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NEWS UPDATES Asean Affairs    26 June 2012

Expect volatility in Thai financial market: impact from Euro crisis

19-June -2012

Local authorities foresee further fallout from the crisis in the euro area on Thailand's financial market and export sector, even though Greece's election results promise no break-up of the single currency zone for now.

The worst is not yet over given the fundamental problems in the euro area, the Bank of Thailand's Monetary Policy Committee and Financial Institutions Policy

Committee said in a joint statement after their first-ever meeting yesterday.

Together, though praising Thailand's solid economy and financial system, they expressed concern that the chronic euro crisis would remain the biggest risk, as this could destabilise global financial markets and economy.

In the near term, volatility in the domestic financial market is imminent on periodic tight demand and supply for foreign currencies. In the long term, Thailand will inevitably be affected when the euro crisis drags down the global economy, they said.

Policy options were discussed at the meeting to mitigate possible impacts on the stability of the Thai economy and financial market, central bank Governor

Prasarn Trairatvorakul said. The committees see no need for any measures for now, but developments in the euro area must be closely monitored.

"Though the pro-bail-out parties won the election, it does not mean that all problems are solved. The risks are not wiped out 100 per cent. It remains to be seen," he said.

The financial market saw heavy volatility yesterday. According to Thai Bond Market Association data, global funds bought US$1.9 billion more Thai government debt than they sold this month through June 15. The baht was unchanged at 31.47 per US dollar after reaching 31.33 earlier, the strongest level since May 22, according to data compiled by Bloomberg.

Prasarn insisted that the central bank had nothing to do with the baht's recent appreciation. He noted that despite the sell-offs in the bond and stock markets, foreigners remained net buyers and there was no sign of significant capital outflow.

At the ThaiPublica Forum yesterday, Kanit Sangsubhan, director of the Fiscal Policy Research Institute, said the medium- and long-term problems in the euro area had yet to be solved. There is a 20-per-cent chance that Europe, earlier expected to witness a 0.9-per-cent economic contraction this year, may suffer as much as a 5-per-cent shrinkage in gross domestic product. That would squash the Thai GDP growth forecast from 5.5 per cent to 2.2 per cent this year.

While saying that Greece's election result just eased some investor concerns, Bandid Nijathaworn, former deputy BOT governor, and Supavud Saichuea, managing director of Phatra Securities, said Thailand should stay alert for the indirect impacts. Europe accounts for less than 10 per cent of Thailand's exports but 18 per cent of exports from China, which is a major market for Thailand.

Bandid said that unlike 2008-09 when boom times in emerging markets helped bolster export demand, the Thai export sector might suffer and this could lead to financial problems. Supavud said that if Italy and Spain had to continue dealing with fears of contagious impacts, market volatility was warranted.

As European companies are expected to face tight liquidity amid bank deleveraging, the Export-Import Bank of Thailand anticipates defaults or delayed payments for Thai goods. To help Thai suppliers, the bank is cutting the penalty rate for exporters and the export paper discount rate, as well as providing export credit insurance and risk-evaluation services. Kanit Sukonthaman, president of the bank, also urged exporters to buy export credit insurance to cover all orders.

Like global bourses, the Stock Exchange of Thailand's main index soared yesterday, only to close at 1,163.41 points, down 2.32 points or 0.20 per cent. In May, the SET gave up 7 per cent on the compound negative factors from the euro area.

So far this month, foreign investors' net sales have reached 8 billion baht ($254 million), with 875 million baht ($27 million) added yesterday. Year to date, they remain net buyers, with a position of 61.1 billion baht ($194 million).

SET president Charamporn Jotikasthira said volatility should remain in the next month or two, depending on the formation of the new government in Greece and its actions to navigate the country out of the debt storm. Greece's election ended with pro-bail-out parties winning more votes than anti-bail-out Syriza.

The world heaved a sigh of relief, as Greece will stay within the euro zone for now, with fresh financial injections from the European Union and International Monetary Fund to keep it afloat.

However, leaders arriving for the Group of 20 summit in Mexico still have European instability concerns at the front of their minds as the crisis there continues to weigh on the global economy.

"Sunday's outcome represented a step forward, but there remain huge challenges ahead," Erik Nielsen, chief economist with Italy's Unicredit bank, told Deutsche Presse-Agentur.

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