Thailand’s finance minister says his country is in no hurry to raise rates in order to narrow its gap with rising U.S. interest rates, but not all economists agree with the move.
Finance Minister Arkhom Termpittayapaisith told CNBC last week that the country still has net capital inflows, hence capital flight is not a huge concern right now.
Capital flight takes place when investors take their assets or money out of a country to seek better opportunities elsewhere. As U.S. interest rates rise, there are concerns it could lead to capital outflows for some economies as investors seek higher returns in the U.S.
“Many countries, they’re raising the interest rates just to keep [sic] the difference between the Fed rate and the local interest rate. But that’s not the case for Thailand,” the Thai finance minister told CNBC’s “Street Signs Asia” on Thursday.
Customers shop at a wet market in Bangkok, Thailand, on July 2, 2022. Thailand’s economy grew at a slower pace than expected in the second quarter, official data showed on Monday, helped by increased activity and a rebound in tourism as Covid-19 curbs were eased, but surging inflation remains a concern.
Andre Malerba | Bloomberg | Getty Images
“I think when we look at the capital inflow and outflow, we still have the net inflow of capital. As you can see, our stock market although is very volatile at this time, foreign buyers are still net buyers for capital in Thailand.”
Not everyone agrees.
Capital Economics senior Asia economist Gareth Leather said the Thai central bank might be too optimistic given that the Thai baht has fallen 12% peak-to-trough in the past year and foreign exchange reserves have dropped sharply.
“In terms of monetary policy, the central bank is certainly taking a gamble,” Leather said.
“It is true that the factors pushing inflation higher, energy and food, have been on the supply side, and tighter monetary policy will not directly affect that. But raising rates just once while headline inflation has increased from 3.2% in January to 7.9% currently, is a risk.”
The Bank of Thailand’s inflation target is between 1% to 3%, but headline inflation hit 7.86% in August.
Thailand raised its key policy rate by 25 basis points in August from a record low of 0.5%, and the one-day repurchase rate currently stands at 0.75%. The last time the central bank raised the benchmark rate was almost four years ago in December 2018.
Our expectations are for the Bank of Thailand to proceed with gradual policy rate hikes and monetary normalization as it balances rising inflation with a smooth economic growth lift-off.
Chua Han Teng
Economist, DBS Group Research
Instead of racing to hike rates, Termpittayapaisith said it’s important to take a more balanced approach to monetary policy especially when the Thai economy is recovering and the country is still experiencing net capital inflows.
“The central bank is very, very careful in raising the interest rate… at the same time our economy has to recover.”
The finance minister also said since global inflation was caused by supply side disruptions, hiking up rates to curb demand might not be an effective approach.
He said he was not worried about servicing foreign debt — even as the Thai baht continues to depreciate against the U.S. dollar — since there are other growth engines in Thailand beyond the tourism sector.
“I’m not worried because debt service is still in our capacity, particularly for… the public debt,” Termpittayapaisith said. “I think once the economy recovers, I think we are not worried about that.”
Aside from tourism, Termpittayapaisith said the government was expecting increased foreign direct investments in its Eastern Economic Corridor, a new economic zone in the country’s eastern provinces.
The number of tourists is expected to rise to between 8 million to 10 million next year, about a quarter of pre-Covid numbers, according to Termpittayapaisith.
On Thursday, the Thai government also said it wanted to increase its rice exports. Earlier last week, the Thai National Shippers’ Council reaffirmed Thailand’s exports were still on track to rise between 6% to 8% this year.
In line with Termpittayapaisith’s comments, DBS Group Research economist Chua Han Teng said there had been net portfolio capital inflows into Thai equities and bonds since the start of the year and he expected the Thai central bank to take a moderate path with rate hikes.
“Foreign equity inflows are performing notably better than the past two years, likely on expectations that Thailand has started to recover from the pandemic, driven by improved tourism and private consumption activity,” Chua said.
“Our expectations are for the Bank of Thailand to proceed with gradual policy rate hikes and monetary normalization as it balances rising inflation with a smooth economic growth lift-off.”
However, he said Thailand’s continued “negative policy interest rate differential” with the U.S. could be problematic for the country, especially since the Federal Reserve has shown it has more appetite to raise rates which could then heighten risks of capital outflows.
