Foreign fund managers poured back into Thailand on Thursday following news the Thai baht would be floated, revealing new confidence that the country was now prepared to deal with its economic troubles.
From our perspective we are delighted by the news. This means the recovery of the economy will now occur far more quickly than we expected, said Stewart Aldcroft, director of marketing at Templeton Franklin Investor Service.
On Thursday, the Stock Exchange of Thailand index was up 48.96 points, or 8.61 percent, to 617.75 at the morning close. As the stock exchange soared, there were reports that foreign premiums on some Thai shares, including Bangkok Bank, reached 100 percent following the announcement by Thailands central bank of a new managed float regime for the baht.
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The Bank of Thailand on Thursday set its daily baht weighted average interbank rate at 27.383 to the U.S. dollar, the first reference rate set by the central bank after it announced a new system that effectively devalued the baht by about 15 percent.
Templeton continues to add to its overweight Thailand position against the Morgan Stanley Capital International (MSCI) Asia ex-Japan Free index after launching a Thailand fund just a few weeks ago.
Our weighting has been increasing all along and we are still continuing to add to what weve got, and were very pleased, Aldcroft said. Lehman Brothers also has been adding to its position following a move in May to heavily overweight at five percent against the MSCI benchmark of three percent.
What we have been playing on was the possibility of a re-rating of the market due to structural change, said chief strategist Abhijit Chakraborrti. The change in the exchange rate regime was going to occur at some stage, but timing was a different issue. However, James Wilson, director of institutional sales at Deutsche Morgan Grenfell, said the stock market had over-reacted, warning that the effects of the new foreign exchange system will be mixed.
On the stock market, our perspective is that one has to exercise caution at the moment, Wilson said. Most foreign observers have been predicting and calling at least for a managed depreciation of the baht, and this has pleased them. But there are mixed repercussions. The most immediate effect will be faster improvements in Thai export growth with a contraction in the trade deficit. This could then narrow the current account deficit to four percent by year-end from prior levels approaching eight percent - the widest in the world.
But the most important factor influenced by the policy change interest rates could remain unaffacted for a while. Many fund managers were forecasting little change in punishingly high Thai rates, which were required to keep the former baht-U.S. dollar link intact but strangled the nations cash-strapped financial sector in the process.
Some warned of even higher rates as the central bank worked to establish and stabilise the new regime. I have a shrewd feeling that interest rates will stay high at least until the end of the year, Chakraborrti said.
But another fund manager was forecasting a 400 basis point decline in the average minimum lending rate to nine per cent from the current 13 percent, with a corresponding decline in deposit rates to keep the spread intact.
The weaker baht is expected to push non-performing loans throughout the banking sector to 15 per cent of total loans outstanding over the next 12 months, he said, with loan growth falling to four per cent this year and one percent in 1998.
A number of major banks and finance companies will be forced to recapitalise, he said, and full recovery cannot be expected until 1999 at the earliest.