU ASEAN Other
8.1%
Source: UN, KBank Source: CEIC, KBank
Fig 23. ASEAN major import markets Fig 24. ASEAN trade balance
USD bn USD bn
Imports from ASEAN to selected countries Trade balance of ASEAN against selected countires
300,000 50,000
40,000
250,000
30,000
200,000 20,000
10,000
150,000
0
100,000 -10,000
-20,000
50,000
-30,000
0 -40,000
BN KH ID LA MY MM PH SG TH VN BN KH ID LA MY MM PH SG TH VN
CN JP US EU ASEAN Other CN JP US EU ASEAN Other
Source: CEIC, KBank Source: CEIC, KBank
1717
17
18. Thailand and ASEAN: friend or foe?
Trade statistics revealed that Thailand gained significant trade surplus with ASEAN,
which is seen to benefit Thai exporters if we could explore more of these markets that we
have competitiveness. In particular, even though our exports to Cambodia, Laos,
Myanmar and Vietnam (CLMV) are insignificant, we gained large trade surplus to most of
these countries, except for small deficit to Myanmar. Thailand lies in the strategic location
that our exporters could access to markets in CLMV. Therefore, it is important that we
could act now so as to capture market shares of products in these countries before other
ASEAN members seize this opportunity.
Economic integration in this region is seen to mutually benefit each other while
international trade enhances specialization and economies of scales, leading to greater
productivity and economic growth. However, in some cases we tend to see each other as
core competitors as we all lie in the same geography and produce similar products. In
addition, our major export markets are alike, i.e. China, Japan, the US and the EU. We
also compete for direct foreign investment. We even compromise our tax policy to
provide more incentives to foreigners more than to local producers through the Board of
Investment (BOI).
How about the role of China in this region? We often see China as the end of vertical
integration in Asia where ASEAN exports raw materials and intermediate products to
China. China uses its cheap labor to assemble and produce final products, and then
exports to Japan, the US, the EU and back to ASEAN. China is not seen as a direct
competitor to ASEAN. What about the prospects of economic turmoil in advanced
countries this year? If the markets in the US, the EU and Japan are in trouble, exports
from China are likely to decline, which is seen to unavoidably affect exports from ASEAN
to China. Therefore, we cannot simply diversify our exports from the advanced markets to
China since China is likely to receive negative impact from economic turmoil as well. In
such circumstance, increasing trade transactions within ASEAN is likely to mitigate the
adverse effects of economic slowdown caused by debt crisis in the eurozone. The next
question is what we should be trading within this region during the period of crisis. We
would like to invite the audience to follow us in the next episode of this topic in the future.
Fig 26. Thailand trade balance with major trading
Fig 25. Thailand major trading partners
partners
Trade between Thaiand and selected countries Trade between Thaiand and selected countries
50,000
15,000
40,000
10,000
30,000 5,000
0
20,000
-5,000
10,000 -10,000
-15,000
0
BN KH ID LA MY MM PH SG VN CN JP US EU Other
BN KH ID LA MY MM PH SG VN CN JP US EU Other
Ex ports (USD mn) Imports (USD mn) Trade balance (USD mn)
Source: CEIC, KBank Source: CEIC, KBank
1818
18
19. Uncertainties concerning demand yield curve steepening danger
Bond market in 2011 saw a lower trading volume compared to 2010
due to the increase in uncertainties in the global financial markets
Long-term yields saw lesser change compared to the front-end
despite of a 125bp increase in policy rate - helped borrowers to
maintain relatively low funding cost but this could be different this
year on uncertain bond demand
We continue to expect a 25bp in the next MPC meeting in January
while BoT’s latest outlook on 2011 economic growth also suggests
that further easing is possible
Bond market in the year 2011 – a quick wrap up
Outright trading volume last year was smaller than that of the year 2010. This was partly
due to the increase in uncertainties in the global financial markets, making it more difficult
for investors to gauge market timing and trends. Thai government bonds (LBs) trade
volume averaged at THB379bn per quarter in the year 2011, a 13.4% decline from the
year 2010 which saw an average trade volume of THB438bn per quarter. Meanwhile,
total trading volume for the Bank of Thailand bills (or CBs) continued to maintain a high
volume compared to other types of bonds - average share of total trade is 84%. Share of
corporate bonds and state enterprise (SOE) bonds trade remained low at only 1.1% and
0.2% of total trade, respectively. Government bonds share amounted to about 8.6% in
2011, a significant decline from 2010’s share of 11.2%.
