The Bank of Thailand’s decision to keep its key, one-day bond repurchase rate (1.75%) unchanged–effectively an attempt to ease the rampant baht appreciation (it recently hit a 13-year high versus the dollar)/pressure on exports discussed here earlier–followed its decision last week, per Bloomberg, to “[scrap] a tax exemption for foreign investors in domestic bonds to slow capital inflows that have pushed up emerging-market currencies.”  Yet according to Santitarn Sathirathai, a Singapore-based economist at Credit Suisse Group AG, “it’s only an exception to the trend of hiking rates.”  Indeed, late last month the state’s finance ministry opined that the rate “may climb to 2 percent by the end of the year and 3 percent next year.”  Yet as long as core (1.1% y-o-y) consumer price inflation remains removed from the high-end of the Bank’s target range of as much as 3%, and state price-influence remains in tact (per Businessweek, in June “the government extended state subsidies on mass transportation and energy costs for six months, while the commerce ministry controled prices of key consumer products to help reduce the public’s burden following political clashes in the second quarter that killed at least 89 people”), it’s conceivable that rates stay stagnant.  That said, as The Economist pointed out two weeks ago while citing a fascinating study authored by two economists at Goldman Sachs which looked at the pace at which central banks in emerging Asian economies built up reserves by buying foreign currency (and then scaled the absolute amounts in question by the country’s base money supply in order to determine a net effect), Thailand–along with Malaysia–have had the most “appreciation-friendly” regimes in Asia since 2006 (to boot, China’s intervention in relation to the size of its economy has been relatively small, the piece shows).  With all of this in mind, is a carry trade into baht-tied assets still viable, absence of the 15 percent tax exemption be damned?  Given the impending round of quantitative easing in at least one developed country, the emerging/frontier market flow may still have a ways to go.  “The Fed’s quantitative-easing speculation is back in focus and that means growing optimism of more inflows into Asia,” Hideki Hayashi, a global economist at Mizuho Securities Co. in Tokyo, told reporters today.

Regardless of your short-term view on rates, one way to currently play Thailand may still be through its bustling financial services sector.  During the first half of this year, for instance, the country’s banking sector realized 61b baht in net profits–a 42% increase y-o-y–on the back of strong net interest margins (NIM, i.e., the difference between interest income and interest expense expressed as a percentage of interest-bearing assets) and a continually declining non-performing loan– NPL–ratio (a proxy on underlying asset quality).  These results continued into the most recent earnings period, as analysts’ “outlook for Thai banks remains bright as strong loan growth should continue in the fourth quarter and into the start of next year after healthy economic growth.”   And while in theory rising rates may be NIM-negative (for liability-dominated balance sheets, a rising interest rate environment–and thus a flattening yield curve–suggest a given bank’s net interest margins will be comprimised given the cost of deposits outpacing asset yields), Suphachai Sophastienphong, chief economist at Siam City Bank, pointed out in August that in reality this is probably not the case:

“Empirical evidence in Thailand appears to contradict the prevailing orthodoxy that changes in interest rates and the slope of the yield curve (changes in the levels of long-term and short-term rates) will have significant impact on banks’ net interest margins.  Over the past half a decade net interest margins have been hovering around 3 percentage points, reflecting, in the view of many pundits, less-than-competitive pricing behaviour and inefficient intermediation–irrespective of the shape of the yield curve . . . Even in parts of the developed world, the correlation between bank profitability and the yield curve has weakened considerably over the past few decades thanks to deregulation, securitisation and the use of interest rate swap as well as other derivatives contracts.”

In order and by assets, Thailand’s biggest banks are Bangkok Bank, Krung Thai Bank, Kasikornbank and Siam Commercial Bank (the country’s oldest).

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