Capital flow and exchange rate volatility in the region still persist

Bank of Thailand (BOT) and Bangko Sentral ng Pilipinas (BSP) kept their policy rates unchanged this week, even though both central banks cautioned that risks on the global economy are tilted towards the downside going forward. We believe the decisions to hold policy rates were due to concerns on capital outflows from the Asean region, which had led to recent volatile regional currencies movement, in view of expectation of a steeper pace of monetary policy tightening by US Federal Reserves, especially in 2017.

BOT voted unanimously to keep 1-day repurchase rate at 1.5%, as the Committee assessed the economy would continue to expand at a pace close to the previous assessment, driven by government expenditure as well as private consumption. Looking ahead, BOT also guided that the downside risks to economic recovery have increased, due to weaker-thanexpected growth among Thailand’s trading partners as well as uncertainties on US trade policies which may have undesirable implications on confidence and international trade.

Furthermore, Chinese tourist may be lower than expected, as a result of Government’s crackdown on zero-dollar tour operations. Chinese tourists to Thailand had declined for the second month by 29.7% yoy in November (-16.2% in October), leading to a 4.4% contraction in the overall tourist arrivals, the first decline since September 2016. Given that Thailand is highly dependent on export and tourism sector, slowdown in these activities may dampen the overall economic growth momentum. As such, the Committee viewed that “monetary policy should remain accommodative, and stands ready to utilize an appropriate mix of available policy tools in order to ensure that monetary conditions are conducive to the economic recovery, while ensuring financial stability.” Meanwhile, BSP left its reserve repurchase facility unchanged at 3%, in view of gradual return in inflation to 2-4% target in 2017-2018, driven by higher oil prices and strong domestic economic activity. As highlighted by BSP, central banks in the region are assessing the global economic developments and calibrate its policy tools, where we believe will likely be dependent on US Fed’s decision on the hikes in Federal Funds rate (FFR).

Separately, Singapore’s non-oil domestic exports (NODX) rebounded from a 12% yoy contraction in October to 11.5% in November, the first positive growth in six months and exceeding market expectation of a 2.7% decline. The rebound was supported by electronic products (+3.5% yoy vs -6% in October) as well as non-electronic products.

Source: Affin Hwang Research - 23 Dec 2016