Bond yields in the first half of 2011 were on an upward moving trend, in line with the pick
up in inflation rate and the policy rate. Yet, long-term yields saw lesser change compared
to the front-end: 2-year yield increased by 86bp whereas 10-year yield rose only 14bp
during the first half. The policy rate saw a 1.00% increase during the same period. Such
trends helped the government and the corporate sector to maintain relatively low costs of
borrowing. For the second half of the year, bond yields started to see declines, although
there were sell-offs in certain periods due to global market’s risk-off sentiment. In general,
the local market indicated that investors had begun to price in global and local economic
slowdown, as well as the earlier-than-expected policy rate cut by the Bank of Thailand in
the aftermath of the floods. 2-year yield ended the year at 3.11%, way below the policy
rate while the 5- and 10-year yields were at 3.16% and 3.35%, respectively.
Fig 27. Government bond yields Fig 28. Bond trade volume per quarter (exclude <1YR)
% Government bond yield curve THB bn
4.50 1000
900
4.00
800
3.50 700
3.00 600
2.50 500
400
2.00 300
1.50 200
1.00 100
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 0
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11
policy rate 2y 5y 10y Government bonds BoT bonds SOE bonds Corporate bonds (all)
Source: Bloomberg, KBank Source: Bloomberg, KBank
1919
19
20. Going forward, the bond market should be supported by policy rate downtrend (although
we expect only another 25bp cut for Thailand, monetary easing remains the theme in
Asia) as well as a slowdown in price increase. However, there are also several negative
factors which include high level of borrowing needs by the government in 2012-2013 to
fuel a quick economic recovery as well as to equip the country with better water
management systems to avoid another 2011-style flooding. Furthermore, foreign
investors’ demand for Thai bonds this year could be less robust compared to the 2010 –
2011 period. All the factors would make demand for fixed income investment rather
unpredictable in the quarters ahead.
Uncertain bond demand and growth in mutual funds NAV
Over the past few years, the growth of mutual funds or unit trusts had been robust, or at
least, the annual growth of the net asset value (NAV) in the past had usually been
double-digit high. While the year 2010 was a good year for both stocks and emerging
market bonds, the year 2011 saw a topsy-turvy trading ground. We note that the NAV of
mutual funds saw an average growth of 11.1% during the past 5 years, including 2011
(data as of October 2011), which is much lower than the 28% average growth achieved
during the previous 5 years (2002-2006). In particular, NAV fell 2% from the end of 2010
to October 2011. The decline reflected the market-to-market effect of fixed income
securities when yields rose as well as the decline in equity value (SET Index fell
0.72%yoy in 2011). We also suspect that fresh investment into the mutual funds could be
less robust than the previous two years when the stock market was in recovery mode.
Fig 30. Size of mutual funds, life policy reserves, and
Fig 29. Growth of mutual funds
bank deposits compared to GDP
% Domestic savings in various forms as share of GDP %
2,500 70
25 120
Oct 60
2,000 100
50 20
1,500 40 80
15
30 60
1,000 20 10
40
10
500 5
0 20
0 -10 0 0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Net asset value (left axis :Bt bn) Growth (right axis : % ) Mutual fund Life Policy Reserves Bank Deposits (right axis)
Source: AIMC, KBank Source: AIMC
In particular, the investors’ eagerness in fixed income funds could be much more
subdued due to small difference of returns from term deposits and bond yields. While
fixed income funds continue to have the largest share (62% in 2010) among all of the
fund types, its growth has been less significant compared to the other types of funds,
namely equity funds, mixed funds, and property funds.
2020
20
